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[2016] ZACT 30
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Tegeta Exploration and Resources (Pty) Ltd v Optimum Coal Mine (Pty) Ltd (in business rescue) and Others (LM212Jan16) [2016] ZACT 30; [2016] 1 CPLR 258 (CT) (12 April 2016)
COMPETITION
TRIBUNAL OF SOUTH AFRICA
Case
No: LM212Jan16
In the
matter between:
Tegeta
Exploration and Resources (Pty)
Ltd
Primary
Acquiring
Firm
and
Optimum
Coal Mine (Pty) (in business rescue)
Optimum
Coal Terminal (Pty) Ltd
Koornfontein
Mines (Pty)
Ltd
Optimum
Nekel Mining and Exploration (Pty)
Ltd
Optimum
Vlakfontein Mining and
Exploration (Pty) Ltd
Optimum
Overvaal
Mining
and Exploration (Pty) Ltd
Optimum
Mpefu Mining and Exploration (Pty)
Lt
d
Primary
Target Firm
Panel
: Norman Manoim (Presiding Member)
: lmraan Valodia (Tribunal Member)
: Fiona Tregenna (Tribunal Member)
Heard on
: 17 February 2016
Order
Issued on
: 22 February 2016
Reasons
Issued on
:
12 April 2016
Reasons
for Decision
Approval
[1] On 22
February 2016, the Competition Tribunal ("Tribunal")
conditionally approved the merger between the primary acquiring
firm,
Tegeta Exploration and Resources (Ply) Ltd ("Tegeta") and
the target firms Optimum Coal Mine (Ply) (in business
rescue)
("OCM"), Optimum Coal Terminal (Pty) Ltd ("OCT"),
Koornfontein Mines (Pty) Ltd ("Koornfontein"),
Optimum
Nekel Mining and Exploration (Pty) Ltd ("Nekel"), Optimum
Vlakfontein Mining and Exploration (Pty) Ltd ("Vlakfontein"),
Optimum Overvaal Mining and Exploration (Pty) Ltd ("Overvaal"),
Optimum Mpefu Mining and Exploration (Ply) ("Mpefu").
[2]
The reasons for approving the proposed transaction follow.
Parties
to transaction
Primary
acquiring firm
[3] The
primary acquiring firm Tegeta is jointly controlled by Oakbay
Investments (Pty) Ltd ("Oakay") and Mabengela Investments
(Ply) Ltd ("Mabengela"). Oakbay is held by lslandsite
Investments 180 (Pty) Ltd, Mr Atul Gupta and Mrs Chetali Gupta.
Mabengela's largest shareholder is Duduzani Zuma.
[4]
Tegeta is a registered holder of the new order mining rights in
respect of farms in Brakfontein and Brakfontein Extension on
which
the Brakfontein coal mine is situated. Eskom is Tegeta's largest
customer of coal with its remaining supply being taken up
by the
residual domestic market. Oakbay is an investment holding company
which has various interests, of relevance to this transaction
is its
ownership of the ldwala Coal Mine. However this mine is not yet
operational and Oakbay is awaiting the outcome of its mining
rights
application. Mabengela is a consulting agent which engages in
prospecting on behalf of mining companies and on its own behalf.
Primary
target firms
[5] OCM
operates a large opencast and underground coal mining complex
referred to as Optimum Collieries which supplies the domestic
market
as well as minimal exports supplied through the Richards Bay Coal
Terminal. Koornfontein is an underground mining operation
located in
Witbank. OCT is party to an off take agreement where it agreed to
sell export coal produced by OCM to Glencore International
AG.
Vlakfontein, situated in Ermelo, is an opencast coal development
project which has submitted a mining rights application to
the
Department of Mineral Resources. Overvaal which is situated in
Mpumalanga which has a new order prospect. Mpefu's mining rights
have
lapsed and it does not operate.
[6] These
firms are directly controlled by Optimum Coal Holdings (Pty) Ltd
("Optimum Coal Holdings") and will hereinafter
be referred
to as the Target Group.
Proposed
transaction and rationale
[7] The
proposed
transaction
involves
Tegeta
acquiring
the
shares
and
claims
on
loan account
held by Optimum
Coal
Holdings
in the
seven
target
firms.
[1]
As
a result of the proposed
transaction
Tegeta
will acquire control over the target firms.
However of the
seven
firms,
only
two
are
operational
mines
at
present
(OCM
and
Koornfontein),
the
third
is
the
interest
in
the
Richards
Bay
coal
terminal
while
the
remaining
firms
are either
dormant
or
await
the
necessary
rights.
Our reasons
therefore
relate to
the
two operating
firms.
[2]
[8] The
reason for the transaction is that two of the target firms, OCM and
Optimum Coal Holdings, are presently in business rescue
in terms of
the Companies Act, due to what they consider unprofitable commercial
supply agreements they currently have with Eskom.
[9]
Tegeta, whose other mine Brakfontein also supplies Eskom, believes it
can turn this business around. According to the testimony
of Nazeem
Howa, its representative at the hearing, Tegeta believes by changing
mining techniques and increasing supply so that
some coal can be
exported at higher export prices, the mines can become profitable.
Impact
on competition
[10
]
The merger leads to an overlap in the activities of the merging firm.
OCM and Koornfontien produce thermal coal for what is termed
the
domestic tied market as does the acquiring firms Brakfontein mine.
The domestic tied market is a technical term used to describe
the
market for supply of thermal coal to a single domestic customer Eskom
in terms of supply agreements to power stations located
in the
proximity of these mines.
[11]
Since the respective
mines are not competitors to supply the powers stations located
near
them
the
merger
does
not
lead
to
a
geographic
market
concern.
Nor will
the merger change the
power relations between the merged firm and its customer in
terms of bargaining
power. Tegeta
post-merger
will only supply under 5 % of Eskom's coal needs.
[12]
Representatives of Eskom, at the request of the Tribunal, presented
themselves at the hearing and confirmed that they had no
concerns
about the merger.
[13] We
thus agree with the Commission's recommendation to us that the merger
raises no competition concerns and this aspect does
not need to be
considered any further.
Third
party view
[14] At
the hearing, a Mr. Temane representing another potential buyer of the
target firms, the Endulwini Consortium complained
that his offer to
purchase had been rejected by the business rescue practitioners. The
business rescues practitioners advised that
the offer was unsuitable
as it did not, amongst other reasons, include proof of funding. It is
not within the jurisdiction of the
Tribunal to dictate to sellers who
they should sell to. The Act only gives us powers to consider the
transaction before us. We
can therefore not take Mr Temane's concerns
any further.
Public
interest
[15] At
the time of the Commission's investigation into the proposed
transaction the acquiring firm had not undertaken a comprehensive
due
diligence on the Target Group specifically because the number of
retrenchments is contingent, in part, on Eskom's renewal of
a certain
supply contract. As such the merging parties were unable to indicate
how many employees might be retrenched post-merger.
[16] It
is common cause that the Target Group presently employs 3 055 people,
of which 1920 are contractors. It is also common cause
that the two
operational firms are in financial distress because of the
uncertainty of the Eskom contracts. In relation to Koornfontein
the
present contract has expired and has been renewed for a brief period
until the end of the business rescue process on the current
terms. It
is by no means clear if Eskom will agree to improved terms and Eskom
at this stage was not willing to commit itself.
In relation to OCM
the present contract expires in 2018. The sellers also considered
this contract uncommercial so here too, a
new negotiation will
determine the operational fate of the mine.
[17] The
Commission and merging parties came to the hearing with an agreed
proposal for a condition to place a moratorium on merger
specific
retrenchments. In essence this condition placed a moratorium on
merger specific retrenchments indefinitely as no time
period was
stipulated.
[18]
During the hearing after questions from the panel it emerged that the
Commission and the merging parties differed in their
interpretation
of the condition: in particular what the term merger specific
contemplated. For the merging parties this meant only
merger created
redundancies; for the Commission the term also covered retrenchments
brought about by a change in business policy
at the mine .We decided
to
g
ive
them the opportunity the come to a
common understanding or submit separate proposals.
[19] They
were, after deliberations, unable to come to a common agreement so we
need to consider their separate proposals.
[20] The
Commission proposed a blanket ban on all post-merger retrenchments.
It justified this on the basis that the merging parties
had not
conducted a rational process to identify the necessity for
retrenchments and therefore all post-merger requirements should
be
considered on that basis to have merger specificity. A similar
position was also articulated at the hearing by one of the unions,
UASA, whose representative Mr Van Heerden who had argued for a three
year blanket moratorium on all retrenchments.
[21] The
merging parties argued that it was difficult for them to come to a
more specific position on retrenchments, as the fate
of the Eskom
contracts, was, at the time of the hearing, inconclusive. Hence
whether retrenchments would be necessary could not
yet be determined.
The argument was that if retrenchments became necessary, they would
be operational, rather than merger specific.
Put differently if
retrenchments had to be effected this would have been due to the
viability of the mines in terms of the Eskom
contracts not the
merger. We agree with this contention. The merging parties were
however agreeable to a moratorium on retrenchments
in respect of
merger created redundancies and hence we have accepted their draft in
on this aspect.
[22]
Despite
this
concession
the
merger
is
unlikely
to
lead
to
many
redundancies
as
the Brakfontein
mines
and the
target
mines are
located far
apart
and
synergies
will
occur at
head
office
not
operational
level.
However
as
we
have
previously
held
the
public interest
concerns
under the Act
are
limited to
merger
specific
concerns
and hence the distinction with
those that are independent
of
the merger for which the term operational has been
used in the
past
and which
is the
preserve
of
labour
law. We
were
urged to consider whether
the
new
owners
might
change
the focus
of the target
firms
in a way
that
differed
from
that
prior to the
merger
a fact
we
had taken
into account
in
Adcock
Ingram
where
a change
in business
policy post-merger
rather than mere redundancies
had
led
to
an
apprehension
about
retrenchments
which
in our
view
in that
case
had justified
a
blanket
moratorium
on
retrenchments
for
a
period
of
one year.
[3]
However
in
this
case there
is no evidence
on any change
in policy.
To
the
extent
that
there
might be
a
change
the
evidence
of
Mr
Howa
suggests
that
post-merger
the
acquiring
firm might
be less likely to
retrench than the
prior owners.
However
what
is fundamental
is that
two
of the Target
group firms
are
in business
rescue with
no other
better prospects.
We
thus
differ
with
the
Commission on this
issue
[23] We
did however prefer the Commission's draft in relation to the
monitoring of the conditions and this version of their draft
has been
retained.
Conclusion
[14] In
light of the above, we conclude that the proposed transaction is
unlikely to substantially prevent or lessen competition
in any
relevant market. In addition we find that the conditions we imposed
address any public interest concerns
12
April
2016
DATE
________________________
Mr
Norman Manoim
Prof
lmraan Valodia and Prof Fiona Tregenna concurring
Tribunal
Researcher:
Aneesa Ravat
For the
merging parties: MJ
Engelbrecht instructed by Strauss Scher Atttorneys for KPMG
For the
Commission:
Daniela Bove and Thabelo Masithulela
[1]
OCM,
OCT,
Koomfontein,
Nekel,
Vlakfontein,
Overvaal
and
Mpefu.In terms of the
sale of
shares agreement Tegeta
will be
acquiring
51% of
Nekel's
issued
share
capital.
[2]
The target firms will
continue
to operate
as
standalone firms and will not be integrated
into
the
business
operations
of Tegeta.
[3]
BB
Investment
Company
(Pty)
Ltd
and Adcock
Ingram
Holdings
(Pty) Ltd
CT case
no:
018713