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[2013] ZACT 111
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Premier Group (Pty) Ltd v Border Star Bakery (Pty) Ltd and Others (017434) [2013] ZACT 111; [2013] 2 CPLR 557 (CT) (4 November 2013)
COMPETITION
TRIBUNAL OF SOUTH AFRICA
Case
No.017434
In
the matter between:
Premier
Group (Pty) Ltd
Primary
Acquiring Firm
and
Border
Star Bakery (Pty) Ltd Border
Star
Bakery (EP) (Pty) Ltd Sikunye
Bakery
(Pty) Ltd Westpat Properties cc
(Collectively
referred to as the “Eastern Cape Bakeries”)
Primary
Target Firms
Reasons
for Decision
Panel :
N Manoim (Presiding Member), A Wessels (Tribunal Member) and M
Mokuena (Tribunal Member)
Heard
on
:
09 October 2013
Decided
on
:
09 October 2013
Reasons
issued on :
04 November 2013
Approval
On
09 October 2013, the Competition Tribunal (‘Tribunal”)
approved the merger between Premier Group (Pty) Ltd (“Premier”)
and Border Star Bakery (Pty) Ltd, Border Star Bakery EP (Pty) Ltd,
Sikunye Bakery (Pty) Ltd, Westpat Properties cc. The reasons
for
approving the proposed transaction follow below.
Parties
to the transaction
[1]
The
primary acquiring firm is Premier, a privately owned company involved
in the milling, selling and distribution and marketing
of branded
maize and flour products, the operation of wholesale bakeries, the
baking, selling and distribution and marketing of
bread for human
consumption to distributors, wholesalers and retailers. Premier’s
primary brands include Iwisa, Snowflake
and Blue Ribbon.
[1]
[2]
The
primary target firms are five independent bakeries situated in the
Eastern Cape. The bakeries through their baking operations
supply
bread throughout the Eastern Cape and a very limited amount in the
southern coast of KwaZulu-Natal (“KZN”).
[2]
The bakeries are situated at East London, Queenstown, King Williams
Town, Port Elizabeth and Mthatha. We will refer to them from
now on
as the Target Firms.
Proposed
transaction and rationale
[3]
Through a series of sale of share
agreements, the proposed transaction will result in Premier acquiring
100% shareholding in each
of the entities which comprise the target
firms. However the transaction was notified as a single indivisible
transaction due to
common controlling shareholders.
[4]
The
proposed transaction will offer Premier an opportunity to effectively
enter the Eastern Cape market, as the Eastern Cape area
is a very
populous area with a number of consumers.
[3]
It will also offer the present shareholders who also manage the
businesses an opportunity to realise their investment.
Relevant
markets and impact on competition
[5]
The proposed transaction results in
horizontal as well as vertical product overlaps.
[6]
The relevant product market is the
market for the production and supply of bread, with the relevant
geographic market being the
Eastern Cape.
Market
share
[7]
Premier does not presently sell bread or
flour in the Eastern Cape. Post merger the merged entity will assume
the market shares
of Target Firms constituting less than 20%, of the
market for the production and supply of bread.
Our
Analysis
[8]
There are two issues that we had
concerns with regarding the proposed transaction. First, would the
merger lead to co-ordinated
effects given a history of established
collusion between major firms in the bread industry. Secondly would
the merger lead to foreclosure
concerns if Premier being a vertically
integrated firm began to self supply flour as an input to the Target
Firms which had pre-merger
relied on local suppliers.
Coordinated
Effects
[9]
Premier used to compete in the Eastern
Cape market until 1998 when it decided to close its bakery in
Mthatha. None of the present
management is aware of the reasons for
the decision to exit although they speculate that the consideration
was that the operation
was not offering a sufficient return at that
time.
[10]In
2006, as a result of a leniency application the Commission commenced
an investigation into collusion in the bread industry
involving
several of the major firms who operated nationally but became
implicated in regional cartels. Amongst the allegations
made by the
Commission were that the firms divided geographic markets and
colluded on prices. This included allegations that some
firms had
exited regional markets in favour of others. There were no
allegations that Premier’s exit from this market at
the time
was the result of an agreement to divide markets. Nevertheless
Premier admitted at the time that its employees had engaged
in
various cartel activities. One of the firms that were also implicated
was Pioneer now the firm with the largest market share
in the Eastern
Cape.
[11]Pioneer
is currently the lessor of one of the Target Firms’ bakery. The
concern was that if Premier takes over the target
firms, and it
inherits a lease with one of its erstwhile cartel members, this might
give Pioneer, qua lessor, informational and
disciplining
opportunities to enforce a cartel agreement, which would make
co-ordination a possibility post merger None of the
target firms were
alleged to have partaken in cartel activities nor do any of them
compete with Pioneer in other regions as does
Premier. Thus the
question is whether the merger makes co-ordination more likely post
merger, given the history of collusion in
this industry, if the
Target Firms are controlled by Premier.
[12]Mr
Hartman from Premier when asked about these issues gave two
satisfactory answers. In the first place Premier is now under
the new
management of the Brait Group which officially took over the
operation of the Premier business in 2011. Brait has, as a
controlling shareholder, taken various steps to ensure that Premier
is not involved in any collusive behaviour in future. These
include
educational programmes and various other training and legal
initiatives to avoid any repetition of anti-competitive conduct
within the Premier group.
[4]
[13]He
went on to say that Premier saw the merger as an opportunity to win
market share from Pioneer in the Eastern Cape. Thus he
emphasised
that the merger would lead to aggressive competition rather than
collusion.
[5]
Nor did he view the lease as giving Pioneer any leverage over them as
the terms of the lease were clear and did not require further
renegotiation. We are satisfied with this explanation.
Foreclosure
Concerns
[14]
The
Target Firms currently receive 70-75 % of their supply from a local
firm, Mr Bread Milling (Pty) Ltd (“Mr Bread”).
Mr Bread
also supplies other bakeries which compete with the target firms.
During the hearing we had an opportunity to hear from
Mr Anthony
Pitts, the general manager of Mr Bread. Three years ago Mr Bread used
to be a vertically- integrated business with its
own bakery known as
Mr Bread Bakery/which was then sold and is currently known as Sikunye
Bakery, one of the Target Firms . Currently
Mr Bread is only involved
in milling.
[6]
[15]
During
the investigation of the merger the Commission had received an
indication of concern from Mr Bread about its future post
merger.
However when it came to the time of the hearing Mr Pitts testified
that foreclosure post merger was unlikely due to geographic
location,
and the re-assurance from the merging parties that they had no
intention of terminating his supply agreement with the
target
firms.
[7]
Mr Pitts submitted that it would not be economically feasible for
Premier to supply wheat flour to the Target firms from its other
mills, which are located outside the Eastern Cape at a lower cost
than he could supply them due to high transport costs.
[8]
Both merging parties supported this view. We are thus persuaded that
it is unlikely that in the short term Premier would self supply
flour
to the target firms.
Public
Interest
[16]
The
Commission submitted that during their investigation they contacted
FAWU which is the Trade Union that represents the majority
of
employees of the Target Firms. FAWU submitted that the relocation of
the Target Firms to new premises post merger will result
in
retrenchments of some of the employees at the Queenstown bakery.
[9]
[17]Mr
Hans Stolp on behalf of the Target Firms submitted during the hearing
that plans to relocate the bakeries had been underway
as far back as
2007 before plans of the proposed transaction had even begun. Mr
Stolp submitted that the building was acquired
in 2007, and engineers
were appointed in 2008, to date, they have been purchasing machinery
and overhauling and putting everything
into place. The reason the
whole process is taking such a long time to finalise is due to
financial constraints.
[10]
Due to the future retrenchments not being merger specific, we need
not consider the issue further.
Conclusion
[18]We
are satisfied that the Merging parties have addressed our concerns
and we accordingly approve the transaction without conditions.
04
November 2013
DATE
Norman
Manoim
Andrews
Wessels and Medi Mokuena concurring.
Tribunal
Researcher: Caroline Sserufusa
For
the merging parties: John Oxenham and Anthony Norton of Nortons Inc
For
the Commission: Mogau Aphane
[1]
See para 14.2 page 358 of the Merger record.
[2]
See para 14.1 page 391 of the Merger record.
[3]
See para 10 page 17 of Transcript of hearing.
[4]
See para 5 page 18 of Transcript of hearing.
[5]
See para 15 page 22 of Transcript of hearing.
[6]
See page 1190 of the Merger record.
[7]
See para 5 page 13 of Transcript of hearing.
[8]
See para 10 page 14 of Transcript of hearing.
[9]
See para 15 page 12 of the Transcript of the hearing.
[10]
See para 25 at page 11-12 of Transcript of hearing.