Brief Summary

Competition Law — Merger Approval — Gold Fields Limited's acquisition of Barrick Gold South Africa (Pty) Ltd and Western Areas Limited — Gold Fields sought to acquire control over South Deep Gold Mine through two transactions involving Barrick and WAL, both of which held joint control over the mine — The Competition Tribunal treated the transactions as one for the purposes of assessing competition effects — Tribunal unconditionally approved the mergers, concluding that the acquisitions would not substantially lessen competition in the relevant market and would enhance operational efficiencies.

Comprehensive Summary

Summary of Judgment

1. Introduction

These were large merger proceedings before the Competition Tribunal of South Africa, heard and decided on 22 November 2006, with written reasons issued on 6 December 2006. The Tribunal considered two notified mergers under Case No.: 83/LM/Oct06 (Gold Fields Limited and Barrick Gold South Africa (Pty) Ltd) and Case No.: 84/LM/Oct06 (Gold Fields Limited and Western Areas Limited).

The primary acquiring firm was Gold Fields Limited (“Gold Fields”), a publicly listed company. The primary target firms were Barrick Gold South Africa (Pty) Ltd (“Barrick South Africa”) and Western Areas Limited (“WAL”). Barrick South Africa and WAL each held 50% in the Barrick Gold Western Areas Joint Venture, which owned and operated the South Deep Underground Gold Mine (“South Deep”).

Although the parties notified two mergers separately, the Tribunal, for purposes of its analysis and reasons, treated them as a single composite transaction because both steps were directed at the same economic end-result, namely Gold Fields’ acquisition of control over South Deep. The Competition Commission had been requested by the parties to consider the competitive effects on the assumption that there was one transaction aimed at that acquisition.

The general subject-matter of the dispute concerned whether the proposed transaction(s) would be likely to result in a substantial prevention or lessening of competition in the relevant market(s), and whether any public interest considerations arose under the competition law merger control framework.

2. Material Facts

Gold Fields was a public company listed on the JSE Securities Exchange (and also traded/listed on various international exchanges as described in the record). The Tribunal recorded that Gold Fields was not directly or indirectly controlled by any single company, and it identified several significant minority shareholders, none of which controlled Gold Fields.

Barrick South Africa was the first target firm. The Tribunal recorded that Barrick South Africa’s entire issued share capital was held by PDG Aureate Limited, a special purpose vehicle incorporated in Mauritius, which was a wholly owned subsidiary within a corporate chain ultimately controlled by Barrick Gold Corporation (a Canadian entity). The Tribunal recorded that there was no single entity that directly or indirectly controlled Barrick Gold Corporation.

WAL was the second target firm. WAL was also a publicly listed company on the JSE and was not directly or indirectly controlled by any one company. The Tribunal recorded WAL’s larger shareholders, including Harmony Gold Mining Company Limited (approximately 29.2%), JCI Investment Finance (Pty) Ltd together with subsidiaries (approximately 21.6%), and Gold Fields itself (approximately 18% at the time reflected). WAL, like Barrick South Africa, held a 50% interest in the joint venture that owned and operated South Deep, meaning that Barrick South Africa and WAL exercised joint control over South Deep before the transaction.

The transaction was structured in two stages, each directed at one of the joint venture partners, with the intended end-result that Gold Fields would obtain sole control of South Deep. The first stage, described as the “Barrick transaction”, entailed Gold Fields acquiring the entire issued share capital of Barrick South Africa, thereby obtaining Barrick South Africa’s 50% interest in South Deep. The second stage, described as the “WAL transaction”, entailed Gold Fields acquiring control over WAL, which held the remaining 50% interest in South Deep.

A material aspect noted by the Tribunal was that, at the time of the hearing, it was not clear whether Gold Fields would ultimately acquire more than 50% of WAL’s issued shares. However, the Tribunal recorded that it appeared Gold Fields would acquire a sufficient stake to control the majority of votes at a general meeting, and therefore could be regarded as controlling WAL for purposes of section 12(2)(b) of the Competition Act (as referenced in the reasons). This was linked to the described mechanisms for control, including a general offer to WAL shareholders and a specific acquisition of WAL shares from JCI together with option arrangements that would increase Gold Fields’ voting interest.

The Tribunal recorded the parties’ stated commercial rationale. Gold Fields sought increased exposure to South Deep and asserted that South Deep’s proximity and contiguity to Gold Fields’ Kloof mine would enable mining synergies and potentially lower marginal costs by using shared infrastructure. Barrick intended to dispose of its interest because it lacked deep-level underground mining expertise, which Gold Fields had. JCI’s disposal rationale was framed as exchanging a WAL stake for an investment in a more diversified gold mining company at a premium.

3. Legal Issues

The Tribunal was required to determine whether the mergers (considered together as one composite transaction for analytical purposes) were likely to lead to a substantial prevention or lessening of competition in any relevant market, given the consolidation of interests leading to Gold Fields’ intended sole control of South Deep.

This required the Tribunal to identify and accept appropriate definitions of the relevant product market and relevant geographic market, and then to assess competitive effects primarily through market share evidence and the market’s structural characteristics as described in the record and prior Tribunal decisions.

The issues predominantly concerned the application of law to fact within a merger control assessment. The Tribunal also had to address, as part of the transaction description and its legal characterisation, whether Gold Fields’ anticipated stake in WAL would amount to “control” for purposes of the statutory control concept, specifically with reference to section 12(2)(b) as cited in the reasons.

A further question was whether any public interest issues arose that could affect the approval decision; this required a value-based assessment in principle, but on the facts the Tribunal found none.

4. Court’s Reasoning

The Tribunal accepted the relevant product market definition advanced by the parties and the Commission as the market for the production and supply of gold. This acceptance was expressly grounded in the Tribunal’s prior merger decisions involving gold producers, in which the same product market definition had been adopted.

On the relevant geographic market, the Tribunal accepted the parties’ and Commission’s approach that the market was international. The reasons reflected two supporting considerations: most South African gold produced by the merging parties and their competitors was converted into bullion and sold on the international bullion market, and the Tribunal had previously defined the geographic market in these terms. The Tribunal stated it had no reason to deviate from the parties’ and Commission’s definitions of either product or geographic market.

In evaluating competitive effects, the Tribunal considered market share information for major international gold producers and the estimated impact of adding South Deep’s output to Gold Fields’ overall position. The Tribunal recorded that South Deep’s 2005 production was 14.34 tonnes, equating to approximately 0.56% of total world gold production. On this basis, the Tribunal accepted that the transaction was expected to increase Gold Fields’ estimated world market share by 0.56%, from 5.18% to 5.74%.

The Tribunal’s evaluation relied not only on the numerical change but also on precedent-based comparative reasoning. It referred to the Tribunal’s decision in Harmony Gold Mining Company Limited and Gold Fields Limited, Case No. 93/LM/Nov04, in which it had remarked that a combined market share of 9.5% would be insufficient to give rise to an anti-competitive effect in the relevant market. The Tribunal also referred to Barrick Gold Corporation and Placer Dome Incorporated, Case No. 118/LM/Dec05, where it had stated that even the creation of the largest gold producer in the world was unlikely to substantially prevent or lessen competition because of the international character of the gold market.

Against this background, the Tribunal reached an evaluative conclusion that Gold Fields’ market share increase was small and did not raise competition concerns in the international market for the production and supply of gold. The Tribunal accordingly found that the transaction did not result in a substantial prevention or lessening of competition.

On public interest, the Tribunal stated that there were no public interest issues relevant to the transaction, and therefore none that could alter the competition-based conclusion.

5. Outcome and Relief

The Tribunal unconditionally approved the mergers and issued merger clearance certificates on 22 November 2006, treating the two notified mergers as part of a single overall transaction for purposes of its analysis and end-result assessment.

The approval was granted without conditions, on the basis that the transaction did not lead to a substantial prevention or lessening of competition and that no public interest issues arose.

The reasons, as provided, did not record any costs order.

Cases Cited

Harmony Gold Mining Company Limited and Randfontein Estates, Case No. 16/LM/Feb00.

Franco-Nevada Mining Corporation Limited and Gold Fields Limited, Case No. 77/LM/Jul00.

Randfontein Estates Limited and Anglogold, Case No. 03/LM/Jan01.

Cidet No. 383 (Pty) Ltd and the Free State Operations of Anglogold Ltd, Case No. 05/LM/Jan02.

Crown Gold Recoveries (Pty) Ltd and IDC of South Africa Limited and Khumo Bathong Holdings (Pty) Ltd, Case No. 31/LM/May02.

Armgold/Harmony Freegold Joint Venture Company (Pty) Ltd and St Helena Gold Mines Limited, Case No. 54/LM/Aug02.

Anglogold Ltd and Driefontein Consolidated (Pty) Ltd, Case No. 66/LM/Nov03.

Harmony Gold Mining Company Limited and African Rainbow Minerals Gold Ltd, Case No. 25/LM/May03.

Ubuntu-Ubuntu Commercial Enterprises (Pty) Ltd and Anglovaal Mining Ltd/Avgold Ltd/Harmony Gold Mining Company Ltd, Case No. 06/LM/Feb04.

Harmony Gold Mining Company Limited/Gold Fields Limited, Case No. 93/LM/Nov04.

Barrick Gold Corporation and Placer Dome Incorporated, Case No. 118/LM/Dec05.

Legislation Cited

Competition Act (section 12(2)(b) as referenced in the reasons).

Companies Act, No. 61 of 1973 (as amended), section 440.

Rules of Court Cited

No rules of court were cited in the reasons provided.

Held

The Tribunal held that, assessed in the international market for the production and supply of gold, the transaction would result in only a small increment in Gold Fields’ market share (approximately 0.56%, from 5.18% to 5.74%) attributable to South Deep’s output. On this basis, and with reference to the Tribunal’s prior merger decisions addressing the global character of gold markets, the Tribunal found that the transaction did not lead to a substantial prevention or lessening of competition.

The Tribunal further held that there were no public interest issues arising from the transaction that affected the merger assessment. The mergers were therefore approved unconditionally.

LEGAL PRINCIPLES

The Tribunal applied the principle that merger assessment requires identification of the relevant product and geographic markets, and that in gold producer mergers the appropriate product market may be characterised as the production and supply of gold, with the geographic market characterised as international where output is sold into the international bullion market and prior decisions support that characterisation.

The Tribunal applied the principle that a merger’s competitive impact may be assessed by reference to market shares and the magnitude of change attributable to the transaction, particularly in a market with an international scope and numerous substantial competitors. In this matter, the Tribunal treated a small increment in market share, viewed in light of earlier Tribunal findings about the international gold market, as not giving rise to a substantial prevention or lessening of competition.

The Tribunal applied the statutory concept of control in merger analysis with reference to section 12(2)(b) (as cited), indicating that control can arise from the ability to control the majority of votes at a general meeting, even where shareholding may be below an absolute majority, depending on the facts as presented in the record.

The Tribunal applied the principle that merger approval also requires consideration of public interest factors, and where none are raised on the facts, they do not alter the competition assessment or outcome.

Gold Fields Limited and Barrick Gold South Africa (Pty) Ltd / Western Areas Limited (83/LM/Oct06) [2006] ZACT 94; [2007] 1 CPLR 157 (CT) (6 December 2006)