COMPETITION TRIBUNAL OF SOUTH AFRICA
Case No: 86/LM/Dec09
In the matter between:
Optimum Coal Holdings (Pty) Ltd and
Optimum Koornfontein Investments (Pty) Ltd Acquiring Firms
And
Main Street 431 (Pty) Ltd Target Firms
Twin Cities Trading 39 (Pty) Ltd
Dunrose Trading 191 (Pty) Ltd
Panel : Norman Manoim (Presiding Member),
Yasmin Carrim (Tribunal Member), and
Andreas Wessels (Tribunal Member)
Heard on : 10 March 2010
Order Issued : 10 March 2010
Reasons Issued: 28 May 2010
Reasons for Decision
Approval
[1] On 10 March 2010, the Competition Tribunal (“Tribunal”) unconditionally
approved the merger between the above-mentioned parties. The reasons for
approving the transaction follow.
The parties
[2] The first acquiring firm is Optimum Coal Holdings (Pty) Ltd (“Optimum”), a
private company which controls a group of companies and a number of assets
all of which are involved in the mining of thermal and metallurgical coal.
Optimum is 56% controlled by Broad Based Black Economic Empowerment
shareholders.1 Optimum wholly controls inter alia Optimum Overvaal Mining
and Exploration (Pty) Ltd (“Overvaal”), which in turn wholly controls Universal
Pulse Trading 75 (Pty) Ltd (“Universal Pulse”). The second primary acquiring
firm is Optimum Koornfontein Investments (Pty) Ltd (“OKI”), a wholly owned
subsidiary of Optimum. Premerger OKI holds a 32.8% interest in Main Street
431 (Pty) Ltd (“MS 431”) - the primary target firm (see paragraph below).
[3] As stated in paragraph above, the primary target firm is MS 431. MS 431 is a
special purpose vehicle which is indirectly and jointly controlled by (i) Optimum
(with a 32.8% interest in MS 431 through OKI and a 6% interest through
Universal Pulse) and (ii) Siyanda Resources (Pty) Ltd (“Siyanda Resources”)
(with a 43.73% combined interest in MS 431 through Twin Cities Trading 39
(Pty) Ltd (“Twin Cities”) and Dunrose Trading 191 (Pty) Ltd (“Dunrose”)). The
following entities have a direct interest in MS 431:
• OKI 32.8%
• Universal Pulse 6%
• Twin Cities (wholly owned by Siyanda Resources) 32.8%
• Dunrose (wholly owned by Twin Cities) 10.93%
• Inkwali Engineering Services (Pty) Ltd 10%
• The Employee Trust (a sharing incentive trust) 8%
[4] MS 431 has a joint controlling interest of 50.02% in Siyanda Coal (Pty) Ltd
(“Siyanda Coal”), formerly known as Main Street 432 (Pty) Ltd (“MS 432”). 2
Siyanda Coal owns the Koornfontein Mine.
[5] The second and third target firms are Twin Cities and Dunrose.
1 The shareholders of Optimum are: Warrior Coal Investments (Pty) Ltd (21%); AMCI Capital Warrior Mauritius
Limited (21%); Executive Employee Share Incentive Trust (1%); Henry Christo White (1%); The Optimum Employees
Benefit Trust (12.5%); The Optimum Community Trust (12.5%); Miscan Investments (Pty) Ltd (13.5%); Monkoe Coal
Investments (Pty) Ltd (7%); Mlungisi Kwini (5.5%); Mobu Resources (Pty) Ltd (3%); and Miranda Kwini (2%).
2 The other shareholder in Siyanda Coal is Sentula Coal (Pty) Ltd.
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The transaction
[6] Optimum entered into a restated sale of shares agreement with Siyanda
Resources and Twin Cities to acquire: (i) all of the issued share capital of Twin
Cities from Siyanda Resources; and (ii) all of the shares in the issued share
capital of Dunrose from Twin Cities: thus indirectly Siyanda Resources’ entire
interest in MS 431. As such the proposed transaction consists of two steps that
are interrelated and intricately intertwined. In the first step, Optimum shall
purchase from Siyanda Resources all of the shares in the issued share capital
of Twin Cities (and debts owed to Siyanda Resources by Twin Cities, MS 431
and MS 432). In the second step Optimum shall purchase from Twin Cities all
the shares in the issued share capital of Dunrose (and debts owed to Twin
Cities by Dunrose).
[7] Upon conclusion of the proposed transaction Optimum will have sole control of
Dunrose, sole control of Twin Cities, and a controlling interest (i.e. a 82.53 %
shareholding) in MS 431. The control dynamic over MS 431 thus changes from
joint control by Optimum and Siyanda Resources premerger to sole control by
Optimum post-merger. The proposed deal therefore constitutes a merger as
defined in section 12 of the Competition Act, 1998 (Act No. 89 of 1998).
Rationale for the proposed transaction
[8] According to the acquiring parties this transaction enables Optimum, as a
mining and exploration group supplying both local and international coal
consumers, to grow its local coal business. Optimum, through its contiguous
mine, has the ability to fully utilise the extensive Siyanda Coal infrastructure.
Siyanda Resources does not have the ability to leverage the Koornfontein Mine
assets as it has no other assets within a 100 km radius of the Koornfontein
Mine. Optimum states that it has other reserves beyond the infrastructural
advantages that could be exploitable through the Koornfontein Mine. From the
advantages that could be exploitable through the Koornfontein Mine. From the
target firms’ perspective, Optimum’s offer to Siyanda Resources for its shares
was deemed to be fair and commercially sound in light of the infrastructure
utilisation.
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THE PARTIES’ ACTIVITIES
Optimum
[9] As stated in paragraph above, Optimum controls a group of companies and a
number of assets all of which are involved in the exploration and mining of
thermal and metallurgical coal.
[10] Of relevance to the instant transaction is that Optimum through Optimum Coal
Mine (Pty) Ltd (“Optimum Coal Mine”) owns the Optimum Colliery, a thermal
coal mining complex located near Middelburg, Mpumalanga. Coal is supplied
from this colliery to the export market through the Richards Bay Coal Terminal
(“RBCT”) to various domestic customers as well as to Eskom’s Hendrina power
station. In addition, Optimum wholly owns Optimum Coal Terminal (Pty) Ltd
(“Optimum Coal Terminal”) which in turn owns 8.68% of the issued share
capital of Richards Bay Coal Terminal Company Limited (“RBCT Company”).
There is an agreement between Optimum Coal Terminal and Optimum Coal
Mine in terms whereof Optimum Coal Mine is entitled to use the throughput
capacity of Optimum Coal Terminal at the RBCT.
MS 431
[11] As stated in paragraph above, MS 431 holds a 50.02% interest in Siyanda
Coal which owns the Koornfontein Mine. The Koornfontein Mine is involved in
the exploration, development, mining and transportation of thermal coal.
[12] Siyanda Coal has a 2% shareholding in RBCT Company which gives it
throughput capacity at the RBCT through which it supplies thermal coal to the
export market. Siyanda Coal does not export thermal coal itself but has
agreements with a number of firms that arrange shipping to their foreign
buyers. Siyanda Coal produces and transports the thermal coal to the RBCT
utilising its throughput quota. Siyanda Coal also supplies Eskom with thermal
coal, in particular its Camden and Mabuja power stations. Siyanda Coal
furthermore indirectly supplies Eskom through supply agreements it has with
other domestic firms.
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The relevant markets
Relevant product markets
[13] Form the above-mentioned activities of the merging parties’ businesses it is
clear that there is a horizontal overlap in these activities with regard to the
mining and sale of thermal coal. Thermal coal is a type of bituminous coal that
is most commonly used to generate electricity and produce synthetic fuels.
[14] The Tribunal has in previous decisions distinguished between the following coal
markets: first, a delineation of bituminous coal from other types of coal; and
second, a delineation between two types of bituminous coal, namely thermal
and metallurgical coal. 3 The Competition Commission (“Commission”) further
submitted that in line with a previous Tribunal decision the broader bituminous
thermal coal market can be further divided into three separate relevant product
markets, i.e.:4
a. the export market, i.e. bituminous thermal coal exported by South African
producers (mainly to the Atlantic Basin and the Pacific Rim);
b. the domestic market, i.e. bituminous thermal coal sold primarily to two
domestic customers, namely Eskom and Sasol; and
c. the residual domestic market, i.e. the sale of bituminous thermal coal to
domestic companies other than Eskom and Sasol, for example cement
companies and smaller coal mines requiring coal for market blending.
Relevant geographic markets
[15] The merging parties submitted that the relevant geographic markets are
national in scope. However, the exact geographic parameters of the said
domestic markets, i.e. whether they are national in scope or narrower (i.e.
regional), can be left open in the instant case since it does not alter our
conclusion regarding the competitive effects of the instant deal.
[16] Be that as it may, certain information submitted by the Commission and the
merging parties is clearly indicative of potential regional domestic markets. The
Commission inter alia explains that coal is expensive to transport via road and
Commission inter alia explains that coal is expensive to transport via road and
that there are relatively few power stations that can accept significant quantities
3 See, for example, the large merger involving Anglo South Africa Capital (Pty) Ltd and Arnot North Mining Business
and Additional Reserves, Case no. 44/LM/May05. 4 See, for example, the large merger between Lexshell 668 Investments (Pty) Ltd and Wakefield Investments (Pty)
Ltd, Case no. 82/LM/Oct06.
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of coal by rail. It also states that Eskom increasingly has to source coal from
further afield (i.e. not from adjacent tied collieries) and pay significantly higher
transport costs. The merging parties, on the other hand, indicated that because
of their geographic locations in the Middelburg/Witbank region it would not be
viable for Siyanda Coal and the majority of Optimum’s operations to supply
Eskom’s planned developments in the Waterberg, Limpopo province 5 since the
merging parties do not have coal reserves in this geographic area. 6 When
questioned at the hearing about the above-mentioned statement and in general
in regard to the geographic scope of the domestic market the merging parties
commented as follows:
“ ... coal mining is as much a business of logistics as it is a business of
mining. ... it (coal) is exceptionally heavy and quite difficult to move around.
When the Commission correctly says that (the) Optimum mine is tied to Eskom
that is true because the coal produced goes on a conveyer belt to (the)
Hendrina power station. So in simple economics to compare that ease of
delivery with trying to truck this stuff to (the) Waterberg is just not feasible . ...
And it also happens that a lot of the Eskom power stations ... are not heavily
supplied by the rail network. They either are supplied by the most adjacent tied
colliery or the coal is generally trucked to them if they need to buy over and
above their tied colliery.”
“ ... from a costing point of view you can easily add 50 to 100% to your costs by
just trying to move coal around. Taking cognisance of how Optimum supplies to
(the) Hendrina power station for example via conveyer belt, and we run
extensive networks of conveyers belts on Optimum Colliery, we talk in the
order of 8 to 10 cents a ton per kilometre ” in comparison to “ 80 cents and 1
rand” a ton per kilometre were you to transport coal for example to the
rand” a ton per kilometre were you to transport coal for example to the
Waterberg/North, a distance of approximately 600 kilometres. The
Waterberg/North “in actual fact ... does not become a market ” since the coal
would be “totally priced out of the market should you in any way try and
participate in that business”.
5 Situated in the North West of the country.
6 See merging parties’ Competitiveness Report, page 252 of the record.
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Competition analysis
Export Market
[17] Table 1 below summarises the national market share estimates of the major
South African producers of bituminous thermal coal who supply the export
market. The coal is sold “free on board” which implies that the buyers arrange
the shipping themselves.
Table 1: Estimated national market shares in the export market for
bituminous thermal coal
RBCT Shareholders Estimated market share (%)
Anglo Coal [20-30]
BHP Billiton [20-30]
Xstrata [20-30]
Optimum 9
Total Coal [0-10]
Sasol Mining [0-10]
Exxaro [0-10]
Koornfontein 2
Kangra Coal [0-10]
Other South African firms <1
Source: Merging parties’ estimates based upon the RBCT Company throughput quotas, given that
the vast majority of coal is exported via the RBCT.
[18] As shown in the Table 1 above, the post-merger market share of the merged
entity will be approximately 11% in the export market for bituminous thermal
coal. This relatively small market share does not raise competition concerns;
the merged entity will face competition from larger market players such as
Anglo Coal, BHP Billiton and Xstrata, as well as some smaller competitors.
Domestic Market
[19] Table 2 below summarises the estimated national market shares of the South
African suppliers of bituminous thermal coal to the domestic market, i.e. to
primarily Eskom and Sasol.
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Table 2: Estimated national market shares for the supply of bituminous
thermal coal to the domestic market (i.e. Eskom and Sasol)
Competitor Estimated market share (%)
Exxaro 27
Anglo Coal 23
BHP Billiton 23
Kumba 12
Optimum 4
Xstrata 2
Koornfontein 2
Graspan Colliery 1
Kangra Coal <1
Total Coal <1
Other South African firms 4
Total 100
Source: Merging parties’ estimates
[20] Table 2 above shows that the merged entity will have a post-merger national
market share of approximately 6% in the domestic market for bituminous
thermal coal. This relatively small market share does not raise competition
concerns at a national level; the merged entity will face competition from larger
market players such as Exxaro, Anglo Coal, BHP Billiton and Kumba.
[21] From a regional perspective, the Koornfontein Mine, along with the Optimum
Colliery, is situated in the Middelburg/Witbank region, within close proximity of a
number of Eskom power stations. Eight of Eskom’s eleven operational power
stations are situated in this region. Eskom is also in the process of
recommissioning three other power stations in the area, namely Komati,
Grootvlei and Camden. The merging parties at the hearing explained that there
is a radius of approximately 70 km between the centre of the Optimum and
Koornfontein coal mines in the Middelburg/Witbank area “ where 99% of the
current operating collieries of substance are located and within that area as
well there is four or five power stations operating ”. The merging parties stated
that the coal mining industry is focused in this geographic area and that inter
alia BHP Billiton and Anglo American are present as competitors to the merged
entity. Furthermore, the Commission indicated that Eskom raised no concerns
in regard to the proposed merger. We therefore conclude that the proposed
merger is also unlikely to raise competition concerns in a potential regional
domestic market.
Residual Domestic Market
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[22] Table 3 below summarises the national market share estimates of the South
African suppliers of bituminous thermal coal to the residual domestic market.
Table 3: Estimated national market shares for the supply of bituminous
thermal coal to the residual domestic market
Competitor Estimated market share (%)
Wakefield 13
Xstrata 12
Graspan 9
Koornfontein 2
Optimum 2
Other South African firms 62
Total 100
Source: Merging parties’ estimates
[23] Table 3 above shows that the merged entity will have a post-merger national
market share of approximately 4% in the supply of bituminous thermal coal to
the residual domestic market. This relatively low market share does not raise
competition concerns; the merged entity will face competition from market
players such as Xstrata, Wakefield and Graspan, as well as numerous other
smaller firms that participate in this market. There is no reason for us to believe
that competition concerns arise at a regional level.
[24] The Commission noted that it has identified certain pricing and production
anomalies in the residual domestic market for bituminous thermal coal, but
indicated that these were not merger specific issues and therefore do not raise
concerns in the context of the instant merger. We shall therefore not elaborate
on these issues in these reasons.
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Public Interest
[25] The merging parties confirmed that the proposed merger will have no impact on
employment. The proposed transaction also raises no other public interest
concerns.
Conclusion
[26] The merger is approved unconditionally since it is unlikely to substantially
prevent or lessen competition in any relevant market. In addition, the proposed
transaction raises no public interest concerns.
________________ 28 May 2010
Andreas Wessels DATE
Tribunal Member
Norman Manoim and Yasmin Carrim concurring.
Tribunal Researcher : Romeo Kariga
For the acquiring firms : Adv Michele Le Roux instructed by Glyn Marais
Inc
For the target firms : Webber Wentzel Attorneys
For the Commission : Fergus Reid (Mergers and Acquisitions division)
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