Brief Summary

Competition — Merger Approval — Acquisition of Cartons and Labels Business by Bucket Full (Pty) Ltd — Competition Tribunal conditionally approves the acquisition, finding that the merger is unlikely to substantially lessen competition in the relevant markets despite horizontal overlaps in the manufacturing of lithographic printed GFCs, gravure printed cigarette cartons, and wet glue paper beer labels. The Tribunal concludes that significant countervailing power exists among customers, which mitigates potential unilateral effects on pricing and competition.

Comprehensive Summary

Summary of Judgment

1. Introduction

These proceedings concerned an intermediate/large merger (as applicable under the Competition Act framework) before the Competition Tribunal of South Africa, in which the Tribunal was required to decide whether to approve a proposed acquisition and, if so, on what conditions.

The primary acquiring firm was Bucket Full (Pty) Ltd (“Bucket Full”), ultimately part of the Caxton and CTP Publishers and Printers Limited group structure (through CTP Limited and CAT Publishers and Printers Limited). The primary target firm was the Cartons and Labels Business, a division within Nampak Products Limited (“Nampak Products”), itself part of the broader Nampak group.

The matter was heard on 2 July 2014. The Tribunal issued an order on 9 July 2014 conditionally approving the transaction, and later furnished reasons on 6 August 2014. The decision addressed both competition effects (arising from horizontal overlaps in specific packaging and labelling markets) and public interest considerations, with particular focus on employment and retrenchments allegedly linked to the merger.

The general subject-matter of the dispute was whether the proposed consolidation in the cartons, cigarette cartons, and beer labels segments would substantially prevent or lessen competition, and whether conditions were required—especially to address concerns about potential merger-related job losses.

2. Material Facts

Bucket Full proposed to acquire the Cartons and Labels Business as a going concern, resulting in sole control by Bucket Full post-merger. The acquiring group (the CAT/CTP structure) conducted a range of publishing, printing, and packaging activities, and the target business formed part of Nampak’s packaging operations.

The Tribunal accepted that the transaction produced horizontal overlaps in three product areas identified as relevant to the decision: lithographic printed general folding cartons (GFCs), gravure printed cigarette cartons, and long-run gravure wet glue paper beer labels. The relevant geographic market was treated as national, subject to the presence of potential competition from imports in each of the three markets.

In the GFC market, the merged entity’s market share was stated to be approximately 40.1%, with an accretion of 34.1% to the acquiring group’s pre-merger share. Competitors with material shares included Golden Era, Shave & Gibson, Transpaco, Triumph, Keypack, and smaller players. The Commission’s assessment relied, among other things, on the existence of competitors with spare capacity and customers’ ability to switch.

In the cigarette carton market, the merged entity’s share was stated to be approximately 77.5%, in a market described as highly concentrated with only two other competitors (Rotoprint and Golden Era). The Commission’s assessment relied heavily on the position of BAT SA as the principal customer, including its procurement practices (benchmarking, global tenders, and cost scrutiny) and an existing long-term supply agreement referenced as running until 2016.

In the wet glue beer labels market, the merged entity’s share was stated to be approximately 63%, with other competitors including Spear and Topfer (with Topfer’s market share not quantified in the record due to missing sales figures). The Commission’s assessment relied materially on SAB as a significant customer, its allocation decisions across suppliers, limited importing (stated as 19% and constrained from exceeding 20% for reasons including BBBEE codes and foreign exchange risk), and the capacity and expansion options of Spear.

The public interest dispute centred on employment effects. It was common cause that retrenchments were contemplated, but the parties and the Commission differed on the extent to which retrenchments were merger-specific. The Cartons and Labels Business indicated an intention to retrench 151 employees irrespective of the merger due to declining profitability. CTP indicated it would need to retrench 122 employees, attributing this to the poor financial performance of the target business, duplication from facility consolidation, and investment in more efficient equipment, while contending these retrenchments were not merger-specific. The Commission contended that there was sufficient evidence that claimed non-merger retrenchments were in fact merger-related, referencing internal documentation and negotiation-stage communications.

A further factual dispute addressed how many retrenchments, if any, should be treated as non-merger related, and the appropriate duration of any moratorium on merger-related retrenchments.

3. Legal Issues

The central legal questions concerned the application of merger control standards to the transaction on two dimensions.

First, the Tribunal had to determine, on the competition assessment, whether the merger was likely to result in unilateral effects or co-ordinated effects in the relevant markets, given the post-merger market shares and concentration, and considering constraints such as countervailing buyer power, spare capacity, switching options, and import competition. This component involved the application of competition law principles to largely economic facts and forecasts.

Second, the Tribunal had to determine whether public interest conditions were warranted in relation to employment, including (i) whether alleged retrenchments were sufficiently shown to be merger-specific, (ii) whether the Tribunal could or should address retrenchments characterised as non-merger related, and (iii) what duration of moratorium, if any, was justified on the evidentiary record. This involved a mixture of factual assessment (what retrenchments were linked to the merger) and evaluative judgment (the balancing and appropriateness of conditions), including consideration of the Commission’s evidentiary burden in motivating conditions.

4. Court’s Reasoning

On the competition assessment, the Tribunal’s reasons reflected acceptance of the Commission’s view that the transaction was unlikely to raise substantial competition concerns in the three overlapping markets, notwithstanding high post-merger shares in certain segments.

In the GFC market, the reasoning turned on the presence of multiple competitors and the conclusion that competitors had sufficient spare capacity to respond should the merged entity attempt a price increase. The assessment also relied on differentiated customer types, with large multinational and large national customers exerting countervailing power through tendering and international benchmarking that could attract bids beyond domestic suppliers, while smaller and medium-sized customers were considered able to switch to alternative suppliers. On co-ordination, the Commission’s analysis (accepted in substance) treated significant asymmetries among firms, customers’ monitoring abilities, and the relative ease of entry at small scale as factors making co-ordinated effects unlikely.

In the cigarette carton market, despite the very high post-merger share and concentration, the Commission’s reasoning (reflected in the Tribunal’s account) emphasised that BAT SA accounted for the overwhelming proportion of sales for both merging firms and exercised substantial buyer power. The Tribunal’s reasons recorded features of BAT SA’s procurement model—global tenders, benchmarking, scrutiny of cost breakdowns, and BAT SA’s involvement in negotiating raw material input pricing directly—as constituting constraints on the merged entity’s ability to raise prices. The presence of potential international sourcing was treated as an additional discipline. On that basis, unilateral effects were assessed as unlikely.

In the wet glue beer labels market, the Tribunal’s reasons similarly proceeded from the view that buyer power and supply alternatives constrained anti-competitive outcomes. While SAB had raised a concern about unilateral effects, the Commission disagreed, pointing to SAB’s procurement leverage, partial importation, and the ability of Spear—the other local supplier—to expand output through identifiable operational changes or investment. The Tribunal’s reasons recorded the Commission’s conclusion that SAB could switch some demand to imports and Spear in response to price increases, and that co-ordinated effects were unlikely given the market structure and asymmetry.

On public interest and employment, the Tribunal identified three related questions in dispute: whether retrenchments were merger-related; the number of retrenchments that should be treated as non-merger specific; and the appropriate period for a moratorium.

The Tribunal recorded the Commission’s position that evidence supported the conclusion that retrenchments advanced as non-merger specific were in fact merger-related, including internal documentation and negotiation communications. It also recorded the Commission’s concern about the significance of alleged merger-specific retrenchments, particularly affecting semi- and unskilled employees in a declining industry. However, the Tribunal ultimately stated that the Commission was unable to demonstrate that retrenchments were merger-specific on the evidence presented, characterising the emails and correspondence relied upon as insufficient to prove that retrenchments were decided as a result of the merger.

Regarding the attempted delineation of non-merger related retrenchments (the Commission contending for a smaller number than that advanced by the merging parties), the Tribunal took the view that the hearing did not have jurisdiction to address non-merger related retrenchments as such. In consequence, it decided that a proposed condition (clause 3.2 of annexure “A”), which purported to exclude a specified number of non-management employees who would allegedly have been retrenched irrespective of the merger, should be deleted. The Tribunal’s approach focused conditions on retrenchments “as a result of” the merger, rather than on retrenchments said to arise independently of it.

On the moratorium period, the Tribunal noted the Commission’s submission that a three-year moratorium was required and that a two-year period would be ineffective given implementation timelines and uncertainty regarding eventual retrenchment impacts. The merging parties resisted a longer period, contending that an extension increased risk to the transaction and delayed cost savings and rationalisation; they offered a two-year period as a compromise and referred to annual reporting obligations (and a suggested amendment to require notice to the Commission when engaging in a section 189 process under labour legislation).

In considering these submissions, the Tribunal referred to the balancing exercise described in the Competition Appeal Court discussion in the Walmart/Massmart matter, which framed the tension between efficiencies and consumer benefits on the one hand and employee detriment on the other, and emphasised that the Commission must be able to persuade the Tribunal that a proposed condition is necessary and supported by evidence. Applying that approach, the Tribunal concluded that the Commission had failed to provide sufficient evidence to justify a three-year moratorium and had not discharged the onus for that more extensive remedy. It accepted that a two-year moratorium was sufficient, notwithstanding the merging parties’ position that no moratorium was required.

5. Outcome and Relief

The Tribunal approved the proposed acquisition subject to conditions. The principal operative condition recorded in the conclusion was that the merged entity shall not retrench any employees for a period of two years from the effective date as a result of the proposed transaction.

The Tribunal also determined, in relation to the formulation of conditions, that clause 3.2 of the conditions in annexure “A” (which attempted to carve out specified non-merger retrenchments) should be deleted, on the basis that the hearing did not have jurisdiction to address non-merger related retrenchments and should instead focus on merger-resultant retrenchments.

No costs order is recorded in the reasons as provided.

Cases Cited

Walmart and Massmart (110/CAC/Jun11 and 111/CAC/Jun11).

Metropolitan and Momentum (41/LM/Jul10 and 58/CAC/DEC05).

Legislation Cited

Labour Relations Act (reference to a section 189 process and to section 213).

Rules of Court Cited

No rules of court were cited in the reasons as provided.

Held

The Competition Tribunal conditionally approved Bucket Full (Pty) Ltd’s acquisition of the Cartons and Labels Business of Nampak Products Limited. The Tribunal accepted that the transaction created horizontal overlaps in the manufacture of lithographic printed general folding cartons, gravure printed cigarette cartons, and long-run gravure wet glue paper beer labels, but concluded—on the Commission’s analysis recorded in the decision—that unilateral and co-ordinated competitive harm was unlikely due to constraints including buyer power, available capacity, switching options, and import alternatives.

On public interest, the Tribunal declined to adjudicate or condition non-merger related retrenchments as such and removed a proposed carve-out clause aimed at identifying such retrenchments. It imposed a two-year moratorium on retrenchments as a result of the merger, finding that the Commission had not provided sufficient evidence to justify a longer, three-year moratorium.

LEGAL PRINCIPLES

The decision applied the principle that merger assessment requires identification of relevant product and geographic markets and an evaluation of whether the transaction is likely to lead to unilateral or co-ordinated effects, taking into account market concentration as well as competitive constraints evidenced on the record, including countervailing buyer power, rivals’ spare capacity, customers’ switching ability, and the role of imports as potential competitive discipline.

In the public interest enquiry relating to employment, the reasoning reflected that conditions should be directed at addressing merger-related effects, and that the Tribunal approached its role as not extending to determining or regulating retrenchments characterised as non-merger related within the merger hearing. The Tribunal further proceeded on the basis, consistent with the referenced appellate guidance, that the onus lies on the Commission to provide sufficient evidentiary support to motivate the necessity and scope of a proposed remedy (such as the length of a retrenchment moratorium), and that the setting of such a moratorium entails an evaluative balancing of economic and employment considerations on the facts placed before the Tribunal.

Bucket Full (Pty) Ltd v Cartons And Labels Business of Nampak Products Ltd (018457) [2014] ZACT 52 (6 August 2014)