COMPETITION TRIBUNAL OF SOUTH AFRICA
Case No: 101/LM/Nov11
[013680]
In the matter between:
Steinhoff International Holdings Ltd Acquiring Firm
And
KAP International Holdings Ltd Target Firm
Panel : Yasmin Carrim (Presiding Member)
Medi Mokuena (Tribunal Member)
Takalani Madima (Tribunal Member)
Heard on : 30 March 2012
Order issued on : 30 March 2012
Reasons issued on : 15 August 2012
Reasons for Decision
APPROVAL
1] On 30 March 2012 the Competition Tribunal (“Tribunal”) unconditionally approved
the acquisition by Steinhoff International Holdings Ltd of KAP International
Holdings Ltd. The reasons for the approval follow below.
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PARTIES TO THE TRANSACTION
2] The primary acquiring firm is Steinhoff International Holdings Ltd (“SIH”), a public
company listed on the Johannesburg Securities Exchange Ltd (“JSE”). The
following shareholders held more than a 5% interest in SIH for the year ending 30
June 2011:
• Investec Asset Management 18.86%
• Public Investment Corporation 13.28%
• BS Beteiligungs und Verwaltungs GmbH 11.18%
• Eurotin SA 7.96%.
3] SIH control various firms1 and has a 34% shareholding in the target firm.
4] The primary target firm is KAP International Holdings Ltd (“KAP”), a public
company listed on the JSE. The following shareholders held more than a 5%
interest in KAP for the year ending 30 June 2011:
• Daun & Cie AG 41.43%
• SIH 34.00%.
5] KAP controls various firms including Feltex Automotive.2
ACTIVITIES OF THE PARTIES
6] SIH is a multi-national integrated lifestyle supplier serving markets in Southern
Africa, Europe and Australia. In South Africa, Steinhoff is active in a number of
markets, including the supply of raw input material to furniture manufacturers.
The only activity of SIH relevant for purposes of this transaction is the
manufacture of flexible polyurethane foam, which it produces through its business
division namely, Vitafoam.
7] The polyurethane foam that Vitafoam produces (called general foam) is supplied
in blocks as well as in various shapes, mainly to the manufacturers of bedding,
1 For a complete list of firms controlled by SIH see annexure A to form CC4(2) filed by the
merging parties. The merging parties also submitted to the Commission that SIH had a
controlling interest in Loungefoam (Pty) Ltd (“Loungefoam”) but that this company ceased to
trade on 01 July 2009 and sold its remaining assets to Vitafoam.
2 See annexure 2 to form CC4(2) filed by KAP for an organogram of the firms it controls.
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lounge suites and case goods products as raw input material into their final
product. Vitafoam produces general foam at its plants in South Africa and
Namibia.
8] KAP is a listed industrial and manufacturing business with significant local
manufacturing operations which has two segments, namely an industrial segment
and a consumer segment. The industrial segment consists of the following:
• Industrial Footwear - produces leather protective footwear, PVC gum
boots and supply bovine leather to the footwear and leather goods
industries),
• Feltex Automotive - one of South Africa’s largest automotive component
manufacturers and manufactures moulded seat foam for use in car seats
and trim components (called automotive foam) to South African Original
Equipment Manufacturers (“OEMs”).
• Hosaf - manufactures and distributes polyethylene terephthalate resin for
the bottle and packaging market and distributes polyester staple fibre for
the traditional and industrial textile sector.
9] The consumer segment consists of the following:
• Jordan Shoes - specialises in supplying men’s fashion and sports
footwear mainly to the domestic markets through the entire spectrum of
retailers, being credit and cash chain stores, discounters, wholesalers,
mini-chains and independents
• Glodina - a towel manufacturer which provides towelling products to
retailers, excluding the JD Group, and the hospitality industry;
• Bull Brand - a producer of canned and processed meat base products for
the retail and informal markets throughout Southern Africa.
• Brenner Mills 3 - operates out of five factories and its outsourced
3 The merging parties submitted that this company is currently subject to an investigation
relating to the chop market under case number 2010/Aug/5315 as well as a referral relating to
white maize milling under case number 2007/Mar/2944. The merging parties further submitted
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distribution centres are spread over the rest of the country. Its customers
include national retail chain stores, national wholesale chain stores,
private wholesales, private retailers, spaza stores as well as corner cafes.
DESCRIPTION OF THE TRANSACTION
10]The proposed transaction is related to the SIH/JD Group transaction (the “JD
Group transaction”) wherein SIH is increasing its shareholding in exchange for
shares in KAP. In the instant transaction, SIH intends to acquire 50% of the
shares in KAP, which would increase SIH’s shareholding in KAP from 34% to
88%. In exchange, KAP will acquire SIH’s Industrial Assets in South Africa. 4 SIH
is currently the single largest shareholder in the JD Group and it has been
granted certain call options to acquire further shares in the JD Group in exchange
for shares in KAP.
11] The exercise of the call options by SIH will result in SIH’s shareholding in KAP
reducing from 88% to approximately 65%, whilst its shareholding in the JD Group
will increase from 32.4% to more than 50%. The net effect of these transactions
is that SIH will, post-merger, control KAP and the JD Group.
RATIONALE FOR THE TRANSACTION
12] SIH submitted that this acquisition gives effect to its strategy of being an
investment holding company which holds majority shareholdings in listed entities
which have industrial and retail assets, but which are subject to third party inputs
and controls, and are subject to extensive regulation. The merging parties further
submit that SIH’s strategy is to be a majority shareholder in these listed entities
with a long term commitment and focus.
13] KAP submitted that the proposed transaction represents an opportunity for it to -
acquire leading industrial assets in southern Africa, complement its existing
portfolio of industrial assets and establish itself as one of the largest listed
industrial portfolios operating in Southern Africa. KAP also submitted that having
industrial portfolios operating in Southern Africa. KAP also submitted that having
that neither of these proceedings is relevant in the context of this merger, as the acquiring
firm does not own or control any businesses involved in the milling of chop or bran.
4 The Steinhoff Industrial assets include PG Bison Holdings (Pty) Ltd, Unitrans Holdings (Pty)
Ltd, SHF Raw Materials and Toolplast Holdings (Pty) Ltd, which includes raw input
manufacturers such as Vitafoam, BCM Holdings and DesleeMattex.
4
SIH as the controlling long-term shareholder will provide it with the strategic
assistance to ensure its success and continued growth within the Southern Africa
markets.
THE RELEVANT MARKETS AND IMPACT ON COMPETITION
14] The Commission identified a horizontal overlap as well as a vertical relationship
between the activities of the merging parties.
Horizontal Analysis
15] Both merging parties are involved in the manufacture of flexible polyurethane
foam. In defining the relevant product market the Commission identified separate
product markets for the flexible polyurethane foam manufactured by Vitafoam i.e.
general foam and Feltex i.e. automotive foam. The Commission found that
general foam manufactured by Vitafoam is used in the furniture and bedding
industry and cannot be used by OEMs in the automotive industry. On the other
hand, Feltex manufactures specialised foam which is suitable for use in the
automotive industry.
16]In relation to automotive foam, the Commission found that automotive foam
manufacturers such as Feltex are able to manufacture general foam for use in
the furniture and bedding industry. This was confirmed by several other market
participants5 in the furniture and bedding market who informed the Commission
that Feltex is capable of producing general foam for the furniture and bedding
industry with its current machinery and equipment. Accordingly, the Commission
identified supply side substitutability from manufacturing automotive foam to
manufacturing general foam, but not vice versa.
17] The Commission concluded that the relevant market is the market for the
manufacture and supply of general foam for use in the furniture and bedding
industry with Vitafoam and Feltex being actual or potential competitors amongst
other players. It is important to note that there is an ongoing enforcement case
against Vitafoam and Feltex in the polyurethane market (which will be briefly
dealt with below).
dealt with below).
5 These market participants include Strandfoam, Tuf Foam, Foaming Concepts, Uni Mattress
and Greenacres.
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18] In relation to the geographic market, the Commission was informed by
competitors of the merging parties that a correctly defined geographic market is
regional and may include more than one province depending on the maximum
distance that suppliers are willing to travel in order to reach their customers. The
provinces indentified are Kwazulu Natal (“KZN”), Gauteng, Gauteng and KZN and
KZN and the Eastern Cape. The Commission found that Feltex only has a foam
manufacturing plant in KZN and supplies foam to furniture and bedding
manufacturers that are situated in this geographic area. For purposes of
analysing this transaction, the Commission focused on KZN as this is the
narrowest geographic area in which the competitive effects of the proposed
transaction are most likely to be observed.
19]The Commission was informed by the merging parties that there are two methods
used to produce general foam, namely box foam 6 plant production and
continuous foam7 plant production. The Commission found that the market
participants in the KZN area namely, Vitafoam, Feltex, Uni Mattress, Tuf Foam,
Foaming Concepts and Strandfoam operate continuous foam plants. The
Commission submits that it excluded the box foam plant producers from its
competitive assessment of this merger as it was informed by the continuous plant
producers that they do not consider box foam plant producers as a significant
competitive threat. Further, the Commission submits that it excluded the box
foam producers as it is of the view that the continuous foam plant producers are
likely to be able to meet the necessary quality and supply requirements of
furniture and bedding manufacturers in KZN.8
i) Market shares
20] In respect of market shares the table below shows actual production of market
6 With this method general foam is manufactured by pouring the chemical inputs manually
6 With this method general foam is manufactured by pouring the chemical inputs manually
into a box mould. The Commission was informed that this is a low cost method of
manufacturing general foam.
7 This method involves mixing chemical inputs and pouring them automatically through a
nozzle into a trough or moving conveyor.
8 According to the Commission this exclusion does not mean that the box foam producers do
not have an impact of the competitive dynamics of the market.
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participants within the KZN area and those participants that have manufacturing
plants located outside the KZN area but who transport general foam to this area.
Table 1: Market share calculation based on actual production volumes for KZN
Competitor Location of
manufacturing
plant
Actual
production
(tons): 2010
Estimated
market share:
2010
Actual
Production
(tons): 2011
Estimated Market
Share: 2011
Vitafoam Newcastle 200
2.24%
100 1.20%
Vitafoam Durban 4,600
51.58%
3,500 42.15%
Feltex Durban 204
2.29%
224 2.70%
Merged
entity
5,004
56.11%
3,824 46.05%
Unimattress Isithebe 2,494
27.97%
2,683 32.32%
Tuffoam Johannesburg 1,085
12.17%
910 10.96%
Foaming
Concepts
Johannesburg 75
0.84%
600 7.22%
Strandfoam Durban 260
2.92%
285 3.43%
TOTAL 8,918
100.00%
8,302 100.00%
Source: Information collected from market participants
21] This table shows that Vitafoam and Feltex have pre-merger market shares of
approximately 43.35% and 2.70% respectively. The merged entity will therefore
have an estimated market share of 46.05%, but the accretion in market share is
relatively small. The Commission points out that the small market share accretion
and the fact that Feltex only has a foam manufacturing plant in KZN and supplies
foam to furniture and bedding manufacturers that are situated in this area may
lead one to conclude that the proposed transaction does not raise competition
concerns. However, as pointed above there is an on-going market allocation case
against Vitafoam and Feltex in the polyurethane market. The Commission
therefore assessed the effects of this alleged marker allocation on the proposed
transaction.
ii) Alleged Market Allocation
22]The Commission referred a complaint against Vitafoam, Loungefoam (Pty) Ltd
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and Feltex Holdings (Pty) Ltd to us for adjudication on 25 September 2008. 9 In
the referral the Commission submitted that Loungefoam and Feltex Ltd entered
into an agreement in 1999 in terms of which Loungefoam acquired the furniture
and bed division of Feltex Ltd, whilst Feltex Ltd retained the automotive and hi-
tech divisions. According to the Commission, Clause 16 of the aforesaid
agreement contained a restraint of trade clause, preventing Feltex from
competing with Loungefoam in South Africa and neighbouring countries in
respect of the acquired business for a period of five years. The Commission
alleges that the intent and effect of this agreement was that Feltex Ltd would
primarily focus on supplying polyurethane foam to the automotive industry, whilst
Loungefoam would focus on supplying polyurethane foam to the furniture
manufacturing industry. The Commission further alleges that notwithstanding that
the aforesaid agreement terminated in 2004, its investigation has revealed that
Loungefoam, Vitafoam and Feltex Ltd have continued to conduct themselves as
though the 1999 agreement remains in force.
23] The Commission also alleges that although it found that Vitafoam was not a party
to the agreement between Feltex and Loungefoam, there was an understanding
on its part not to compete with Feltex Ltd in supplying polyurethane foam to the
automotive industry and that this was done in accordance with the agreement
concluded between Feltex Ltd and Loungefoam. Furthermore, the Commission
alleges that its investigation revealed that Feltex Ltd was cheating on the
agreement by supplying a customer in the furniture market and this necessitated
communication between Loungefoam, Vitafoam and Feltex Ltd to ensure that the
terms of the market allocation agreement were complied with.
24] Due to the various points in limine that have been raised by Vitafoam and Feltex,
we have not heard nor decided on the merits of the case.
we have not heard nor decided on the merits of the case.
iii) The Counterfactual
25] The Commission points out that the volume of general foam produced by Feltex
9 The referral was later amended to include SIH, KAP and Gomma Gomma (Pty) Ltd (see
amendment reasons dated 08 June 2010, Case No: 103/CR/Sep08.
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is likely to have been limited due to the existence of this market allocation
agreement and that this has the effect of masking the market share accretion that
would have other prevailed. The Commission therefore submits that it is
important to define the relevant counterfactual against which this merger should
be assessed had there been no distortion of the general foam market conditions
through the alleged market allocation agreement.
26]The Commission’s assessment of the counterfactual position started by analysing
and calculating the production capacity of the general foam manufacturers. The
results of this exercise are shown in the table below.
Table 1: Capacity-based market shares 10 for KZN (virgin and re-bonded foam),
2010/11
Competitor Capacity (tons) Market share
Vitafoam (Newcastle) 300 1.43%
Vitafoam (Durban) 8 600 40.96%
Feltex 2 000 9.53%
Merged entity 10 900 51.92%
Uni Mattress 4 500 21.43%
Tuffoam 1,274 6.07%
Foaming Concepts 4,320 20.58%
TOTAL 20,994 100.00%
27] This table shows that the merged entity will have a post-merger market share of
approximately 52%. The Commission also assessed whether competitors of the
10 The Commission submits that one of the competitors of the merging parties, namely,
Strandfoam, submitted that the capacity of its manufacturing plant in Durban is 18 500 tons
per annum (these figures would make Strandfoam the largest player in the KZN market).
However, the Commission submits that the capacity figures of Strandfoam are not
corroborated by other market participants who see Vitafoam as being the largest player.
Although the Commission is of the view that Strandfoam is in a position to increase output in
the event of an increase of demand or an increase in price by its competitors, the
Commission submits that it is unlikely that Strandfoam would be able to produce 18 500 tons
per annum due to infrastructure constraints such as warehousing space. The Commission
per annum due to infrastructure constraints such as warehousing space. The Commission
therefore excluded Strandfoam in its market share calculations as Strandfoam’s inclusion
would have resulted in a decrease of the market share estimates of the merging parties and
all the other general foam manufacturers.
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merging parties compete from a more or less similar cost base by analysing the
production costs of these firms. In this regard, the Commission found that the
production costs are fairly comparable and that competitors of the merging
parties are not at a significant cost disadvantage. The Commission is therefore of
the view that the market position of the merged entity (under the counterfactual
position) is unlikely to provide it with market power to unilaterally affect the
competition condition in the general foam market in KZN.
iv) Barriers to Entry
28] The Commission found that the barriers to entry for the production and supply of
general foam are not very high and that there has been new entry in the market.
For example the Commission established that Foaming Concepts commenced
trading in Gauteng in 2006, but only entered the KZN market during 2010 and
was able to grow its market share in KZN by approximately 7%.
29] The Commission also established that competitors of the merging parties have
existing excess capacity and therefore it is likely that these competitors would be
able to expand or increase their actual production in the event that the merged
entity decided to increase the price of general foam or deteriorate product quality.
v) Countervailing power
30]In relation to countervailing power it is the view of the Commission that customers
of general foam, i.e. furniture manufacturers, have countervailing power. This,
according to the Commission, is evidenced by the fact that furniture
manufacturers are able to switch between the different general foam suppliers
with no or relatively little switching costs. For example Cantoni, Loungecraft
Industries and Style Collections informed the Commission that they purchase
general foam from different suppliers, do not incur costs when switching and can
buy from different suppliers on a weekly basis. Further, The Commission submits
buy from different suppliers on a weekly basis. Further, The Commission submits
that there is also evidence to suggest that furniture manufacturers are price
sensitive and that suppliers compete fiercely on prices 11 as illustrated by the fact
11 For example the Commission was informed by Cantoni that it has been able to play the
different foam manufacturers off against each other with regards to price in the past three
months. Further, Restonic, a major player in the bedding manufacturing market, informed the
Commission that during the year 2011 it purchased the majority of its foam requirements from
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that general foam manufacturers have to absorb the transport costs of the
product.
vi) Unilateral Effects
31] According to the Commission the merged entity would not be able to exercise
any form of market power to profitably increase prices or reduce output and
quality of general foam. The Commission submits that any move by the merged
entity to exercise market power would be constrained by the countervailing power
of customers who are likely to switch to competitors of the merged entity, thereby
rendering such behaviour unprofitable.
32] Moreover, the Commission submits that this conduct is also likely to be
unravelled by competitors of the merging parties who, with the excess capacity
currently available in the market, will be able to expand output and offer general
foam at more competitive prices than the merged entity.
vii) Coordinated Effects
33] As indicated above, there is an on-going enforcement case against Vitafoam and
Feltex in terms of which the Commission has alleged that the two firms have
entered into a market allocation strategy wherein each party undertook not to
enter the market allocated to its competitor. Despite these market allocation
allegations, the Commission submits that it is unlikely that the proposed
transaction will result in coordinated effects as the merger does not facilitate
collusion in any manner and does not materially increase the likelihood that firms
in the market will successfully coordinate their behaviour or strengthen existing
competition.
34] The Commission also submits coordination is unlikely as information received
from market participants suggests that the market for the supply of general foam
in KZN is very competitive, customers have buying power and that the low
barriers to entry are an indication that a potential entrant is likely to enter the
market should the merged entity and other foam manufacturers increase their
market should the merged entity and other foam manufacturers increase their
prices. Furthermore the Commission submits that the excess capacity of general
other suppliers due to the fact they had better pricing and delivery than Vitafoam.
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foam manufacturers is likely to enable a firm not participating in the strategy to
increase output and service a substantial part of the coordinating firms’
customers. According to the Commission this course of action by a competitor is
likely to unravel and make any form of coordination unprofitable.
Vertical Analysis
35] The Commission identified a vertical relationship in the activities of the merging
parties. In particular, the Commission analysed the following business
relationships between the parties – Vitafoam’s supply of foam to Jordan, supply
of freight cleaning and forwarding services by Buffalo Freight Systems to Hosaf,
supply of freight and logistics services to Hosaf by Unitrans and supply of
rebonded foam by Feltex to Vitafoam.
36] After analysing these relationships the Commission came to the conclusion that
any attempt of foreclosure by the merged entity is unlikely as the volumes of
sales supplied by each of the above firms were small and there are other firms in
the market involved in the supply of these services.
THIRD PARTY VIEWS
37] The Commission contacted third parties in order to get their views about the
proposed transaction. The majority of those contacted did not have any concerns
about this transaction. However, LR Foam, a customer of the merging parties,
submitted that it sources one specific grade of foam from Feltex and not from any
other competitor due to the high quality of this grade from Feltex. LR Foam
indicated that it uses this grade of foam to manufacture mattresses for bed cots
only i.e. this foam is not used by LR Foam across the board in the manufacture of
beds or lounge suits. LR Foam’s concern is that Feltex will, post merger, stop
supplying it (due to the influence of SIH) and that it would be forced to purchase
inferior products from Vitafoam at higher prices.
38] In response the Commission submits that as this specific grade of foam is used
38] In response the Commission submits that as this specific grade of foam is used
by LR Foam for a limited product only (beds cots) it is unlikely that this will have a
significant effect on competition in the broad market for furniture and bedding
manufacturing. The Commission also submits that this is a pre-merger issue and
that this current merger does not change situation. Further the Commission
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points out that this grade of foam is not being distributed by Feltex to any other
furniture and bedding manufacturers. In addition, LR Foam sources other grades
of foam from Vitafoam as well as from other competitors in the market.
PUBLIC INTEREST
39] The merging parties submitted to the Commission that the proposed transaction
will not have any significant effect on employment.
CONCLUSION
40] 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.
____________________ 15 August 2012
Yasmin Carrim Date
Medi Mokuena and Takalani Madima concurring.
Tribunal researcher: Ipeleng Selaledi
For the merging parties: Heather Irvine of Norton Rose Inc.
For the Commission: Werner Rysbergen
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