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COMPETITION TRIBUNAL OF SOUTH AFRICA
Case No: 91/LM/Oct12
In the matter between:
CALULO INVESTMENTS (PTY) LTD
INVESTEC BANK LIMITED Acquiring Firms
And
FFS REFINERS (PTY) LTD Target Firm
Panel : A Wessels (Presiding Member)
M Mazwai (Tribunal Member)
A Roskam (Tribunal Member)
Heard on : 19 February 2013
Order issued on : 19 February 2013
Reasons issued on : 19 April 2013
Decision
Conditional approval
1. On 19 February 2013, the Competition Tribunal (“ Tribunal”), in terms of
section 16(2)(b) of the Competition Act of 1998
1, conditionally approved
the proposed transaction involving Calulo Investmen ts (Pty) Ltd (“Calulo”)
and Investec Bank Limited (“Investec”), the primary acquiring firms, and
FFS Refiners (Pty) Ltd (“FFS”), the primary target firm.
2. The reasons for conditionally approving the pro posed transaction follow.
1 Act No. 89 of 1998, as amended.
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Merging parties and their activities
3. The primary acquiring firms are Calulo and Inves tec, both of which
companies are incorporated in accordance with the c ompany laws of the
Republic of South Africa. Investec holds 29.47% of the issued share
capital in Calulo. Calulo controls inter alia Calulo Petrochemicals (Pty) Ltd
(“Petrochem”) which holds a 25.1% shareholding in F FS via FFS Calpet
(Pty) Ltd (“FFS Calpet”) (also see paragraph 7 below).
4. Calulo is an investment holding company which ha s a portfolio of
investments in companies/businesses within the petroleum, chemicals and
logistics sectors in Southern Africa. Calulo, throu gh the
companies/businesses in which it holds investments, provides the
following products and services: (i) shipping and freight brokerage; (ii)
shipping services; (iii) crude oil and petroleum pr oduct commercial
marketing and distribution; (iv) ships agency and c learing and forwarding;
(v) liquid fuel storage and facilities management; and (vi) rural
electrification utilising solar energy systems.
5. Investec is a wholly owned subsidiary of Investe c Limited, a company
listed on the Johannesburg Stock Exchange (“JSE”). Investec is the main
banking subsidiary of Investec Limited. The Investe c group provides a
diverse range of financial products and services to a niche client base in
two principal markets, namely South Africa and the United Kingdom, as
well as in eight other countries, including Australia.
6. Of relevance to the competition assessment of th is transaction is that
Investec holds a shareholding in Corobrik (Pty) Ltd (“Corobrik”). Corobrik
is a manufacturer, distributor and exporter of bric ks and allied products.
From a vertical competition assessment perspective, we note that Corobrik
uses light fuel oil (known as Light Oil 2 or LO2
2) supplied by FFS. FFS also
2) supplied by FFS. FFS also
2 LO2 is a cost effective low flashpoint, low sulphur fuel suitable for larger applications that
require a clean and light fuel where the risks associated with the low flashpoint can be
properly mitigated.
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supplies a variety of fuel oils, including the supp ly of LO2, to other brick
manufacturers in South Africa (also see paragraph 8 below).
7. The primary target firm is FFS. FFS is directly controlled by Fuelmark
Investments (Pty) Ltd (“Fuelmark”), which owns 51% of the shares in FFS.
The other shareholders of FFS are FFS Calpet, which owns 25.1% of the
shares in FFS, and FFS Management Company (Pty) Ltd , which owns
23.9% of the shares in FFS. FFS Calpet is a wholly owned subsidiary of
Petrochem which, in turn, is a wholly owned subsidi ary of Calulo. FFS
directly or indirectly controls a number of firms.
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8. FFS is mainly involved in the procurement, proce ssing and blending,
refining, distribution and marketing of industrial fuel oils (“IFOs”). It also
provides ancillary, technical and support services to its IFO customers.
FFS’s technical support services are provided to as sist customers in
choosing and using the IFO product best suited to t heir needs and
ensuring that the IFO is used in the most efficient and optimal way.
9. IFOs of desired customer specificities are produ ced through the
processing and blending of heavy fuel oils (HFOs) f rom refinery residuals,
used waste oils and marine waste oils. IFOs are fue ls or fuel blends used
to produce energy which is used in (i) manufacturin g and industrial
facilities such as glass and brick making factories ; (ii) the production of
steam from boilers; (iii) road-mix heating; (iv) he ating of lime kilns; and (v)
sand and stone drying.
10. As stated above, of specific relevance to the c ompetition assessment of
this transaction is that FFS sells LO2 to inter alia Corobrik.
Proposed transaction and rationale
11. The proposed transaction comprises a number of interdependent steps,
which ultimately result in Investec jointly control ling FFS Calpet with a
shareholding of between 40% and 49% and Calulo (via Petrochem) jointly
controlling FFS Calpet with a minimum shareholding of 50% and FFS
controlling FFS Calpet with a minimum shareholding of 50% and FFS
3 See merger record, pages 45 and 46.
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Calpet owning a 100% equity shareholding interest i n FFS.
4 The exact
shareholding will be confirmed post the finalisatio n of the funding structure
for the transaction.
12. Investec and Calulo will thus post-merger contr ol FFS Calpet which will
solely control FFS.
13. The merging parties submitted that FFS is a pro fitable business that
demonstrates attractive growth potential and the pr oposed transaction
increases Calulo’s exposure to the oil and energy s ectors. The merging
parties further submitted that FFS requires superio r BEE credentials to
effectively compete in the South African market and Calulo’s increased
shareholding will provide FFS with the requisite pr eviously disadvantaged
shareholding profile.
14. From Investec’s perspective, FFS is an attractive investment in the energy
sector which has been identified as a strategic focus area.
15. FFS is concluding the transaction for two reasons. First, the percentage of
IFO sales dependent on public tenders is increasing and FFS needs to
improve its broad-based black economic empowerment score in order to
improve its chances of effectively competing for th ese opportunities.
Second, Fuelmark has made a decision to dispose of its investments in
South Africa, but retain FFS’s activities in Austra lia and the United
Kingdom and grow its investments elsewhere in the globe.
Impact on competition
16. The Commission found that Investec’s increased shareholding in FFS as a
result of the proposed transaction brings about a c hange in the control of
FFS. The Commission concluded that Investec will ha ve at least joint
control of FFS post-merger due to (i) its increased shareholding in FFS
and associated rights; and (ii) Calulo acquiring the shares of Fuelmark that
currently exercises control over FFS. The Commissio n further found that
Investec has [...] of Corobrik.
4 See page 71 of the merger record.
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17. The main theory of competitive harm advanced by the Commission was
that of post-merger input foreclosure in the downst ream market for the
production and sale of face bricks. We shall only d eal with this theory of
harm in these reasons since we found no other likely competition concerns
resulting from the proposed transaction.
18. As stated above, pre-merger FFS sells LO2 to Co robrik. Given Investec’s
post-merger (joint) control over FFS and its relati onship with Corobrik, the
Commission was concerned that Investec may cause FF S to foreclose
Corobrik’s rivals in the downstream bricks market(s ) in respect of the
supply of LO2.
19. The Commission further found that pre-merger FF S has market power in
the market for the processing and blending of LO2 i n the geographic
markets affected by the proposed merger, i.e. in Kw aZulu-Natal, the
Eastern and the Western Cape.
20. From a customer and potential substitution pers pective, we note that the
available evidence suggests that HFO is significant ly more expensive than
LO2.
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21. The Commission’s analyses of profit margins and market dynamics
suggest that there is a likely incentive for the me rged entity to foreclose
brick competitors of Corobrik in KwaZulu-Natal, the Eastern and the
Western Cape. This ultimately would cause likely ha rm to end-customers
in the bricks market(s) through consequent price in creases and/or a
reduction in choice.
22. In order to address this input foreclosure conc ern raised by the
Commission, the merging parties agreed
6 to a behavioural condition (i.e. a
supply condition) which in essence guarantees the p ost-merger non-
foreclosure of competitors of Corobrik in respect o f the supply of LO2. The
Commission was of the view that the foreclosure con cerns raised by the
5 See page 52 of the Commission’s Report.
6 See transcript, page 16.
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proposed merger were sufficiently addressed by thes e tendered
conditions.
23. We concur with the Commission’s finding that th e merging parties’
tendered conditions are warranted to address the id entified competition
concern. We further find that the tendered conditio ns are proportionate to
the concern. We therefore have approved the propose d transaction
subject to the following conditions:
23.1. FFS shall continue supplying its existing bri ck customers with LO2
on terms and conditions which do not discriminate i n favour of
Corobrik in terms of trading conditions, price, vol ume and quality,
other than reasonable allowances made to reflect (a ) differences in
cost or likely cost of manufacture or distribution, sale, promotion,
storage or delivery resulting from the differing pl aces to which,
methods by which or quantities in which, the LO2 is supplied to
different customers; or (b) variations in the quali ty and available
volumes of the raw materials used to make the LO2. In this regard,
it is noted that LO2 is a low flash point product p roduced by
blending and processing raw materials from a variet y of waste
products emanating from refinery slops, by-products , contaminated
and off specification materials. Due to the unsecur ed, variable and
ad hoc supply of these raw materials, the availability an d cost to
FFS of these raw materials varies continuously and is not fixed or
related to any index. In addition, because the natu re of the raw
materials varies so much, the processing requiremen ts and
associated processing costs also vary accordingly. In addition, due
to the very nature of the origin of these raw mater ials waste
streams the generators of these raw materials canno t give any
supply commitments to FFS. Because the raw material s used to
make LO2 are waste streams and vary considerably, t he quality of
the LO2 supplied also varies; and
23.2. In the event of an unanticipated reduction in the production of LO2
23.2. In the event of an unanticipated reduction in the production of LO2
for whatever reason, such that FFS is unable to ful ly fulfil its
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commitments to its existing brick customers, FFS sh all apply any
reduction in volumes of supply on pro rata terms ba sed on the
volume of its LO2 supplies to existing brick custom ers during the
consecutive 12 months period preceding such anticip ated
reduction.
Restraint of trade
24. The Confidentiality Agreement between the mergi ng parties contains a
restraint of trade clause in terms of which the sel ler, Fuelmark, its
shareholders and certain employees of FFS are restr ained from entering
the African market for the processing and blending of IFOs for a period of
five years. The merging parties stated that they view this restraint as being
pro-competitive as FFS will be prepared to make investments in expansion
and technological improvements knowing that it will not face competition
from erstwhile shareholders and employees.
25. The Commission assed the restraint and conclude d that it was both
reasonable and justifiable in the circumstances and necessary to protect
the value of the investment made by the acquiring firms.
26. The Tribunal questioned the merging parties wit h regards to the rationale
for and the scope of the restraint of trade and req uested them to explain
the relevant know-how and intellectual property tha t the acquiring firms
wish to protect.
7 We were satisfied with the answers provided and ha ve no
reason to doubt the Commission’s conclusion concern ing the restraint
being reasonable and justifiable.
Public interest
27. The merging parties confirmed that the proposed merger will not result in
any retrenchments and that employment will not be affected.8
28. The proposed merger raises no other public interest issues.
7 See pages 20 to 22 of the transcript.
8 See pages 8 and 100 of the merger record.
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CONCLUSION
29. We approve the proposed transaction subject to the conditions as per the
attached “Annexure A”.
____________________ 19 April 2013
Andreas Wessels DATE
Mondo Mazwai and Anton Roskam concurring
Tribunal Researcher: Thabo Ngilande
For the merging parties: Werksmans Attorneys
For the Commission: Werner Rysbergen