COMPETITION TRIBUNAL OF SOUTH AFRICA
Case No: 69/LM/Oct09
In the matter between:
Wispeco (Pty) Ltd Acquiring Firm
And
The Sheerline Business of AGI Solutions (Pty) Ltd Target Firms
Panel : Norman Manoim (Presiding Member)
Yasmin Carrim (Tribunal Member)
Merle Holden (Tribunal Member)
Heard on : 01/02/2010
Order issued on : 03/02/2010
Reasons issued on : 20/05/2010
Reasons for Decision
Approval
[ 1 ] On 3 February 2010 the Competition Tribunal (“Tribunal”) approved with conditions the
merger between Wispeco (Pty) Ltd (“Wispeco”) and the Sheerline business of AGI
Solutions (Pty) Ltd (“Sheerline”). The reasons follow below.
The transaction
[ 2 ] This is an acquisition by Wispeco, a wholly owned subsidiary of Wispeco Holdings
Limited, which in turn is controlled by Remgro Limited, of the Sheerline business, a
division of AGI’s aluminium business.
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[ 3 ] Wispeco consists of four divisions; remelt (billet) production, extrusion production,
finishing and stockist division in which it operates a number of stockist outlets under the
Conways, Almex and RF Metals’ brands. AGI’s aluminium business has three divisions;
Sheerline, its stockist or distribution business in which it operates a network of stockist
outlets across the country, Profal its manufacturing business which produces aluminium
extrusions, and its manufacturing business (finished goods plant) which assembles
doors, windows, etc., using glass and aluminium extrusions.
[ 4 ] In terms of the transaction, Wispeco intends to acquire the business of Sheerline
comprising the stocking, wholesale and distribution of aluminium products, as well as
the design and development of these aluminium products. The proposed transaction
does not involve Wispeco purchasing the entire aluminium operations of AGI. AGI will
continue to operate its Profal extrusion operations as well as its manufacturing
operations (finished goods plant), and the proposed transaction will only result in the
acquisition by Wispeco of the Sheerline division of AGI.
[ 5 ] Principally this transaction results in the combination at the stockist level, where post
merger Wispeco and Sheerline will be under common management where they were
competing entities pre-merger.
Rationale for the transaction
[ 6 ] Wispeco views Sheerline as a reputable brand which will also add an additional
distribution network to its business. AGI was forced to sell the Sheerline business
because of its present financial predicament.
The Relevant Market
[ 7 ] The aluminium supply chain comprises several levels. Figure 1 below helps to
understand the relevant market at its various levels as well as the overlaps relevant to
this merger.
Figure 1: South African (country specif ic) aluminium supply chain from alumina up to
f inished extruded products
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Refineries
Import
Mass manufacturers
Extruders (Semi-fabricators)
Stockists
Smelters
BHP Bill i ton (Bayside smelter-bil let production stopped), foreign and secondary (remelt) producers
Alumina
Billets
Lafarge
Imports
Star
Hulamin
Wispeco
Profal
Extrusions
Lafarge
Hulamin
Wispeco / Sheerl ine
Others
Fabricators
Extrusions
Extrusions
Installers
Finished products
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products
Finished products
products
Bespoke Contractors
Extrusions
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[ 8 ] From Figure 1 we can identify the market interfaces in the supply chain of aluminium,
leading to the supply of finished extruded products which includes; (i) the supply of
alumina feedstock to smelters; (ii) the supply of billets to semi-fabricators; (iii) the supply
of semi-fabricated products to stockists/distributors by firms known as extruders; (iv) the
supply of semi-fabricated products by stockists to fabricators; and (v) the supply of
fabricated products (finished products) to the installer or end user. This transaction is
concerned with market interfaces (iii) and (iv) of which stockists and fabricators are an
important market.
[ 9 ] Although the Commission in its analysis distinguishes between the roles of fabricators
and stockists, thus suggesting that they operated at different levels of the supply chain,
this classification became less certain during oral testimony in the course of the hearing.
The Tribunal had called as a witness, Mr Paul Howard from a firm called Xline. Howard
was the former chief executive of Sheerline. At the time the firm was facing the prospect
of being sold by its parent company he left with some of his colleagues to form a rival
stockist firm called Xline.
[ 1 0 ] Howard explained that the extruder is the original supplier who extrudes the aluminium
product and adds finishing to it; i.e. powder coating, surface treatment and painting.
The product is then delivered to stockists who are direct purchasers of extrusions, and
who stock a range of aluminium profiles at a variety of outlets and sell those products to
fabricators.
[ 1 1 ]Stockists, he testified come in different sizes, from large national players to smaller local
players. The same can be said of fabricators – they too range from large to small. What
blurs the dividing line is the range of services they provide be they classified as
fabricator or stockist. Some provide designer services and technical know-how, others
fabricator or stockist. Some provide designer services and technical know-how, others
are little more than transporters of the product. Some stockists operate as well as quality
controllers – inspecting the work of fabricators on site. Products themselves vary in
complexity – the more complex the more value added by the expertise of the particular
stockist or fabricator. On the record we have before us it is clear that segmenting the
market between fabricators and stockists is not a useful way of understanding the
competitive dynamics of those firms who are downstream from the extrusion market, but
upstream from the final users.
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[ 1 2 ]What seems finally to distinguish stockists from fabricators is the quantities that they
order from extruders. Stockists order in bulk and then on sell to fabricators in smaller
quantities. Yet even this distinction it seems is not consistent industry practice. For this
reason it would be better to consider the market as one in which firms operate to supply
extrusions to the building industry but in which a range of services is offered which
differentiate firms from one another.
[ 1 3 ]It is clear that in this market the four firms most closely related and hence likely to
operate as a competitive restraint on one another are the two merging firms, and
Hulamin and Lafarge. All these firms apart from their size have another thing in
common, they are vertically integrated.
Market Definition
Horizontal Analysis
Unilateral effects
[ 1 4 ]The Commission struggled to obtain reliable market share figures from the market
participants in the relevant stockist market. Estimates of the merging parties’ combined
post merger market shares in this market varied widely ranging from between 47% to
67%, although undoubtedly Wispeco has the largest market share, followed by
Sheerline pre-merger.1 However there are a number of reasons for concluding that the
merging parties would post merger still be subject to competitor restraints from Hulamin
and Lafarge, albeit by firms more differentiated from them and also the need to
recognise that Sheerline would, absent the merger, not be the competitive force it had
been in the past.
[ 1 5 ]In the first place the market shares are historic and for reasons that we explain are not
likely to be an indication of what they might have been in the future if the merger was
prohibited. For a variety of reasons which we do not need to go into, it seems common
1 Pgs. 43-46 of the Commission’s recommendations.
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cause that Sheerline is not the strong competitor it used to be until quite recently.
Sheerline was purchased and became part of the AGI group in 2002. It, as Howard
testified did not have a happy history as part of the broader AGI group for amongst other
reasons that vertical integration between the businesses was notional only and they
operated quite independently of one another. The troubles of AGI led to its bankers
forcing the present sale as a solution. This had two consequences. Management and a
large chunk of the staff left with Howard to form a new rival firm called Xline.
[ 1 6 ]Secondly, the performance of the firm declined rapidly and up to date figures supplied to
us at the time of the hearing confirmed this. Thus the true counter factual is not the
Sheerline of recent years which was a strong competitor, and at times the industry
maverick, but the rather more depleted business that is sold to Wispeco.
[ 1 7 ]There are two other features that would also serve to diminish competition concerns.
The more important feature that we alluded to earlier is that although the market is
differentiated between players downstream from the extruders there is a level of
constraint coming from so called fabricators who it appears are a diverse and numerous
population of business and would be in a position to compete more fiercely with the
merging parties in the event of sustained supra- competitive price rises.
[ 1 8 ] According to evidence at the hearing AGI will remain in the market at the stockist level
even though it has sold Sheerline. Whilst this may not be an enormous source of
comfort until the group sorts outs its problems, it could emerge as another source of
competition. The merging firms also relied on the existence of import competition as a
huge constraint. Figures based on customs documentation evidenced this with imports
sometimes spiking and then declining over short time periods - although curiously they
sometimes spiking and then declining over short time periods - although curiously they
seemed not to correlate with pricing responses from figures produced in another
document by the merging parties. Despite this anomaly, imports do seem to pose at
least some upper limit to the domestic suppliers, albeit subject to the usual caveats
about relying on imports for comfort from domestic concentrations viz, currency
vagaries, logistical problems at ports and the reliability of local distribution networks.
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[ 1 9 ]We also explored the issue of the value of brand names in this market. As a result of the
merger Wispeco will control two of the four strongest brands in the market. Although
counsel for the merging parties in opening address suggested brands were not
important given the nature of the product, the evidence of Mr Herman Rolfes, the
Managing Director of Wispeco was more circumspect on this point. Asked pointedly if
the merger was subject to a condition that the Sheerline brand be divested of, he stated
plaintively that “it would be nasty”. 2 Howard’s view was that brands had some value,
but that given the intimacy of industry contacts, the reputations of managements were
equally important. Hence a new firm with an unknown brand might compete strongly
with branded firms if the management enjoyed industry recognition. This seems a
plausible explanation given that the product is sold to industry players as opposed to a
mass market customer base.
[ 2 0 ]The final theory of harm in relation to unilateral effects is to consider whether Wispeco is
using the merger to protect it from import competition. In a motivation to the board
concerning the merger, a document described as an AGI opportunity was presented in
which the rationale for the acquisition of Sheerline was stated as follows:
“The acquisition of Sheerline will add an additional distribution network and
reputed brand to Wispeco and fits in with Wispeco’s strategy of increasing its
market footprint and becoming the dominant player in architectural
aluminium. In addition it will prevent the possible entry of a new or foreign
competitor backed by another or foreign extruder”.3
[ 2 1 ] When asked about this at the hearing Rolfes explained that he had used this motivation
to help gain board support for the merger. In other words this should be considered as a
sales pitch and not a real consideration that Sheerline might have constituted a
sales pitch and not a real consideration that Sheerline might have constituted a
competitive threat to the Wispeco business.
2 At pg. 186 of the t ranscript .
3 At pg. 851 of the merger record.
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[ 2 2 ]Although this explanation is not entirely satisfactory and the merger may well have been
driven by a defensive strategy on behalf of Wispeco to protect its market position in the
extruder market, that fact taken on its own, is insufficient to condemn the merger.
Barriers to entry in the stockist market are not so compelling that a committed new
entrant would not be able to buy another stockist or create a new business should it be
so inclined.
[ 2 3 ]On a balance of all these considerations, although the merger will lead to an increase in
concentration there is not enough to conclude that the merger will raise unilateral effects
concerns that would not be present in the market even absent the merger given the
demise of the Sheerline business.
Co-ordinated effects
[ 2 4 ]During the course of its investigation into the merger, the Commission uncovered
correspondence between the extruders and their customers concerning price increases
during March 2005.4 The correspondence indicated that extruders advised their
customers of similar increases in prices at similar times of the year. The Commission
considered whether this was evidence of a co-ordinated relationship between firms at an
extruder level and whether the merger at the downstream stockist level might enhance
this co-ordination potential.
[ 2 5 ]The Commission concluded it did not. This, it argued was because AGI’s Profal is post
merger, likely to have the incentive to supply independent stockists since it will no longer
be vertically integrated into the stockist level, and would rather exert some competitive
pressure against the vertically integrated stockists. On the other hand, Wispeco is likely
with its increased stockists facilities to want to increase its market share, rather than act
in concert with rivals.5
4 At pgs. 671-673 of the merger record.
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[ 2 6 ]The merging parties denied that any co-ordination existed in the past and argued that
common cost increases that all firms faced because of increased input costs, accounted
for the pricing similarities.
[ 2 7 ]We do not need to take a view on this for the purpose of this merger. Assuming that co-
ordination had taken place at the extruder level, the question for us would be whether
the merger at the downstream level would help strengthen this co-ordination upstream
in some way? Typically downstream mergers would facilitate an upstream co-ordination
if pre-merger there were problems in the exchange of information or monitoring that the
merger would resolve. It seems from the record that firms at the upstream level were
able to exchange information and monitor one another absent the merger. Thus if the
conditions for co-ordination already exist in the market upstream the merger does not
facilitate this.
[ 2 8 ]AGI, as the Commission points out, is free to perform its own distribution function and
does not need to distribute through Sheerline. Nor does Sheeline bring to Wispeco
pricing information of other extruders that it does not already have access to. This
information appears to get known in the market from letters to customers. Thus in our
view the merger would have no impact on any collusion should it exist at the extruder
level. There is no suggestion of any co-ordination existing at the stockist /fabricator
level of the market.
Vertical Analysis
[ 2 9 ]The transaction results in vertical integration in relation to the markets for the production
and supply of extrusions on the one hand, and stockists on the other. However, the
Commission’s investigation showed that Wispeco is unlikely to have the ability to
engage in input foreclosure since independent stockists can switch to AGI, which post
merger is no longer vertically integrated, and to Hulamin which is not operating at full
capacity.
5 At pg. 92 of the Commission’s recommendation.
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[ 3 0 ] In addition there are a range of alternative domestic suppliers of extrusions such as
Lafarge, Profal, Star Aluminium, as well as imports which are viable. These alternatives
render any likely strategy of input foreclosure, unlikely or unviable as Wispeco would not
gain any significant market power over the downstream stockists market if it engaged in
such strategy.
[ 3 1 ]In addition, despite the likely change in the orientation of the Sheerline business, the
proposed transaction is not likely to raise customer foreclosure concerns.
[ 3 2 ]Although the Commission initially wanted to advance the argument that the upstream
market for the production of extrusions was susceptible to interdependent conduct,
particularly in so far as pricing strategy is concerned, it found that this merger is unlikely
to facilitate or strengthen co-ordination.
[ 3 3 ] The transaction is therefore unlikely to substantially prevent or lessen competition
neither in the horizontal nor the vertically related relevant markets.
Public Interest
[ 3 4 ] This transaction raises the public interest matter of employment. According to their
submissions to the Commission, the merging parties estimated that the proposed
transaction, in the worst-case scenario, would result in the reduction of employment of
approximately 40-50 employees of Sheerline. However, the parties insisted that these
retrenchments are not merger specific as Sheerline would have in any event, engaged in
wide-scale restructuring in order to ensure viability of the business which is said to be
currently loss making. In addition the parties stated that the number of employees who
have resigned from Sheerline and moved to Xline, will result in far less smaller impact on
employment within the business.
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[ 3 5 ]At the hearing Mr Eugene Mutileni from NUMSA 6 appeared before the Tribunal and
raised the concern that the merging parties had not properly consulted with NUMSA. It
is common cause that the merger documents were served on the representative trade
unions of both merging parties. Mutileni confirmed that NUMSA had received the
merger notification, however it sought clarification of the possible employment impact
both from the Commission and the directors of the merging parties, and that after
various attempts to interact on this issue, there was no further engagements
forthcoming, nor was any feedback obtained.
[ 3 6 ]According to the Commission’s assessment, the employment issues are not merger
specific, given Sheerline’s dire financial circumstances, which accordingly would have
necessitated such retrenchments whether the merger was going to take place or not.
The Commission’s assessment ended on that point and did not address the issue of
whether the unions had been properly consulted.
[ 3 7 ]A dispute of fact arose over the adequacy of the consultation process. Mutileni alleges
that he had contacted the merging parties’ attorneys to discuss the matter and was
referred by them to Wispeco management who never returned his calls. This was not
denied by Wispeco but it argued that consultation had taken place in discussions with
NUMSA’s local organiser for the East Rand. Mutileni countered this by stating that
NUMSA handles merger related issues at head office level and that it was not adequate
to have discussions with local branch organisers.
[ 3 8 ]We have previously held that proper consultation is an essential part of the public
interest consideration particularly where job losses are contemplated post merger.
Where a union has indicated that it wishes to have further consultation and through
which office it wants consultation to take place, provided it does so timeously, this
which office it wants consultation to take place, provided it does so timeously, this
request should be respected by merging parties. We do not consider that in this merger
6 NUMSA represents some of Wispeco’s employees, as well as all of Sheerl ine’s employees. United
Associat ion of South Africa (UASA) and Solidari ty, which are unions representing some of
Wispeco’s employees, both provided the Commission with let ters of non-part icipation.
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the acquiring firm met its obligations. However we are not inclined to postpone the
hearing further to allow these deliberations to take place, as NUMSA requested, given
the parlous state of the target business.
[ 3 9 ]For this reason we have imposed the conditions that:
“1. For a period of one year after the date of this order, the merged entity may not
make any merger-related retrenchments at the target firm, provided that this will not
prevent the merged firm making operationally related retrenchments at the target firm
during this period.
2. During the one year period, the merged entity must notify the Competition
Commission of any retrenchments taking place at the target firm within 20 days of
the retrenchment being notified to the employee/s concerned. The notification to the
Commission must include the number of employees retrenched and the reasons for
the retrenchment.”
CONCLUSION
[ 4 0 ] We have found that there is insufficient evidence to suggest the merger is likely to
have an anti-competitive effect. The merger might have an adverse effect on the public
interest in respect of employment, but this concern is adequately addressed by the
condition we have imposed on the merger which is annexed hereto marked A.
____________________ 20/05/2010
N Manoim Date
A Wessels and Y Carrim concurring
Tribunal Researcher: Londiwe Senona
For the merging parties: Adv. D Unterhalter S.C. instructed by Nortons Inc.
For the Commission: Mfundo Ngobese and Jabulani Ngobeni
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