Brief Summary

Competition Law — Merger Approval — Conditional approval of intermediate merger between Bedrock Mining Support (Pty) Ltd and Mondi Ltd's Letaba, Numbi, and De Kaap businesses — Concerns raised by third parties regarding input foreclosure and public interest considerations — Tribunal found that while concerns were valid, conditions imposed would mitigate potential anti-competitive effects — Merger conditionally approved under section 16(2)(b) of the Competition Act 1998.

Comprehensive Summary

Summary of Judgment

1. Introduction

These proceedings concerned a reconsideration by the Competition Tribunal of South Africa of the Competition Commission’s decision to prohibit an intermediate merger in terms of the Competition Act 89 of 1998. The Tribunal ultimately issued reasons for a decision to conditionally approve the merger.

The applicant was Bedrock Mining Support (Pty) Ltd (the primary acquiring firm). The respondent was the Competition Commission of South Africa. The merger under consideration involved Bedrock’s acquisition of the Letaba, Numbi and De Kaap plantation businesses of Mondi Ltd (the primary target businesses).

Procedurally, the merging parties notified the intermediate merger to the Commission. During the Commission’s investigation, two third parties, Tshifhire Timbers (Pty) Ltd t/a Shefeera and Reatile Timrite (Pty) Ltd, raised concerns primarily relating to input foreclosure and (in Reatile’s case) post-merger coordination. The Commission proposed that Bedrock divest the Numbi plantation; the merging parties refused, and the Commission issued a Merger Prohibition Certificate on 21 April 2010. Bedrock then invoked the Tribunal’s reconsideration jurisdiction under section 16(1)(a). During the hearing, the Commission and merging parties reached agreement in principle on behavioural remedies, which included supply agreements with the concerned third parties and a mechanism to address information exchange concerns. The Tribunal approved the merger subject to conditions.

The general subject-matter of the dispute was whether a vertical merger—Bedrock’s acquisition of three hardwood timber plantations—would likely substantially prevent or lessen competition, particularly through foreclosure of hardwood inputs to downstream rivals and/or by facilitating coordination between major downstream competitors in the supply of timber-based mining support products and services.

2. Material Facts

Bedrock’s pre-merger activities were primarily downstream. It manufactured and supplied underground mining support products (including elongates and support packs) to deep-level gold and platinum mines, and it also supplied value-added services such as chemical treatment, logistics, and underground technical services. Bedrock owned a number of timber sawmills, including sawmills located in or near the geographic areas associated with the target plantations (with certain sawmills identified as potentially affected by the transaction).

The target businesses were the Letaba, Numbi and De Kaap plantations of Mondi Ltd. These businesses comprised mainly hardwood eucalyptus plantations and produced and sold mining timber, pulpwood and agricultural poles, selling into Limpopo and Mpumalanga. Only two current customers of the target businesses used hardwood timber for the production of mining support products: Bedrock and Reatile (a competitor of Bedrock downstream).

The transaction was a sale of business in terms of which Bedrock would acquire the three plantation businesses as going concerns, resulting in Bedrock becoming vertically integrated into the upstream supply of hardwood timber used as a key input for mining timber products.

Undisputedly, third-party concerns arose during the Commission’s investigation. Shefeera, a BEE firm involved in the treatment and supply of poles (not a downstream mining support competitor of Bedrock), alleged dependency on timber supply from the Letaba plantation and raised concerns framed as input foreclosure and public interest (in light of its BEE status). Reatile, Bedrock’s competitor in downstream mining support products, raised concerns focused on the Numbi plantation, alleging that Bedrock’s ownership could impair Reatile’s access to hardwood timber (input foreclosure), and that the cession/assignment of Mondi’s rights and obligations under the Numbi Supply Agreement could create a platform for coordination by requiring negotiations over timber pricing and potentially exposing competitively sensitive information.

It was material to the Tribunal’s determination that, by 20 July 2010, Bedrock concluded timber supply agreements respectively with Shefeera and with Reatile. Shefeera and Reatile each confirmed to the Tribunal that these agreements satisfactorily addressed their concerns. The Tribunal made compliance with these agreements a condition of approval.

A further material fact was the continuing existence of the Numbi Supply Agreement (originally between Mondi and Reatile), which contained a price-setting mechanism that contemplated negotiation and reference to “market prices” and other relevant factors. The perceived risk was that post-merger, Bedrock and Reatile—being major downstream rivals—would engage directly in negotiations over an important input price, potentially creating enhanced information flows.

3. Legal Issues

The central legal questions were whether the proposed merger was likely to lead to anticompetitive effects, in particular whether it would likely result in post-merger input foreclosure of hardwood timber (an upstream input) to downstream users, and whether it would likely facilitate horizontal coordination (particularly tacit coordination) between Bedrock and Reatile in the downstream market for timber-based mining support products and services.

The dispute required application of competition law standards to an assessment of the likely effects of a vertical merger. It involved questions of economic fact and inference (market characteristics, barriers to entry, transparency, product heterogeneity, and the practical implications of supply relationships), together with the application of legal standards under the Competition Act to those facts. It also implicated a public interest dimension insofar as Shefeera’s position as a BEE firm was raised under the statutory public interest considerations.

A further issue concerned the adequacy and design of behavioural remedies as merger conditions, particularly whether a remedy substituting direct price negotiations with an independent expert determination could sufficiently reduce information exchange and mitigate coordination risk.

4. Court’s Reasoning

The Tribunal characterised the merger as vertical because there was no horizontal overlap between Bedrock’s downstream mining support activities and the upstream plantation activities of the target businesses; rather, the merger integrated Bedrock into the ownership of upstream hardwood timber plantations.

On market definition, the Tribunal recorded that, because the matter narrowed after the parties agreed to proposed remedies and no further witnesses were called, it would not definitively conclude on the exact parameters of the relevant markets. Nevertheless, it described the upstream market as involving the supply of hardwood timber, with a dispute between the Commission and the merging parties about whether the relevant upstream market should be viewed broadly (hardwood supply in the Northern Regions) or more narrowly as “contestable hardwood supply usable for mining support products” after accounting for usable proportions of trees, timber locked into long-term contracts, internal supply, and “swap” arrangements. The Tribunal also highlighted that the supply chain stage under assessment (logs for sawmilling versus milled timber input) affected geographic scope because sawmills must be relatively near plantations for viability, whereas mining customers can be supplied from further distances.

The Tribunal assessed substitutability in the downstream market and concluded—based on evidence from mining customers—that pure steel-based and pure cement-based support products were highly unlikely to be substitutable (from a pricing perspective) with timber-based products or composites. The Tribunal therefore confined its competition analysis to timber-based mining support products, since foreclosure concerns only applied to timber inputs.

On input foreclosure, the Tribunal approached Shefeera and Reatile separately. For Shefeera, the Tribunal accepted that Shefeera’s concerns related to reliance on timber supply from the Letaba plantation and that those concerns had a public interest dimension. However, the Tribunal did not undertake further substantive foreclosure analysis because Shefeera confirmed that it had signed a timber supply agreement with Bedrock on 20 July 2010 that addressed its concerns. The Tribunal made adherence to that agreement a condition of approval and regarded Shefeera as capable of monitoring compliance. It also noted that the agreement afforded Shefeera time to secure alternative sources of supply, and that other hardwood suppliers existed in the broader region.

For Reatile’s foreclosure concern regarding the Numbi plantation, the Tribunal noted that the Commission’s own prohibition was not founded on a strong finding that input foreclosure was likely. While the Commission suggested that Bedrock and Reatile might “swap positions” in procurement (with Reatile sourcing more from smaller suppliers), the Tribunal expressed scepticism about assuming Bedrock would not use the acquired plantation to expand its downstream mining support business. Despite this scepticism, the Tribunal placed weight on the fact that Reatile signed an additional timber supply agreement with Bedrock on 20 July 2010 and confirmed satisfaction with its terms, indicating that short- to medium-term foreclosure would be avoided. The Tribunal made adherence to this Reatile supply agreement (in addition to the existing Numbi Supply Agreement) a condition of approval and observed that Reatile would have time and options to address future supply needs when the agreements expire, including sourcing from private growers, relocating sawmilling capacity, optimising other timber sources, and using procurement innovations such as swap agreements.

On the coordination theory of harm, the Tribunal explained the Commission’s concern as being that the merger would create a supplier-customer relationship between Bedrock and Reatile requiring price negotiations over a key input, potentially enabling exchange of competitively sensitive information and facilitating coordination. The Tribunal accepted that the market exhibited features sometimes associated with coordination risk, notably a high combined share for Bedrock and Reatile and seemingly high entry barriers, and it treated the creation of a post-merger forum for information exchange as the immediate concern.

The Tribunal evaluated the proposed behavioural remedy that replaced direct price negotiations with a mechanism whereby an independent expert would determine the timber price payable by Reatile. The Tribunal’s key reasoning was that, for the remedy to be effective, it had to be structured to eliminate direct contact and to restrict information flows between the rivals. It therefore required enhancements so that information would flow in a confined manner: Bedrock and Reatile would disclose their respective submissions to the expert only, not to each other, and the expert would provide confidentiality undertakings to the Commission and be prohibited from disclosing either party’s confidential information to the other.

Having imposed these enhancements, the Tribunal assessed whether coordination remained likely. It emphasised that the downstream mining support market was highly differentiated, involving many products, varied technical applications, and a significant embedded service component in pricing. This differentiation, together with the absence of evidence of final-price transparency, was treated as a factor making tacit coordination difficult to reach and sustain. The Tribunal further reasoned that, even though Bedrock would know Reatile’s Numbi purchase volumes and the final input price determined by the expert, the supply volumes covered by the agreements were limited relative to Reatile’s total timber requirements and would not enable Bedrock to infer Reatile’s final output prices with any meaningful precision, particularly given different cost structures, margins, and service elements.

The Tribunal concluded that, viewed collectively, the conditions (particularly the expert determination and confidentiality design) and the market characteristics meant that successful post-merger tacit collusion as a result of the transaction was unlikely, and that the coordinated effects hypothesis in this case therefore lacked substance.

On public interest, the Tribunal recorded that employment would be transferred under section 197 of the Labour Relations Act 66 of 1995, that the businesses were sold as going concerns, and that no retrenchments were envisaged. Apart from Shefeera’s concerns (addressed through the supply agreement condition), no other public interest issues were found to arise.

5. Outcome and Relief

The Tribunal conditionally approved the intermediate merger in terms of section 16(2)(b) of the Competition Act.

The approval was subject to behavioural conditions requiring Bedrock to comply with its contractual obligations under the timber supply agreements concluded on 20 July 2010 with Reatile and Shefeera, which were incorporated as annexures to the reasons (in confidential form as to precise terms). A further condition required that the independent expert envisaged in the Bedrock–Reatile supply arrangement must keep each party’s information confidential, must not disclose it to the other party or third parties, and must provide undertakings to the Commission to this effect.

No costs order was recorded in the reasons.

Cases Cited

Mondi Ltd and Kohler Cores and Tubes (Pty) Ltd (Case No. 06/LM/Jan02), Competition Tribunal of South Africa.

Main Street 333 (Pty) Ltd and Kumba Resources Limited (Case No. 14/LM/Feb06), Competition Tribunal of South Africa.

Legislation Cited

Competition Act 89 of 1998 (as amended), including sections 12(1), 12A(3), 16(1)(a), and 16(2)(b).

Labour Relations Act 66 of 1995, section 197.

Mine Health and Safety Act (as referenced in relation to regulatory and quality requirements affecting entry and survival in the downstream market).

Rules of Court Cited

No rules of court were cited in the reasons.

Held

The Tribunal held that the merger, properly characterised as a vertical merger, did not warrant prohibition once the agreed and Tribunal-enhanced behavioural conditions were imposed. Concerns about input foreclosure raised by Shefeera and Reatile were treated as addressed by the concluded supply agreements, compliance with which was made a condition of approval. Concerns about coordinated effects between Bedrock and Reatile were held to be sufficiently mitigated by replacing direct price negotiations with an independent expert price-determination mechanism, strengthened by confidentiality protections that restricted information exchange and removed the need for direct bilateral contact. Considering the market’s product differentiation and lack of transparency in final prices, the Tribunal found that tacit coordination as a result of the merger was unlikely.

LEGAL PRINCIPLES

A vertical merger may raise competition concerns where it creates the ability and incentive for the merged firm to foreclose rivals by restricting access to a key upstream input used in downstream competition. Assessment of foreclosure requires attention to practical supply conditions, including contractual lock-in, internal supply, and the contestability of upstream volumes, and may be addressed through appropriately structured supply commitments.

A merger may also raise concerns of coordinated effects where it creates or enhances a forum for exchange of competitively sensitive information between close competitors, including through supplier–customer relationships that require input price negotiations. Behavioural merger conditions may be used to mitigate such risks where they are designed to eliminate direct contact, limit both the quality and quantum of information exchange, and include enforceable confidentiality constraints.

The likelihood of tacit coordination depends materially on market features such as product heterogeneity, the presence of significant service elements, and the degree of transparency of final prices and volumes. Where products and contracts are differentiated and final pricing is not transparent, and where information exchange is constrained by effective remedies, the probability of sustainable tacit coordination may be reduced.

Bedrock Mining Support (Pty) Ltd v Competition Commission of South Africa (23/AM/May10) [2010] ZACT 71; [2010] 2 CPLR 290 (CT) (21 October 2010)