COMPETITION TRIBUNAL OF SOUTH AFRICA
Case No: 107/LM/Dec06
In the matter between:
Group Five Construction (Pty) Ltd Acquiring Firm
And
Quarry Cats (Pty) Ltd Target Firm
Panel : DH Lewis (Presiding Member), N Manoim (Tribunal
Member), and Y Carrim (Tribunal Member)
Heard on : 16 February 2007
Decided on : 16 February 2007
Reasons Issued: 5 March 2007
Reasons for Decision
Approval
1] On 16 February 2007 the Tribunal issued a merger clearance certificate
unconditionally approving the merger between Group Five Construction (Pty)
Ltd and Quarry Cats (Pty) Ltd. The reasons for approving the transaction follow.
The Parties
2] The primary acquiring firm is Group Five Construction (Pty) Ltd (‘Group Five
Construction’), a private company controlled by Group Five Limited (‘Group
Five’). No single shareholder controls Group Five. The following are the major
shareholders of Group Five which hold more than 5% of its total issued share
capital in the indicated percentages:
[2.1] Group Five BEE Share Scheme Control Account 25.39%;
[2.2] Old Mutual Group 6.42%;
[2.3] Morgan Stanley 5.36%;
3] The primary target firm is Quarry Cats (Pty) Ltd (‘Quarry Cats’), a wholly owned
subsidiary of Cobblers Limited (‘Cobblers’). Cobblers is a wholly owned
subsidiary of SCI Essell Offshore Services Limited, incorporated in Mauritius. 1
Quarry Cats directly or indirectly owns approximately ten firms. 2
4] Group Five directly and indirectly controls a number of firms. 3
The Transaction
5] In terms of the agreement, Cobblers sells to Group Five Construction the entire
issued share capital of Quarry Cats, and all claims on loan account or
otherwise which Cobblers has against Quarry Cats or any of the firms
controlled by Quarry Cats. 4
Rationale for the transaction
6] Group Five Construction views the transaction as enhancing and
complementing its expansion and growth strategy in the infrastructure sector
and mitigating the risk of future materials shortages with respect to key
infrastructure projects undertaken in Gauteng.
7] Cobblers perceive the transaction as an opportunity to disinvest from South
Africa.5
1 SCI Essell is wholly owned by Mr Kim Fat Ho Fong.
2 Record p99.
3 Schedule 13 attached to CC4(2) form compiled by Group Five Construction.
4 The sale of the shares in and any claims against Quarry Cats or against any of the firms
controlled by it shall be valued as at the effective date, being 1 October 2006. The sale of
shares and claims exclude the ‘excluded claims’, as defined in the agreement.
5 Cobblers wants to disinvest from South Africa because of its general long term weak view
about Africa as compared to emerging markets in Europe.
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The parties’ activities
The Primary Acquiring Firm
8] Group Five is one of the four largest construction companies in South Africa.
The business of Group Five can be divided into three clusters:
[8.1] Infrastructural development involving the creation of property investment assets
which include, large scale PublicPrivate Partnership (‘PPP’) infrastructure
concessions;
[8.2] Production of fibre cement building products and large diameter steel pipes;
and
[8.3] Construction of buildings, and housing , road and earthworks and engineering
projects.
The primary target firm
9] The target company conducts the following businesses:
[9.1] Mining dolomite and quartzite rocks;
[9.2] Excavating, loading and hauling of rock from the quarry pit;
[9.3] Crushing and screening of slag dumps, runofmine ore and rocks from the
quarry on a contract basis;
[9.4] Supply of crushed sand and stones of different sizes from the quarry called
aggregates; and
[9.5] The manufacturing and supply of readymix concrete and readymix mortar.
10] The target company also conducts the business of labour brokers and property
investors in properties used for its dolomite mining operations and as a
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residence for its site managers.
Overlapping activities
11] The acquiring group does not own quarries and sand and stone products and
does not sell these products to third parties. There is accordingly no horizontal
overlap in the market for the supply of sand and stone.
12] The companies in the Group Five group do not own operational readymix
plants but mix their own concrete on site for internal use. 6 Group Five has,
however, occasionally sold readymix concrete to third parties from its site
batching plants and is still doing so at its site batching plant in Vereeniging,
Gauteng.7 Furthermore, Group Five and the Mia Group of companies intend to
construct a readymix plant near Midrand 8 which will, once it is operational,
operate in the same geographic market as the target company. Hence, to the
extent that there will be some geographical overlap in the activities of the
merging parties in the readymix market, such overlap will be minimal and will
be restricted to Vereeniging and Midrand.
13] Although Group Five does crushing and screening from time to time to supply
consortia (which it forms part of) with sand and stone, it does so only for
internal use. The target company provides the services of crushing and
screening to mines where it crushes and screens slag dumps on a contract
basis. There is therefore no product and geographic overlap in the market for
the provision of crushing and screening services.
Vertical integration
14] The transaction gives rise to vertical integration in that the acquiring firm is
involved in the downstream activities of building and roads construction and
civil engineering, while the target firm is involved in the upstream activities of
6 Record p111.
7 The parties stated that the acquiring group sold no concrete from any sitebatching plant to
third parties since 1 July 2006 (since these construction projects were finalised, except from
the plant at Mittal, Vereeniging.
8 This plant will service the Waterfall Estate development, but will also sell readymix concrete
to other purchasers.
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supply of sand and stone, readymix concrete 9 and the provision of crushing
and screening services.
Relevant markets
15] The parties and the Commission have submitted that the relevant product
market comprises the building and construction market, the readymix concrete
market, the sand and stone market, and the market for crushing and screening
services. We now turn to consider these markets in detail.
Building and construction
16] In its decision in Murray & Roberts Limited and Concor 10 the Tribunal stated
that building construction (focusing on the large project market) constitutes a
product market.11 The Commission and the parties have submitted that the
market for building construction is national. Most building construction firms
like the acquiring group, Murray & Roberts and Concor, WBHO, Grinaker,
Stocks & Stocks and Liviero, have a national presence and customers can
reasonably turn to firms which are located in any part of the country.
17] The estimated market shares of the acquiring group and its competitors in the
construction market in Gauteng are set out below:
TABLE 1 Estimated market share in South Africa for building construction
Competitor Estimated national
market shares for the
provision of building
construction services
focusing on the large
project submarket for
2005 (%)
Estimated market share
in the market for all
building construction
based on turnover
during the year ended 30
June 2006 (%)
9 Quarry Cats is involved in the market for the provision of readymix concrete through its
subsidiary, Affrimix.
10 Case No 101/LM/Oct05.
11 Refer to par 11 of the Murray & Roberts and Concor case.
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Group Five 19 4
Murray and Roberts 19 2
WBHO 23 4
Grinaker LTA 19 2
Stocks and Stocks 19 2
Others 1 86
18] The acquiring group holds 19% in the market for the provision of building and
construction services. The merged entity will continue to face competition from
various other firms with a national footprint. Murray & Roberts and Concor,
WBHO, Grinaker LTA, Stocks and Stocks hold amongst themselves an
estimated combined national market share of 80% of the large building
construction segment.
19] The construction companies use sand and stone and readymix concrete in their
construction operations. The market shares above show the potential demand
for sand and stone and readymix concrete from different suppliers. As shall be
seen below, the target company has a small market share in the markets of
sand and stone and readymix concrete. Thus, should Group Five decide not to
supply its competitors with sand and stone and readymix concrete, the negative
implications on competition, if any, stemming from such a refusal will be
minimal. These competitors can source the materials from other suppliers some
of whom have larger market shares than the target company.
Readymix Concrete
20] Concrete can be obtained by either mixing on site where construction is taking
place (also called ‘site batching’) or a constructor can purchase readily mixed
concrete (called ‘readymix’) from a supplier selling readymix concrete. The
Commission and the parties submitted that the geographic market for readymix
concrete is regional because readymix plants are usually within a few
kilometres of worksites of raw materials such as sand and stone. Readymix
concrete is usually only delivered up to approximately 25km from the plant,
although delivery can take place up to 100km from a readymix plant in special
circumstances.
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21] The merging parties submitted that the target company has approximately 10%
market share in each of the respective areas in which it supplies readymix
concrete. The merging parties estimated a similar distribution of market shares
for each of the areas concerned, with Holcim and Lafarge holding an estimated
combined market share of 53% in each of these areas. The relevant
geographic markets are Chloorkop, Jet Park, Blue Hills, Benoni, Johannesburg
City and Honeydew. The estimated market shares in Chloorkop are set out in
Table 2 below and they resemble estimated market shares and competitor
composition of other relevant geographic markets.
22] The target company conducts business in the market for the provision of
readymix concrete through its subsidiary, Affrimix Ready Mixed Concrete (Pty)
Ltd. The estimated market shares of Affrimix and its competitors for the year
ended 31 December 2005 in the narrower readymix concrete market 12 are as
follows:
TABLE 2 Estimated market shares for Chloorkop for the supply of readymix
concrete
Competitor Estimated market share in the 20km
radius from Chloorkop (%)
Holcim 32
Lafarge 21
Pronto 15
Wearnes 8
Affrimix (Quary Cats) 10
Other 14
23] Form the above table, it is clear that the merged entity will continue to face
competition from other major competitors like Holcim, Lafarge, Pronto, and
Wearnes. In addition, the merging parties submitted, that post merger, Quarry
Cats will continue to supply readymix concrete to third parties in order to ensure
its sustainability. 13 It is thus unlikely that there will be a foreclosure of
competition in the relevant geographic markets since there are other options
12 The narrower readymix market excludes site batching except to the extent that the
acquiring firm sells concrete mixed on site into the market.
acquiring firm sells concrete mixed on site into the market.
13 The merging parties submitted that Quarry Cats would form a very small portion of the
business and turnover of Group Five. It would need to retain its existing customers post
merger, in order to ensure its viability and profitability. See record, p134.
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that customers can turn to and post merger, Quarry Cats will continue to supply
third parties.
Sand and stone
24] The sand and stone supplied by the target company is sometimes called
‘aggregates’. These are obtained from quarrying and waste rock dumps from
mining. The stones are crushed into different sizes. 19mm stones are used in
manufacturing concrete. Stones not of a suitable size are sold for use in such
areas as car parks, bricks and the precast concrete industry. The Commission
and the parties submitted that the market for the supply of sand and stone is
regional. This is so because sand and stone are heavy and expensive to
transport relative to their values. Because of the high transport costs suppliers
of sand and stone usually distribute their products within a limited radius of
approximately 40km from each quarry. Readymix concrete plants are thus
usually situated within close proximity of the supplies of the composite
materials. The target company has two quarries from which it gets sand and
stones and these are Modderfontein and Laezonia. Where the target company
does not have quarries it purchases sand and stone from other suppliers. For
instance, the target company does not have quarries in Jet Park and Chloorkop
but has a readymix concrete plant there; it purchases its sand and stone from
Klipfontein Quarries and PPC.
25] The estimated market shares of the target company and its competitors in the
market for the supply of sand and stone in Laezonia and Modderfontein are as
follows:
TABLE 3 Estimated market shares for the supply of sand and stone at Laezonia
Competitor Location of Quarries Estimated market share in
the 35km radius from
Laezonia (%)
Holcim Jukskei, Olifantsfontein
and Roodekrans
35
PPC Mooiplaas and Laezonia 35
Quarry Cats Laezonia 10
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Littleton Quarries Littleton 4
Canyon Rock/ SPH Midrand 4
Drift Super Sand Muldersdrift 4
De Bruyns Muldersdrift 4
TABLE 4 Estimated market shares for the supply of sand and stone at
Modderfontein
Competitor Location of quarries Estimated market share
in the 35km radius from
Modderfontein (%)
Holcim Jukskei, Olifantsfontein,
Rooikraal and Vogels
60
Quarry Cats Modderfontein 18
Klipfontein Quarries Chloorkop 10
Canyon Rock/ SPH Midrand 6
SA Stone Benoni South 6
26] The target firm has estimated market shares of 10% at Laezonia and 18% at
Modderfontein in the market for the supply of sand and stone. It continues to
face competition from Holcim, PPC, Klipfontein Quarries, and Littleton Quarries.
It is unlikely that this transaction will lead to foreclosure in the market of sand
and stone since there are other suppliers that customers of the target company
can turn to and these have a substantial percentage of the market share.
Crushing and screening
27] Crushing and screening services are offered on contract basis to clients of
varied occupation. For the purposes of these reasons the relevant services are
in as far as they are rendered to clients involved in the construction industry
either as contractors or as suppliers of raw materials to constructors. The
Commission and the parties have submitted that the market for the provision of
crushing and screening services is national. This is so because the flexibility,
mobility and portability of plants which have been developed by manufacturers
in recent years, allow crushing and screening work to be performed for different
types of customers and almost anywhere in the country. The merging parties
submitted that although Quarry Cats is located in Gauteng, it delivers crushing
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and screening services throughout South Africa (Kathu, Krugersdorp,
Middelburg, Lesotho, Cato Ridge and Secunda). When a contract is secured,
the target company sets up a plant at the location the crushing and screening
services are delivered.
28] The estimated national market shares of the largest competitors in the market
for the service of crushing and screening is as follows:
TABLE 5 Estimated market shares in South Africa for the provision of crushing
and screening services
Competitor Estimated market share (%)
The target company 10
The acquiring group 0.0001
Blasting and Excavating International 35
Crushing and Screening 15
Quarry and Mining Group 15
Grinaker/ Lta 10
Concor Mining 5
Patcon Sales 5
Other 4.9999
29] The target company has an estimated market share of 10% in the market for
crushing and screening services. Postmerger, there are many competitors who
will compete with the merged entity in the provision of crushing and screening
services and these competitors have larger market shares than the target
company. These competitors include Blasting and Excavating International,
Crushing and Screening and Quarrying and Mining. As a result of the aforesaid,
input foreclosure is an unlikely possibility.
Public Interest Issues
30] There are no public interest issues.
Conclusion
31] The transaction will not lead to a substantial prevention or lessening of
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competition and is accordingly approved.
________________ 5 March 2007
Y Carrim DATE
Tribunal Member
N Manoim and D Lewis concur in the judgment of DH Lewis.
Tribunal Researcher: R Kariga
For the merging parties: L Grange and M Gouws Hofmeyr Herbstein & Gihwala
Inc.
For the Commission : M Ngobese (Mergers and Acquisitions)
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