COMPETITION TRIBUNAL OF SOUTH AFRICA
Case No: 128/LM/Nov07
In the matter between:
Investec Bank Ltd Acquiring Firm
And
RJ Southey (Pty) Ltd Target Firm
Panel : N Manoim (Presiding Member), Y Carrim (Tribunal
Member) and M Mokuena (Tribunal Member)
Heard on : 20, 25 & 29 August and 03 November 2008
Order issued on : 29 August & 10 November 2008
Reasons issued on : 30 January 2009
Reasons for Decision
Introduction
[1] The Commission recommended that this merger be approved subject to
conditions. In its recommendations, the Commission came to the conclusion
that this transaction is likely to substantially prevent or lessen competition in
the markets for ship repair and marine blasting and painting. The
Commission also found that this transaction is likely to lead to co-ordinated
effects in the above-mentioned markets.
[2] We approved this transaction with conditions which were subsequently
revised in order to address competition concerns identified by the
Commission. The reasons for our decision follow below.
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Parties
[3] The primary acquiring firm is Investec Bank Ltd (“Investec”), a company
incorporated under the company laws of the Republic of South Africa.
Investec is controlled by Investec Ltd. The primary South African subsidiaries
of Investec Ltd are:
• Investec Group Data (Pty) Ltd
• Investec Bank
• Investec Management Holdings (Pty) Ltd
• Investec Assurance Ltd
• Investec Employee Benefits Holdings (Pty) Ltd
• Fedsure International Ltd
[4] Investec has a number of subsidiaries. 1 For purposes of this transaction, the
following entities are relevant:
• DCD Dorbyl (Pty) Ltd (“DCD Dorbyl”)
• Dorbyl Marine (Pty) Ltd (“Dorbyl Marine”)
• Nautilus Marine Cape Town (Pty) Ltd (“Nautilus Marine”)2
• Uni-span Holdings (Pty) Ltd (“Unispan”)
[5] The primary target firm is RJ Southey (Pty) Ltd (“RJ Southey”), a company
incorporated under the company laws of the Republic of South Africa. RJ
Southey has in excess of forty subsidiaries.3 It is controlled by the Brunt Trust,
which owns 38.59% of its shareholding. 4 The other shareholders in RJ
Southey are as follows:
• Clidet No 717 (Pty) Ltd (Clidet) 36.13%
• CJA Kirkwood (“Kirkwood”) 13.665%
• JGC Donaldson (“Donaldson”) 5.93%
• BJR Wickins (“Wickins”) 5.69%
1 Refer to the competitive report, annexure “C” for the complete list of Investec’s subsidiaries.2 Nautilus Marine is a joint venture between Dorbyl Marine and Globe Engineering.3 These subsidiaries are in schedule 3 of the merger filing. 4 The Brunt Trust controls Global Pact Trading 170 (Pty) Ltd.
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[6] RJ Southey controls the following subsidiaries, which are relevant for the
purposes of this transaction:
• Dormac Marine (Pty) Ltd (“Dormac Marine”)
• RJ Southey Contracting (Cape) (Pty) Ltd (“Southey Contracting”)
• Okapi South Africa (“Okapi”) (Pty) Ltd.
Description of the transaction
[7] This is a two-stage back-to back transaction whereby Investec will initially
purchase all the shares in RJ Southey in order for certain shareholders to exit
and immediately thereafter introduce the new shareholders by selling 54.5%
of the shares to the new shareholders. In terms of the shares and claims
agreement, Investec intends to acquire 63.87% of the issued ordinary share
capital of RJ Southey and 100% of the issued share capital of Clidet 717.
Investec will thus acquire all claims against RJ Southey. Post-merger, the
shareholding in RJ Southey will be as follows:
• Investec 45%
• BEE Company 15%
• Brunt Trust 10%
• Management 30%
Rationale for the transaction
[8] Investec submitted that this transaction represents an attractive investment
opportunity for it. However, the Commission was of the view, formed during
its investigation that Investec’s rationale for this acquisition is to consolidate
the marine business. The Commission further submits that it appears that part
of Investec’s strategic objective is to invest in markets with high barriers to
entry and this transaction is in pursuit of that strategy.5
[9] The shareholders of RJ Southey submitted that they view this transaction as
a good opportunity to realize their investments. It was further submitted by
these shareholders that the transaction will, inter alia, result in the introduction
5 The Commission came to this view after perusing Investec’s internal strategic documents.
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of a broad based BEE shareholder into the RJ Southey Group of companies
as well as the introduction of a shareholder of reference, namely Investec. It
appears that an additional motive for the sale was a fall out among the RJ
Southey shareholders.6
Parties’ Activities
The Acquiring Group
[10] Investec Bank is an international specialist banking group that provides a
diverse range of financial products and services to a niche client base through
its subsidiaries. Its principle business is divided into, inter alia, investment
banking, treasury and specialised finance, private banking and asset
management.
[11] DCD Dorbyl is involved in the provision of ship repair through Dorbyl Marine.
Ship repair includes providing services such as steel fabrication and
replacement, hydraulics and mechanical work and engine overhauls. Nautilus
Marine is involved in marine blasting and painting. Uni-span is a manufacturer
of scaffolding.
RJ Southey Group
[12] RJ Southey is involved in ship repair, ship building and heavy industrial
engineering. It also manufactures scaffolding, pocket knives, agricultural
tools, expanded polystyrene products, modular accommodation, panels for
cold rooms, gas tanks and pressure vessels. In addition, RJ Southey is
involved in the provision of contracting services in relation to industrial and
marine corrosion protection, thermal insulation and ducting, scaffold hire, fire
proofing, sandblasting and painting, sheeting and cladding.
[13] Southey Contracting, a division of RJ Southey, is an industrial non-marine
firm that performs corrosion protection, industrial painting, thermal insulation,
scaffold erection and hire, fireproofing, sheeting and cladding in Gauteng,
Kwa-zulu Natal and the Western Cape. In Cape Town it is involved in marine
6 This was confirmed by the parties in a meeting they held with the Commission on 21 July
2008.
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blasting and painting services in respect of oil and gas rigs. Dormac marine is
involved in ship repair. Okapi is involved in the manufacturing and hiring of
scaffolding.
Summary of submissions
[14] In their submissions to the Commission the merging parties had identified two
relevant markets namely ship repair and the manufacture, sale and rental of
scaffolding. The merging parties provide ship repair services to vessels and
ships through Dormac Marine and Dorbyl Marine respectively.
[15] Scaffolding is described as a temporary framework used to support people
and material in the construction or repair of buildings, industrial facilities and
ships. Scaffolding equipment serves a similar purpose to other forms of
access equipment such as ladders, towers, cradles and scissor lifts. The
supply chain for scaffolding begins with the manufacturer who manufactures
and sells the scaffolding to customers.
[16] These customers include construction firms, industrial companies and
contractors who either buy or rent the scaffolding. The post-merger market
share in the market for the manufacture, sale and rental of scaffolding is 12%.
This market does not raise any competition concerns. We will therefore not
deal with it any further.
[17] Ship repair is a bidding market in which the bidding players submit a quote
which includes all forms of repairs even if the shipyard does not possess the
necessary capabilities. Individual companies may bid for large contracts and
sub-contract elements of that to other players in the market. Alternatively
players form joint ventures and quote for all repair work as a joint venture.
[18] The merging parties argued that the market for ship repair encompasses
various types of work (such as steel and pipe repair, electrical and
mechanical work, engine work, hydraulic work and underwater repairs)
including blasting and painting because the market was a bidding market in
including blasting and painting because the market was a bidding market in
which bidding players submit tenders for the full repair. They further argued
that barriers to entry were low and although a local market could be identified,
consisting of Durban, Cape Town and East London, the market was
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international because ship owners generally communicate with hundreds of
ship yards worldwide via email when advertising tenders for ship repair and
the majority of their customers were international companies.
[19] Marine blasting and painting involves blasting, high pressure blasting and
ultra pressure blasting, industrial cleaning, tank cleaning, waste disposal, anti-
corrosion measures, insulation and cladding of vessels such as ships, oil and
gas rigs as well as fixed structures in the harbour.
[20] The Commission argued that it considered marine blasting and painting as a
separate market from ship repair. In its view barriers to entry were high in
both these markets and the merger may lead to unilateral effects in both
these markets.
[21] The Commission’s investigation revealed that the ship repair market is
characterised by high barriers to entry. These barriers include dry docking
facilities, equipment and skill, accreditation and insurance as well as
relationship with customers. The merging parties’ combined post-merger
market share in this market would be approximately 30%, creating the largest
competitor in this market.
[22] In the Commission’s view the marine blasting and painting market is also
highly concentrated with the merging parties combined post-merger market
share estimated to be 60%, with its largest competitor South Eastern Marine,
having only 20%, Atlatech 10% and Robben Marine 0.5%.
[23] The Commission was also concerned about the merger resulting in co-
ordinated effects. Post-merger Investec will hold 43% and 45% shares in
DCD Dorbyl and RJ Southey respectively, with minority protection. In the
blasting and painting market DCD Dorbyl has a 50% joint venture with Globe
Engineering, which competes with Southey Contracting. The Commission
was concerned that these structural links 7 were likely to lead to coordinated
effects in the affected markets and accordingly recommended a conditional
effects in the affected markets and accordingly recommended a conditional
approval.
7 According to the ICN Merger Guidelines, these cross-shareholding/joint ventures enhance
coordination/collusion.
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[24] The Commission submitted further that its investigations revealed that the
geographic market for ship repair is influenced by the size of the project to be
undertaken. For small projects, the geographic market seems to be local. For
large projects, on the other hand, the market seems to be international. This
is because large projects involve substantial repair work which is advertised
internationally and quotations are received from big engineering companies,
including international ones.8
[25] Further, the Commission found that most of the ship dry dock facilities are
situated at the Cape Town Harbour, competition amongst suppliers occur in
Cape Town and that customers turn to Cape Town for their suppliers. In
addition, an industry study conducted by Who Owns Who 9 found that ship
repairs are done mainly in Cape Town and Durban. The Commission,
however, did not conclude on the relevant geographic market for ship repair
but rather analysed the effect of the transaction on competition in the local
market, specifically the Cape Town Harbour.
History of proceedings
[26] On the first day of the hearing the Tribunal raised with the merging parties
that, having gone through the record, our prima facie view was that Investec
would indeed be in a position to influence the strategic direction of both RJ
Southey and DCD Dorbyl, and that the merger was likely to result in the
removal of an effective competitor in the affected markets by what might be
the equivalent of a merger between the two marine divisions of Dormac and
of Dorbyl Marine.
[27] The Tribunal also indicated to the parties that whilst it had understood the
concerns raised by the Commission in its analysis of the transaction, our view
was that the proposed conditions did not adequately address those concerns
and seemed inconsistent and ineffectual. On the other hand the merging
parties placed the Commission’s conclusion in dispute – on their version
parties placed the Commission’s conclusion in dispute – on their version
Investec was not able to control either firm, and the merger would not lead to
anticompetitive effects. We decided given the inadequacy of the remedies to
8 This was confirmed by SA Five Engineering, Ivan Engineering and Belmet Marine.9 Who Owns Who’s research report – Maintenance of Ports and Harbours – July 2007.
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address the anticompetitive effects, if any, and the dispute over whether there
were such effects that we should hear oral evidence. The matter then
proceeded on 20 & 25 August 2008. As it was not possible to hear the
remaining witnesses of the merging parties and the Commission in that period
the matter was set down to proceed on the 03 September 2008.
Decision
[28] The hearing proceeded with the testimony of the merging parties’ witnesses,
namely Thomas Prins, Head of Investec’s Principal Investments, Gregory
Hirschowitz, Investec’s representative responsible for this transaction and
Vincent Langlois, Investec’s representative on the DCD Dorbyl Board. The
Commission led its first witness John Edward Binns, Belmet Marine’s
Marketing and Human Resource Manager. In the course of this evidence
being led it became apparent from the minutes of Investec’s Principal
Investments Monthly Meetings that strategic discussions pertaining to the
acquisition of RJ Southey, its marine division and to DCD Dorbyl, were
routinely held in the presence of Investec’s representatives on the board of
DCD Dorbyl.
[29] On 28 August 2008 and prior to the Commission’s and the merging parties
other witnesses being led, Investec advised the Tribunal that it was willing to
provide undertakings to the Commission and requested that the Tribunal
grant an order incorporating these undertakings as conditions by 31 August
2008, which was the final agreed closing date for the transaction. On 29
August 2008 the parties appeared before the Tribunal and placed on record
the conditions agreed between the merging parties and the Commission and
which are attached hereto as annexure “A”.
[30] The effect of the revised conditions is that Investec will divest all its shares in
RJ Southey (“Investec shares”) to an independent third party within a
RJ Southey (“Investec shares”) to an independent third party within a
specified period. In the interim until the divestiture is effected, Investec will
waive its minority rights and its shareholding and voting rights in respect of
the entire RJ Southey Group.
[31] In our view the above conditions, once fulfilled, would adequately address the
potential concerns raised by the Commission and the Tribunal, and obviates
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the need for us to deal any further with the merits of the transaction in these
reasons. Once the conditions are fulfilled Investec will have no financial
interest in the Southey business, and issues of whether the merger could lead
to unilateral or co-ordinated effects via the structural link created by the
Investec stake in RJ Southey’s Dormac Marine business, fell away.
[32] This transaction was therefore approved subject to the above conditions on
29 August 2008. However, soon thereafter, a dispute ensued between
Investec and RJ Southey, which led to Mr. Barry Wickins, the CEO of RJ
Southey, launching a review application with the Competition Appeal Court
(“CAC”) seeking to set aside our decision to approve the merger. 10 The
dispute revolved around whether Investec had been entitled to agree to the
undertakings on behalf of the target firm and if not whether this was required.
[33] As a result of this dispute, the transaction was not closed following our order
and Investec was not therefore able to take transfer of the Investec shares.
The parties however settled their dispute on 10 October 2008, and the review
application was withdrawn.
The Merging Parties’ Application for a Variation Order
[34] On 24 October 2008, the merging parties lodged an application with the
Tribunal to vary certain clauses in the order that was initially issued. In the
first part of the application, the parties requested the Tribunal to agree to a
variation that the divestiture process starts running from 10 October 2008 as
opposed to 29 August 2008 (the date of the order).
[35] In the second part of the variation application, the parties requested that
Investec Corporate Finance (“ICF”) be appointed to manage the divestiture
sale process. The reasons given by the merging parties for wanting ICF to
manage the sale process was that it was already familiar with the business of
manage the sale process was that it was already familiar with the business of
RJ Southey, had prepared the disposal timetable and draft information
memorandum and reviewed all existing due diligence and other reports. In
other words, ICF would be in a position to run the sale quickly and effectively
whereas another third party would take a bit longer. The Commission
10 Paragraph 41 of Mr. Wickins’ affidavit.
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supported the first part of the application, but was opposed to the second as it
believed it would undermine the protections introduced in the original order in
which Investec had undertaken to waive its shareholder rights during the
divestiture period.
[36] The application was heard on 03 November 2008. On 10 November 2008 we
granted the merging parties’ request that the divesture period start running
from 10 October 2008. The second request was, however, not granted.
___________________ 30 January 2009
Y Carrim Date
N Manoim and M Mokuena concurring.
Tribunal Researcher: I Selaledi
For the merging parties: Cliffe Dekker Hofmeyr
For the Commission: L Khumalo (Mergers & Acquisitions)
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ANNEXURE A
CONDITIONS (Non-confidential)
1 Investec Bank Limited ("Investec") shall, for as long as it
holds shares in RJ Southey (Pty) Ltd (“RJ Southey”) or of
any company that directly or indirectly holds shares in R J
Southey (“the Investec shares”):
1.1 not exercise any of its rights emanating from the Investec
shares to appoint any directors to the board of directors of R
J Southey;
1.2 not be present or represented at any meeting of the
shareholders of RJ Southey;
1.3 not vote (in person or by proxy) any of the voting rights
attaching to any of Investec's shares in RJ Southey;
1.4 not request or be entitled to receive any minutes of any
meetings of the board of directors or the shareholders of RJ
Southey or its subsidiaries; and
1.5 not be entitled to any information of any nature from RJ
Southey and/or its subsidiaries relating to ship repair and
marine blasting and painting activities.
2 Investec shall, within a period of [ ] from the date of the
approval of this merger by the Competition Tribunal (“the
divestiture period”), have disposed of all the Investec shares
(“the disposal transaction”) to an independent party, as
defined in clause 8 below (“the proposed purchaser”);
3 The time required for regulatory approval of the disposal
transaction (if necessary) shall suspend the running of the [
] period provided that the Commission may suspend such
suspension of the time periods if in its view the notifying
parties in the disposal transaction are not sufficiently co-
operative or forthcoming with information;
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4 Notwithstanding the provisions of paragraph 1 above,
Investec shall be entitled to receive group consolidated
financial information to enable Investec to facilitate the
disposal of its shareholding.
5 If Investec has not disposed of the Investec shares within
the divestiture period as required in clause 2 above, the
Trustee, described more fully in annexure B1, will have an
exclusive mandate and power of attorney to sell the
Investec’s shares within a period of [ ] at no minimum
price (“the Trustee divesture period”) to a proposed
purchaser as described in clause 8 below.
6 Should the Trustee fail to dispose of the Investec shares
within the trustee divestiture period, the Commission may
apply to the Tribunal for a further [ ], on good cause
shown (“the extended period”).
7 Should the Tribunal not grant the application for an
extension or has granted it and the Trustee has failed to sell
the Investec shares within the extended period, the merging
parties shall undo the merger as if it had never been
implemented.
8 THE PROPOSED PURCHASER
8.1 The proposed purchaser of the Investec shares shall be
independent and shall not be –
8.1.1 an employee or director of Investec,
8.1.2 related to Investec; or
8.1.3 directly or indirectly, an affiliated member of the Investec
group of companies.
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8.2 The proposed purchaser must obtain all necessary
approvals from the Commission and other regulatory authorities for
the acquisition of the Investec shares (taking into account any
remedies that might be offered).
8.3 The proposed purchaser shall provide the Commission with
an affidavit deposed to by a senior official of the proposed
purchaser confirming the accuracy of all information
provided to the Trustee and the Commission.
8.4 In order to maintain the structural effect of this order,
Investec or any directly or indirectly affiliated member of
Investec’s corporate group, will not subsequently directly or
indirectly re-acquire influence over the whole or part of R J
Southey (Pty) Ltd.
8.5 When Investec has reached an agreement with a proposed
purchaser they will submit to the Trustee and the
Commission a fully documented and reasoned proposal
enabling the Commission to:
8.5.1 Verify in consultation with the Trustee that the proposed
purchaser is a suitable purchaser of the Investec shares.
8.5.2 Grant any approvals required under these commitments
with respect to any ancillary arrangements.
8.6 Such a proposal shall be submitted no later than one month
prior to the end of the divestiture period and shall include
copies of the draft and/or final sale agreement and all other
ancillary agreements and/or other documents related to the
proposed divestment.
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8.7 The Commission will approve or reject Investec’s proposal
in writing. The approval of the proposal shall not be
unreasonably withheld.
8.8 Once the sale agreement with the proposed purchaser has
been concluded, Investec shall submit a signed copy of the
sale agreement, together with any other relevant
documentation to the Commission.
9 DUTIES AND OBLIGATIONS OF THE PARTIES DURING
THE TRUSTEE DIVESTITURE PERIOD
9.1 If Investec is not able to transfer its shares to an approved
purchaser within the divestiture period, the Trustee shall
have an exclusive mandate with the necessary power of
attorney to sell the Investec shares at no minimum price.
9.2 At the expense of Investec, the Trustee may appoint
advisors (in particular for corporate finance or legal advice),
subject to the Investec’s approval, which approval shall not
be unreasonably withheld or delayed, if the Trustee
considers the appointment of such advisors necessary or
appropriate for the performance of its duties and obligations
under the Trustee mandate, provided that any fees and
other expenses incurred by the Trustee are reasonable.
9.3 If Investec refuses to approve the advisors proposed by the
Trustee, the Commission may approve the appointment of
such advisors, after having heard Investec’s objection
thereto.
9.4 Investec will indemnify the Trustee, its employees and
members of the Trustee team (each an “Indemnified Party”)
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and hold each indemnified party harmless against any
liabilities arising out of the performance of the Trustee’s
duties under this order, except to the extent that such
liabilities result from the wilful default, recklessness, gross
negligence of the Trustee, its employees or members of the
Trustee team.
10 Save for the time periods in which the Tribunal requires
Investec or the Trustee to dispose of the Investec shares,
the contents of “Annexure A” are not confidential.
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