Brief Summary

Mergers and Acquisitions — Merger approval — Unconditional approval of merger between Power Technologies (Pty) Ltd and IST Group (Pty) Ltd — Power Technologies intends to acquire IST Group's entire issued share capital excluding two divisions — No significant competition concerns identified despite some overlap in product markets — Tribunal finds merger enhances competitive ability against larger multinational firms.

Comprehensive Summary

Summary of Judgment

1. Introduction

This matter concerned merger proceedings before the South African Competition Tribunal. The Tribunal was required to decide whether to approve a proposed acquisition in terms of the merger control regime administered by the competition authorities.

The acquiring firm was Power Technologies (Pty) Ltd (“Powertech”), a wholly-owned subsidiary of Allied Electronics Corporation Limited (“Altron”). The target firm was IST Group (Pty) Ltd (“IST Group” or “IST”), which wholly owned IST Holdings (Pty) Ltd (“IST Holdings”), operating through multiple business divisions.

The merger was heard on 22 August 2007, on which date the Tribunal issued an order unconditionally approving the merger. The Tribunal’s reasons were issued later, on 2 October 2007. The record reflects that the Competition Commission investigated the transaction and expressed views on market definition and competitive effects, which the Tribunal considered in its assessment.

The general subject-matter of the dispute was whether the proposed transaction was likely to substantially prevent or lessen competition in certain horizontally and vertically affected markets involving electrical and telecommunications-related products and solutions, and whether any public interest concerns arose.

2. Material Facts

Powertech formed part of the Altron group, which held a portfolio of subsidiaries active in, among other areas, power electronics and telecommunications. Within power electronics, Altron subsidiaries included entities engaged in products such as transformers, batteries, electrical accessories, and protection and monitoring equipment. Powertech itself was involved in the manufacture, supply, and design of products in both the power electronics and telecommunications sectors.

IST Group operated through a number of divisions. For purposes of the transaction, the Tribunal treated IST as active in electronic and industrial sectors through five relevant divisions, including IST Data, IST Telecom, IST Energy, IST Otokon, and IST Industrial, each offering technology products and systems ranging from telecom operational support and voice/data telecommunications technology to automation, protection systems, substations, energy management, and industrial engineering contracting.

The transaction entailed Powertech purchasing the entire issued share capital of IST Group, subject to the unbundling of two divisions, namely IST Dynamics and IST Nuclear, from IST Group. Upon completion, Powertech would control IST Group and its remaining five divisions. The parties’ stated rationale was that the merger represented a strategic fit, integrating complementary portfolios and capabilities; IST shareholders wished to exit, and they identified Powertech as having the capacity to execute IST’s core projects.

On the competitive overlaps, the Tribunal accepted that there was horizontal overlap in three areas, namely the supply of high voltage protection relay systems, the supply of remote terminal units (“RTUs”), and the supply of direct current (“DC”) power systems. The Tribunal also accepted there was a vertical relationship between the parties in relation to the manufacture of electricity meters (upstream) and the provision of turnkey solutions (downstream), where meters formed an input.

On market definition, while the Commission indicated there was no need to decide whether the relevant geographic markets were national or international, it proceeded on a national basis, and the Tribunal held that, for purposes of the transaction, the geographic market for all relevant markets was national.

The Tribunal distinguished, in the protection relay context, between a narrow approach (where the parties’ products were said not to be substitutable because they served different levels of complexity and applications) and a broader market definition (under which an overlap would arise and under which the Commission assessed competitive effects). For RTUs, the Tribunal accepted the characterisation of RTUs as versatile devices used across applications without needing differentiation, and it noted the presence of multinational suppliers operating locally through South African partnerships. For DC power systems, the Tribunal treated IST Telecom as a new entrant without market share and identified overlap largely in relation to a specific tender process in which both parties were shortlisted.

In the vertical assessment, certain competitors expressed concern about potential exclusive access to upstream manufacturing capacity for power transformers above 50 MvA. Evidence placed before the Tribunal was that Powertech was the only local manufacturer for transformers above that threshold, but that it faced competition from international suppliers capable of supplying into South Africa at various capacities. The Tribunal further accepted that IST did not operate in the turnkey market for large transformers, because its turnkey operations typically involved substations using transformers below 50 MvA, which the Tribunal treated as relevant to the foreclosure theory advanced.

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

3. Legal Issues

The central legal question was whether the proposed merger was likely to substantially lessen or prevent competition in any relevant market, considering both horizontal effects (in protection relay systems, RTUs, and DC power systems) and vertical effects (in electricity meters and turnkey energy management solutions, as well as concerns relating to transformer supply in turnkey projects).

The dispute required determinations involving market definition (both product and geographic), assessments of competitive constraints (including the role of multinational competitors requiring local presence), and evaluation of market structure indicators such as market shares and the significance of the transaction in markets that may function through tendering. The analysis therefore concerned a combination of law applied to fact (competition assessment of a merger) and evaluative judgment, particularly in assessing the significance of high measured market shares in tender-driven contexts, and in assessing whether alleged foreclosure concerns were plausible given the parties’ actual areas of operation.

A further issue arose from the Tribunal’s concern about Powertech’s cross-shareholding relationship with ABB through a joint venture, and whether this relationship affected the competitive assessment or implied higher effective market power than indicated in the Commission’s market share calculations. This raised an application-of-law-to-fact inquiry into whether the relationship was relevant to the markets affected by the merger.

4. Court’s Reasoning

The Tribunal began from the Commission’s approach to market definition and adopted a national geographic market for all relevant product markets. In relation to protection relay systems, the Tribunal noted that no overlap existed in the parties’ activities in relays for low voltage distribution networks. It further accepted a distinction drawn between the parties’ relay products: Powertech’s relays were described as less complex and used for smaller applications, while IST’s GE Multilink relays were described as more complex and used for large industrial applications. On the narrow approach described in the reasons, the Tribunal accepted that these products were not substitutable, implying limited direct rivalry at a granular level.

Despite this, the Tribunal proceeded to consider the Commission’s broader approach in which the market was defined as protection relay systems generally. Under that broader approach, the Tribunal considered estimated market shares showing a post-merger combined share of 18% (from IST’s 8% and Strike Technologies’ 10%). The Tribunal recorded the parties’ position that this accretion did not raise significant concerns and would allow stronger competition against large international firms such as Siemens and ABB. The Tribunal nonetheless raised a concern regarding Powertech’s joint venture relationship with ABB, which could potentially complicate the competitive analysis. At the hearing, however, the parties clarified that the ABB joint venture related solely to transformers in the substation market, that IST did not compete in that transformer market, and that the relationship was therefore not relevant for the competitive assessment of the merger’s overlaps as presented to the Tribunal.

For RTUs, the Tribunal accepted that RTUs are versatile devices performing essentially similar functions across applications and that product adaptation is relatively easy. It also noted that market participants included multinationals active in South Africa via partnerships. The Commission’s market share assessment indicated very high shares for IST (GE product) and Alcom (Motorola product), yielding a combined share of 90%, which the Tribunal treated as requiring careful scrutiny. The parties responded that RTUs were sold in a tender-driven environment, that IST’s position was attributable to winning a significant Eskom tender renewed in 2003, and that customers were large utilities.

The Tribunal did not make a definitive finding on whether the RTU market was a “bidding market”. It nevertheless concluded that the merged entity would face sufficient competition from credible players such as Siemens, Alstom, and ABB, which the Tribunal regarded as well placed to win tenders issued by large customers. The Tribunal also considered that customers in this space—generally large utilities—possessed significant countervailing power, which reduced concern that the merged entity could exploit a high share position reflected by past tender outcomes.

In relation to DC power systems, the Tribunal treated IST Telecom as a new entrant with no market share, and therefore considered that no meaningful competitive assessment could be made on the basis of market shares. It recorded the parties’ evidence that the product would remain available post-merger and that there were strong competitors, including established suppliers. The Tribunal thus did not identify a basis on the presented facts to infer a substantial lessening of competition in this market.

Turning to vertical effects, the Tribunal identified an upstream market for the manufacture and supply of electricity meters and a downstream market for turnkey energy management solutions, in which IST primarily competed. It recorded the Commission’s findings that Powertech (through Strike Technologies) operated predominantly in the commercial and industrial segment of metering and supplied major utilities and public entities. In the downstream turnkey market, the Tribunal recorded that customers included municipalities and power entities located throughout South Africa, and that projects involved implementing and managing infrastructure influencing the quantity or patterns of energy use.

The Tribunal then addressed competitor concerns about exclusive access to upstream manufacturing capacity for transformers above 50 MvA. It recorded testimony that, although Powertech was the only local manufacturer above that threshold, there were several international suppliers capable of supplying transformers into South Africa at relevant capacities. Critically for the Tribunal’s conclusion on foreclosure, it accepted that IST’s turnkey operations generally used transformers below 50 MvA, meaning that IST did not operate in the turnkey market for the large transformers that were the focus of the exclusivity concern. On that basis, the Tribunal concluded that input foreclosure concerns did not arise on the facts as presented.

Drawing these strands together, the Tribunal found that the transaction was not likely to substantially lessen or prevent competition in any of the relevant markets. It also found that there were no public interest issues requiring conditions.

5. Outcome and Relief

The Tribunal unconditionally approved the merger between Power Technologies (Pty) Ltd and IST Group (Pty) Ltd.

No conditions were imposed. The reasons reflect that the Tribunal identified no public interest issues and found no basis to conclude that the merger would substantially lessen or prevent competition in the relevant markets.

The published reasons do not record any costs order.

Cases Cited

Murray & Roberts Limited and The Cementation Company (Africa) Limited 02/LM/JAN04.

Murray & Roberts Limited/Concor Limited 101/LM/OCT05.

Legislation Cited

No legislation is expressly cited in the reasons provided.

Rules of Court Cited

No rules of court are expressly cited in the reasons provided.

Held

The Competition Tribunal held that the proposed acquisition, structured as the purchase by Powertech of the entire issued share capital of IST Group subject to the unbundling of IST Dynamics and IST Nuclear, was not likely to substantially lessen or prevent competition in the nationally defined relevant markets, including protection relay systems, remote terminal units, and direct current power systems, and did not raise vertical foreclosure concerns on the facts placed before it.

The Tribunal further held that there were no public interest issues arising from the transaction and accordingly approved the merger without conditions.

LEGAL PRINCIPLES

The Tribunal applied the principle that, in merger assessment, competitive effects must be evaluated with reference to relevant market definition (including geographic scope) and the structure and dynamics of competition within those markets, including the presence of credible competitors and the role of customer power.

The Tribunal proceeded on the basis that, even where a market may function through tendering or bidding, this does not place the market beyond scrutiny; competitive constraints may still be assessed by considering the presence of capable alternative suppliers and the countervailing power of typically sophisticated customers such as large utilities.

The Tribunal’s analysis also reflected that allegations of vertical foreclosure require attention to the parties’ actual areas of operation and the practical relevance of the input to the downstream activity; where the alleged input concern relates to a segment in which the downstream firm does not operate (as presented in the evidence), foreclosure concerns may be rejected on that factual basis.

Harmony Gold Mining Company Ltd & Other and Mittal Steel South Africa Ltd & Other (13/CR/Feb04) [2007] ZACT 71 (6 September 2007)