COMPETITION TRIBUNAL OF SOUTH AFRICA
Case No: 108/LM/Oct08
In the matter between:
DCD Dorbyl (Pty) Ltd Acquiring Firm
And
Globe Engineering Works (Pty) Ltd Target Firm
Panel : N Manoim (Presiding Member), M Mokuena (Tribunal
Member) and N Theron (Tribunal Member)
Heard on : 18 February and 02, 03, 04, 12, 13 & 16 March 2009
Order issued on : 19 March 2009
Reasons issued on : 30 April 2009
Reasons for Decision
1. Order
[1] On 19 March 2009 the Tribunal conditionally approved the acquisition by
DCD Dorbyl (Pty) Ltd of Globe Engineering Works (Pty) Ltd. The conditions
are contained in annexure “A” hereto. The reasons follow below.
2. The Parties
[2] The primary acquiring firm is DCD Dorbyl (Pty) Ltd, (“DCD Dorbyl”). DCD
Dorbyl is controlled by Investec Bank Limited (“Investec”), Reyapele
Investments (Pty) Ltd and Management. Investec is the largest shareholder
owning 47.3 % of the equity. 1 DCD Dorbyl is active in the ship repair market
through DCD Marine (“DCD Marine”).
1 An empowerment company Reyapele Investments Pty Ltd holds37.47% of the shares and
the remainder are owned by various members of the management team. See
competitiveness report file page 41-2.
1
[3] The primary target firm is Globe Engineering Works (Pty) Ltd (“Globe
Engineering”). Globe Engineering is controlled by Up-Front Investments (Pty)
Ltd and West African Ship Repairs (Pty) Ltd. It is active in the ship repair
market and industrial engineering.
[4] Prior to the merger the two firms had an existing relationship with one another
through two joint ventures. The first, which has been in existence since 1972,
is Nautilus Marine (“Nautilus”), a company which performs marine blasting
and painting services. The other, is a proposed joint venture to lease the
working area of a part of the Cape Town harbour, known as the A-berth. The
outcome of this merger is that DCD Dorbyl acquires 100% of the issued share
capital in Globe Engineering from its present controlling shareholder Globe
Engineering Holdings.
3. Rationale for the transaction
[5] Both parties provide ship repair services in the Cape Town harbour. The
broad category of “ship repair” can be further delineated into four categories,
i.e. the repair of smaller ships, large ships, large oil and gas vessels and very
large oil and gas vessels and structures. This market delineation will be dealt
with more fully below.
[6] In terms of the rationale for the merger, the evidence put forward by the
primary acquiring firm 2 was that it had made a strategic decision to develop
an oil and gas repair facility in the harbour of Cape Town. This strategic
decision has been taken as a result of the stagnation of the business of DCD
Marine and financial losses suffered as a result.
[7] DCD Dorbyl indicated that although it had won some major international
contracts in recent times (e.g. the repair of the Polaris vessel), it was not
confident that the business would be sustainable if it did not have access to
permanent staff and infrastructure to conduct such repairs in the future. In this
regard, the special engineering expertise of Globe Engineering could be used
regard, the special engineering expertise of Globe Engineering could be used
in large projects. Furthermore, access to the A-berth facility in the Cape Town
2 Mr Venter the managing director of DCD Dorbyl said: “The fourth item was to develop an oil
and gas repair facility, those were the 4 strategic actions that were taken to get out of this
loss making” - p. 592 of the transcript.
2
harbour would enable the merged entity to be able to market itself efficiently
and to win large tenders in the oil and gas repair market.
4. Background to the hearings
[8] This merger has an interesting and complicated history. The ship repair
industry in South Africa has been characterized by a series of joint ventures
and attempted mergers. Some of the more recent relevant transactions are
the formation of Dormac in 2000 (as a result of the merger between Dorbyl
Marine and Fluid Contracting (Pty) Ltd)), the RJ Southey and Dormac merger
in 2004, the aborted Dormac Marine and Globe merger in 2005, the
acquisition of a controlling shareholding by Investec in DCD Dorbyl in 2007,
and the acquisition of control over RJ Southey by a consortium led by
Investec and the consequent divestment of the Investec shares in RJ Southey
in 2008.3 These transactions form the background to the current merger.
[9] During the Investec and RJ Southey transaction, the Commission found that
Investec’s rationale for this acquisition was to consolidate the marine
business. The Commission argued that part of Investec’s strategic objective
was to invest in markets with high barriers to entry and that the merger was
part of this strategy. The Tribunal ruled that the merger be approved subject
to the divestiture of Investec of its entire shareholding.
[10] The current merger should therefore be seen against the background of
increasing consolidation in the ship repair market and the concerns the
Commission raised in the Investec/ RJ Southey transaction, around high
barriers to entry. However, having analysed the market in the current case,
the Commission concluded that despite high barriers to entry and the fact that
the merger will result in the removal of an effective competitor, the merger is
unlikely to substantially prevent or lessen competition and should therefore be
approved. As stated by the Commission:
approved. As stated by the Commission:
“Although choice will be reduced the Commission is of the view that
the transaction will create an attractive firm with all the credentials to
3 See our decision in RJ Southey, case number 128/LM/Nov07.
3
be able to facilitate and conclude large oil and gas rig contracts for
Cape Town”.4
[11] The Commission seems to have recommended an approval without
conditions because it took a narrow view of the ambit of the transaction.
During the course of the Commission’s investigation many competitors whom
it interviewed, were concerned about the merging parties’ rights to the A-
berth.
[12] A-berth is a quay that is located at the entrance of the Cape Town harbour
and although specifically designated for the repair of rigs can be used to
repair other vessels. The Commission’s interviewees were concerned that the
merger might lead to rival firms being foreclosed from access to A-berth. The
Commission was not dismissive of these concerns, but as it was of the view
that the A-berth lease, which has not yet been finalized, was a separate
notifiable merger, it considered that these issues could be addressed in the
course of that notification.5
[13] The difficulty with the Commission’s position is that the merging parties have
never considered the acquisition of their rights to the A-berth as constituting a
merger. They argued that the A- berth lease was not a notifiable merger and
that if the issues surrounding their utilization of the A-berth were merger
specific, the appropriate time was to raise them in the course of this hearing.
[14] This was what was before the Tribunal when we commenced our hearings
into this merger on 18 th February 2009. As we were not persuaded by the
Commission’s legal submission, we decided that the A - berth issue must be
considered as part of the present merger, as it seemed to constitute a central
part of the transaction, and we instructed the Commission to call as witnesses
a representative sampling of the firms who had raised concerns. This then
gave rise to a full merger hearing which ran for another six days, ending on
the 16th of March 2009.
the 16th of March 2009.
4 See the Commission’s Competitive Report, p. 585 See the Commissions’ Competitiveness Report, p 44: “Should these lease agreements
come into effect for any reasons the Commission is of the view that these transactions are
highly likely notifiable to the Commission and any potential competition concerns that might
arise from these agreements will be addressed by the Commission”.
4
5. Competition Analysis
5.1 Introduction
[15] In order to determine whether this merger will lead to a substantial prevention
or lessening of competition, it is necessary to define the relevant markets and
to examine each in some detail. However, market definition was not a
contentious issue, as most parties agreed that the primary focus must be on
the oil and gas repair market. Most of the evidence led dealt with the position
of the other competitors in this market and how the merger would affect their
ability to compete in the market for oil and gas repair.
5.2 Relevant markets
5.2.1Ship repair
[16] The Commission delineated 6 the broader ship repair market into three broad
categories, i.e. standard commercial shipping, extraction industry vessels and
regionally based vessels. In subsequent analyses the Commission grouped
“standard commercial” and “regionally based vessels” together and
distinguished this from the other category “repairs on extraction industry
vessels”.
[17] This is therefore an acknowledgement that the oil and gas repair market is
indeed a separate market from general ship repair. It is not necessary to
apply more formal tests to this distinction, as it seems that it was common
cause among both the merging parties and some of the competitors who
testified, that this was indeed a separate market. In Dormac’s submission to
the Commission they explained this distinction as follows:
“Yes, ship repair services are different to repair services undertaken
on oil and gas rigs. Although the two forms of repair services entail
the same engineering disciplines …they are very different in respect
to project timing, scope size, commercial requirements, quality
requirements, etc. The basic difference between a ship and oil or gas
6 P. 17-21 of the Commission’s Competitiveness report.
5
rig means that the work needed to repair and maintain them is
different.
An oil rig is a platform from which deep sea drilling and extraction can
be carried out in a fixed position whereas a ship is built to carry cargo
and travel the oceans. An oil and gas rig is built to house people and
extraction machinery whereas a ship is built to carry cargo. The result
is that oil and gas rig repairs require specialist engineering skills
associated with the machinery for deep sea extraction whereas ship
repairs require nautical and maritime engineering skills associated
with moving a ship which carries cargo”. 7
[18] It is also important to point out, as indicated by Mr Kelly of SA Five that the oil
and gas market does not only consist of rigs.
MR KELLY : “Yes you would. I mean I think that also we’ve got to
realize that when we’re talking about oil and gas here, we’re not only
talking about rigs. We’re talking about FSPO 8s that are also operating
in the west coast of Africa that could also quite easily come to Cape
Town. We’re also talking about Sub-sea structures, which are built or
fabricated on land and then taken to whichever well or block field that
is oil fuel that’s required for it.
I think most of today and yesterday we were always talking about rigs
in the oil and gas and I or SA Five don’t only regard rigs as being oil
and gas”.
[19] The merging parties submitted that there are four relevant markets:
• Smaller Ships are those that are small in size, travel shorter
distances and can be worked on the synchrolift dock;
• Large Ships are those ships that require to be docked in either the
Sturrock dock or the Robinson dock, in Cape Town harbour, and fall
into the category of classical ship repair jobs;
7 Dormac’s submission to the Commission dated 20/10/2008, page 1312 of the Record. 8 Floating Production Storage and Offloading Vessel
6
• Large Oil and Gas vessels such as crane barges, pipe laying
barges. The clients are international companies, typically operating off
the West Coast of Africa. The jobs require access to the Sturrock dock
(for below waterline repairs) and afloat repairs at one of the berths;
and
• Very large Oil and Gas vessels and structures such as FSO’s,
FPSO’s, jack-up rigs and semi-submersible rigs. The clients are again
international companies, typically operating off the West Coast of
Africa. These vessels and structures are repaired afloat at one of the
berths.
[20] The first two markets listed above, i.e. smaller and larger ship repair, did not
receive much attention during the hearing. The main reasons for this were the
following:
• Although the market for ship repair is probably a local market, there
are enough smaller players in this market;
• The merging parties have generally moved away from the ship repair
market (due to their strategic drive towards servicing the more
lucrative oil and gas market). The market shares of the merging
parties in these markets were consequently low9;
• There are enough facilities available at the harbour where these
smaller projects can be carried out, e.g. any of the docks (Sturrock,
Robertson, synchrolift, etc); and
• The market for larger ship repair was said to be a regional and
probably an international market.
[21] On the basis of the above, there did not seem to be any real competition
issues arising from the general ship repair markets.
5.2.2 Oil and gas vessels and structures
9 Here it must be noted that the evidence of the merging parties’ economist on market shares
– percentage of the number of days in docks – was not entirely satisfactory. However, it is not
clear that a different or better indicator of market shares would have yielded dramatically
different results.
7
[22] The remaining two markets are the markets for large oil and gas vessels and
very large oil and gas vessels and structures. During recent times, both the
merging parties have increasingly shifted their focus to these two (lucrative)
markets. We were not provided by market shares in these markets by the
merging parties. It emerged during the hearing that it is not exactly clear how
these two markets should be delineated and who the players in each are.
[23] The evidence led by the merging parties (both Mr Venter and Mr Blackbeard)
was that there are only three players in Cape Town that can compete for the
business of the very large oil and gas structures. These three being DCD
Dorbyl, Globe and SA Five. Mr. Blackbeard spent quite some time during his
testimony10 pointing out that they have researched the market – mainly
through contacting the SA Oil and Gas Alliance - and have found the market
to be populated by these three firms only.
[24] Some competitors regard the delineation of the market into oil and gas repairs
as erroneous. They maintained that the correct characterization relates to the
type of services demanded by a customer seeking ship repair work. Since
ship repair work entails a range of services, making different resource and
skill demands of repairers, their view seems to be that it is the nature of the
‘service’, not the nature of the ‘client’ that determines the correct market
delineation.
[25] Even if this view is correct, it does still seem that the nature of the customer
has a bearing on the nature of the firms which can compete to serve them.
We do not need however to come to a determination on this issue in order to
come to a decision on the central competition concern in this merger, which is
that of foreclosure. That issue is largely determined for us by the fact that the
TNPA has determined that all oil and gas repairs in Cape Town harbour must
TNPA has determined that all oil and gas repairs in Cape Town harbour must
take place in this berth and further that this berth’s lay down area will be the
subject of a ten year lease agreement.
[26] Thus firms competing to provide oil and gas customers with repair services
will only be able to do so in the future from this facility, as stated by Mr.
Claasen:
10 See p. 513-516 of the transcript.
8
“I think what is important is to stick to the zoning of the port and I’ve
just explained that the zoning in respect of A-Berth is very clear for the
oil and gas industry...”11
[27] It is thus of less importance to determine whether a firm is one that provides
electrical engineering services to vessels, including oil and gas vessels and
structures, or whether one repairs the latter and provides as one of the
services, the former.
[28] The competition issue remains the same – can the firm compete without
access to the A-berth facility and if they cannot, what are the implications for
competition post merger. A brief history of the A-berth and the merging firms’
relationship to it, is necessary to appreciate the effect of the merger on
access to this berth.
[29] The proposed utilisation of A-berth can be seen as the outcome of an
alignment of two industrial policies then current. The TNPA wanted to use its
berths in a more efficient manner in order to create the best return. This
meant creating dedicated berths for particular industries such as container
shipping. At the same time arising from the arms deal the government had
imposed an obligation on successful bidders to make large scale investments
into infrastructure.
[30] These investments referred to as offsets formed part of a program
administered by the Department of Trade and Industry, known as the NIPA.
One such bidder was MAN Ferrostaal, a large German engineering firm that
had been a partner in a consortium for the supply of submarines to the South
African Navy. It agreed to explore various possibilities for an offset program,
and when its first proposal for a steel mill came to naught, the idea was
suggested that it invest in improving port infrastructure.
[31] This idea met with its approval and those of the relevant authorities. This led
to two investments in harbours in the Western Cape - one at Saldanha Bay
to two investments in harbours in the Western Cape - one at Saldanha Bay
and the other at the A-berth in Cape Town. The structure of the two
investments was to be similar. MAN Ferrostaal’s local entity, Ferromarine
11 Page 61 of the transcript.
9
Cape (Pty) Ltd (Ferromarine) would enter into a main lease with the TNPA
and agree to make the investment into improving the port’s infrastructure.
[32] In respect of A-berth the investment was R60 million. In turn it would be given
the right to sublease the particular facility to an operating company composed
of local firms. The operating company would then generate turnover, which
together with the original fixed investment, would be taken into account in
assessing whether the offset obligations had been met. The task of setting up
the structures fell to a company headed by Brian Blackbeard, a former naval
engineer, who is also the managing director of Ferromarine.
[33] Two groupings were formed comprising of local firms one around Saldanha
and one around the A-berth, they were to be the prototypes of the operating
companies who would run the facilities once established. Each group
commenced negotiations with both Ferromarine and the TNPA. Initially DCD
Dorbyl was a member of both groups, although represented on the
prospective operating companies through different divisions of the company.
[34] It eventually withdrew from Saldanha, leaving Grinaker LTA to become the
sole constituent of the operating company. Although we were assured that the
Saldanha project does not compete with A-berth, as the former has an
emphasis on fabrication not repair, the minutes of meetings that designed the
projects are filled with references of the need for the two projects not to
compete.12
[35] That however is not an issue relevant to the consideration of the present
merger, other than to illustrate the point that competition in the country is
relevant to an assessment of this merger, despite the merging parties’
suggestion that we should consider the large ship repair market as an
international one. The concern that the two consortia might compete suggests
international one. The concern that the two consortia might compete suggests
that local competition for ship repair is considered possible by the industry
players.
[36] The A-berth operating company has had a difficult history. Originally three
companies were to comprise the membership of the operating company, i.e.
the two merging parties and another ship repair company based in Cape
12 See by way of an example File 3 page 201.
10
Town, SA Five. As we discuss more fully later, SA Five, seemingly at the
behest of its overseas associate and controller, RBG, wanted either control of
the operating company or nothing. Not having got the other partners to
concede control to it, it withdrew leaving the operating company with two
members, Globe and DCD Marine.
[37] With the merger, the operating company, once intended to be representative
of the local industry, will have a single firm as its member. It is not clear
whether this is a matter of concern for any of the project’s stakeholders, but
perhaps the elapse of time has made them reluctant at this late stage to
introduce any new complexity. It has however made the project controversial
in the opinion of local industry who claims that no proper process was
followed in selecting members for the operating company. Whilst Blackbeard
disputes this, he does concede that there was no public call for participation.13
[38] Whilst the fairness of the process is not relevant to our enquiry it has proved
relevant to one aspect, because it explains why the A- berth joint venture is
not yet in place. The TNPA has prepared a draft lease agreement with
Ferromarine and seemingly negotiated its terms to both parties satisfaction.
Ferromarine has in turn entered into a sublease with the operating company.
[39] There is as yet no agreement in place between the members of the operating
company, but with the approval of this merger this may become academic.
Thus a sublease has been signed, but not the main agreement, without which
the former is of no force and effect. We were advised during the hearing that
the reason that the TNPA has not yet signed the main lease is because it is
awaiting a decision from the Minister of Transport to issue a directive to the
TNPA in terms of the relevant legislation.14
[40] As we understood the rationale for the directive was that it would have the
[40] As we understood the rationale for the directive was that it would have the
effect of exempting the TNPA from having had to comply with a public tender
process.15 It is not yet clear whether the Minister will decide to do so, and if
so, when. In the interim we were advised that the A-berth has been leased
13 Transcript, p. 444 – 446.14 Section 79 of the National Ports Act, no 12 of 2005.15 This all set out in a letter from Ferromarine to the Minister of Transport dated 12 January
2009, Exhibit B.
11
out to a rig owner for a large scale repair which will last several months – and
that DCD Marine and Globe have tendered for some of this repair.16
[41] The implications for the merger are that the A-berth is a probable, but not yet
inevitable, asset of the merging firms. We will approach the merger as if it is –
this has been the approach of the merging parties. Thus pre-merger the two
merging parties were members of an operating company that had exclusive
rights to lease the A-berth working area for a period of ten years. It is not
clear how this relationship would work between them. In their merger filing the
merging parties stated that:
13.7.1 neither party has or will transfer its existing business (or any
part thereof) to the joint venture company;
13.72. both parties will tender independently and separately for ship
repair contracts and they will not share information in respect of
prices, costs and the like;17
[42] The internal documentation discovered by the merging parties subsequent to
the Commission’s investigation reveals that this was never their intention and
indeed they appear to have discussed the benefits of collaboration. It is thus
most likely that even without the merger the firms would have approached
customers as a single entity. This might suggest that the merger makes no
difference in respect of A-berth – it was to be run as a single entity prior to the
merger and the merger will not bring about any change in that regard.
[43] However the fact that the parties may have contemplated operating as a
single entity does not mean they could have done so without considerable
legal risk. The joint venture as contemplated may well have been considered
collusive.18 It is apparent from the papers we have had discovered that the
parties were sensitive to this issue and had taken opinion on the issue and
indeed even considered applying for an exemption in terms of section 10 of
the Act.
indeed even considered applying for an exemption in terms of section 10 of
the Act.
16 Transcript 663.17 See merging parties’ competitiveness report file 1 page 99.18 For instance one minute of the joint venture working committee refers to the need to
develop a bid strategy in respect of each opportunity identified. File 3 page 332. See also
minutes undated at file 3 page 227 where Venter remarks on the need to have a collaborative
approach to avoid the duplication of bid costs.
12
[44] The fact that parties may have acted in an unlawful collaboration absent the
merger, does not therefore mean that the merger makes no difference to its
competitive effect. The approach we are adopting is that without an
exemption such collaboration would have been collusive. We therefore make
the presumption that even though the merging firms were the sole partners to
a joint venture pre-merger, they would have had to manage the joint venture
in such a way as to ensure competition between them was maintained.
[45] This is the position they adopt in their competitiveness report in the passage
cited above. Post merger, it is clear from the evidence of Mr Venter that the
benefits of the merger are to run the operating company as a single entity so
as to enhance its efficiency. Since the merger would lead to the elimination of
this competition it thus has merger specific implications which we now
proceed to examine.
5.3 The transaction’s impact on competition
[46] The main competition issue that seems to arise, and this is specifically
relevant to the A-berth, is the possibility of foreclosure of competitors.
Although the only customer to testify Mr Jones of De Beers testified that their
preferred suppliers in Cape Town are DCD Dorbyl and Globe and that the
merger would result in the removal of an effective competitor it seems that in
the markets his company was concerned with alternatives do exist 19. The fact
that his firm has thus far not chosen to use them does not mean that post
merger it will be without choice for the particular services it requires to its
vessels.
[47] On the issue of foreclosure, we heard from quite a number of competitors
who gave evidence on how they expect to be affected by the merger. Nor was
the possibility of excluding competitors simply the fanciful notion of rivals –
internal documents reveal that the exclusion of rivals was contemplated by
internal documents reveal that the exclusion of rivals was contemplated by
the parties to the joint venture. 20 In order to analyse the potential for
foreclosure, one has to first establish who the participants in the relevant
market are.
19 Page 354 of the transcript. 20 See for instance the minutes of a meeting dated 19 May 2005 where it is stated that “other
than Opco no other companies would be allowed to work at A-berth. File 5 page 125.
13
[48] In the Commission’s competitiveness report they refer to the following
companies who (apart from the merging parties) participate in the broader
ship repair market, SA Five, Dormac (a subsidiary of RJ Southey), Belmet,
Hesper and EBH. However, as stated above, there do not seem to be specific
competition concerns relating to the general ship repair market. The more
pertinent issue is to analyse who would be potentially foreclosed from the oil
and gas market, if the merging parties were to control A-berth as a single firm.
[49] There are various sources of information as to which of the companies’ active
in ship repair in the Cape Town harbour are also active in the oil and gas
market. If one looks at the DCD Dorbyl document “Marine Cape Town
Business Defined”, dated November 2007, one sees a list of competitors in
each of nine sub-segments of the ship repair market. 21 In the four oil and gas
segments (O&G Dry Dockings, O&G Offshore, O&G Rig Refits, O&G
FPSO’s), the only companies listed are DCD, Globe and SA Five (Belmet
also appears in the O&G Offshore segment).
[50] The other competitors that made presentations during the merger hearing
were Mr. Kelly of SA Five, Mr. Peter Kroon of Belmet and Mr. Cook of
Atlatech. Mr. Jones also testified on behalf of De Beers, a large customer of
the ship repair industry. The first competitor that gave evidence, Mr Kelly
from SA Five, explained that SA Five is essentially a fabrication and pipe
services organization, and started operating in the oil and gas market from
the mid-1990’s:
MR KELLY22: “We are essentially a fabrication and pipe services
organisation with project managers. And in the mid 90’s we moved
towards oil and gas industry and therefore required additional facilities
than what we had at Blackheath, which was at A-berth, clearly
because of a contract that we obtained in 1997/1998 with the upgrade
because of a contract that we obtained in 1997/1998 with the upgrade
of the FA Platform off Mosselbay. And from that date onwards we
have operated at A-berth and thus have marketed ourselves having
that facility”.
21 Page 747 of the record. 22 Transcript p. 170.
14
[51] During the evidence of Mr. Kelly it became clear that SA Five operates in the
oil and gas market mainly through its overseas associate company, RBG.
RBG would obtain the work and this would then be channelled to SA Five
locally. The facility of the A-berth was used as a marketing tool. This is also
clear from the listing of A-berth under ‘facilities’ on the SA Five website 23. It is
therefore not clear whether SA Five would be able to compete for large
tenders in the oil and gas market on its own. The evidence of Mr. Kelly was
that SA Five would not tender as a main contractor 24, but would always work
through RBG.
[52] However, in terms of potential foreclosure, Mr. Kelly did indicate that SA Five
would not be able to compete in the oil and gas market if it does not have
access to the A-berth. This is clear from the following exchange between Mr.
Kelly and the Chairperson:
CHAIRPERSON: “Mr Kelly does SA Five want to oil and gas work in
the Cape Town harbour?
MR KELLY: Yes we do.
CHAIRPERSON: And if you did do that, where would you do that
work?
MR KELLY: In the present circumstances we wouldn’t be able to do it
if A-berth is not available to us. And once again it comes down to the
size of the project and the type of work that’s required”.
[53] Mr. Kelly also indicated that if they had to put in a tender on a large oil and
gas project and A-berth was not available, that they would not tender. He
suggested that RBG would tender for the project and then do the work at
Walvis Bay and not Cape Town 25. However, Mr. Kelly also stated that they
are “neutral”, and do not oppose or support the merger 26. Recall that SA Five
23 See exhibit G.24 Mr. Kelly (page 220 of the transcript): “I can say that SA Five more than likely wouldn’t want
to be and we haven’t been the main contractor. It has always been through RBG, if we are the
main contractor. So, in future SA Five as SA Five would not be the one to tender as the main
main contractor. So, in future SA Five as SA Five would not be the one to tender as the main
tenderer for a rig to come here”.25 P. 209-210 of the transcript. 26 P. 178 of the transcript.
15
was originally a member of the OPCO that would have leased the A-berth
facility from Ferromarine Cape. However, SA Five wanted a greater
involvement, and when this did not happen they withdrew from the OPCO,
and shifted their focus to the port of Walvis Bay.
[54] The next witness, Mr. Kroon of Belmet indicated that his company would not
be the “sole contractor” on a large project, but might well be the “lead
contractor”. Mr. Kroon also indicated that Belmet was neutral on the subject of
the merger, but that it had concerns regarding the A-berth issue 27. The
principal concern was that A-berth should not be the exclusive domain of
some parties. Mr. Kroon testified that he became aware of the fact that A-
berth was marketed by DCD Dorbyl as an exclusive facility and that this was
also communicated to other parties. Mr. Kroon testified that his company
Belmet does compete in the same market as DCD Dorbyl:28
CHAIRPERSON: “Let me ask the question differently. Would you be a
fir[m] that would be competing with DCD Dorbyl in tendering for oil
and gas repair work?
MR KROON: Well, like I said before, if you look at the last couple of
projects, the Trans Ocean, Expedition, the Scarabeo 7, the Pride
vessels, the Pride vessel coming in now, I know for a fact we are
tendering against them and have been, yes”.
[55] It seems therefore that although Belmet does not act as a ‘main’ or ‘sole’
contractor, it regards itself as a competitor in the oil and gas market. Finally,
Mr. Cook from Atlatech also testified that his company was not opposed to
the merger, but was concerned that the merging parties would be able to
“lock” other competitors out of A-berth at various times, if they controlled this
facility.29
27 P. 245-246 of the transcript. 28 Transcript p. 291. 29 Mr Cook (page 309 of the transcript): “ We have no objection to the proposed merger being
approved. We do, however, have some serious concerns as to what may happen following
approved. We do, however, have some serious concerns as to what may happen following
the approval of the transaction. These concerns arise from rumours, which have been
circulating in the Cape Town harbour for quite some time. According to these rumours, one or
more agreement may be concluded between the National Ports Authority, NPA, and the
merging parties. In terms of these agreement certain facilities, such as A-Berth, etc, would be
let by the NPA to the merging parties. Access to such facilities is essential to firms such a
Atlatech conducting their activities in the ship repair industry”.
16
[56] The evidence from the competitors, i.e. SA Five, Belmet and Atlatech seems
to indicate that the only issue that really concerns them is access to the A-
berth. The important question here is whether these companies can be
considered as market players in the markets for “large oil and gas” and “very
large oil and gas vessels and structures”. It would probably be more correct to
define a separate market for “main contractors” on large oil and gas
structures.
[57] But it is possible that even the three players mentioned, might not be proper
contenders in such a narrow market. It seems that although each of SA Five,
Globe and DCD has been a main contractor in the past, the experience of
DCD with the Polaris project has made them hesitant to tender again as main
contractor on a large project, if the circumstances were to remain the same
(i.e. not control over their ‘own destiny’ and dependent on sub-contractors).
[58] The evidence from Globe was that although they have been a main contractor
in the past, they would no longer be in a position to play such a role, and at
best would be a sub-contractor. Mr Blackbeard insisted in his evidence that
the market for large oil and gas repairs only include DCD Dorbyl, Globe and
SA Five, and that enquiries with the Oil and Gas Alliance yielded no other
names30 at the time. The fact is that we have the evidence from the merging
parties and Mr Blackbeard indicating that there are very few players (possibly
only three) in the market for large oil and gas vessels and structures.
[59] On the other hand we have the evidence of SA Five, Belmet and to a lesser
extent Atlatech, who also consider themselves participants in this market and
have real fears about foreclosure. Whether smaller players can evolve into
“main contractors” is not clear at this point, although a company like Belmet
clearly sees itself competing in this market.
[60] Even if none of the other firms present in the Cape Town market for ship
[60] Even if none of the other firms present in the Cape Town market for ship
repairs is capable of bidding successfully for a large oil and gas repair
30 Mr Blackbeard (p. 516 of the transcript): “ Well obviously everybody aspire, no matter when
we start this business. If we started it today and we included the others, we went to 7
companies, tomorrow there will be 9. It is a never ending loop potentially because it will cause
more work to happen and then it will grow. We had to … at that point in time this was the best
information available and we had no complaint to us and had no third party requesting to
participate in the Opco as I said last week to this very day, including the complainants”.
17
contract at this point in time, this does not justify coming to the assumption
that they never will, or that they would not be able in conjunction with another
international firm skilled in project management be able to do so. The
relationship that SA Five has with RBG is just such an example and there was
evidence of a number of sizeable international ship repair firms even though
they were not presently located in Cape Town who could tender with a local
partner.
[61] Thus foreclosure of rivals post merger remains a valid concern. The merging
parties placed much emphasis on trying to show that the oil and gas market is
international and that there would be no loss of consumer welfare as
customers post merger would have the choice of any number of international
ports to go to if Cape Town was considered uncompetitive.
[62] The evidence on this point was inconclusive. Whilst there was evidence that
for some customers for some repairs there were a range of ports available it
was not wholly persuasive. At the same time there was evidence that
customers lose an enormous amount of revenue for so long as a rig or vessel
is travelling to and from a repair berth, and that this downtime, as well as the
time spent in port, is factored into any decision where to repair. It also
emerged that not all ports are suitable for all repairs. Thus Walvis Bay which
is newly emerging as a rival for Cape Town for this market has some physical
limitations as well as a less developed local engineering industry, which
makes sub-contracting less feasible.
[63] Whilst Cape Town would be constrained by the competition from other ports it
is by no means clear that this constraint is as meaningful as the constraint
that would emerge from local competition for repair work most of which is
tender based. As we noted earlier, internal documents of the parties showed
their concern about local competition on pricing. 31 Geography remains an
their concern about local competition on pricing. 31 Geography remains an
element in a ports’ competitive advantage. It is also correct that customers
are not wholly concerned with price. The quality of repair work, reputation of
firms doing the work and the management of the port authority all take part in
the mix of factors going into a decision to award a tender.
31 See for instance an email from Baret to a Mr Contarini in which he refers to ongoing price
wars in the industry which he says have gone well beyond the normal free market dynamic -
file 3 page 577.
18
[64] On the other hand the evidence that the merged firm will be able to foreclose
its rivals, actual and potential in the Cape Town port from this market is
strong. Since evidence on the effect of the merger on consumer welfare is
equivocal, we cannot dismiss concerns expressed by rivals to the merged
firm in the Cape Town harbour that they will be foreclosed from this market by
denial of access to the A-berth. We examine this issue by considering
whether A-berth is a ‘must have’ for rivals wanting to compete with the
merged firm in Cape Town for oil and gas repairs.
5.4 The A-berth as an essential facility
[65] A-berth has unique features which makes it specifically suitable for oil and
gas repairs; it has a long berthing area with a length of 274m and a depth of
12m; at the back of the berth is a lay-down area, which according to the
Commission is an “essential facility”. 32 Mr. Claasen of the TNPA also pointed
out in his evidence that the A-berth has been designated as a zone for oil and
gas repairs33.
[66] The crucial question here is whether other areas in the port of Cape Town
can be used for large oil and gas repair work. Mr. Claasen indicated that
although another area in the port, the repair quay, has in the past been used
for oil and gas work, this was on a very “limited basis”. He explained that if it
is a large project, a lot of backup space will be required and the area around
the repair quay would not be sufficient. 34 But most importantly it appears from
his evidence that the TNPA wants all oil and gas work to take place at A-berth
and not at any other quay.
[67] Before continuing to discuss issues of access to the A-berth, it should be
pointed out that the A-berth consists of various elements, i.e. a shed that
houses offices, a large lay-down area, 35 and a quayside area. The latter, the
strip between the face of the quay and the shed (plus minus 18 metres), is not
strip between the face of the quay and the shed (plus minus 18 metres), is not
part of the lease agreement and is available to any party on a common user
basis. Any third party can gain access to this area by booking this with the
TNPA who allocates this space on a first-come-first serve basis.36
32 See the Commissions’ Competitiveness Report, p. 44. 33 Page 79 of the transcript. 34 Transcript p. 107. 35 A lay down area is the space where work can be performed on the quay.36 Transcript p. 53.
19
[68] The part of A-berth that will be affected by the merger, and the subsequent
lease of the facilities to the merging parties via their operating company, is
therefore the shed as well as the lay-down area. Much of the evidence
presented focused on whether parties that do not have access to the A-berth
(shed and lay-down area) would be able to compete in the market for large oil
and gas repair. We have already referred above to the evidence of Mr. Kelly
who testified that SA Five will not tender for a large oil and gas project if they
do not have access to A-berth. The following excerpts from Mr. Kelly’s
evidence are also important:
MR KELLY37: “A-berth is essentially used for what I call offshore
projects. Processing plant is more inland and done on various other
companies that we do work for. A-berth is also used for the rig and
ship maintenance. And so it’s essentially those two projects that are
used for where we use A-berth. Our facilities at Blackheath are not big
enough to be able to do the structural steel fabrication for offshore
work, as well as that you need quayside facility to be able to deliver to
the client. In respect of ships and/or rigs, you do need the quayside to
be able to not only fabricate on land but also to do certain work on the
vessel itself along the way”.
[69] Mr. Claasen also said in his evidence that they cannot accommodate more
than one oil rig at A-berth 38. He did indicate that an oil rig can be repaired at
the repair quay, but only if it is a smaller project, as the repair quay offers only
about 8 000 square metres, compared to the 47 000 square metres at A-
berth.
[70] Although the merging parties were at pains to illustrate that large oil and gas
vessels and structures can be serviced in other areas of the port, it does
seem from the evidence that very large oil and gas structures do need the
facilities at A-berth and cannot be handled at the dry docks or at the repair
facilities at A-berth and cannot be handled at the dry docks or at the repair
quay (although the latter might be used temporarily). Even one of their own
witnesses, Mr. Blackbeard explained why the A-berth is essential for large oil
and gas repairs:
37 Transcript p. 171-172.38 Transcript p. 157
20
MR BLACKBEARD39: “So everything said here is exactly pointing to
that, whereas Cape Town the access to the A-Berth quay side or
other quay sides is easier because of a greater water depth and a
quay of 200 metres plus in length versus 35 in Saldana and hence the
rigs cannot be brought to Saldana for repair and it is only fabrication
of new components and modules that can be floated away by a barge
is limited to the scope of work for Saldana, which is still a problem for
us to this very day I can add, whereas rigs can only be floated into the
port of Cape Town, because of sufficient water depth and quay sides.
These rigs, just to complete your pictures they are approximately 100
metre by 100 metre square and to tie up alongside a quay you can
imagine with the mooring lines they need approximately 200 metres of
quay side to secure them safely especially in the strong South Easter”.
[71] It would seem therefore that any company that wants to attract business in
the market for “very large oil and gas vessels and structures” and probably as
a “main contractor” will need access to A-berth. This raises the question of
whether A-berth can be classified as an “essential facility”. The Competition
Act defines an essential facility as follows:
“An ‘essential facility’ means an infrastructure or resource that cannot
reasonably be duplicated, and without access to which competitors
cannot reasonably provide goods or services to their customers”.40
[72] Although this is not an abuse of dominance case and section 8(b) 41 is
therefore not applicable, the A-berth does seem to have the characteristics
one would generally associate with an essential facility. It cannot be easily
duplicated and the evidence indicated that competitors cannot reasonably
provide services to large oil and gas vessels and structures without access to
A-berth. The Commission in their report also referred to A-berth as an
A-berth. The Commission in their report also referred to A-berth as an
39 P. 488 of the transcript. 40 Section 1(1)(viii).41 Section 8(b) states that it is prohibited for a dominant firm to refuse to give a competitor
access to an essential facility when it is economically feasible to do so;
21
essential facility and mentioned that: “ Preferential access to essential
facilities may limit competition in the market”.42
[73] The merging parties denied – both in the evidence of their economist and
during closing argument – that A-berth can be classified as an essential
facility. Although the issue of A-berth as an essential facility is not crucial to
the outcome of this case, it is worth pointing out that there is a substantial
body of literature that indicates that ports are often considered by competition
authorities as essential facilities.
[74] The economist for the merging parties argued that A-berth cannot be an
essential facility, as downstream users will not be negatively affected. This
does not seem to be the only test suggested in the literature, and without
adopting a dogmatic stance on the issue of A-berth as an essential facility, it
remains true that it certainly has some of the features of an essential facility.
As explained by Motta:43
“Any input which is deemed necessary for all industry participants to
operate in a given industry and which is not easily duplicated might be
seen as an essential facility…There are many examples that might
satisfy this very loose definition of essential inputs. In the airline
industry, slots at an airport; for maritime transportations, a port’s
installations”.
[75] Motta also deals specifically with port infrastructure as an example of an
essential facility. The literature generally speaks about upstream access and
not only about downstream effects.44
[76] Given the evidence that participants in the market for very large oil and gas
vessels and structures do indeed need access to the A-berth, it seems that
one could very well use the principles applied to an essential facility, i.e. that
there should be open access to all. The condition offered by the merging
parties – that the sub-lease covers no more than 50% of the A-berth area – is
parties – that the sub-lease covers no more than 50% of the A-berth area – is
42 Competitive Report, p. 30.43 Motta, M. (2004). ‘Competition Policy – Theory and Practice’. Cambridge University Press
at page 66. 44 See Motta op cit at page 67.
22
therefore a solution to the A-berth problem. This will be dealt with more fully in
the next section.
6. The condition
6.1 Lease of A-berth restricted to 50% of the facility
[77] During the course of the hearing, on the 4 th of March 2009, the merging
parties proposed a condition relating to A-berth. The essential feature of the
condition was that the merging parties agreed that if it wished to lease the A-
berth lay-down area, that such lease would not be for more than 50% of the
property. Further to discussions with various parties, the initial condition was
amended to include two important aspects:
• Firstly, the requirement that the remaining area i.e. that portion of the lay
down area not the subject of the merging parties lease, must be reasonably
accessible to the quay;
• Secondly, the parties drew a diagram showing the proposed split into leased
premises and the remainder, and undertook that they would propose to the
TNPA that the premises to be leased by them, be situated as indicated on the
shaded portion of the diagram.
[78] During the hearing, the Commission seemed to be of the view that the
condition was not viable as access issues had not been sufficiently
canvassed with other role players. . There are however, various reasons why
this condition seems to solve the issue of access to the A-berth. The first
aspect is that there has been evidence led that ship repairers seldom need
access to the full lay down are in A-berth and often let only a portion of that
space. Mr. Claasen said the following on this issue:
MR CLAASEN45: “Another option is where people are saying maybe
we need 50% of the shed and that’s why you even see in the lease
agreement there is an option in the agreement that they might take
50% of the shed down to create extra lay-down areas. So, I’m saying
once again it differs from project to project. My experience is 90% of
45 Transcript p. 161-162.
23
the time they only require maybe 50% up to 10, 15% of the shed. I
cannot recall when a rig was in the port of Cape Town occupying
the whole of A-shed. I can’t recall. This deal we signed last Friday,
once again they are looking only at 25% of the shed. They don’t
require the rest. So, I’m saying I think it’s a nice-to-have”.
[79] Mr. Kelly46 from SA Five also testified that they used to rent only portions of A-
berth. He mentioned figures of 50% of the workshop and around 20% of the
lay-down area. From this evidence it seems perfectly viable to lease smaller
portions of A-berth to companies without impeding their ability to perform their
services. The second important point is that when the option of accessing
50% of A-berth was put to various of the competitors, they did not object to
this proposal. This position is clear from the evidence of Mr. Kelly when asked
by counsel for the merging parties whether SA Five would be satisfied with
such a condition47:
ADV VAN DER NEST : “I had a hypothetical debate with Mr Claasen
yesterday and I want to have a similar hypothetical debate very briefly
were you. If the heavens were to open and Transnet were to say I
make 50% of that lay-down area available on common user basis not
to the merging parties. I’m only going to lease to them 50% of the lay-
down area in A-Berth and 50% of the sheds and 50% of everything
and I’m leaving 50% open on a common user basis to the port. What
would your response be to that?
MR KELLY: We will be happy.
ADV VAN DER NEST : And would that cure any complaints that you
could possibly have?
MR KELLY: The only complaint that we have had is the right of use of
A-Berth, up until the 28th of February 2009 and the perception was
that A-Berth was not available to anyone other than the merging
parties. As of today it has changed and I’m happy with that change, if
it is put into practice.
46 Page 117 of the transcript47 Page 237-238 of the transcript.
24
ADV VAN DER NEST: Did you not know that the quayside, the apron
and the operational area were still subject to common user principle?
Did you not know that?
MR KELLY: Yes, it is available and I did know that, but you cannot
use that area for any work on a rig other than if you are doing the
work on the rig.
ADV VAN DER NEST: Right, so now if Transnet were to say I cut it in
half and 50% - I’m taking a random figure – were to be made available
on a common user basis to other parties, that would cure your
complaint.
MR KELLY: Of the quayside area?
ADV VAN DER NEST: No, no, the lay-down area.
MR KELLY: The lay-down area, we are happy with that.
[80] Access to A-berth was also the only issue raised by Mr. Cook of Atlatech and
in his evidence he proposed the following48:
MR COOK: “In the circumstances, what we would like to ask the
Tribunal, if it were to approve the proposed merger, is to render its
approval conditional upon the merging parties providing an
undertaking that they will not prevent the competition in the ship repair
industry from using any essential facilities, and in particular the A-
Berth and other facilities in the Cape Town harbour in the future”.
[81] It seems therefore, that if this is a condition that satisfies the requirements of
TNPA, the merging parties49 and the competitors, these parties will find a way
of implementing this condition. It is also worth pointing out at this point that
there is another regulator, the TNPA that controls access to A-berth by means
48 Page 310 of the transcript49 Mr. Venter (DCD Dorbyl) testified that OPCO is prepared to lease a reduced area and pay a
new pro-rated fixed rental. He also indicated that OPCO accepts and agrees that the
remaining area will be available to third parties on an ad hoc and on a common user basis.
25
of the harbour master. One of the functions of the port regulator is to promote
equity of access to the port and to facilities provided by the port (National
Ports Act 12 of 2005, section 30(1)(b)). Any practical issues would be better
solved by the harbour master who is responsible for access to the port
facilities. We agree therefore with the merging parties that the condition is
‘practical, workable and cures competition concerns.50
[82] Furthermore, the condition also satisfies Ferromarine who indicated that they
are still committed to the investment of the full sum, i.e. R60 million to
upgrade the facilities at A-berth. The result of the condition is that there will be
more development on the smaller portion of A-berth. While this may not be an
optimal allocation of scarce resources, this is the inevitable outcome of the
attempt to resolve the issue of competitor’s access to A-berth.
6.2 Employment issues and condition
[83] It is trite law that one of the issues the Tribunal considers in evaluating a
merger is whether the merger can or cannot be justified on substantial public
interest grounds. One of the public interest grounds set out in the Act is the
effect that the merger will have on employment. 51 The issue of employment
arises in this merger as the merging parties have indicated that
retrenchments are likely post merger.
[84] When they filed the merger with the Commission on 1 0ctober 2008 the
merging parties indicated that 28 “white collar” jobs might be lost in the first
12 months following the approval of the merger. The 28 jobs under
consideration were those of 4 executive managers and 24 support staff . The
support staff work in the following areas: administration and finance, human
resources (including training), stores and security.52
[85] According to the merging parties, the relevant employees were skilled and
had experience which would enable them to find jobs in other industries. In
had experience which would enable them to find jobs in other industries. In
addition the parties stated that additional employment might be created in 12
months after the merger. They stated that this was because the merger would
result in “envisaged growth”. The categories of employment thus created
50 See the merging parties’ heads of argument, p. 5.51 Section 12A (3)(a).52 See File 1 page 86
26
would be for skilled and semi-skilled workers. 53The parties notified the union,
in this case the National Union of Metalworkers of South Africa (NUMSA) of
the merger.
[86] There was no response from NUMSA during the course of the Commission’s
investigation and hence the Commission assumed the merger would not
create any adverse effects on employment and hence any substantial public
interest concern.
[87] During the course of our hearing a representative of NUMSA asked to make
representations to us. Eugene Mutileni, NUMSA’s national legal officer
indicated that he had only become aware of the merger a few days before our
hearings commenced. This was because although the merger filing had been
served on the union’s local office it had not come to the attention of NUMSA’s
head office, where these issues are dealt with.
[88] There can be no criticism of the merging parties for this, as they complied
with their service obligations. Nevertheless we gave Mr Mutileni an
opportunity to make submissions to us. Mr Mutileni indicated that he had read
the parties filing and after initially being predisposed to oppose the merger,
was satisfied with the extent of the losses set out there and on that basis
would no longer oppose the merger. This is because NUMSA organizes blue
collar workers and in the filing no job losses for blue collar workers are
indicated.
[89] Mutileni also advised us that in the previous week Globe had sent out a notice
of intention (dated 26 February 2009) to retrench in terms of section 189 of
the Labour Relations Act of 1995. He was told that if the merger prevailed
then this situation would be alleviated and although there could be no 100%
guarantee that jobs would not be lost, the situation was better with the merger
than without it.
[90] Counsel for the merging parties in response made a long submission about
how the recent downturn in the economy since October necessitated further
how the recent downturn in the economy since October necessitated further
retrenchments at Globe, but that matters were better with the merger than
without it from the point of view of employees. Pressed by us on whether
53 See file 1 page 88.
27
more retrenchments were envisaged beyond those postulated in the October
filing, counsel indicated that the position was unsure and the merging parties
could not give further undertakings. Mr Mutileni was not unsympathetic, and
as he put it:
“We know you cannot give us 100% assurance, given the recent
economic recession, but the guarantee is that our members, would
their employment be safe in the long run or in the 12-month period
that is starting from the day the merger is concluded”.54
[91] Counsel responded that it would be too irresponsible to give such
guarantees.55 At the end of the case the merging parties offered an
employment condition on the following terms:
“That the merging parties will make their best endeavours not to
retrench any blue collar workers, but in any event, undertake not to
retrench more than 25 blue collar workers for a period of six months”56
[92] As we understand the position this reference to blue collar workers is in
addition to the white collar workers contemplated in the merger filing. As
counsel argued it, this position was more favourable for labour than would be
the situation if there were no merger, because in the no-merger scenario,
Globe would retrench up to 100 blue collar workers. 57 (In essence this means
that 75 workers are better off for six months than they would be if the merger
did not go ahead.)
[93] Thus the merging parties’ case is that post filing in October 2008 and by the
time of our hearing in March 2009, economic conditions because of the world
wide recession were such as to necessitate retrenchments not contemplated
four months earlier. But the Tribunal had sought and obtained discovery of
internal communications between the merging parties, written during the
course of the merger negotiations - a period that appears to have stretched,
course of the merger negotiations - a period that appears to have stretched,
54 See Transcript page 416.55 See Transcript page 416.56 See Merging parties heads of argument paragraph 37.57 See merging parties counsels’ address to the Tribunal, transcript page 963 and 965.
28
with some interruptions, from at least July 200758, until concluded in July 2008
with the signing of the sale agreement.
[94] The 2007 negotiations were aborted as Globe announced it was negotiating
with another party,59 but that buyer never came through and negotiations with
DCD Dorbyl were then resurrected in early 2008 60. This correspondence was
not before the Commission at the time it evaluated the merger nor had it ever
been communicated to the union, as far as we are aware.
[95] The evidence of this correspondence and the testimony of Mr Baret, the
managing director of Globe, indicate that the negotiations for the merger were
delayed by the actions of DCD Dorbyl. DCD Dorbyl took an inordinately long
time to sign the Sale of Shares Agreement, quibbling about the appropriate
NAV of Globe. In addition DCD Dorbyl did not respond to Globe’s repeated
inquiries about the strategy going forward (2009) with regard to Globe’s
business, yet it had stipulated in the sale agreement that any changes in the
ordinary course of Globe’s business required its consent.
[96] DCD Dorbyl had thus placed itself in the position where it would neither give
guidance to the merged firm nor waive the requirement for its consent to a
change in the business. Baret’s frustration is evident from a series of emails
he writes during this period. There are indications that in May 2008,
negotiations were getting bogged down and Baret writes in an email to Mr
Taljaard of DCD Dorbyl that he is uncertain as to whether Globe will survive
the acquisition process.
[97] Later that month he writes to Venter complaining about not knowing what
DCD’s strategy was going forward and advising that he had been instructed
by his controlling shareholder to suspend further discussions until there was a
signed agreement.61 In May as well, emails indicate a difference of opinion on
whether Globe should work on another major ship repair known as the Polaris
whether Globe should work on another major ship repair known as the Polaris
project and if they did, how this should be valued for the purpose of the
58 File 5 page 9059 File 5 page 93.60 File 5 page 1. This is an email from Baret to Taljaard at DCD confirming what appears to
have been an earlier discussion and is dated 17 January 2008.61 File 5 pages 144-5.
29
purchase price. Baret suggests that if they could not reach agreement on this,
Globe should be excluded from the project as they had had some good
enquires and would be fine on their own.62
[98] In August 2008, which appears the time at which the filing with the
Commission is being discussed, because Baret is being asked to comment
on its content, Baret remarks about the potential damage to the Globe
business over the last 6 weeks as they had had no costing, no WIP and no
management review meetings.63
[99] In October 2008, the gloomy picture continues, at least from Globe’s
perspective, as they signal opportunities being lost. In an email from Mr.
Bailey of Globe to DCD, dated 1 October, he indicates that discussions he
was having with a Canadian bearings company have been put on hold due to
the transaction – he suggests setting up a meeting between the Canadian
firm and DCD Dorbyl. In an email from Baret to DCD Dorbyl, dated 27
November 08, he expresses frustration again, and notes that senior staffers
have resigned. In an email dated 29 October 2008 to Venter, Baret informs
him that a senior employee, Gunnar Math, has resigned, as he was not
comfortable with the merger and concerned about the lack of planning and
communication with regard to restructuring. 64
[100] In an e-mail dated 12 November 2008 written to Vincent Langlois, one of the
directors of DCD Dorbyl, but who is also an appointee to that board by
Investec the largest shareholder in DCD Dorbyl, Baret writes:
“From operational point of view, Globe was prevented by DCD
(instructed in fact) not to proceed with its 2009 Business Plan based
on the anticipation of a quick and easy resolution with the CC. “Low
fruit hanging” type of opportunities were parked despite several
attempts on my part to motivate the capex.. resulting in the loss of a
few million rand of revenue for absolutely no good reasons
few million rand of revenue for absolutely no good reasons
whatsoever (Valve repairs, etc), recruitment of key personnel was
62 File 5 page 88.63 File 5 page 94.64 File 5 page 423
30
cancelled, internal restructuring stopped, development of the electrical
workshop stopped, …. The business was in standby”. 65
He further said:
“Following on the signature of the sale agreement, Globe was also
expected to support DCD Marine literally at all costs, which not only
resulted in other opportunities (tender turned down by the estimating
department) to be lost but also to expose us to DCD’s learning curve
on large projects such a s Polaris and Globe taking a bath in the
process. We have just started in the Scarabero but so far it looks like
it will be a repeat of the Polaris.”
[101] Effectively Globe was being run down. According to Baret, Globe had no
prospects of revitalizing its business if the merger failed. In his own words he
said:
“I would go as far as saying that Globe is now so “damaged good”,
that should DCD’s application be rejected by the CC, it will no longer
be a sustainable business”
[102] These communications are highly instructive as they put a completely
different perspective on the reasons for Globe’s now dire financial straits. The
evidence that emerges from this series of emails indicates that the reasons
for Globe’s current difficulties, arose from the merger process itself - the
delays created by the negotiations themselves and the resultant managerial
impasse meant that Globe instead of pro-actively moving its business forward
through taking up investment opportunities and competing for tenders
stagnated, whilst waiting for guidance from its future controller, which appears
to have been indifferent in the face of these queries, neither encouraging or
discouraging any course of action.
[103] Whilst DCD Dorbyl might contend that it could take no steps to implement the
merger, it did not signal to Globe that it was free to act in its own best
business interests until the merger was approved. Between the helplessness
of the target firm and the indifference of the acquiring firm, the future
of the target firm and the indifference of the acquiring firm, the future
65 File 5 pages 405-6.
31
employment prospects of employees at Globe deteriorated. It is more
probable that employment prospects of Globe’s blue collar workers is a
function of the merging parties merger machinations than external economic
conditions.
[104] At the same time the doom and gloom supposedly attaching to Globe does
not seem to have affected its new proprietor. Post merger we must judge the
merged firm as a whole not as two discrete entities. The parties have
motivated this merger at all times as efficiency enhancing and justified the
need to bulk up to attract major projects. This posture sits inconsistently with
a firm that is forced to retrench. In addition there was an indication that even
without the A-berth agreements finalized the merging parties were likely
contenders in a major repair at the A-berth that would last from July to
November of this year. According to Mr Venter, “We are confident of getting
the order” and he went on to say “... it would take all our resources to
execute”.66
[105] We therefore conclude that the merger has been the probable cause of
employment losses at the target firm, that in relation to the original projections
of job losses in the original October filing, these can be regarded as
substantial, and that it is appropriate for us to consider a condition that
addresses the adverse public interest concern.
[106] Clearly by now the public interest dictates that the merger is better for
employment than a prohibition. It then remains for us to consider whether an
appropriate condition can be crafted to ameliorate the employment
consequences brought about by the merger. The Tribunal has always been
reluctant to impose its own view of what level of retrenchment is permissible
in any given merger scenario.
[107] However given that the merger regime in our legislation is designed to create
[107] However given that the merger regime in our legislation is designed to create
a transparent process of negotiations between labour and management
around merger specific employment consequences we have intervened in the
past to ensure that this process is observed. 67 Here it is fair to hold the
merging parties to the original indication which they made to both the
66 Transcript page 663-664. The evidence was that both DCD and Globe had tendered for
this.67 See Daun et Cie AG and Kolosus Holdings Ltd, case no: 10/LM/Mar03.
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Commission and labour and to which neither at the time of the merger filing
objected to. Had they been advised at the time of filing of the more adverse
scenario for labour now being presented, they may have responded
differently.
[108] The subsequent departure from this indication to introduce a far more severe
regime of retrenchments has undermined this process. The merging parties
new intentions in respect of retrenchments come very late in the day and
have thus frustrated the very process that the legislature has introduced into
the Act for management and labour to engage in. 68 Nor would labour have
been aware of how the merger process has impacted on the economic health
of Globe. This justifies our intervening with a condition on a substantial labour
issue, whereas ordinarily we would have been more deferential to the
outcome of a fair consultation process between employees and management.
[109] As a matter of substance we come to the conclusion that on a balance of
probabilities the retrenchments are more probably the result of the merger
process than economic conditions external to this and thus the merger has
led to a substantially adverse effect on employment for workers in the most
vulnerable category. Accordingly, to ameliorate these adverse effects we
imposed the following condition on the merger:
“The merged entity must not retrench any employees of the merging
firms, for a period of one year after the date of the approval of the
merger, except as provided for in paragraphs 11.3.1.1 and 11.3.1.2 of
the merging parties’ competitive report.”
7. Other public interest issues and efficiency gains
[110] The remaining public interest issues favour the approval of the merger and
are not compromised by the conditions we have imposed on it. In the
Commission’s competitiveness report they summarise the reasons given by
the Western Cape Provincial Government why this merger will be beneficial
the Western Cape Provincial Government why this merger will be beneficial
68 Noteworthy is the fact that the section 189 Notice was served after our proceedings
commenced on 18 February Had we completed proceedings on that day the issues would not
have come to our attention.
33
for the Western Cape economy. 69 In broad terms the idea is that the merging
parties could become a major operator that could attract very large oil and
gas work to the port of Cape Town.
[111] Wesgro also submitted to the Commission that the merger is strategically and
operationally important, in the sense that it will allow access to bigger
projects. Also important – and pointed out by Wesgro – is that the projects
that the merged firm will be bidding for would require the use of many of the
smaller firms to complete key tasks 70. It seems therefore that the merged firm
will be in a better position to attract large oil and gas projects and that this will
also benefit other firms downstream. In short, the merger is an important step
in establishing Cape Town as an international Oil and Gas hub and for the
further development of the local industry.
[112] Not much evidence was presented during the hearing on efficiency gains. The
main expected gains have been summarized in the Commission’s
competitiveness report (p. 53-56). Although these were not specifically tested
during the hearing, the overall effects seem to be positive. The effect of the
transaction on employment has been discussed above under the section
dealing with the employment condition.
[113] The merging parties in their heads of argument also emphasized that the
merger will assist the merged entity to compete effectively in an international
market. International oil and gas repairs are large projects that are put out on
tender. Allocation of these projects is lumpy, and the projects require
significant capacity and resources within strict time limits.
[114] The evidence on DCD’s capacity and Globe’s complementary skills base and
infrastructure did seem to indicate that the merger will provide the merged
entity with the necessary critical mass, financial capabilities and skills to
entity with the necessary critical mass, financial capabilities and skills to
become an international player in this highly competitive international market.
Accordingly, it is expected that the merger will yield more work for the merged
entity in the international market, and that it will bring a considerable amount
of work into the Cape Town harbour, benefiting the local industry as a whole.
69 Commission’s competitiveness report, p. 48-4970 Commission’s competitiveness report, p. 51.
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8. Conclusion
[115] In conclusion, this merger has brought about a firm with much potential for
future growth, but also certain adverse consequences for competition and
employment in the short term. The main issue in terms of anti-competitive
effects is the potential foreclosure of competitors. This is adequately
addressed by the 50% condition. There seems to be enough evidence on
efficiency gains, i.e. infrastructure investment in the port, the merged entity
being able to attract more business post-merger, etc.
[116] Although these efficiency gains were not quantified, they seem to be broadly
accepted by other interested parties such as the Western Cape Provincial
Government and Wesgro. The merger will therefore not substantially prevent
or lessen competition if 50% of the A-berth remains available to competitors.
The public interest aspects such as investment, long term job creation,
stimulating local industry, becoming internationally competitive, etc. are all
positive. The short term job loss is not and hence the temporary employment
condition which we have imposed on the merged firm.
______________________ 30 April 2009
M Mokuena and N Theron Date
N Manoim concurring.
Tribunal Researcher : I Selaledi
For the merging parties : M van der Nest SC and SW Burger instructed by
Werksmans Attorneys
For the Commission : R Buckas and L Khumalo
35