Brief Summary

Competition — Merger — Conditional approval of merger between Oceana Group Limited and Foodcorp (Pty) Ltd — Merger involving overlap in market for canned pilchards — Competition Commission expressing concerns over substantial lessening of competition — Tribunal approving merger on condition of divestiture of Glenryck brand and associated fishing rights — Rationale for transaction includes acquisition of fishing quota to enhance profit margins.

Comprehensive Summary

Summary of Judgment

1. Introduction

These proceedings concerned an application for reconsideration in terms of section 16(2) of the Competition Act 89 of 1998 of an intermediate merger that had been conditionally approved by the Competition Commission. The reconsideration application was brought to the Competition Tribunal of South Africa and required the Tribunal to determine, on the evidence before it (including evidence not previously before the Commission), whether the merger should be approved and, if so, on what conditions.

The parties were Oceana Group Limited as the primary acquiring firm (and first applicant) and Foodcorp (Proprietary) Limited as the primary target firm (and second applicant), with the Competition Commission as respondent. The notified transaction entailed Oceana acquiring Foodcorp’s fishing business as a going concern, including (relevantly for the dispute) Foodcorp’s activities in small pelagic fish and the downstream sale of canned pilchards under the Glenryck brand, in circumstances where Oceana marketed canned pilchards under the Lucky Star brand.

The procedural history was that the merger was notified to the Commission on 2 August 2013 as an intermediate merger. On 29 October 2013, the Commission approved the merger subject to conditions requiring divestiture of the Glenryck brand together with Foodcorp’s small pelagic fishing rights prior to implementation. On 13 November 2013, the merging parties filed a request for reconsideration with the Tribunal. The Tribunal heard evidence over multiple hearing days and on 15 April 2014 issued an order conditionally approving the merger. These reasons were issued on 11 June 2014.

The general subject-matter of the dispute was whether the merger would likely lead to a substantial lessening or prevention of competition in the canned pilchards value chain, and particularly whether requiring divestiture of the Glenryck trademark alone (as offered by the merging parties) was sufficient, or whether effective competition necessitated divestiture of the Glenryck brand together with the small pelagic fishing rights that supported it.

2. Material Facts

The Tribunal treated as common cause that the relevant portion of the fishing industry is characterised by high barriers to entry, including regulatory barriers arising from the allocation of fishing rights and permits under the Marine Living Resources Act 18 of 1998 and the annual setting of the Total Allowable Catch (TAC) by DAFF. Small pelagic fish (including pilchards) are a constrained and seasonal resource, and the evidence accepted by the Tribunal was that the South African demand for canned pilchards exceeds what can be produced from the local TAC.

It was not disputed that both Oceana and Foodcorp were vertically integrated in pilchards, being active in harvesting, processing, and marketing canned pilchards, and that they competed downstream through their branded products. Oceana’s brand was Lucky Star and Foodcorp’s was Glenryck, both long-established in South Africa. The Tribunal accepted that Lucky Star was the dominant brand and that Glenryck was the second largest branded competitor in the canned pilchards market.

The Tribunal accepted evidence on the relative cost ranking of inputs for firms selling canned pilchards in South Africa. The most desirable input was fish from own quota, which was treated as the cheapest and most secure source of supply. Where local quota was insufficient, firms competed for third party quota (quota held by rights holders who sold their quota to others to harvest or process), and only then relied on more expensive alternatives such as imports (either frozen fish/cutlets for local processing, or imported canned finished product). The Tribunal accepted that reliance on imports was associated with substantially lower margins, added risk (including foreign exchange exposure), and quality compliance burdens.

The Tribunal accepted that Oceana’s pre-merger market position was extremely strong. On the evidence before it, Lucky Star had an estimated market share of 73.1% in canned pilchards, Glenryck had 8.2%, and the next largest vertically integrated rival, Saldanha, had 4.6%. The Tribunal also accepted that Oceana held 15.01% of the South African TAC for small pelagic fish and Foodcorp held 11.2%, such that post-merger Oceana’s rights allocation would rise to 26.2%.

A central factual controversy (addressed by the Tribunal through evaluation of the evidence) concerned whether the Glenryck brand could remain an effective competitor in the downstream canned pilchards market without access to its own quota, by sourcing supply through a mix of third party quota, domestic processors, and imports. The merging parties’ position was that divesting the Glenryck trademark alone would preserve competition because a purchaser could source product from alternative supply channels. The Commission’s position was that Glenryck would become a materially weaker competitor (or potentially exit), because the purchaser would be deprived of the lowest-cost and most secure input source, while the dominant Lucky Star would gain additional low-cost quota.

A further material factual development was the presentation by the merging parties of evidence concerning a proposed offer by Bidfish to acquire the Glenryck brand without the associated quota (the “Bidfish agreement”). The Tribunal accepted that this proposal had not been notified for competition assessment and that Bidfish was not a party to the proceedings. The Tribunal nevertheless considered the evidence of Bidfish’s representative to the extent it bore on the practical question whether Glenryck could be sustained as a competitive brand absent quota, and accepted that Bidfish itself would not be able to maintain Glenryck’s volumes solely from its own quota and would still need to rely on more expensive third party quota or imports.

On public interest facts, the Tribunal accepted that Foodcorp’s fishing business employed about 1000 employees, with 590 permanent jobs at Laaiplek and Port Elizabeth. However, the Tribunal did not accept that the evidence established an inevitability of closure or job losses if the merger were not approved on the merging parties’ preferred terms. It also accepted evidence that other potential purchasers had expressed interest in acquiring the package, including parties with strong empowerment credentials, undermining the contention that the specific transaction structure was necessary to secure transformation outcomes.

3. Legal Issues

The central legal question was whether the proposed transaction was likely to result in a substantial lessening or prevention of competition in the relevant market, and if so whether the lessening could be remedied through appropriate conditions, specifically whether the Tribunal should require divestiture of the Glenryck brand together with small pelagic fishing rights, rather than divestiture of the brand alone.

A closely related question concerned market definition and the appropriate lens for analysis, namely whether the relevant market should be treated as a narrow vertically integrated market for canned pilchards spanning procurement, processing, and marketing, or whether the presence of house brands and non-integrated players required a different market characterisation. This entailed an application of law to fact, informed by the Tribunal’s evaluation of competitive dynamics and constraints.

The Tribunal also addressed procedural and evidentiary matters in reconsideration proceedings, including the role of “onus” and how new evidence is treated in reconsideration. While the merging parties contended that the Commission bore the onus and the Commission disputed this, the Tribunal treated reconsideration as an appeal in the wider sense and approached the matter in a way that did not depend on resolving an abstract onus debate, concluding in any event that the Commission’s case was established on the evidence.

Finally, the Tribunal had to consider whether any public interest factors justified a different outcome from that indicated by the competition analysis, particularly regarding employment and transformation, in the context of the industry’s concurrent regulation by DAFF and the competition authorities.

4. Court’s Reasoning

The Tribunal approached the reconsideration under section 16(2) on the basis that it was entitled to consider the Commission’s record and additional evidence led before it, and it reiterated its prior approach that reconsideration proceedings are “appeals in the wider sense” rather than being limited to the Commission’s original evidentiary record. It considered that an issue-by-issue evidential burden may arise, and that reliance on a rigid legal onus model may be undesirable given the Tribunal’s inquisitorial role. It nonetheless stated that, even if the Commission were assumed to carry an onus, the Commission had met it.

On market definition, the Tribunal rejected the merging parties’ attempt, during the proceedings, to retreat from earlier characterisations of the market as vertically integrated. It reasoned that the evidence showed that Oceana and Foodcorp were not merely quota traders but firms engaged across the value chain, ultimately competing in the downstream branded canned pilchards market, and that their holding of quota was central because it improved margins and security of supply in that downstream market. It treated the inclusion of various house brands as a basis for changing the market definition as unpersuasive, holding that house brands were not a single competitor, that they were housed within large retail businesses not dependent on pilchards as a core margin driver, and that the merging parties themselves treated Lucky Star, Glenryck, and Saldanha as the closest competitive set. On that basis, the Tribunal accepted a narrow vertically integrated market framing.

The Tribunal’s core competitive reasoning was that own quota is the lowest-cost and most secure input for canned pilchards, and that South Africa’s demand exceeds local TAC, causing firms to compete intensely for limited supplies of local fish and third party quota. It found that if Oceana acquired Foodcorp’s small pelagic fishing rights, Oceana would gain further access to the cheapest input source and improved margins, while the Glenryck brand—if sold without quota—would be forced to rely on higher-cost sources such as third party quota and imports. The Tribunal considered the merging parties’ contention that Oceana merely sought “import substitution” and would not grow market share to be implausible as a stable competition constraint, and it treated evidence of Lucky Star’s existing pricing premium and the established dominance of Lucky Star as reinforcing the concern that the transaction would entrench dominance.

In assessing the proposed alternatives for Glenryck, the Tribunal accepted evidence that imports are materially more expensive than local own-quota inputs and are associated with additional compliance and foreign exchange risks. It considered that while Oceana had a sophisticated procurement network and could manage import-related risk (including through internal hedging), a standalone brand owner without quota and processing would be in a far weaker position. It inferred that the Glenryck brand would be unable to match pre-merger competitive intensity against Lucky Star when deprived of its own quota and forced to source supply on costlier terms.

The Tribunal treated the “third party quota” market as constrained by scarcity and contract structures. It did not accept the characterisation of that market as “contestable” merely because quota holders might have some switching ability. It reasoned that relationships and contractual commitments mattered, switching was not frequent, and the overall supply of fish was fixed by TAC. Critically, it reasoned that a post-merger Glenryck brand owner without quota and processing would have less margin to bid for third party quota against vertically integrated and more profitable rivals, especially the enlarged Oceana. This fed into the conclusion that Glenryck would be a weaker competitive constraint post-merger if divorced from quota.

The Tribunal addressed the Bidfish offer by distinguishing between the fact that a buyer might be willing to purchase the Glenryck brand without quota and the separate question whether Glenryck would remain an effective competitor thereafter. It considered the Bidfish proposal not determinative because it had not been notified or evaluated by the Commission, Bidfish was not a party to the proceedings, and the offer had not been tendered as a binding, enforceable component of the conditions for merger approval. It further reasoned that the substance of Mr Arnold’s evidence tended to support the Commission’s concern, because Bidfish would still need to secure additional fish beyond its own quota to maintain Glenryck volumes and because imports were not viewed as an attractive margin-preserving option.

On barriers to entry and expansion, the Tribunal accepted evidence that increased quota concentration in Oceana’s hands would likely raise barriers for smaller and empowerment-oriented entrants and for existing rivals. It treated the counterfactual as being that Foodcorp’s quota had become available for redistribution and that allocating it to the largest incumbent could exacerbate concentration and limit competitive development, especially given the way rights renewals may tend to preserve incumbents’ positions due to sunk investments across the value chain.

Regarding alleged procurement effects, the Tribunal considered two potential theories. It found insufficient evidence to support a conclusion that Oceana would drive down prices paid to third party quota holders through increased bargaining power. However, it treated as more plausible the concern that improved margins from increased own quota would enable Oceana to outbid rivals for third party quota, creating or worsening a “margin squeeze” for competitors, although it noted that evidence on pricing dynamics was muted and potentially complicated by previous arrangements under investigation for collusion.

On public interest, the Tribunal rejected the proposition that approval on Oceana’s preferred terms was necessary to prevent job losses at Laaiplek. It held there was no evidence that Foodcorp was a failing firm and accepted that other purchasers remained interested in acquiring Foodcorp’s fishing business, which undermined the contention that employment depended on approval of the merger without divesting quota. On transformation, it treated DAFF’s empowerment concerns as capable of being satisfied by alternative transactions with other buyers, including those with strong empowerment credentials, and concluded that transformation did not justify approving a merger structure likely to lessen competition.

Drawing these strands together, the Tribunal concluded that the merger, if implemented without divesting Foodcorp’s small pelagic fishing rights alongside the Glenryck brand, was likely to remove or weaken an effective competitor, entrench Lucky Star’s already dominant position, and raise barriers to entry and expansion. It therefore conditionally approved the merger on terms requiring divestiture of both the Glenryck brand and Foodcorp’s small pelagic fishing rights.

5. Outcome and Relief

The Tribunal conditionally approved the intermediate merger between Oceana and Foodcorp. It required, as a condition to approval, that the Glenryck brand (trademark) and Foodcorp’s fishing rights in small pelagic fish be divested.

The Tribunal did not set out a costs order in the reasons provided. The operative conditions were contained in Annexure A to the reasons (not included in the provided text), and the Tribunal’s conclusion was that no public interest grounds justified an outcome different from the conditional approval requiring divestiture of both the brand and the associated small pelagic fishing rights.

Cases Cited

Primedia Limited and Others v Competition Commission [2007] 1 CPLR 113 (CT).

Legislation Cited

Competition Act 89 of 1998.

Marine Living Resources Act 18 of 1998.

Rules of Court Cited

No specific rules of court were cited in the provided text of the judgment.

Held

The Tribunal held that the relevant competitive assessment concerned a narrow vertically integrated market in which firms compete from access to quota and harvesting through processing to the downstream marketing and sale of branded canned pilchards. It held that, given the scarcity of local small pelagic fish constrained by TAC and the cost and risk disadvantages of imports and third party quota dependence, the Glenryck brand would likely become a materially weaker competitor (or potentially exit) if divested without its supporting small pelagic fishing rights, while Lucky Star’s dominance would be entrenched by gaining Foodcorp’s quota.

It further held that the existence of a proposed offer by Bidfish to purchase Glenryck without quota did not neutralise the Commission’s concerns, because the Bidfish proposal was not before the Tribunal as a notified, enforceable transaction and, in substance, did not demonstrate that Glenryck would remain an effective competitive constraint absent quota. On the evidence, the Tribunal concluded that the merger would likely lead to a substantial lessening of competition unless the Glenryck brand and the small pelagic fishing rights were divested together. It accordingly approved the merger subject to that divestiture condition.

LEGAL PRINCIPLES

The Tribunal applied the principle that merger analysis requires assessing whether a transaction is likely to result in a substantial lessening or prevention of competition, including by removing or weakening effective competitive constraints and by increasing barriers to entry or expansion, within a properly defined relevant market informed by competitive realities.

It applied the principle that where competition occurs across a value chain and firms are vertically integrated, the relevant market and competitive effects may properly be assessed in a manner that reflects the integrated nature of rivalry, particularly where upstream inputs (such as quota-constrained fish supply) materially determine downstream competitive performance (such as pricing, margins, and the ability to sustain branded competition).

In the context of reconsideration under section 16(2), the Tribunal applied the approach that reconsideration is an “appeal in the wider sense” in which the Tribunal is not confined to the Commission record and may consider additional evidence led before it, and that questions of evidential burden may arise on an issue-by-issue basis rather than through a rigid adversarial conception of onus.

The Tribunal also applied the principle that proposed third-party commercial arrangements advanced during merger proceedings (such as a prospective sale of a brand) do not, without being notified, evaluated, and made binding and enforceable within the merger approval framework, necessarily resolve competition concerns arising from the notified transaction.

Oceana Group Ltd and Another v Competition Commission; In Re: Oceana Group Ltd v Foodcorp (Pty) Ltd (018101) [2014] ZACT 35; [2014] 1 CPLR 17 (CT) (11 June 2014)