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COMPETITION TRIBUNAL OF SOUTH AFRICA
Case No: 89/LM/Dec09
In the matter between:
Investec Principal Investments Acquiring Firm
And
NCS Resins (Pty) Ltd Target Firm
Panel : Norman Manoim (Presiding Member),
Yasmin Carrim (Tribunal Member)
Andreas Wessels (Tribunal Member)
Heard on : 24 March 2010
Order issued on : 24 March 2010
Reasons issued on : 14 May 2010
Reasons for Decision
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APPROVAL
[1] On 24 March 2010 the Competition Tribunal unconditionally approved
the merger between Investec Principal Investments and NCS Resins
(Pty) Ltd. The reasons follow below.
THE TRANSACTION
[2] In terms of the sale of shares agreement, Investec Principal
Investments will acquire [ ] % interest in the business of NCS Resins.
On completion of the transaction, Investec Principal Investments will
control the business of NCS Resins with [ ] % interest in the business.
THE RATIONALE
[3] Investec Principal Investments believes that NCS fits into its investment
profile and appears to be a business which will yield the necessary
investment returns over the expected investment period.
[4] Medu Capital Fund, which has [ ] % shareholding interest in NCS,
wishes to exit the market and capitalise on its investment. Further, the
parties submit that the managing director of NCS Resins and certain of
his colleagues are at the retirement age and wish to exit the business.
THE PARTIES AND THEIR ACTIVITIES
[5] The primary acquiring firm is Investec Principal Investments (“IPI”), a
division of Investec Bank Ltd (“Investec Bank”). Investec Bank 1 is
controlled by Investec Ltd (“Investec”), a public company which is not
controlled by any individual shareholder. Investec’s major shareholders
are as follows:
1 Investec Bank is part of an international specialist investment group that provides a diverse
range of financial products and services to a niche client base. The Investec Group’s
business divisions are private banking, private client portfolio management and stockbroking,
capital markets, asset management, property activities and investment banking.
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• Public Investment Corporation 8.5%;
• Old Mutual Asset Managers 7.4% and
• Investec Securities (Pty) Ltd 5.5%
[6] Investec has a number of subsidiaries worldwide 2 and the relevant
subsidiary for purposes of this transaction is Waterlinx Pool and Spa
(Pty) Ltd (“Waterlinx”). Investec has [ ] % interest in Waterlinx and the
balance is held by the management of Waterlinx. Waterlinx is involved
in the distribution of resins and fibreglass. These products are
distributed to companies that manufacture and repair swimming pools.
Waterlinx does not manufacture resins. Waterlinx’s business is to
distribute a variety of products to pool contractors and in the course of
this business distributes resins and fibreglass products.
[7] The primary target firm is NCS Resins (Pty) Ltd (“NCS Resins”). 3 NCS
Resins controls Mega Resins (Pty) Ltd (“Mega Resins”). 4 NCS Resins
is involved in the manufacture and distribution of resins, ancillary
products (such as gelcoats, poolcoats, flowcoats and pigment pastes)
and accessory products (such as fibreglass, catalyst, application
equipment and release agents). In contrast to Watelinx its customer
base is industrial and hence supplies customers in much larger
quantities.
THE RELEVANT MARKETS AND IMPACT ON COMPETITION
[8] The markets affected by this transaction are the markets for the
manufacture of resins (upstream market) and the distribution of resins
2 Refer to annexure A of form CC4 (1) for a complete list of Investec’s subsidiaries.
3 NCS Resins is controlled by Medu Capital Fund (“Medu Capital”) which is ultimately
controlled by Medu Holdings (Pty) Ltd (“Medu Holdings”). Medu Holdings has in excess of 14
subsidiaries nationwide.Refer to annexure B for a complete list of firms controlled by Medu
Holdings.
4 The merging parties indicated that Mega Resins does not form part of the proposed
transaction as it is not intended to be acquired by IPI.
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and fibreglass (downstream markets). There is also a vertical
relationship between the activities of the merging parties in that NCS
Resins manufactures and sells resins to Waterlinx, a distributor of
resins.
Manufacturing of resins (Upstream Market)
[9] NCS Resins is involved in the manufacture of inter alia resins. It
indicated that manufactures of resins can easily manufacture all
different types of resins. One of NCS Resins’ competitors, namely,
KZN Resins, also confirmed this and submitted that all companies
active in the manufacturing of resins manufacture different types of
resins.
Distribution of resins (Downstream Market)
[10] Both merging parties are active in this market. Waterlinx distributes
resins it sources to small swimming pool manufacturers, swimming
pool repairers and swimming pool reliners. According to the parties,
these resins are distributed in small quantities (in terms of packaging).
NCS Resins on the other hand distributes resins in bulk to larger
companies for industrial use.
[11] The Commission found that even though the parties target different
customers, they exert a competitive constrain on each other in the
distribution of resins and nothing precludes them from supplying any
type of customer.5
Distribution of Fibreglass (Downstream Market)
[12] Both firms are active in this market but as distributors not
manufacturers.
5 Interviews with competitors of the merging parties such as Scott Barder and customers such
as [ ] and [ ].
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[13] The Commission defined the geographic market for resins and
fibreglass as national.
Market shares
[14] In the market for the manufacturing of resins, NCS Resins has a
market share of 60%. It competes with firms such as Cray Valley
Resins (17%), KZN Resins (10%) and Scott Barder (8%). Imports in
this market account for approximately 5%.6
[15] In the market for the distribution of resins, NCS Resins has a market
share of 55% and Waterlinx 1%. Therefore the combined post-merger
market share of the parties is 56%. The merging parties face
competition from Cray Valley Resins (20%), Scott Barder (10%), KZN
Resins (8%) and imports (6%).
[16] In respect of the market for the distribution of fibreglass, NCS Resins
has a market share of 32% and Waterlinx 1%. The combined post-
merger market share of the parties is therefore 33%. Competitors of
the merging parties in this market include firms such as Jushi Group
SA Sinosia with 22%, Taishan with 18%, Cray Valley Resins with 12%,
Scott Barder with 8%, KZN Resins with 4% and others with 3%.
[17] From the above market shares it is evident that the merged entity has
high market shares of 56% and 33% for the distribution of resins and
fibreglass respectively. However, the Commission found that in both
these markets, the market share accretion is only 1%. The Commission
6 According to the merging parties, import duties payable for importing resins have been
reduced since 1991 from 15% to 10%. The Commission found that import duties payable
for importing resins vary depending on the type of resin and the country of origin. In this
regard, the import duties for importing different types of resins is 2.5% if the product is
from the European Union, free if the product comes from the SADC region 6.3% if the
product is from the European Free Trade Associations, 10% if the product is imported
from areas other than those mentioned.
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is therefore of the view that the market share accretion is insignificant
to result in a substantial prevention or lessening of competition in the
affected markets.
Vertical Assessment
[18] As indicated above, there is also a vertical relationship between the
activities of the merging parties in that NCS Resins manufactures and
sells resins to Waterlinx, a distributor of resins. The merging parties’
competitors in the manufacturing of resins include Cray Valley, Scott
Barder and KZN Resins, all of whom are vertically integrated with their
own in-house supply of resins. Input foreclosure is therefore unlikely as
the availability of alternative input suppliers will reduce the merged
entity’s incentive to engage in an input foreclosure strategy.
[19] With regards to customer foreclosure, the Commission assessed the
ability and incentives of the merged entity to foreclose access to
downstream markets by reducing its purchases from its upstream rivals
and whether such a foreclosure strategy would have a significant
detrimental effect on competitors upstream.
[20] As indicated above, the merging parties’ post-merger market share for
the distribution of resins is 56%. In the previous financial year Waterlinx
purchased [ ] tonnes of resins of which [ ] % was purchased from
NCS Resins. Further, Waterlinx bought [ ] % of its resins from NCS
Resins’ competitors. According to the merging parties, customers of
Waterlinx are brand loyal and stipulate the manufacturer of choice
when ordering resins. Further, competitors indicated to the
Commission that Waterlinx is also their significant customer. In
addition, competitors of the merging parties have their own distribution
outlets. Based on this above, the Commission concluded that the
merged entity will not have an ability and incentive to foreclose
customers.
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Views of Third Parties
[21] None of the customers of the merging parties raised concerns about
the merger. From the competitors’ side, only two competitors objected
to the merger. These are KZN Resins and Cray Valley. KZN Resins’
concern was that the merger would result in a monopoly and
competition in the resins market would be wiped out. Cray Valley’s
concern related to customer foreclosure. CEPPWAWU, the Trade
Union representing employees of NCS Resins also objected to the
merger and submitted that the merged entity will have the ability to
abuse its dominance in the markets for the distribution of resins and
fibreglass. CEPPWAWU further submitted that the merged entity could
use its dominance to the detriment of SMME’s.
[22] Mr. Kader of KZN Resins, who was present at the hearing, further
submitted that NCS Resins already has high market shares, is now
seeking to acquire a huge customer (Waterlinx) and together with the
financial advantage of being owned by Investec, will enjoy a monopoly
at the expense of the other resin manufacturers, distributors as well as
resin end-users.
[23] In addressing these concerns, the Commission noted that competition
would still exist in the affected markets post-merger. Major competitors
of the merging parties such as KZN Resins, Cray Valley and Scott
Barder are all vertically integrated with their own distribution outlets.
Further, Waterlinx is an insignificant player in both markets for the
distribution of resins and fibreglass with only 1% share. With only 1%
share, it’s unlikely that Waterlinx would afford to only distribute the
products from one manufacturer, i.e. NCS Resins, especially since it
was noted that customers in these markets are loyal to preferred
brands and usually stipulate the manufacturer of their choice when
making orders. In addition, there is also the option of importing the
making orders. In addition, there is also the option of importing the
products into South Africa. Import duties in both the distribution of
resins and fibreglass are low and customers also indicated that they
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have the ability to import the products. This objection seemed to be
based on the fact that a rival was going to have a strong shareholder
rather than the overlaps. This does not constitute a basis for
condemning the merger.
CONCLUSION
[24] To conclude, we agree with the Commission that the proposed
transaction is unlikely to result in a substantial lessening or prevention
of competition in the affected markets as the market share accretion
resulting from the transaction is low. In addition, the merged entity
would still face competition from other firms.
[25] The transaction does not result in any significant public interest issues
and is accordingly approved.
____________________ 14 May 2010
Norman Manoim DATE
Yasmin Carrim and Andreas Wessels
Tribunal Researcher : I Selaledi
For the merging parties : Werksmans Inc.
For the Commission : T Mahlangu
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