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[2014] ZACT 98
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Bucket Full (Pty) Ltd v Cartons and Labels Business of Nampak Products Limited (018457) [2014] ZACT 98; [2014] 2 CPLR 473 (CT) (6 August 2014)
COMPETITION
TRIBUNAL OF SOUTH AFRICA
Case
No: 018457
In the matter
between:
BUCKET FULL (PTY)
LTD
............................................................................
Primary
Acquiring Firm
And
CARTONS AND
LABELS BUSINESS
OF NAIVIPAK
PRODUCTS
LIMITED
..............................................................
Primary
Target Firm
Panel: Dr I Madima
(Presiding Member)
: Ms A Ndoni
(Tribunal Member)
: Prof F Tregenna
(Tribunal Member)
Heard on: 2 July
2014
Order Issued on: 9
July 2014
Reasons Issued on: 6
August 2014
Reasons for
Decision
Approval
[1] On 9 July 2014,
The Competition Tribunal (“Tribunal”) conditionally
approved the acquisition by Bucket Full (Pty)
Ltd for all the issued
shares in Cartons and Labels Business.
[2] The reasons for
approving the proposed transaction follow hereunder.
Parties to the
transaction
[3]
The primary acquiring firm is Bucket Full (Pty) Ltd (“Bucket
Full”),
a
wholly owned subsidiary of CTP Limited
("CTP”).
CTP
is in turn a wholly owned subsidiary of CAT Publishers and Printers
Limited (“CAT Publishers”). CAT Publishers is
wholly
owned by Caxton and CTP Publishers and Printers Limited (“
CAT
’).
[4]
CAT is a publically traded company and listed on the Johannesburg
Securities Exchange
(“JSE”),
it
is solely controlled by Mr Moolman through his shareholdings in other
companies. It is through these companies that Mr Moolman
can vote a
majority at CAT and appoint or veto the appointment of the majority
of the directors at the firm. Mr Moolman therefore
exercises sole
control over CAT. Major shareholders of CAT include; Caxton Limited,
Publically held (including directors and management),
Element One
Limited and Allan Gray (Pty) Ltd.
[5]
The primary target firm is Cartons and Labels Business, a division
within Nampak Products Limited (“Nampak Products”).
Nampak Products is a publicly traded company which is listed on the
JSE.
1
Nampak Products is a wholly owned subsidiary of Nampak Limited
("Nampak”) which is the parent company of the Nampak
Group. The Cartons and Labels Business does not directly or
indirectly control any other firm. Major shareholders of Nampak
include;
Allan Gray Investment Council, Public Investment Commission,
Fidelity International Limited, Sanlam Investment Management, Red
Coral, Black Management Trust, Abax Investments, The Vanguard Group
Inc., Capital Group Companies and Stanlib Asset Management.
Proposed
Transaction
[6] Bucket Full will
acquire the Cartons and Labels Business as a going concern.
Post-merger, the Cartons and Labels Business will
be solely
controlled by Bucket Full.
Rationale
[7] There has been a
general decline in the cartoons and labels industry in addition,
operations and pricing pressures have further
forced a number of
industry players to consolidate their operations or radically
rationalise operations- The merging parties have
also been affected
by declines in business; therefore, electing to consolidate their
companies. The CAT Group views the Carton
and Labels Business as
complementary to its current packaging business which will grow the
CAT Group’s geographic presence.
The consolidation will also
enable the CAT Group to leverage its expertise and experience in the
paper and board market to achieve
economies of scale and thus realise
efficiencies within the Cartons and Labels Business.
[8] The acquisition
is also a critical part of the CAT Group’s diversification
strategy from its traditional printed media
business. This will
ensure long-term sustainability and growth for the CAT Group and this
affords it an opportunity to re-invest
the proceeds in other
developments. CAT intends to invest in the combined packaging
businesses to ensure that all operations are
properly equipped with
the latest technology to ensure the sustainability of these
businesses.
[9] Similarly for
Cartons and Labels Business, the industry is in a mature and
declining market vulnerable to imports from low cost
trading nations.
Cartons and Labels Business requires a broader industry consolidation
as the business has been ailing for a number
of years. Cartons and
Labels business’ major customers are global multi-nationals.
Numerous restructuring initiatives have
been implemented in the past
but due to on-going demand, Nampak Products has decided to dispose of
this business to enable consolidation
and to create economies of
scale required to remain globally competitive and sustainable. Nampak
Products is also required to commit
significant capital into its
future investments in Africa.
Relevant Market
and Impact on Competition
[10] The CAT Group
is a publisher and printer of books, magazines and newspapers for
itself and on behalf of third parties. It is
a commercial printer and
manufactures a range of packaging products and labels. GAT Group’s
business activities can be divided
into; publishing, printing,
distribution, advertising, ink importation and manufacturing, optical
disk replication, digital publishing,
stationery and packaging and
labels. Relevant for this transaction are the following business
activities:
General
Folding Cartons ("GFGs”)
Cigarette
Cartons
Wet
glue paper beer labels
[11] Nampak
manufactures a diverse range of metal, glass, paper and plastic
packaging products. The manufactured products include;
lithographic
printed GFCs, gravure printed cigarette cartons, gravure printed
paper beer labels, cigarette cork tipping material
and lithographic
laminated cartons.
[12] The proposed
transaction does result in horizontal overlaps in three product
markets. The first is in the market of manufacturing
lithographic
printed GFCs. GFCs are predominantly used in the Fast-Moving Consumer
Goods (“FMCG”) sector by suppliers
to package a range of
products such as food packaging, detergents, beverages, confectionary
and household products. The second
is in the market of gravure
printed cigarette cartons which are only used in the tobacco industry
and the third is in the market
of long-run gravure wet glue paper
beer labels.
[13] The relevant
geographic market is national with potential competition from imports
in the, (i) market of manufacturing lithographic
printed GFCs, (ii)
the market for gravure printed cigarette cartons; and (iii) the
market for wet glue paper beer labels.
GFC market
[14] The merged
entity will have a market share of approximately 40.1%, this
represents a 34.1% accretion for CTP’s market
share. The market
shares indicate that the Cartons and Labels Business has lost a 14%
market share in the last 5 years to competitors
other than CTP. Other
competitors in the market include; Golden Era which has a market
share of 36%, Shave & Gibson 13.8%,
Transpaco 5.4%, Triumph
4.2% and Keypack 0.5%. The Commission is of the view that there are a
number of smaller players in the
market such as Propoint; Masterpack
and Magnum and an estimated 10% market share belongs to these small
players. It must be noted
that competitors have sufficient spare
capacity to meet an increase in demand, should the merged entity
decide to increase the
price of GFCs.
[15] A distinction
must be drawn between multi-national and large-national customers on
the one hand and small and medium-sized
customers on the other hand.
These are all customers of the merging parties. Each of these
customers has varying degrees of countervailing
power, including,
multinationals using tenders for their regional requirements which
attracts bids from international suppliers.
This results in these
customers being able to play these suppliers against one another.
They use international benchmarking practices
in order to negotiate
lower prices from the merging parties. Whilst small and medium sized
national firms indicate that there are
sufficient alternative
suppliers, which they can switch to in the event of a price increase
by the merging parties. The Commission
is therefore of the view that
the merged entity is unlikely to unilaterally increase the prices of
GFCs.
[16] The
co-ordinated effects are unlikely to facilitate or create
co-ordination amongst GFC suppliers as there is significant asymmetry
between the market shares and between the market shares of GFC
competitors. Customers have countervailing power which reduces the
ability for suppliers to co-ordinate their competitive behaviour, as
customers are able to monitor and interrogate costs and price
increases. The barriers to entry on a small scale are relatively low
and there are no regulatory barriers, evidence suggests that
small
scale entries are able to grow their business and compete with
incumbent firms. New and second hand equipment is also readily
available. Unlike barriers to entry at a larger scale which is much
higher and significant capital investment is required.
Cigarette
Carton market
[17] The merged
entity will have a market share of approximately 77.5%, CTP has a
market share of 14.3% and Nampak has a market
share of 63.2%. The
proposed transaction will result in CTP being the dominant competitor
in the market. This is a highly concentrated
market with only 2 other
competitors namely, Rotoprint which has a market share of 17.1% and
Golden Era which has a market share
of 5.4%. Despite this the
Commission still considers the transaction unlikely to raise
competition concerns as the large customers
of the merging parties
have countervailing power.
[18] BAT SA, the
merging parties largest customer accounts for 96% and 86% sales
respectively for CTP and Nampak. The balance of
sales is acquired by
BAT Kenya and BAT Nigeria. BAT SA uses international benchmarking
exercises and global tenders in order to
compare the prices of
different suppliers. The Commission Is of the view that the above
conduct is a legitinriate threat and is
likely to constrain the
merged entities. BAT SA is not concerned about the proposed merger;
it has a long term supply agreement
in place until 2016 relating to
the pricing and quality supply from the merged entity.
[19] The Commission
is also of the view that BAT SA has additional countervailing power
which includes; (i) BAT SA suppliers are
required to provide a cost
breakdown, (ii) BAT SA manages and negotiates the price of raw input
material which is supplied to the
merging parties directly with the
raw material suppliers, and (iii) BAT SA indicated that it can
procure cigarette cartons from
international suppliers. The
Commission concluded that the proposed transaction is unlikely to
result in unilateral effects.
Wet glue beer
labels market
[20]
The merged entity will have a market share of approximately 63%, CTP
has a market share of 43% and Nampak has a market share
of 19%. The
proposed transaction will result in CTP being the dominant competitor
in the market. This market is also highly concentrated
with only 2
other competitors, Spear with a market share of Topfer.
2
[21] SAB is also a
significant customer to both the merging parties, accounting for 78%
sales for CTP and 89% for Nampak. SAB controls
the market share
position of all the suppliers by deciding how much of their purchases
to allocate to each supplier. SAB imports
19% of its wet glue paper
beer labels and has indicated that it is constrained from importing
more than 20% due to BBBEE codes
and the foreign exchange risk. SAB
has raised a concern that the proposed merger is likely to result in
unilateral effect, however,
the Commission disagrees as SAB has
sufficient alternative options for the supply of wet glue paper beer
labels and it also exercises
countervailing power.
[22] Spear is the
only other local SA supplier of wet glue paper beer labels and has
excess capacity of approximately %. It has
also indicating that it
can easily increase its total capacity in one of three ways; firstly,
by increasing their current shift
from secondly by adding a third
finishing line at and thirdly by investing in Spear also indicated
that it can reallocate unused
capacity that was originally allocated
to SAB to its other customers if demand from other customers
increases.
[23] NBL is the only
other common customer between the merged entities. It has raised no
concerns as it can make use of alternative
labelling methods
(self-adhesive labels) and other wet glue paper beer label suppliers.
[24] According to
the Commission SAB can switch some of its demand to imports and Spear
to discipline the merged entity in the event
of uncompetitive price
increases. The Commission concludes that SAB appears to have
alternative options of wet glue beer label
supply for its most
popular beer brands. It is also satisfied that the procurement
methods of SAB show that it has countervailing
power which is likely
to disrupt any anti-competitive behaviour that may be caused by the
merged entities. The Commission is of
the view that co-ordinated
effects are unlikely to disrupt asymmetry in the market shares of the
merged entity and its suppliers.
Public Interest
[25] The are a
number of issues relating to employment; the first is whether the
retrenchments are merger related, the second is
the actual number of
the non-merger specific employment retrenchments, and the last issue
is how many years the moratorium should
be in place for. The merging
parties called the following witnesses to testify in this regard: Mr
Morris and Mr Holden.
Employment issues
[26] The Cartons and
Labels Business has indicated that it intends retrenching 151
employees irrespective of the merger due to the
current declining
profitability, CTR submits that it would need to retrench 122
employees due to poor financial performance of
the target firm,
duplication of employment positions resulting from a consolidation of
manufacturing facilities and investment
in more efficient equipment.
The merging parties claim these retrenchments are not merger specific
and are necessary in order to
lower the employee costs of the target
firm in order to become globally competitive and as efficient as its
rivals.
[27] The Commission
is of the view that there is sufficient evidence to support the view
that all of the claimed non-merger specific
retrenchments are in fact
as a result of the merger. In support of this view the Commission
referred to internal documents reflecting
that the target company
prepared budgets for retrenchments and e-mail correspondence between
the merging parties at negotiation
stage showing that the acquiring
firm was not willing to proceed on the basis of the high employment
costs at the target firm and
had planned to make significant
retrenchments.
[28] The Commission
finds that the 115 merger specific retrenchments are significant and
are of semi or unskilled employees. This
poses a problem as there is
a general decline in the cartons and labels industry. It is therefore
unlikely that these employees
will find alternative employment in the
short term. Thus the merger specific retrenchments are substantial
and are of concern.
[29] The Commission
also finds that the parties could not provide evidence showing that
they would be in a worse competitive position
should they not lower
their cost through retrenchments.
[30] The Commission
was unable to demonstrate that the retrenchments were merger
specific. The evidence produced by the Commission
such as emails and
correspondence was not sufficient to prove that the retrenchments
were decided as the result of the merger.
Non-merger
related retrenchments
[31] The Commission
is of the view that only 66 employees should be non-merger specific
retrenchments; it asserts that the number
provided by the merging
parties of 88 employees is incorrect and calculated erroneously. The
Commission relies on documents received
from the merging parties to
reach the conclusion that any other retrenchments would be related to
the merger. It highlights that
CTP went into the negotiations with
Nampak knowing that the size of the business of the target firm was
not going to work and retrenchments
would need to occur.
[32] According to
the Commission, CTP would be compensated for the retrenched
employees. The merging parties dispute the allegations
made by the
Commission. Nampak indicated that the division had made substantial
losses in 2013 because of the weak economy and
as a result one of the
initiatives identified by management in a decision reached in
May/June 2013 was retrenchment. These retrenchments
are not related
to the proposed merger.
[33] Mr Morris, the
group executive at Nampak responsible for a portfolio of their
divisions indicated that the 88 employee retrenchments
were
non-merger specific and a decision was taken before discussions of
the merger took place.
[34]
After hearing numerous submissions from both parties the Tribunal was
of the view that clause 3.2 of the conditions in annexure
“A”
should be deleted which reads,
"Clause
3.
1
excludes the retrenchment of 66 Non-Management Employees, who would
have been retrenched by the Cartons and Label Business irrespective
of the Merger”.
It
was of the view that the hearing does not have jurisdiction to
address non-merger related retrenchments and the parties should
rather address any retrenchments that will result from the merger if
approved.
The Moratorium
Commission's view
[35] The Commission
is of the view that a 3 year moratorium should be imposed on the
conditions. They contend that a 2 year moratorium
period is academic,
in the sense that the time that it takes to implement the merger can
be significant and the retrenchments or
the moratorium then for a
period of 2 years becomes insignificant, it is not sufficiently long
enough to protect the employees.
[36] The Commission
has also indicated that the 3 year period should remain in place if
the Tribunal regards the recommendation.
The Comrriission has
indicated that the process that CTP has followed in identifying the
number of employees that it intends to
retrench as a result of this
merger is not rational. The Commission indicates that this raises
concern as it is unclear what the
impact on merger specific
retrenchments may be once this merger has been implemented. Therefore
a 3 year moratorium is necessary
and justifiable in the
circumstances.
Merging parties
view
[37] Mr Holden, the
executive director of Caxion group, indicated that any extension of
that 2-year to 3-year period creates risk
for the contemplated
merger. He indicated that they will further not be able to affect the
cost-savings or rationalisation as quickly
as they would have liked
to. He further indicated that an extension will not sit favourably
with ciistomers and this could potentially
have a negative influence
on the business. The merging parties need the moratorium to be as
short as possible but as a compromise
they are willing to accept a 2
year moratorium.
[38]
The merging parties further indicate that there are measures in place
such as clause 4.4 of the conditions, which stipulates
that,
“
The
merging parties have to submit a report to the Commission annually on
the anniversary of the merger implementation date. This
report must
confirm the number of employees retrenched as a result of the
merger".
The
merging parties proposed that clause 4.4 could be amended to include
that when the merged entities engage in any section 189
3
process in terms of the Labour Relations Act, they would inform the
Commission.
[39]
The merging parties referred to the CAC
Walmart
and Massmart
4
decision,
where in deciding the moratorium, it was stated that one is involved
in quite a complicated balancing exercise economically.
On the one
hand, there is a clear consumer benefit to allowing these
retrenchments to occur and you save costs.
5
Those will be passed on in the form of better pricing to customers,
promoting consumer welfare. However on the other hand, there
is a
detriment to the interest of the employees. You are therefore faced
with the challenge of employees losing their jobs or consumers
benefiting from price reductions.
[40] CAC held that
it is a difficult exercise but the ultimately onus lies with the
Commission, who must be in a position to persuade
the Tribunal that
the condition that it is proposing is necessary to address the public
interest. There must thus be evidence to
support a more extensive
moratorium.
[41]
In the
Walmart
decision
which eventually imposed a 2 year moratorium, there was no reason in
the circumstances to go for a more extensive remedy
as proposed by
the trade unions and by the Minister. The merging parties submit that
the Tribunal must follow a similar approach
in this instance. The
merging parties are of the view that there is no need for a
moratorium at all.
[42]
The merging parties also referred to the
Metropolitan
and Momentum
6
decision
where a 2 year moratorium was imposed. In that case the Tribunal
justified that 2-year proposal
inter
alia
on
the basis of stating that it would take these merging parties 3 years
to realise the synergies anyway. According to the merging
parties
what is of importance is the period that the merged parties would
take in order to realise the synergies. The merging parties
argue
that similar to the
Momentum
decision,
2 years is more than sufficient to accommodate the welfare assessment
in this scenario. This is not a question of law
but ultimately a
question of economies and facts.
[43] After hearing
and considering submissions from both parties, the Commission has
failed to provide sufficient evidence to support
its argument that
the Tribunal must impose a 3 year moratorium. The Commission have
been unable to discharge the onus required.
The merging parties have
provided sufficient evidence to satisfy the Tribunal that a 2 year
moratorium will be sufficient even
though they are of the view that
no moratorium is required at all. We wifi therefore accept the
compromise of 2 years.
Conclusion
[44] In light of the
above, I approve the proposed transaction subject to the condition
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.
1
Allan
Gray Investment Council, Public Investment Commission, Fidelity
International, Sanlam Investment Management and Red Coral.
2
The
Commission was unable to obtain Topfer’s sales figures and
therefore unable to determines Topfer’s market share.
3
Employers
may dismiss employees based on their operational requirement as
defined in section 213 of the Labour Relations Act.
4
110/CAC/Junl1
and 111/CAC/Junll
5
Ibid
at par 112-119
6
41/LM/Jul10
and 58/CAC/DEC05