Brief Summary

Competition Law — Merger Approval — Nampak Products Limited acquiring remaining 50% of Burcap Plastics (Pty) Ltd — Tribunal assessing competition implications of merger — Finding that Nampak and Burcap produce complementary products but also recognizing potential for substitutability in the market — Merger conditionally approved based on evidence of market dynamics and future trends in container technology.

Comprehensive Summary

Summary of Judgment

1. Introduction

These reasons concern merger proceedings before the Competition Tribunal of South Africa in case 71/LM/Oct06, in which the Tribunal was required to decide whether to approve (and if so, on what terms) the acquisition by Nampak Products Limited of the remaining shares in Burcap Plastics (Pty) Ltd.

The acquiring firm was Nampak Products Limited (“Nampak Products”), a wholly owned subsidiary of Nampak Limited, a public company listed on the JSE Securities Exchange. The target firm was Burcap Plastics (Pty) Ltd (“Burcap”), a private company in which Nampak Products already held 50% prior to the transaction, with the remaining 50% held equally (25% each) by the Frits Burger Family Trust and the Hans Westhof Trust.

The Tribunal heard the matter on 8 December 2006 and 22 March 2007, having postponed the hearing after calling for further information and directing the Competition Commission to investigate additional aspects that emerged from new documents. The Tribunal also heard evidence from a representative of a major customer, Plascon (Barlow Plascon South Africa), through Mr Gwilliam, its Group Procurement Executive. On 26 March 2007, the Tribunal conditionally approved the merger; these reasons were issued on 25 June 2007.

The dispute concerned the competition assessment of a transaction converting a jointly controlled plastic container business into a wholly owned subsidiary of Nampak Products, with particular attention to industrial container markets, substitution between metal and plastic containers, and the competitive implications of exclusive licensing of emerging PET paint container technology.

2. Material Facts

Nampak Products already held 50% of Burcap and sought to acquire the remaining 50%. Burcap itself held a 50% interest in Burcap Plastics Gauteng (Pty) Ltd and Burcap Plastics IML (Pty) Ltd, with the remaining 50% in each held by Nampak Products. The merger was triggered by the exercise of put options by the Burger Family Trust and Westhof Trust under a shareholders’ agreement concluded in 2000, which entitled each trust (holding 25%) to put its shares to Nampak after five years, effectively from 30 September 2006.

A relevant historical fact was that in 2000, Nampak’s subsidiary Metal Box South Africa Limited (MBSA) acquired 50% of Burcap in a transaction that constituted an intermediate merger and was notified under the Competition Act. Due to the Competition Commission’s failure to extend the investigation period timeously, that merger was deemed approved under section 14(2). The Tribunal recorded the implication that Nampak acquired joint control by default rather than through a merits-based competition assessment, and that it could not be said that the Commission had fully considered the competitive implications of that earlier merger.

The Tribunal treated the market definition exercise as difficult to undertake with precision given the variety of containers, customer uses (food versus industrial), and the extent of supply-side substitution. Nonetheless, it adopted two broad segments as a workable basis for analysis. The first segment was injection moulded plastic containers for the food industry. The second segment was industrial containers for liquids used in products such as paint, which could be manufactured in metal or plastic and which were increasingly subject to technological change and customer-driven substitution.

In the industrial segment, the Commission had reasoned that Nampak’s metal paint containers and Burcap’s plastic paint containers were complements, largely because solvent-based paints could only be stored in metal, while plastic was preferred for water-based paints. The Tribunal accepted the factual premise that water-based paints can be stored in either plastic or metal (though metal typically requires lacquer coating, increasing cost), and that solvent-based paints were not then generally stored in plastic because plastic is susceptible to solvent attack. However, it also accepted evidence that customers were increasingly substituting plastic for metal where feasible, that plastic containers were generally 15–20% cheaper, and that where one product was in short supply customers sometimes substituted to the other.

The Tribunal placed weight on evidence that the market was dynamic, with Nampak itself acknowledging a trend of migration from metal to plastic for water-based paints. It recorded that Nampak viewed the acquisition of Burcap, investment in improved plastic container production meeting major customers’ standards (particularly Plascon’s), and investment in new plastic technology as part of its strategic response to this trend.

A key factual feature in the competitive assessment was the role of Plascon as a major customer and its then reliance on Pailpac (Pty) Ltd as the sole supplier of plastic containers meeting its quality requirements. Burcap did not then supply Plascon because it lacked the technology to meet Plascon’s standards. Nampak had decided to upgrade Burcap’s Durban plant to manufacture plastic containers meeting Plascon’s requirements, and evidence indicated that production would commence in Durban for logistical reasons and later continue in Gauteng at a Nampak plant.

Another material fact concerned new technology for plastic containers capable of storing solvent-based paints. The Tribunal accepted that overseas technologies existed (not yet exploited domestically) and that Nampak had acquired exclusive rights to produce polyethylene terephthalate (PET) paint containers from an overseas firm (referred to as PCC). The Tribunal also noted that, through Burcap, Nampak would obtain control over another plastic container patent, the Bocan, held under an exclusive licence from a Danish company.

These facts led to the tendering of a condition: for three years after approval, Nampak would not conclude any further exclusive licence agreements for PET paint container manufacture and sale within South Africa (save for the existing PCC licence), together with compliance reporting and an obligation to notify the Commission if the PCC licence would not result in commercial exploitation of 1-litre and 5-litre PET paint containers, and to confirm cancellation before concluding any other exclusive PET licence.

3. Legal Issues

The central legal questions were whether the proposed transaction was likely to result in a substantial prevention or lessening of competition in any relevant market, and, if so, whether the merger could be approved subject to conditions addressing the identified competitive risks.

The dispute required the Tribunal to make findings involving application of law to fact. This included market definition for merger analysis, assessment of current and future competitive constraints, and a forward-looking evaluation of dynamic characteristics of the market, including innovation and product differentiation, as contemplated by section 12(2)(e) of the Competition Act.

A further issue, arising from the factual matrix, was whether the transaction altered incentives and competitive outcomes despite Nampak’s existing 50% shareholding, particularly by changing Burcap from a joint venture partner with independent interests into a wholly controlled subsidiary whose investments and strategic direction could be aligned with Nampak’s broader industrial container strategy.

4. Court’s Reasoning

The Tribunal approached market definition pragmatically, acknowledging the difficulty of defining container markets with precision due to product variety, differentiated customer requirements, and differing substitution patterns. It nonetheless identified two broad market segments sufficient for the merger analysis: plastic injection moulded containers for the food industry, and industrial liquid containers (including paint containers) where both metal and plastic technologies were relevant and increasingly substitutable.

In the food container segment, the Tribunal agreed with the Commission and the merging parties that there were no competition concerns. The Tribunal relied on characteristics including low barriers to entry, a large number of players, and a high degree of supply-side substitution. It accepted market share evidence that the merged entity would have a post-merger share of 19%, with at least three other firms each holding approximately 14.1%, and evidence of multiple new entrants over five years. On these facts, the Tribunal found no basis to conclude that the merger would materially diminish competition in that segment.

The Tribunal’s reasoning differed from the Commission in respect of the industrial container segment. Whereas the Commission had treated metal and plastic paint containers as complements, the Tribunal concluded that they should be regarded as at least partial substitutes capable of constraining each other’s pricing. It emphasised evidence of actual customer substitution where possible, customers’ responsiveness to price differentials, and the expectation that technological developments would increase substitutability further, including the prospect of plastics becoming viable for solvent-based paints.

A central part of the Tribunal’s analysis concerned the effect of moving from joint control to sole control. It reasoned that sole control could change incentives because Nampak would be able to use Burcap strategically to protect Nampak’s position in metal containers and, as plastics became stronger substitutes, to manage pricing and product positioning across both technologies. The Tribunal was concerned that post-merger Nampak could reduce the scope for customers to arbitrage between metal and plastic products by raising plastic prices closer to metal prices, thereby protecting its position in metal containers.

The Tribunal assessed the constraint from alternative suppliers and entry. Although Nampak argued that customers could turn to other suppliers, the Tribunal considered that the number of suppliers able to meet major customers’ volume, service, and technological requirements was limited. It accepted evidence that Plascon, a particularly important customer to Nampak, sourced plastic containers only from Pailpac due to stringent standards, and that Burcap did not then meet those standards. It reasoned that the merger removed the possibility of separate entry by Nampak and Burcap into supplying Plascon’s water-based plastic container requirements, leaving only a single integrated entrant rather than potentially two. This elimination of potential rivalry was treated as competitively significant in a market where plastics represented the direction of future growth.

The Tribunal extended this logic to emerging PET technology for plastic containers suitable for solvent-based paints. It accepted that Nampak held an exclusive licence for PET technology and that, to the best of anyone’s knowledge, no other domestic firm had access to that technology at the time. It reasoned that access to patents could create a barrier to entry into this next-generation segment, and that Nampak’s size and financial strength could enable it to acquire further licences or raise rivals’ costs in competitive licensing processes. It also noted that by acquiring full control of Burcap, Nampak would gain control over Burcap’s other patent position (the Bocan licence).

On this basis, the Tribunal concluded that the merger would, in all probability, result in a substantial prevention or lessening of competition in the industrial container market, particularly when assessed dynamically in terms of innovation and product differentiation under section 12(2)(e). It nonetheless accepted that a targeted condition could mitigate the key concern by limiting Nampak’s ability to accumulate additional exclusive PET licences, thereby improving the prospects for other firms to obtain licences from other patent holders and compete in the evolving market for PET paint containers.

The Tribunal recorded that there were no public interest issues arising from the transaction.

5. Outcome and Relief

The Tribunal conditionally approved the merger.

The approval was subject to a condition that, for three years from the date of approval, neither Nampak nor its subsidiaries could conclude any further exclusive licence agreement for the manufacture and sale of PET paint containers within South Africa, save for the existing exclusive licence with Plastic Can Company Limited (PCC). The condition further required annual compliance reporting to the Competition Commission by affidavit from Nampak’s Group Legal Adviser and imposed a notification and cancellation-confirmation mechanism should the PCC licence not result in commercial exploitation of 1-litre and 5-litre PET paint containers manufactured under the PCC licence.

No costs order was recorded in the reasons.

Cases Cited

No cases were cited in the reasons for decision.

Legislation Cited

Competition Act 89 of 1998, section 14(2).

Competition Act 89 of 1998, section 12(2)(e).

Rules of Court Cited

No rules of court were cited in the reasons for decision.

Held

The Competition Tribunal held that the merger raised no competition concerns in the market for injection moulded plastic containers for the food industry, given market structure, entry, and the merged entity’s market share.

The Tribunal held that, in relation to industrial liquid containers (including paint containers), metal and plastic technologies should be regarded as substitutes to a material and increasing extent, and that the market should be assessed dynamically with regard to innovation and product differentiation.

The Tribunal held that the merger would, in all probability, result in a substantial prevention or lessening of competition in the industrial container market, notably through the elimination of potential competition and the increased ability of the merged entity to influence future competitive conditions in plastic technologies, including PET.

The Tribunal held that the competitive harm could be mitigated by imposing conditions restricting Nampak’s ability to acquire further exclusive PET licences in South Africa for a limited period, together with compliance and notification obligations, and it approved the merger subject to those conditions.

LEGAL PRINCIPLES

The merger assessment applied the principle that relevant markets may be defined pragmatically where precise delineation is difficult, provided that the definition adopted is sufficient to evaluate competitive effects on the evidence before the Tribunal.

In assessing competitive effects, the Tribunal applied the principle that products may be treated as substitutes where evidence shows that customers switch between them in response to relative price, supply conditions, or evolving technical feasibility, even if substitution is incomplete at a given point in time.

The Tribunal applied the principle that merger analysis under the Competition Act requires consideration of the dynamic characteristics of the market, including growth, innovation, and product differentiation, in accordance with section 12(2)(e), particularly where technological change is likely to affect future constraints and competitive rivalry.

The Tribunal applied the principle that a transaction converting joint control to sole control may materially alter incentives and potential competition, including by removing conflicts of interest between co-owners and enabling the acquirer to direct investment and strategic decisions in a manner that can reduce actual or potential rivalry.

The Tribunal applied the principle that where a merger is likely to substantially prevent or lessen competition, approval may nonetheless be granted subject to conditions that are directed at the identified source of competitive harm, including conditions aimed at lowering barriers to entry or limiting the accumulation of exclusionary control over key inputs such as exclusive technology licences.

Nampak Products Limited and Burcap Plastics (Pty) Ltd (1/LM/Oct06) [2007] ZACT 42; [2007] 2 CPLR 373 (CT) (25 June 2007)