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[2015] ZACT 88
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Louis Dreyfus Commodities Africa (Pty) Ltd and Another v Best Milling (Pty) Ltd and Others (LM050Jun15) [2015] ZACT 88; [2015] 2 CPLR 653 (CT) (30 July 2015)
COMPETITION
TRIBUNAL OF SOUTH AFRICA
Case
No:LM050Jun
1
5
I
n
the
matter
between:
L
O
U
I
S
DREYFUS
COMMODITIES
AFRICA
(PTY)
LTD
VKB
AGRICULTURE
(PTY)
LTD
Acquiring Firms
And
BEST
MILLING (PTY) LTD
I
XIA
TRADING
1
77
(PTY) LTD MOLIBLOX (PTY)
LTD
Target
Firms
Panel
:
Norman
Manoim
(Presiding
Member)
: Andiswa Ndoni
(Tribunal Member)
: Yasmin Carrim
(Tribunal Member)
Heard
on
:
8
July
2015
Order
Issued on
: 8 July 2015
Reasons
Issued on
: 30 July 2015
Reasons
for Decision
Approval
[1]
On
8
July
2015,
the
Competition
Tribunal
("Tribunal")
conditionally
approved
the
merger
between
Louis
Dreyfus
Commodities Africa
(Pty)
Ltd
("LDCA")
and
VKB
Agriculture (Pty) Ltd
("VKB") and Best Milling (Pty)
Ltd, lxia Trading 177
(Pty)
Ltd and
Moliblox
(Pty)
Ltd
("Kromdraai
Group
of
Companies").
[2]
The reasons for approving the proposed transaction follow.
Parties
to
transaction and
their
Activities
Primary
acquiring
firms
[3]
The primary acquiring firms are LDCA and
VKB.
LDCA
is controlled
by Louis Dreyfus
Commodities
MEA Trading DMCC, which in
tum
is
controlled
by
Louis Dreyfus
Commodities
B.V
("LDCn).
VKB
i
s
n
ot
controlled
by
any
firm.
I
ts
subsidiary,
N
u
-Pro
Commodities
(pty)
Ltd ("Nu-Pro")
is
relevant to the proposed transaction.
[4]
LDC is a global commodities trader.
Re
l
evant
to this transaction are its activities
i
n trading
agricultural
commodities,
wheat
i
n
particular,
through its
South
African subsidiary, LDCA. An
important
aspect of LDCA's business is that it
procures and sells wheat globally and does not confine
i
tself
to the
l
ocal
market.
[5]
VKB
is
engaged
in
the
business
of the storage and trading of grain. In particular
relevant
to this transaction
i
t
purchases wheat from farmers
i
n
the Eastern Free State, which it
then
sells
to
customers
throughout South
Africa.
[1]
Primary
target firm
[6]
The primary target firm
i
s the
Kromdraai
Group of
Companies, which comprises
of Best Milling (Pty) Ltd ("KBMn},
lxia Trading
1
77
(pty) Ltd ("lxian) and Moliblox (pty} Ltd ("Molibloxn).
KBM is controlled by the JI Trust,
l
xia
i
s
controlled by Suoer Sure Bakery
Trust,
whilst Moliblox
i
s
controlled by
the
KS
Trust.
[7]
The Kromdraai Group is
a
vertically integrated business specialising in
the production of wheat
flour
and
bread. The
Kromdraai
Group consists of
its
wheat
milli
n
g
plant operation (KBM), storage silos used for the storage of wheat
for the mill (Moliblox)
and
a bakery (lxia) which uses the wheat flour to produce bread that is
then sold to
retailers.
Proposed
transaction and rationale:
[8]
The proposed transaction takes place
i
n
two steps.
I
n
the
first,
KBM
will
acquire
all
of the shares
i
n
l
xia and
Moliblox.
I
n
the second step, the acqu
i
r
i
ng
firms will acquire shares
i
n
KBM. Post-merger, KBM's shareholding
will be
as
follows: VKB (59.5%),
LDCA
(25.5%).
[2]
Upon
implementation
of
the
proposed
transaction,
the
Kromdraai
Group
will be jointly controlled by the acquiring firms.
[9]
By way of rationale, it appears that the proposed transaction is
primarily motivated by
the
target
firm's
financial
distress
and
ensuing
risk
of
closure
and
the fact
that
the
Kromdraai
Group is substantially
i
ndebted
to LDCA. Further, as was explained
i
n
the
hearing, the proposed transaction
i
s
structured as a joi
n
t
venture
because
VKB has substantial experience which would benefit LDCA's strategic
plan to integrate into
the
agricultural value chain and more specifically in
the
market
for
wheat milling.
[3]
Relevant
Issues:
[10]
Upon considering the activities of the
merging parties, the Competition Commission
("Commission") found
that
both
VKB
and the
Kromdraai
Group
own
grain storage
silos.
VKB
owns
commercial
grain
silos
which
i
t
h
i
res
to
third
parties
whilst the Kromdraai Group owns storage
silos but
which
are used exclusively by KBM.
[11]
The
Commission
further
assessed
the
i
mpact
of
the
proposed
transaction
on
the
trading market in
which
both LDCA and VKB are active.
In
South
Africa, both parties
trade
i
n
the
following commodities: wheat, maize, sunflovver seeds and
soyabeans.
[4]
However, since
Kromdraai is only active
I
n
the
wheat market the Commission limited
i
ts
investigation
to
the wheat market. LDCA procures wheat locally and internationally and
supplies it
to
purchasers
(including
milling
companies)
whilst
VKB
procures
wheat
exclusively from farmers in
the
Eastern Free State.
[12]
The Commission accordingly considered the impact of the proposed
transaction on the following three issues
•
The
market
for
the
storage
and
handling
of
grain
i
n
commercially
owned
silos within a 60km
radius of the
Moliblox
silo
complex where
the
overlap
i
s
between VKB and the Kromdraai Group;
•
Vertical
effects as Kromdraai exists
i
n
a vertical re
l
ationship
i
n
the wheat supply chain
in
respect
of
the
trading
activities
of
the
two acquiring
firms;
and
•
The
national
market
for
wheat
trading
in
which
the
two acquiring
firms.
LDCA
and
VKB, are active.
H
owever
since
the
acqu
i
ring
firms are not merging
their trading
i
nterests
the
Commission
did
not
examine
the
effects
of
the
merger
as
i
ncreasing
concentration
i
n
this
market
-
since
it
does
not
-
but
rather
whether having
two
competitors
i
nvo
l
ved
i
n
the
control
of
a
downstream
company
i
n
the wheat supply chain might give rise
to co-ordinated effects which but for the
merger might not have been possible.
I
mpact
on
competition:
Horizontal
analysis:
[
1
3]
I
n re
l
ation
to the market for the storage and handling of grain,
the Commission
found that the merged entity wou
l
d
own all of the silos
i
n
the region post-merger. However, the
target firm, unlike VKB, does not store any grain
for third parties.
I
t
uses its' silos purely for its
own
capacity, a
position
that
will
remain
unchanged
post-merger. Hence
the
target firm's
storage
capacity
i
s
not at present nor has it ever
been
part of the competitive
market
for storage.
Thus
the
merger
does
not
lead to
an
i
n
crease
i
n
concentration.
Vertical
analysis:
[
1
4]
The Commission found
that there
i
s
a vertical re
l
ationship
between LDCA and VKB's wheat trading
activities and KBM's milling activities {purchasing
of wheat grain).
The
Commission
further found that a vertical
relationsh
i
p
exists as KBM could use
VKB's storage
facilit
i
es
to
store
its
wheat.
[15]
In its analysis, the Commission found that none of these vertical
relationships raised
any
foreclosure concerns as there are alternative wheat suppliers and
buyers in
the
market.
Further, the target firm wou
l
d
not be able to use all of VKB's
silo
capacity meaning that
VKB
would
not
have an
incentive to foreclose
its competitors.
The Commission also found that although
VKB has used Kromdraai's silos in
the
past, it
does
not
currently
use
any
third
party
storage for its
services.
Co-ordinated
effects:
[16]
The merger gives rise to control over the target firm by two
competitors in the wheat trading market. Thus the question arises
as
to whether the merger can create an opportunity for co-ordination
between these two firms even though they are not merging their
trading businesses. There is a prior history of co-ordination in
these markets as VKB was found to have contravened section 4
(1)(b)(i) of the Competition Act in relation to the market for silo
storage.
[17]
The Commission
considered
this
aspect
and
came
to
the
conclusion
that
further
co
ordination
was
unlikely.
I
t
gave the
following
reasons for coming
to
this conclusion: the
structure
of
the
market
has
changed
since
the
time
of
these
prohibited practices
as
grain
is
now
traded
on
SAFEX
where
prices
are
set
on
an
exchange
related
basis
making
co-ordination
difficult, there are many more players
i
n
the
market
i
ncluding
global players, the market shares of the two acquiring firms do not
exceed 22% in
any
given market.
[5]
Public
interest:
[18]
In terms of employment, the merging parties' submitted that at least
252 out of 313 jobs will be saved as a result of the
merger, failing
which the firm will be forced to close down which will inevitably
result in all of the current employees losing
their jobs. The merging
parties however submitted that it may be necessary to retrench 61
semi-skilled and unskilled employees
at the target firm post-merger.
[19]
The Commission accepted that the merging parties followed a rational
process in determining this figure. However, as the affected
staff
complement is comprised of unskilled workers with little or no formal
education, the Commission was of the view that conditions
were
warranted in this instance and recommended that the merger be
approved subject to the condition that the merged entity may
not
retrench more than 61 employees at the target firm. Further, it
should be noted that the Food and Allied Workers Union is in
support
of this condition.
Conclusion:
[20]
I
n light of
the above, we agree with the Commission's analysis and conclude that
the proposed transaction
i
s
u
nlikely to
substantially
prevent or
l
essen
competition
i
n
the relevant
market
and that
the
merger
should
be
approved
subject
to the
conditions
attached hereto, marked "Annexure
N.
3
August 2015
DATE
__________________________
Norman
Manoim
Ya
s
min
Carrim and Andiswa
Ndoni
concurring
Tribunal
Researcher:
Ammara Cachalia
For
the merging parties: Lara
Granville, Norton Rose Fullbright
For
the Commission:
Gilberto Biacuana
ANNEXURE
A:
VKB
Agriculture
(Pty)
Ltd
And
Louis
Dreyfus Commodities Africa
(Pty)
Ltd
And
Kromdraal
Best Miiiing (Pty) Ltd,lxla Trading 177 (Pty) Ltd and Moliblox (Pty)
Ltd
("The
Kromdraal Group of Companies")
CASE
NUMBER:
2015Jun0312
CONDITIONS
1.
DEFIN
I
TIONS
The
following expressions shall bear the meanings assigned to them below
-
1.1
"Acq
u
i
ring
Firms" mean VKB and LDCA, as defined below;
1.2
"Affected Employees"
mean the 61 employees that may be
retrenched as a
result
of
the
Merger;
1.3
"Approval Date"
means
the
date referred
to
in
the
Tribunal's merger
clearance
certificate;
1.4
"Commission" means the
Competition Commission of South Africa;
1.5
"Competition Act" means the
Competition Act 89 of
1
998,
as amended;
1.6
"Conditions"
means these
conditions;
1.7
"Kromdraal Group"
means,
together,
Kromdraai Best
Milling
Proprietary
Lim
i
ted,
l
xia
Trading
177
Proprietary
Limited
and
Moliblox
Proprietary
Limited;
1.8
"LDCA" means Lou
i
s
Dreyfus Commodities
Africa
Proprietary Limited;
1.9
"Merger" means the acquisition
of joint control over the Kromdraai Group by
VKB and LDCA;
1
.
10
"Merged
Entity"
for
the
purposes
of
these
Conditions
mean
the
combined busi
n
esses
of The Kromdraai Group of Companies, VKB Agriculture (Pty) Ltd and
Louis Dreyfus Commodities
Africa
(Pty) Ltd;
1.11
"Merging Parties" for the
purposes of these Conditions mean the Kromdraai
Group;
VKB
and LDCA;
1.12
"Rules" mean the Rules for the
Conduct of Proceedings in
the
Competition
Commission;
1.13
"Tribunal" means
the Competition
Tribunal of South
Africa; and
1.14
"VKB" means VKB
Agriculture
Proprietary
Limited.
2.
CONDITIONS TO THE APPROVAL
OF
THE
MERGER
2.1
Save for the 61 Affected Employees, the Merging Parties shall
not retrench any employees at the Merged Entity as a result
of the
Merger.
2.2
VKB shall
give
first
preference
to
the
Affected Employees should
positions
arise at VKB for a period of
12 (twelve)
months after the Approval
Date of the
Merger, in the
following manner:
2.2.1
When a
position arises within the VKB
group
of
companies to
be filled
by an external candidate, VKB
shall, at the same time that the
position
is
advertised
externally, forward
a
batch
communique
via
SMS
and
email
to
all
Affected
Employees
who
have
been
retrenched
from
the
Kromdraai Group
as
a
result
of
the
Merger.
The
communique
will
include
i
nformation
and details
of
the
position as well as contact
details
as
to
whom
to
contact
to
enable
the
Affected Employees
to
apply
should they wish to do so.
2.2.2
Under all circumstances the onus will
rest on the Affected
Employee
to apply
for a
vacant position.
2.2.3
Should
an
Affected Employee
meet
the
relevant criteria and
job
requirements in
terms of qualification, experience, and
skills required,
the
application will
be processed
by VKB's
HR
department. In the
event
that two qualified and skilled
i
ndividuals
apply
for a
position, one being
an
Affected Employee and
one being
an external applicant, VKB
will give preference to the Affected
Employee, subject to employment
l
egislation
and the existing
l
abour
l
aw
practices of VKB.
I
n
the event that
there
are
two
Affected Employees who apply
for
the
same
position,
VKB may select one of them
i
n
its sole discretion, subject to employment
l
egislation
and the existing
l
abour
l
aw
practices of VKB.
2.2.4
Within
the
context of paragraph
2.1
above,
retrenchments do
not
include
voluntary
separation
arrangements, voluntary
early
retirement packages
and
unreasonable
refusals to
be redeployed
in accordance
with
the
provisions
of
the
Labour
Relations
Act,
No.
66
of
1
995,
as
amended;
2
.
2
.
5
Within
six
(6) months of the Approval
Date
of the
Merger,
the Acquiring F
i
rms
shall submit plans outlining the
pote
n
tial
i
nvestments
that the Acquiring Firms are likely to make at the Kromdraai Group.
3.
MONITORING
OF
COMPLIANCE WITH THE
CONDITIONS
3.1
The Merging Parties shall circulate a copy of the Conditions to all
the
employees of the Merged Entity within 1
O
(ten) business days of receipt of the
merger clearance.
3..2
As
proof
of
compliance
herewith, the
Merging
Parties
shall
within
1
O
(ten)
business
days
of
circu
l
ating
the
Conditions,
submit
an
affidavit
by
a
sen
i
or
official
attesting to the circulation of the Conditions and provide a copy of
the
Notice
that was sent to the employees.
3..3
Any employee who believes that his/her
employment with the Merging Parties
has
been terminated in contravention of these Conditions may approach the
Commission
with h
i
s/her
complaint.
3.4
The Merging Parties shall on an annual basis for 3 (three) years
after the Approval Date, submit a report to the Commission indicating
the number of retrenchments undertaken as a result of the Merger, the
skills level and position of employees retrenched and the
reasons for
such retrenchments.
3
.5
The
report
shall be accompanied by an affidavit from
a senior official of the Merged Entity
attesting to the accuracy of the report.
3.6
The report shall be submitted on each
anniversary of the Approval Date
of
the
Merger,
for three years after
the
Approval Date.
3.7
The
documents referred to in paragraphs 3.2 to 3.4 above must be
submitted
to
the
following
e-mail
address:
merqerconditi
ons@compcom.co.za.
3.8
An
apparent
breach
by the Merging Parties of any of the Conditions shall be
dealt with
i
n
terms of Rule 39 of the Rules.
3.9
The Merged Ent
i
ty
may, for so
l
ong
as any of the above Conditions remain
i
n
force,
approach
the
Tribunal
to
revise
the above Conditions
on
the
basis
of
changes
i
n market,
economic or regu
l
atory
conditions
justify
i
ng
such revision.
[1]
VKB,
through
Nu-Pro,
trades
in
grain
(including
wheat}
in
the
South
African
market.
[2]
The
JI Trust will retain
the
remaining 15%.
[3]
See
page 6 of the transcript.
[4]
The market shares in each of the trading markets are as
follows: wheat (7.5%), maize (14.0%), sunflower seeds (16.3%} and
soyabean (21.6%).
[5]
At
the hearing Mr Cook of VKB confirmed this position and that the
individuals involved in
the
prohibited practices have left the firm. See page
1
0
of the transcript.