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[2016] ZACT 7
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Zimco Metals Proprietary Limited and Another v Competition Commission; In re: Zimco Metals Proprietary Limited v Atlantis Metals Proprietary Limited (AME160Oct15) [2016] ZACT 7; [2016] 1 CPLR 114 (CT) (11 February 2016)
COMPETITION
TRIBUNAL OF SOUTH AFRICA
Case
No:
AME1600ct15
In
the matter between:
ZIMCO METALS PROPRIETARY
LIMITED
First
Applicant
ATLANTIS
METALS
PROPRIETARY LIMITED Second
Appl
i
cant
and
THE
COMPETITION
COMMISSION
Respondent
I
n
respect
of
the
conditionally approved
merger
between:
ZIMCO METALS PROPRIETARY
LIMITED
Primary Acqu
i
ring
Firm
and
ATLANTIS
METALS
PROPRIETARY LIMITED
Primary Target Firm
Panel
: Yasmin Carrim (Presiding Member)
: lmraan Valodia
(Tribunal Member)
: Andiswa Ndoni (Tribunal
Member)
Heard
on
: 20 January 2016
Reasons
Issued on
: 11 February
2016
Reasons
for Decision
Approval
[1]
On 2 September 2014 the Competition Commission ("Commission")
conditionally approved the intermediate
merger
between Zimco Metals Proprietary Limited
("Zimco") and Atlantis
Metals Proprietary Limited
("Atlantis") in case
number
2014Jul0338.
[2]
On 20 October 2015 the Applicants applied to the Competition Tribunal
for an amendment of the merger conditions
imposed by the
Commission ("the conditions") The application was brought
in terms of section 27(1)(d) of the Competition
Act (No. 89 of 1998)
("the Act"), as read with Tribunal Rule 42, together with
clause 4 of the merger conditions which
provided that
"the
merging
parties may at
any time,
on
good
cause
shown,
including
changes
in
economic
conditions,
approach
the
Tribunal for the conditions
to
be lifted, revised
or amended' .
[3]
On 20 January 2016 the Competition Tribunal ("Tribunal")
approved the application for an amendment of the conditions
with
respect to Condition 3.2.
[4]
The reasons for approving the application for amendment follow.
Background
[5]
On 2 July 2014, the merging parties notified the Commission of their
proposed intermediate merger in which Zimco would
acquire the
business and assets of Atlantis and a property on which the
anode operations of Atlantis were conducted, as a
going concern. The
offer for the anode business also included the anode plants owned by
Lead Processing Industries and Wattled
Crane in the DRC. It should be
noted that at the time, the holding company of Atlantis,
Thuthuka Group Limited ("Thuthuka"),
had been placed in
business rescue. The sale of Atlantis was an attempt by the
Business Rescue Practitioner to raise cash
and prevent the
liquidation of Thuthuka.
[6]
Zimco is a wholly-owned subsidiary of the Zimco
Group (Pty) Ltd ("Zimco Group") and is a producer
of
industrial and base materials, zinc, lead, aluminum metal and alloys,
related chemicals and engineering plastics in South Africa.
Atlantis
is a manufacturer of lead products and specifically lead anodes for
the electrowinning and electrofining of
copper, zinc, nickel,
cobalt and manganese. The manufacturing plants of Atlantis are
located in Brakpan in South Africa and in
Kolwezi in the DRC.
Atlantis operates under a patented anode process licence granted in
2008 by the Electro Winning Products (Pty)
Ltd ("EWP").
[7]
During its investigation, the Commission found that the
merging parties both produced lead
anodes and as such
their activities overlapped in the market for the provision of lead
anodes in South Africa. Given that the merging
parties were the only
two producers of lead anodes in South Africa there was a concern that
a monopoly would be created despite
Atlantis' dire financial
position. In addition the merging parties were also net exporters of
lead anodes and hence there was a
concern surrounding local supply
and employment.
[8]
In light of the above, on 2 September 2014, the Competition
Commission approved the transaction subject to conditions. The
conditions that were imposed can be grouped into three broad
categories namely an obligation relating to supply to customers; the
prevention of the relocation of the Atlantis plant; and employment.
[9]
However on 20 October 2015, the Applicants applied to the Competition
Tribunal for an amendment of the conditions citing a change
in market
circumstances as detailed below.
The
relevant conditions for the application for amendment are:
"3.2
Relocation of the Atlantis Plant
From
the Approval Date and for as long as Zimco has control over Atlantis,
the manufacturing plant/facilities of Atlantis shall
not be relocated
from the current location in Brakpan to premises that are outside of
South Africa.
3.3.
Employment
3.3.1
For a period of two (2) years commencing on the Approval date, Zimco
undertakes that no employees
of Atlantis will be retrenched by the
merging parties in South Africa as a result of the merger.
3.3.2
For the sake of clarity, retrenchments do not include (i) voluntary
retrenchment and/or voluntary
separation arrangements and (ii)
voluntary early retirement offers by Atlantis."
Change
in
market circumstances
[10]
Since the approval of the transaction, the merging parties have made
significant improvements to the facilities at the Atlantis
plant.
However, they have also encountered a number of difficulties due to
changes in market conditions.
[11]
One notable change has been the decline in commodity prices and the
subsequent decrease in demand for commodities (including
copper).
Given that lead anodes are used primarily in the electro winning of
copper, the merging parties submitted that this has
resulted in a
decline in the demand for lead anodes. While they have attempted to
acquire new customers and expand into other countries
the length of
time needed to secure a new business relationship is too long.
[12]
Furthermore the largest customer of Atlantis has decided to suspend
operations at some of its mines in the Democratic Republic
of Congo
and Zambia. This has had grave consequences for Atlantis whose
viability has been dependent on this
customer and
on exports to other copper mines. The parties further submitted that
there are few opportunities for selling lead
anodes in South Africa
due in part to the lack of local copper producers as well as the life
span of the lead anode which has resulted
in a saturated market. As a
consequence of the aforementioned, the parties have concluded that
the Atlantis plant is no longer
economically viable.
[13]
In order to sustain the economic viability of their business, the
parties have decided to move the Atlantis plant from Brakpan
to
Krugersdorp. However in doing so they anticipate that there will be
job losses of 13 employees due to the distance between Brakpan
and
Krugersdorp and the inability of employees to travel. The parties
submit that the proposed retrenchments are not merger specific
but
arise mainly due to an attempt to remain economically viable.
Accordingly the proposed retrenchments are operational
in
nature. Furthermore they submitted that while the relocation
of the plant would reduce costs, being
unable to relocate
outside of South Africa has placed them at a significant disadvantage
to their rivals. Transport costs have
escalated and in a declining
commodity cycle and further weakening of the currency, they
would need to locate the production
capacity closer to their export
markets. For this reason they would like to relocate the machinery
related to the seamless production
of anodes under the patented
process to locations outside South Africa.
[14]
The Applicants therefore sought an order declaring the lifting or
removing of the condition relating to the relocation
of
the Atlantis plant to a location outside of South Africa and/or that
the anticipated retrenchments are not merger specific.
These
amendments refer to Conditions 3.2 and 3.3 respectively of the
conditions.
[15]
The Commission submitted that it had conducted a two month long
investigation into this matter. It had engaged extensively
with the
merging parties and met with its largest customer to confirm their
views on the commodity sector
and
whether they were indeed suspending operations at some of their
mines which were identified. From these discussions
as well as
strategic documents reviewed, the Commission had satisfied itself
that Atlantis was in dire financial circumstances.
On this basis the
Commission submitted that it would not oppose the relocation of
the plant to outside South Africa or the
relocation of the Brakpan
operations to Krugersdorp. It was in favour of deleting condition
3.2. The Commission further confirmed
that it had satisfied itself
that the anticipated retrenchments were not merger
specific but were due to operational
reasons. At first the
Commission required an amendment to condition 3.3 to the effect
that retrenchments ought to be capped
at 13. However after engagement
with the Applicants and members of the Tribunal the Commission
accepted that given its own view
that the retrenchments fall in line
with voluntary retrenchment and/or voluntary separation there was no
need to amend condition
3.3.
Order
[16]
In light of the above the Tribunal ordered that condition 3.2 of the
merger conditions be deleted.
[17]
The conditions to the merger between Zimco Metals (Ply} Ltd and
Atlantis (Pty) Ltd in case number
2014Jul0338
are amended as
reflected in Annexure A hereto.
11
February 2016
DATE
_____________________
Ms
Yasmin Carrim
Mr
lmraan Valodia and Ms Andiswa Ndoni concurring
Tribunal
Researcher:
Karissa Moothoo Padayachie
For
the merging parties:
Ahmore Burger-Smidt and Graeme Wickins from Werksmans Attorneys
For
the Commission:
Thandile Charlie and Nelly Sakata
ANNEXURE
A
Zimco
Metals (Pty) Ltd
And
Atlantis
Metals (Pty) Ltd
Case
number: 2014Jul0338
CONDITIONS
1.
Definitions and Interpretations
The
following expressions shall bear the meaning as assigned below and
cognate expressions bear corresponding meanings-
"Act'"
- means the
Competition Act 89 of 1998
. as amended;
"Acquiring
firm"
means Zimco Metals (Pty) Ltd;
"Approval
date"
means the date referred to in
the Merger Clearance Certificate (Form CC15);
"Commission""
means the Competition Commission of South Africa;
"
Conditions"
means these conditions;
"Customer"
means any person. business or entity located in the Republic of
South Africa that purchase lead anode products from the merging
parties from time to time.
"Control"
has the meaning given in
section 12(2)
of the Act;
"Lead
Anode"
means a sheet of lead alloy measuring
6mm to 8mm in thickness and weighing approximately 100kgs {depending
on the design of the
anode). with a copper bar (also known as a
header bar) fixed to the top of the lead sheet;
"Merger"
means the acquisition of control over Atlantis Metals (Pty) Ltd
by Zimco Metals (Pty) Ltd;
"Merger
Implementation
Date”
means the date.
occurring after the Approval date. on which the merger is implemented
by the merging parties;
"Merging
parties"
means Zimco Metals (Pty) Ltd and Atlantis Metals
(Ply) Ltd;
"Target
firm"
means Atlantis Metals (Pty) Ltd;
"Tribunal"
means the Competition Tribunal of South Africa.
2.
Recordal
2.1.
On 2 July 2014, the merging parties applied to the Commission for
approval of this merger transaction.
2.2.
The implementation of the merger will result in Zimco acquiring
the business and assets of Atlantis, and the property on which the
anode operations of Atlantis are conducted from the Thuthuka Group as
a going concern. Zimco will therefore have sole control over
Atlantis
as a going concern. The transaction constitutes an intermediate
merger as defined in
Section 11(5)(b)
of the Act in that the turnover
and/or asset value of the merging parties are between the lower and
higher thresholds as required
under
section 11
(1)(a) of the
Act.
2.3.
The Commission assessed this transaction and identified separate
markets for the production and supply of first fill anodes
(New Lead
Anodes) and the market for the production and supply of recycled
anodes (Remakes). The Commission found that Remakes
are cheaper
because it excludes certain new raw materials (lead). The Commission
found that the activities of the merging parties
overlap in the
market for the provision of lead anodes in South Africa, and that
there are high barriers to entry into this market.
The Commission
also found that the merging parties are the only two producers of
lead anodes in South Africa, and that post-merger,
the merging
parties will not only have 100% of the market for the production and
supply of New Lead Anodes, but also 100% of the
market for the
production and supply of Remakes, and that there are no imports into
South Africa. From the above assessment, the
Commission found that
this merger transaction would result in the removal of an effective
competitor. Thus, the proposed transaction
is likely to substantially
prevent or lessen competition in South Africa.
2.4.
The Commission further found, as an outcome of its investigation
that the business of Atlantis is experiencing financial
difficulties and the assets are likely to be liquidated. Accordingly,
the proposed transaction is a measure adopted by the Business
Rescue
Practitioner ("BRP") in an attempt to salvage the business
from liquidation.
2.5.
Notwithstanding the financial position of Atlantis, the
Commission is, nevertheless, concerned that a monopoly would be
created
post-merger which was likely to unilaterally increase prices
to the detriment of the South Africa customers. In addition, given
that the merging parties are net-exporters of lead anodes, they may
supply fewer products to the South African customers. The Commission
also considered the impact of this transaction
on
employment.
2.6.
Given the possible impact of the transaction on the
supply to South African customers of lead anode products
and on
employment, as well as Atlantis' financial position, the Commission
considered the imposition of the following conditions
to address the
concerns. The merging parties have agreed to the following
Conditions. This is also in order to address any possible
concerns of
the Commission. The Conditions will ensure that the merging parties
continue to supply South African customers with
lead anode products,
and will not increase prices unilaterally. The Conditions
will also ensure that
there are no retrenchments
post-merger as specifies in paragraph 3.3.1 below.
3.
Conditions to the approval of the merger
3.1.
Supply to customers
3.1.1.
From the Approval date and as long as Zimco has control over
Atlantis, the merging parties agree to continue to supply lead
anode
products to customers in accordance with contractual terms acceptable
to both parties.
3.1.2.
For the duration of the Conditions, the merging parties undertake not
to refuse to supply customers or to limit supply to
customers where
it is economically feasible to do so.
3.1.3.
The obligation above may be suspended for the period during
which an event or events occur that are beyond the control
of the
merging parties, and such events have the effect of delaying
performance of the parties' contractual obligations. Such events
may
include, without limitation, fire, flood, explosion, breakdown of
equipment, epidemic, riot, civil commotion, any strike, lockout
or
other industrial action, war, terrorist activities, any prohibition
by any governments or any other event having such effect.
3.2.
Relocation of the Atlantis
plant
(This
condition was deleted on 20 January 2016 in Tribunal case number
AME1600ct15).
3.3.
Employment
3.3.1.
For a period of two (2) years commencing on the Approval date, Zimco
undertakes that no employees of Atlantis will be retrenched
by the
merging parties in South Africa as a result of the merger.
3.3.2.
For the sake of clarity, retrenchments do not include (i) voluntary
retrenchment and/or voluntary separation arrangements
and (ii)
voluntary early retirement offers by Atlantis.
4.
General
The
merging parties may at any time, on good cause shown, including
changes in economic conditions, approach the Tribunal for the
conditions to be lifted, revised or amended.
5.
Monitoring of compliance with the Conditions
5.1.
.
The merging parties must notify the Commission of the
Merger Implementation Date within ten (10) calendar days of
implementation
of the merger by way of a sworn affidavit by a
senior official duly authorised by the merging parties.
5.2.
The merging parties must, within two (2) weeks of the Approval
date and by way of written notice, inform all existing customers of
Zimco and Atlantis of these Conditions. In addition, the merging
parties must, within one (1) calendar month of the Approval date,
provide to the Commission a sworn affidavit by a senior official duly
authorised by the merging parties attesting to the notification
together with copies of the said notice to customers.
5.3.
In the event that the Commission receives any complaint in
relation to non-compliance with these Conditions. or otherwise
determines
that there has been an apparent breach by the merging
parties of these Conditions, the breach will be dealt with in terms
of Rule
39 of the Competition Commission Rules.
5.4.
All
correspondence in
relation
to these
Conditions should
be
forwarded to
mergerconditions@compcom.co.za.