COMPETITION TRIBUNAL OF SOUTH AFRICA
Case No: 51/LM/May12
In the matter between:
Ferro Industrial Products (Pty) Ltd Acquiring Firm
And
NCS Resins (Pty) Ltd Target Firm
Panel : Yasmin Carrim (Presiding Member)
Andreas Wessels (Tribunal Member)
Andiswa Ndoni (Tribunal Member)
Heard on : 15 August 2012
Order issued on : 15 August 2012
Reasons issued on : 05 September 2012
Reasons for Decision
Approval
1] On 15 August 2012 the Competition Tribunal (“Tribunal”)
unconditionally approved the merger between Ferro Industrial Products
(Pty) Ltd and NCS Resins (Pty) Ltd. The reasons for approval of the
proposed transaction follow below.
1
Parties to transaction
2] The primary acquiring firm is Ferro Industrial Products (Pty) Ltd
(“Ferro”). Ferro is jointly controlled by The Management Shareholders
of Ferro Industrial Products (Pty) Ltd (51%) and Investec Bank Limited
(“Investec”) (49%). Investec is a wholly-owned subsidiary of Investec
Limited.
3] Ferro operates within the industrial chemicals sector as a manufacturer
of base coating materials. Its activities that are relevant to the
competition assessment of this transaction are the manufacturing of
powder coatings and the historic manufacturing of gelcoats. It uses
saturated resins as input in the manufacturing of its powder coatings.
4] The primary target firm is NCS Resins (Pty) Ltd (“NCS”), a firm
incorporated in terms of the company laws of the Republic of South
Africa. NCS controls Pineside Resins (Pty) Ltd, a dormant firm.
5] NCS is a manufacturer and distributor of resins and also distributes
fibreglass products. 1 NCS supplies a complete range of unsaturated
polyester resins, ancillary products such as gelcoats, poolcoats,
flowcoats and pigment pastes, as well as accessory products such as
fibreglass, catalyst, application equipment and release agents. NCS’s
activities that are relevant to the competition assessment of this
transaction are the manufacturing of polyester unsaturated resins and
gelcoats.
6] The key applications of resins include paints and construction (for
example sanitary ware, roof sheeting and piping). Fibreglass is used
with resins for structural reinforcement in transport (for example
canopies and caravans), boat hulls, recreation (for example swimming
pools and spas) and other reinforced and fabricated products.
1 NCS does not manufacture any fibreglass and sources it and other accessory products
predominantly from international suppliers.
2
Proposed transaction and rationale
7] In terms of the proposed transaction, Ferro intends acquiring the entire
issued share capital of NCS and therefore will solely control NCS
following the implementation of the proposed transaction.
8] According to Ferro, there are numerous synergistic benefits associated
with this transaction arising from a consolidation of the Port Elizabeth,
Cape Town and Durban branches where both Ferro and NCS have
operations.
9] According to NCS this transaction will provide it with an opportunity to
form part of a broader chemical cluster and achieve certain synergies
such as raw material economies of scale, transport synergies and
consolidation of sites with potential rental savings.
Relevant markets and impact on competition
Merging parties’ submissions
10]The merging parties submitted that there are no overlaps between their
respective activities and that Investec and/or its subsidiaries are not
involved horizontally, vertically or otherwise in related activities to those
of Ferro and NCS.
Commission’s investigation and conclusions
11]As stated above, Ferro is a manufacturer of powder coatings and NCS
is a manufacturer of unsaturated polyester resins. After investigation
the Commission found that there is a potential vertical overlap in the
activities of the merging parties because Ferro requires saturated
resins as an input in the manufacturing of its powder coatings. The
Commission was of the view that although there is no demand-side
substitutability between saturated and unsaturated resins, there is
supply-side substitutability between these two types of resins. Thus,
although NCS only manufactures unsaturated resins, the Commission
found that NCS could with ease switch to the manufacturing of
3
saturated resins.
12]The Commission further found that NCS currently manufactures
gelcoats and that Ferro manufactured gelcoats in South Africa up until
the 1980s. Furthermore, Ferro currently has a licence agreement with
Ferro Corporation in the USA for the technical “know-how” of
manufacturing gelcoats (also see paragraph 23 below).
13]The Commission defined the relevant upstream markets as the
national markets for the manufacture of (i) saturated resins; and (ii)
unsaturated resins. It defined the relevant downstream markets as: (i)
the national market for the production and supply of powder coatings;
and (ii) the national market for the production and supply of gelcoats.
14]The Commission concluded that the proposed transaction is unlikely to
prevent or lessen competition in any of the above-mentioned relevant
markets, as explained below.
Vertical analysis
15]There are currently three players in the local market for the production
and supply of saturated resins, namely KZN Resins, Arkema and Akzo
Nobel. Arkema and KZN Resins produce saturated resins for coating
applications such as paint and Akzo Nobel produces saturated resins
for powder coats.
16]In relation to potential post-merger foreclosure, the Commission noted
that Ferro does not utilise unsaturated resins (as produced by NCS) in
order to manufacture its powder coatings but imports saturated resins
for this purpose. Mr Ian Forbes (“Forbes”) from Ferro at the hearing of
this matter confirmed that “ we [Ferro] import all of that resin from Asia
and Europe for making powder coating.”2
17]Thus, Ferro is currently not a resin customer of NCS and does not
compete with NCS’s customers for unsaturated resins. Furthermore,
the Commission’s market enquiry revealed that the local market for the
2 See page 11 of transcript.
4
production of unsaturated resin is currently producing at a capacity of
only approximately 50%. The Commission’s market investigation
further revealed that although different types of resins are used by
different customers for different applications, both the large and small
customers of NCS indicated that they are able to, with ease, switch
between suppliers.
18]The Commission further found that the merged entity would not have
the incentive to post-merger hypothetically convert its entire production
capacity to the manufacturing of saturated resins to supply the powder
coatings arm of the merged business since the local market for powder
coatings is small.
19]In light of the above, the notion that NCS might post-merger self-deal to
the exclusion and the detriment of its current customers is dispelled.
The Commission therefore concluded that this merger does not result
in any customers of NCS being deprived from accessing their required
unsaturated resin inputs.
20]The Commission therefore concluded that the proposed transaction
does not raise either likely input or customer foreclosure concerns.
Gelcoats - Scott Bader concern
21]In relation to the market for the manufacturing of gelcoats, the
Commission received a concern from Scott Bader, a local competitor of
NCS. Scott Bader indicated that it is concerned that the merged entity
may post-merger source advanced gelcoat technology from Ferro
Corporation in the USA and use this technology to manufacture “better”
gelcoats in South Africa. Scott Bader alleged that improved/advanced
gelcoat technology introduces a high barrier into this market because it
takes at least two and a half years to develop/improve and test
technology.
22]The current local players in the market for the production of gelcoats
are NCS, Scott Bader, KZN Resins and Arkema. In addressing the
5
above-mentioned concern, the Commission discovered that Ferro
previously manufactured gelcoats in South Africa up until the early
1980’s and currently holds a licence entitling it to the technical “know
how” of manufacturing gelcoats. Ferro explained to the Commission
that the licence covers various products which are available to Ferro if
it chooses to manufacture them in South Africa. The merging parties
further submitted that given that gelcoats are by-products of
unsaturated resin and Ferro does not produce the latter product, that it
was un-economical for Ferro to at the time carry on producing gelcoats.
Ferro however advised the Commission that it will consider making its
gelcoat formulas available to NCS to potentially expand the NCS
offering to customers. Ferro further advised that it will evaluate its
gelcoat formulations to determine whether it will be economically viable
to supply under the current market circumstances in South Africa.
23]Responding to questions of the Tribunal at the hearing, Forbes
confirmed that Ferro made gelcoats at its South African factory up until
1982 but has not been manufacturing gelcoats ever since. He further
confirmed that Ferro has a broad base of licences from Ferro
Corporation that it got as “ a package deal that was part and parcel of
the acquisition of Ferro when Ferro Corporation exited South Africa ... ”
and “[t]he licence still provides for us to make it if we so chose but it
has not been part of our product offering since 1982.”3
24]Ferro further advised the Commission that the market is such that
customers generally tend to purchase bundled products, that is,
unsaturated resins together with gelcoats from one supplier. In
Forbes’s words: “ [t]he gel coat gives the finish and the resin gives the
structural support. If you are not making a package deal offering it is
often more difficult and ... there aren’t people who just make gelcoat.
often more difficult and ... there aren’t people who just make gelcoat.
Generally the products are sold as a package. So my assumption is
[that] Ferro exited this market way back in 1982 because they weren’t
in the combine[d] businesses.”4 This practice of bundling was also
3 See transcript pages 8 and 9.
4 See transcript pages 9 and 10.
6
confirmed to the Commission by Scott Bader, Streamline and KZN
Resins.
25]The Commission’s market investigation further revealed that there is
significant excess capacity in the manufacturing of gelcoats in South
Africa.
26]Furthermore, a competitor in the market, namely KZN Resins advised
the Commission that its technology competes against any brand
available locally and that there are overseas companies that could
license their technology to KZN Resins. However, according to KZN
Resins there is no need for this because its gelcoats perform to SABS
and international standards.
27]The Commission also noted that the mere use of advanced gelcoat
technology may be considered as innovative rather than anti-
competitive.
Conclusion
28]We concur with the Commission’s conclusion that the proposed merger
is unlikely to substantially prevent or lessen completion in any relevant
market.
Public interest
29]The merging parties confirmed that there will be no job losses in
respect to permanent employees or temporary staff as a result of the
proposed merger.5 The Commission requested that the merging parties
depose to an affidavit stating that they will not retrench any employees
as a direct result of this merger for a period of two years and that if the
post-merger consolidation of the merging parties’ plants/operations
results in a duplication of duties, such employees will be re-assigned
elsewhere in the merged entity on employment terms that are not less
favourable than the current terms. The merging parties deposed to
5 See page 6 of the merger record; also see letter of 11 June 2012 from Nortons Inc to the
Commission.
7
such an affidavit.
30]The proposed transaction raises no other public interest concerns.
CONCLUSION
31]Given the above, we approve the proposed transaction unconditionally.
____________________ 05 September 2012
A Wessels DATE
Y Carrim and A Ndoni concurring
Tribunal researcher: Thabo Ngilande
For the merging parties: Nortons Inc
For the Commission: Lebohang Molefe
8