COMPETITION TRIBUNAL OF SOUTH AFRICA
Case No: 61/LM/Jul06
In the matter between:
SAAB AB Acquiring Firm
And
AEROSTRUCTURES BUSINESS
OF DENEL (PTY) LTD Target Firm
Panel : N Manoim (Presiding Member), Y Carrim (Tribunal
Member), and U Bhoola (Tribunal Member)
Heard on : 13 September 2006
Decided on : 13 September 2006
Reasons Issued: 19 October 2006
Reasons for Decision (Non-Confidential)
Approval
[1] On 13 September 2006 the Tribunal issued a merger clearance certificate
unconditionally approving the merger between SAAB AB and the
Aerostructures Business of Denel (Pty) Ltd. The reasons for approving the
transaction follow.
The Parties
[2] The primary acquiring firm is Saab AB (“Saab”), a company listed on the
Stockholm Stock Exchange. The following are shareholders who have more
than 5% shareholding in Saab:
[2.1] BAE Systems (“BAE”) 21%
[2.2] Investor AB 20%
2
[3] The remaining shares in Saab are traded on the Stockholm Stock Exchange.
[4] BAE has in excess of twenty subsidiaries worldwide and a 20% minority in
Airbus, an original equipment manufacturer (“OEM”) involved in the first tier
market. Apart from BAE’s 20% minority shareholding. Airbus is controlled by
the governments of Germany and France.
[5] Investor AB has interests in various companies, which are not important for
purposes of this decision.
[6] Saab has in excess of twenty subsidiaries worldwide. 1 In South Africa it
controls Saab Grintek Defence (Pty) Ltd and Saab Grintek Technologies (Pty)
Ltd. Earlier this year Saab acquired a South African company called Aerospace
Monitoring and Systems (Pty) Ltd.
2
[7] The primary target firm is the Aerostructures Business of Denel
(“Aerostructures Business”). Aerostructures Business is a division of Denel
(Pty) Ltd (“Denel”). Denel is controlled by the Government of South Africa. The
Aerostructures Business does not control any firm, whereas Denel has in
excess of ten subsidiaries worldwide.
3
The Transaction
[8] Denel will create a new wholly ow ned subsidiary (“Newco”) and transfer its
Aerostructures Business to it. Saab will then acquire 20% of Newco’s issued
share capital which will give it joint control with Denel. 4 At the conclusion of the
transaction the Aerostructures Business of Denel will be housed in Newco,
Saab will have a 20% interest in Newco and Denel will have 80% shareholding
in Newco.
5
The rationale for the transaction
1 See Annexure B and C of Form CC4(2) filed by the primary acquiring firm.
2 The transaction was considered under Competition Commission case number 2006Feb2129.
3 See Annexure A of Form CC 4(2) filed by the primary target firm.
4 See page 008 of the record and clause 5.7 of the Memorandum of Understanding on page
474 of the record.
5 Post-merger, Saab will render management servic es to Newco and thereby transfer skills to
5 Post-merger, Saab will render management servic es to Newco and thereby transfer skills to
Newco’s employees. Saab will also be required to contribute an agreed portion of the capital
needed for the various projects in terms of the agreements concluded with Denel.
3
[9] Saab perceives the transaction as creating new business opportunities for it
while strengthening its relationship with and its presence in South Africa. Saab
also perceives the transaction as increasing its capabilities and strengthening
its position in the global aerostructure market.
[10] Denel views the transaction as a first step in its unbundling process as it
endeavours to create profitable entities. It intends to un-bundle and refocus on
its core business of aerospace, artillery and munitions.
6 This has been
precipitated by the losses that Denel has been making in the past nine years
The parties’ activities
The Primary Acquiring Firm
BAE
[11] In South Africa, BAE trades through BAE System South Africa (Pty) Ltd, which
is involved in the manufacturing and supply of armoured vehicle, transmissions,
drivelines and related components for land systems. BAE also develops and
provides services for naval systems. It also has a minority interest in a
company which develops war-gaming, and logistics planning software.
7
[12] In the worldwide market, BAE is active in the development, delivery and
support of advanced defence aerospace systems. It operates through six
business units, namely:
[12.1] Electronics, Intelligence and Support
This business unit is responsible for BAE’s displays, inertial systems and
marine repair activities.
[12.2] Land and Armaments
6 This has been precipitated by the losses that Denel has been making for the past nine years.
To survive Denel is pursuing a strategy bas ed on prime contracting locally and exports of
defence and aerospace systems and components through selective equity partnerships and
alliances with global prime contractors.
7 See page 6 of the record.
4
This unit is involved in the design, development, production and services
support of armoured combat vehicles and calibre naval guns.
[12.3] Programmes
This unit comprises BAE’s air systems, naval ships and submarines activities.
[12.4] Customer Solutions and Support
This unit includes the integration and delivery of supply chain and logistics
management, spares, maintenance, repairs and overhaul.
[12.5] Integrated Systems and Partnership
This unit comprises high-technology defence systems businesses.
[12.6] Commercial Aerospace
The parties have submitted that BAE has since sold its commercial
aerostructures business unit to Sprit Aerostructures Inc. There is therefore no
need to consider its activities.
Investor AB
[13] In South Africa, Investor AB’s only activity relevant for purposes of this
transaction is its interest in Saab, the primary acquiring firm.
[14] On a worldwide scale, Investor AB is an investment holding company, which
has interests in various sectors including defence. The interest in defence is
housed in Saab, the primary acquiring firm in this transaction.
Saab
[15] In South Africa, Saab manufacturers and supplies electronics related products
and services to the telecommunications, defence, avionics, air traffic
management, security and power utilities markets.
5
[16] Saab is also active through its recently acquired subsidiary, AMS, which is
involved in the development and producti on of advanced avionics for military
and commercial aircraft.8
The primary target firm
[17] The Aerostructures Business comprises the manufacturing and assembly
business unit and the airframe structural design section of the development
engineering business unit of Denel Aviation. The parties submitted that the
primary transferred firm would focus on aerostructure design, development,
manufacturing and assembly.
Relevant market
Relevant Geographic market
[18] The Commission and the parties described the market as international. This is
because the merging parties and their competitors are active internationally.
The Commission and the parties relied on the European Commission on
Competition (“ECC”) case of British Aerospace and Gen Marconi
9 (“British
Aerospace matter”) where the ECC defined the market as international. For the
purposes of this transaction the Tribunal finds no reason to disagree with the
Commission’s and the merging parties’ conclusion.
The relevant product market
[19] The Commission relied on the definition of the market for aerostructures in the
ECC case of British Aerospace where the aerostructures market was defined
as:
“the metal fabrication aspects of aircraft production intended to
produce end products such as wings or fuselages. Aerostructures
encompass wide range of products from minor components such as
8 The parties submitted that ‘avionics’ means av iation electronics. It comprises of all electronic
systems designed for use on an aircraft. It is a suite of components and parts making up the
control, management and communication systems of an aircraft.
9 British Aerospace and Gen Marconi European Commission on Competition case number
IV/M.1438.
6
brackets and cables, through major units such as wings to final aircraft
building’10
[20] After considering the parties’ activities and relying on the ECC’s decision in the
British Aerospace matter, the Commission defined the market as the market for
the manufacturing, assembly and supplying of aerostructures. For the purposes
of this transaction, the Tribunal does not differ with the proposed market
definition.
Competition analysis
Horizontal Relationship
[21] The Commission submitted that there is a horizontal overlap in the activities of
the merging parties as shown below.
[22] Denel’s aerostructures business designs, manufactures, and assembles a
variety of aerostructure components and subsystems for an array of customers
worldwide.
[23] Saab supplies complex structural units in metal and composites as well as
subsystems to commercial and military aircraft manufacturers. It derives the
bulk of its turnover from supplying aerostructures to various aircraft
programmes. It also manufactures and assembles almost all aerostructures of
Gripen combat aircraft. For Airbus, Saab manufactures an array of
aerostructures in terms of various aircraft programmes, which include
manufacturing and assembly of mid and outer fixed leading edge of the wing of
the A380 superjumbo and ailerons of the airbus A320. With regard to BAE’s
aerostructure business, as indicated above, BAE has since sold this business
unit to Sprit Aerosystems Inc and the Tribunal will, as a result, not consider it.
11
[24] The parties submitted that it is difficult to obtain global market share figures for
the supply of aerostructures. They estimated the market share for the
Aerostructures Business to be 0.025% and for Saab to be less than 1%
10 British Aerospace and Gen Marconi European Commission on Competition case number
IV/M.1438.
11 The parties submitted that although BAE exited the aerostructure market, they will continue
11 The parties submitted that although BAE exited the aerostructure market, they will continue
to manufacture Hawk until it is completed
7
globally.12 The parties will therefore have less than 2% combined market share
post-merger in the market for the supply of aerostructures globally.
[25] Post-merger, the merging firms will c ontinue to face competition from players
such as Spirit Aerosystems, Vought Aircraft Industries INC, Latecoere,
Mitsubishi International Corporation, Societe Anonyme Belge de Constructions
Aeronautiques, GKN Aerospace and Stock Aerospace Industries. The parties
further submitted that there are approximately 25-30 firms that are active in this
tier of the market globally which compete with the merging firms.
[26] In our view, the proposed transaction is unlikely to raise competition concerns,
as the parties’ post-merger global market share remain low and that there are
other players that will continue to compete with the merging firms.
Vertical Relationship
[27] The Commission found that there is a vertical relationship between the merging
firms in that in the first instance, Saab and BAE have subcontracted the
Aerostructures Business to manufacture and supply them with aerostructures
for Gripen aircraft and Hawk military jet respectively. In the second instance,
Saab supplied the Aerostructure Business with materials that the Aerostructure
Business is utilising to manufacture aerostructures to be supplied to Saab.
13
[28] The Commission and the parties submitted that the vertical relationship
between Saab, BAE and the Aerostructures Business flows from the Defence
Industrial Participation (DIP) obligations that the South African government has
imposed on them when it awarded contracts for the supply of Gripen aircraft
and Hawk military jet to the South African National Defence Force (“SANDF”).
DIP is a program in terms of which suppliers of military equipment to the
SANDF, are required to “offset” the cost thereof by benefiting the South African
economy through investment, technology and skills transfer. As part of fulfilling
economy through investment, technology and skills transfer. As part of fulfilling
this obligation, SAAB and BAE channel their supply through Denel or other
local suppliers
12 At the hearing the parties submi tted that the source of their estimated market share figures
were obtained from Boeing and Airbus, the major players in the aerostructures industry.
13 Saab will manufacture and deliver a comple te Gripen aircraft and BAE will manufacture and
deliver a complete Hawk military jet.
8
[29] The commercial aerospace industry consists of five tiers. 14 The first tier
involves the market of complete aircraft in which original equipment
manufacturers are active. The players active in this market include Airbus and
Boeing. Saab and BAE are considered first tier suppliers in respect of the
supply of a complete Gripen aircraft and Hawk military jet respectively. The
players in the first tier market normally subcontract certain work involving the
structures or subsystems of the complete aircraft to tier-two suppliers. Tier-two
suppliers supply what is called the “main structure” of the aircraft. Players that
are active in tier two include Saab, as a supplier of main structures.
[30] Tier-two players then subcontract tier-three players such as Aerostructures
Business, which will be responsible for assembling structures. The parties
submitted that there are approximately twenty-five to thirty firms active in this
tier of the market. Tier-three players then subcontract to tier-four to assemble
complex parts. The parties submitted that there are about 800 players active in
this market. Tier-four then subcontract tier-five suppliers to supply parts and
materials.
[31] In the previous financial year, the Aerostructures Business, a tier-three player,
supplied Saab, a tier-one player, with a variety of aerostructures. 15 These
aerostructures were supplied to Saab for it to manufacture and deliver complete
Gripen Aircraft.
16
[32] In the previous financial year, the Aerostructures Business also supplied a
variety of aerostructures to BAE, one of the major shareholders of Saab. 17
These are aerostructures for Hawk military jet, which Aerostructure Business
supplied to BAE for BAE to use them to manufacture a Hawk military Jet.
14 These tiers exist due to the fact that indus try players want to spread the risks associated
with non-fulfilment, by subcontracting some acti vities to other suppliers. These risks include
heavy financial penalties for failure to deliver a particular product in time and in accordance
with the supply contract awarded to a particular supplier.
15 These include Gripen Pylon Series, Gripen MLGU Assembly, Gripen Rear Fuselage
Assembly, Gripen Design and Development Centre, Gripen Rear Fuselage parts, and Gripen
Saab Technology Transfer Plan.
16 In this regard Saab is a first tier supplier and the Aerostructures Business is a third tier
suppier. Saab subcontracted other players which are second tier suppliers to provide main
structures of Gripen aircraft. The details of these other players in a second tier are not
necessary since they are not part of the current transaction.
17 Hawk Tailplane RSA, Hawk Tailplane other, Ha wk Flap RSA, Hawk Airbrake, Hawk India
Tooling, Regional Jet Aileron
9
[33] Saab, as a first tier market player , faces competition from players such as
Boeing and Airbus while Aerostructures Business, as a third tier market player,
faces competition from approximately 30 other players globally.18
[34] The Aerostructures Business supplied Saab with aerostructures of Gripen
aircraft to the value of approximately R [confidential] million in the preceding
financial year. The overall aerostructure market is valued at approximately R
[confidential] billion. The R [confidential] million constitutes 0.04% of the entire
global aerostructures market. This percentage of the aerostructures supplied to
Saab by the Aerostructures Business is insignificant.
[35] With regard to the vertical relationship between BAE and the Aerostructures
Business, the Aerostructures Business supplied BAE with aerostructures to the
value of R[confidential] million. This constitutes 0.02% of the entire global
aerostructure market. This percentage is also insignificant.
[36] In addition, the vertical relationship between the Aerostructures Business and
SAAB and BAE, as a result of the DIP obligations, is only expected to last until
either Saab or BAE has completed and delivered Gripen aircraft or Hawk
military jet in terms of their individual supply contract to the South African
Defence Force. Of course such a relationship could occur again in the future in
the event of them being awarded a further contract by the South African
Government. In our view this would not constitute a basis for prohibiting this
current transaction. Whether a further contract is awarded to the parties or
whether in fact the South African Government will issue another contract for the
supply these military aircraft remains to be seen. The competitiveness
landscape will have to be assessed at the time that such eventuality occurs.
[37] On the basis of the information provided to us regarding the relative market
[37] On the basis of the information provided to us regarding the relative market
shares of the merging parties and the number of players in the relevant markets
as discussed above, we are of the view that there is little likelihood of
foreclosure.
18 Record p33.
10
Public Interest Issues
[38] There are no public interest issues.
Conclusion
[39] The transaction will not lead to a substantial prevention or lessening of
competition and is accordingly approved.
________________ 19 October 2006
Y C a r r i m DATE
Tribunal Member
N Manoim and U Bhoola concur in the judgment of Y Carrim.
Tribunal Researcher: R Kariga
For the merging parties: Lesley Morphet and Leslie de Bruyn, Deneys Reitz
Attorneys
For the Commission : Edwina Ramohlola and Makgale Motlala (Mergers and
Acquisitions)