COMPETITION TRIBUNAL OF SOUTH AFRICA
Case No:02/LM/Jan12
[013821]
In the matter between:
Imperial Holdings Ltd Acquiring Firm
And
Probe Corporation South Africa (Pty) Ltd Target Firm
Panel : Yasmin Carrim (Presiding Member)
Medi Mokuena (Tribunal Member)
Takalani Madima (Tribunal Member)
Heard on : 14 March 2012
Order issued on : 14 March 2012
Reasons issued on : 29 June 2012
Reasons for Decision
Approval
[1] On 14 March 2012 the Competition Tribunal (“Tribunal”) unconditionally
approved the acquisition by Imperial Holdings Ltd of Probe Corporation
South Africa (Pty) Ltd. The reasons for the approval follow below.
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Parties to the transaction
[2] The primary acquiring firm is Imperial Holdings Limited (“Imperial”), a
company incorporated in terms of the laws of the Republic of South Africa.
Imperial is a public company listed on Johannesburg Securities Exchange
(“JSE”) Ltd and is not controlled by any single shareholder. 1Imperial
controls the following firms: CIC Holdings Ltd, E-Z-Go Golf Carts, EWC
Express SA (Pty) Ltd, Danmar Autobody and Graffiti Designs (Pty) Ltd.
[3] The primary target firm is Probe Corporation South Africa (Pty) Ltd
(“Probe”), a company incorporated in terms of the laws of the Republic of
South Africa. The shareholders in Probe are Ukhamba Holdings (Pty) Ltd
with a 49.95% shareholding and Management with 50.05% shareholding.
[4] Probe controls the following firms 2: Free State Metals (Pty) Ltd, Fawick SA
(Pty) Ltd, Probe Integrated Mining Technologies (Pty) Ltd, Probe Collision
Avoidance Technologies (Pty) Ltd, Probe Electrical Eastern Cape (Pty)
Ltd, Probe Nelspruit-Nannum Beleggings (Pty) Ltd, Platinum Battery
Technologies (Pty) Ltd and Probe Auto Electrical (Pty) Ltd.
Activities of the Parties
[5] Imperial is a diversified industrial services and retail group which conducts
a wide range of activities relating inter alia to transportation, logistics,
warehousing, specialised freight, supply chain solutions, car rental,
tourism and insurance. The Imperial business relevant for assessment of
the proposed transaction is the Imperial Autoparts division. Imperial
Autoparts is active in the vehicle aftermarket 3, focusing on distributing
1For a list of Imperial’s largest shareholders see form CC4(2) filed by the merging parties.
2These firms form part of this transaction.
3 Aftermarket parts are vehicle parts and accessories that are not produces by Original
Equipment Manufacturers (“OME”) but are alternative/generic parts which are produced by
Equipment Manufacturers (“OME”) but are alternative/generic parts which are produced by
other automotive part manufacturers such as Bosch and are not specific to any type of
vehicle.
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spare parts and accessories for vehicles outside manufacturer’s warranty
and service programmes. Imperial Autoparts’ two divisions relevant for
purposes of this transaction are (i) the Midas Group (“Midas”) and (ii)
Engine Parts.
[6] Midas supplies non-branded automotive spare parts to independent spare
shops, workshops, fleet and various outlets such as engineering shops
and chain stores. Midas operates 16 retail outlets as owner and acts as a
franchisor for these brand names: Midas (with 290 outlets), Motolek (with
61 outlets), ADCO (with 40 outlets), ACD (with 43 outlets) and CBS (with
23 outlets). Engine Parts is a wholesaler of various non-branded
aftermarket automotive parts and accessories and supplies non-branded
engine parts, such as engine bearings, engine gaskets and engine valves,
to independent spare shops and fitment centres.
[7] Probe is an importer of various non-branded spare parts for heavy duty
vehicles in the automotive aftermarket. Probe also supplies certain
Original Equipment Manufacturers (OEM) with spare parts and complete
units, which are factory-approved and are made strictly to manufacturer’s
specifications.
Description of the transaction
[8] Imperial currently has a 49% indirect shareholding in Probe through
Ukhamba Holdings (Pty) Ltd. Through this transaction Imperial intends to
increase this indirect shareholding from 49% to a direct shareholding of
51%. Following implementation of the proposed transaction, Probe will be
controlled by Imperial and will continue to operate a standalone business
within the Imperial Autoparts Division.
Rationale for the transaction
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[9] Imperial submitted that in addition to the proposed transaction providing it
with an aftermarket presence in product segments where it is relatively
inactive, this transaction will also provide it with the benefit of Probe’s
technical capabilities in sourcing and supplying a variety of aftermarket
spare part brands. From Probe’s perspective this transaction offers it with
an opportunity to become part of a company that is larger, financially
sound and that has a good African distribution footprint.
The relevant markets and impact on competition
[10] The Commission identified a limited horizontal overlap as well as a
vertical relationship between the activities of the merging parties. The
horizontal overlap arises because the merging parties sell batteries to
retail customers. The Commission, however, found that Probe’s sales of
these batteries is insignificant and that Probe is not focused on the
retailing of batteries but rather on the wholesaling thereof. The
Commission therefore concluded that this limited overlap is unlikely to
result in a substantial prevention or lessening of competition.
Vertical Assessment
[11] The vertical relationship in the activities of the merging parties arises
because Imperial’s divisions (Engine Parts, Midas, Imperial Cargo and
Tanker Services) purchased limited quantities of certain aftermarket parts
from Probe during 2010. In particular, Engine Parts purchased batteries
and Midas purchased starters and alternators from Probe which
represented about 1.7% and 16% of Probe’s total sales in 2010
respectively. Further, Imperial Cargo and Tanker Services purchased
starters, alternators and batteries from Probe which represented
approximately 0.3% and 0.2% respectively of Probe’s total sales in 2010.
[12] For purposes of assessing the vertical effects of the proposed
transaction, the Commission defined the aftermarket spare parts market at
transaction, the Commission defined the aftermarket spare parts market at
its narrowest level i.e. by product e.g. batteries, alternators and starters as
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the three products are the areas of overlap between the activities of the
merging parties. The Commission further defined the upstream market as
the market for the manufacture and supply (importation) of non-branded
batteries, starters and alternator and the downstream market as the
market for the wholesale distribution of non-branded batteries, starters and
alternators. The geographic market for both the upstream and downstream
markets is defined by the Commission as being national.
(i) Upstream market
[13] The merging parties submitted that Probe focuses its activities of
importing non-branded aftermarket spare parts in order to service the
heavy-duty trucking, mining, construction and commuter aftermarket. In
respect of the importation of batteries Probe has a market share of 3% and
competes with local manufacturers such as First National Battery (“FNB”)
(45%), Powertech (35%), Dixon Batteries (8%)as well as with other
importers such as Deltec (2%).
[14] In respect of starters and alternators the Commission found that there are
very few local manufacturers and that these aftermarket parts are mostly
imported from oversees manufacturers by wholesalers/distributors such
Probe. Probe has a market share of approximately 4% and competes with
firms such as Bosch (20%), Arrow (16%), Electro Part (15%), Elgin (10%)
and Delco Remy (6%).
(ii) Downstream market
[15] The wholesale distribution of batteries takes place through two main
channels, i.e. though fitment centres as well as over the counter (“OTC”)
sales through spares shops. In this market, Probe has a market share of
5% for the fitness centre channel and 2% for the OTC channel whilst
Imperial’s business division i.e. Midas, has 10% share and 35% share for
the fitment centre and over the counter channels respectively. In relation to
distribution of starters and alternators Midas has a share of 13% and 5%
respectively.
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[16] In relation to the foreclosure effects of the proposed transaction the
Commission found that the merging parties neither have the incentive nor
the ability to foreclose customers and competitors. With regards to input
foreclosure the Commission is of the view that wholesalers of aftermarket
automotive spare parts will not be foreclosed because (i) Probe is a small
player in relation to the importation of batteries, starters and alternators (ii)
the wholesalers also distribute a wide range of automotive aftermarket
spare parts and accessories such as brake parts, cooling systems, filters
and are not reliant on the import of batteries, alternators and starters for
their business and lastly (iii) the wholesalers are able to import directly
from oversees manufacturers, bypassing local manufacturers and
importers.
[17] In regard to customer foreclosure the Commission found that upstream
competitors of Probe have their own distribution networks and as such
access to their customer base will not be foreclosed as result of this
transaction. In respect of the distribution of starters and alternators the
Commission found that although Midas stocks various brands (such as
Arrow, Bosch, DAC and Motopart), these brands do not solely rely on
Midas as their main route to the market as they are also stocked by Midas’
competitors.
(iii) Third Party Views
[18] The Commission contacted customers and competitors of the merging
parties in order to get their views regarding the transaction. Three firms
raised concerns namely, Auto Fuel (a franchisee of Midas), Trysome (a
competitor of the merging parties) and FNB (a competitor of the parties).
[19] Auto Fuel submitted to the Commission that it is concerned that it
currently purchases genuine Delco Remy products not from Probe directly
but through Imperial, which is more expensive than when independent
franchisees purchase directly from Probe. In response to this concern the
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merging parties submitted that Midas does not have any ability contractual
or otherwise to compel its franchisees to purchase from any particular firm.
The parties further submitted that Imperial Group did not send out a
directive to its franchisees stating that the Delco Remy products must be
sourced from the Midas network as opposed to sourcing directly from
Probe.
[20] Trysome, which together with Probe is the appointed distributor of
genuine Delco Remy products, stated that it is concerned that its contract
with Delco Remy might not be renewed and that Probe is likely to be the
exclusive distributor of the Delco Remy products post-merger. In response
the merging parties submitted that they do not have any insight into the
relationship between Delco Remy and Trysome or what Delco Remy’s
intentions are regarding its contact with Trysome. The parties further
pointed out that the market shares of Delco Remy are not high (6%) to
warrant any concern or have any significant impact.
[21] FNB, which procures about 20% of spent batteries from Midas, is
concerned that post-merger Probe will have access to spent batteries from
Midas franchisees and then use them to produce refined lead for export
purposes. According to FNB, this will result in less lead for local
manufacturers of batteries who will then have to import more expensive
virgin lead (should Probe decide to use batteries from Midas shops and
networks for their smelter) to offset Probe’s lead exports. The merging
parties responded by stating that Midas franchisees are the ones who
determine what they want to do with their batteries i.e. the batteries do not
go to Midas. Further, the merging parties indicated that Midas does not
have the requisite infrastructure to collect and return large volumes of
spent batteries and that Probe’s lead refining capacity is limited and
spent batteries and that Probe’s lead refining capacity is limited and
cannot absorb all spent batteries. In addition, the parties indicated that it is
more cost effective to purchase lead directly from scrap dealers as
opposed to purchasing spent batteries, owing to the fact that battery cores
tend to be sold at a far higher price.
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Public interest
[22] The merging parties submitted to the Commission that the proposed
transaction will not have any significant effect on employment.
Conclusion
[23] In light of the above, we agree with the Commission that the vertical
relationship between the activities of the merging parties is unlikely to give
rise to any foreclosure of customers or competitors of the merging parties.
Furthermore, the proposed transaction raises no public interest concerns.
Accordingly we approve the transaction unconditionally.
____________________ 29 June 2012
Yasmin Carrim Date
Medi Mokuena and Takalani Madima concurring.
Tribunal researcher: Ipeleng Selaledi
For the merging parties: Anton Roets of Nortons Inc.
For the Commission: Mogau Aphane
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