About SAFLII
Databases
Search
Terms of Use
RSS Feeds
South Africa: Competition Tribunal
SAFLII
>>
Databases
>>
South Africa: Competition Tribunal
>>
2016
>>
[2016] ZACT 38
|
|
CTP Limited and Another v Competition Commission (IM232Feb16) [2016] ZACT 38; [2016] 1 CPLR 105 (CT) (11 May 2016)
COMPETITION
TRIBUNAL OF SOUTH AFRICA
Case
No: IM232Feb16
In
the matter between:
CTP
LIMITED AND
COMPACT
DISC TECHNOLOGIES
(A
DIVISION OF TIMES MEDIA (PTY)
LTD
)
Applicants
and
THE
COMPETITION
COMMISSION
Respondent
Panel
: Norman Manoim (Presiding Member)
: Andreas Wessels
(Tribunal Member)
: Anton Roskam (Tribunal
Member)
Heard
on
: 15 March 2016
Order
Issued on :
16 March 2016
Reasons
Issued on :
11 May
2016
Reasons
for Decision
Introduction
[1]
This is an application for the reconsideration of an intermediate
merger decision made by the Competition Commission ("Commission")
to prohibit a merger between by CTP Limited ("CTP") and
Compact Disc Technologies (a division of Times Media (Pty) Limited)
("CDT"). This application is brought in terms of section
16(1)(a) of the Competition Act, 89 of 1998, ("the Act").
[2]
The merger was notified to the Commission on 15 November 2015 and the
Commission issued its decision to prohibit the merger
on 2 February
2016. We heard the merger on 15 March 2016 and approved it
conditionally on 16 March 2016. Our reasons for that decision
follow.
Background
[3]
The Commission received notice of the intermediate merger on 15
November 2015. In terms of the transaction CTP was to acquire
the
Digital Disc Manufacturing and Replicating Business of CDT from the
Times Media Group. Post-merger CTP would control CDT.
[4]
CTP and CDT are both involved in the manufacture and replication of
optical discs (CDs and DVDs) for the entertainment industry
in South
Africa. Therefore, the activities of the merging parties overlap
horizontally with respect to the manufacture and replication
of CDs
and DVDs. In essence the merger involves the sale of CDT's assets to
CTP, the most valuable being its replication machines.
[5]
The Commission defined the relevant market as:
a.
The national market for the manufacture and replication for CDs with
some imports; and
b.
The national market for the manufacture and replication for DVDs with
some imports.
[6]
The Commission concluded that the merging parties were the only
effective competitors in the relevant markets pre-merger. The
only
other replicator in the market is Jetline. However, Jetline is not a
specialist music replicator and does not have the capacity
to service
the large recording firms such as Universal Music, Warner Music, and
Sony Music. It further found that imports were
not substantial in
these markets and are mainly limited to old music titles and niche
products.
[7]
Despite the fact that the Commission found the barriers to entry into
this market to be low, it concluded that entry into this
market was
unlikely as it is common cause that the market is in decline. CD's
and DVD's represent outdated technology as customers,
particularly
younger ones, make use of online offerings as their source for music
and movies.
[8]
The customers of the merging parties are large recording companies,
many of which were international. Prior to the merger, these
customers had some countervailing power over pricing as they could
credibly threaten to switch their business from the one replicator
to
the other. Post-merger this option would be eliminated.
[9]
The merging parties did not seriously dispute these facts. However,
they raised as the central plank of their defence that CDT
was a
failing firm in a dying market. The merger would thus preserve assets
that would otherwise exit the market and because some
jobs would be
saved, the merger would have a positive public interest outcome.
[10]
The Commission rejected the merging parties failing firm defence as
it concluded that they had not met the necessary requirements
of that
defence, in particular proof that there was no other buyer for the
target firm. Nor was it satisfied that CDT had taken
sufficient steps
to rationalise its business.
[11]
Given its findings that the merged entity would be a near monopoly
and that the failing firm defence did not avail the merging
parties
on these facts, the Commission pursued a unilateral effects theory of
harm. In its reasons it identified three anticompetitive
effects:
a.
Post-merger supra-competitive price increases;
b.
The merged entity would have the ability and incentive to increase
minimum order sizes for CDs
and DVDs thus raising customers' costs;
and
c.
The merged entity would be able to bundle the manufacture and
replication of CDs and DVDs
with the distribution of CDs and DVDs.
[12]
Furthermore, with respect to the public interest considerations, the
Commission found that no rational process was followed
to identify
the potential impact of the merger on employment.
[13]
Despite these adverse findings the Commission still sought to
resurrect the merger by proposing certain conditions which it
considered would address the competition and public interest concerns
mentioned above. The one condition that remains relevant
to the
current decision, as we go on to explain, was a price cap, requiring
the merging parties to price at current levels plus
inflation for the
next five years. The merging parties rejected these proposals. Given
this stance by the merging parties the Commission
concluded that its
only option was to prohibit the merger. This it did on 2 February
2016.
[14]
On 11 February 2016, the merging parties filed their request for
reconsideration. They sought an order that the merger be
unconditionally approved. The essence of their argument was that the
Commission had erred in rejecting their failing firm defence.
In
particular they focused on the Commission's conclusion that the
target firm had not taken any steps to address its decline and
second
that it had made no attempt to find an alternative buyer which would
have represented less of a loss to competition. They
submitted that:
a.
Contrary to the Commission's findings, CDT had taken steps to arrest
its decline such as:
i.
expanding into other geographic areas;
ii.
reducing its workforce from 149 to 58 employees;
iii.
CDT sought to renew contracts with existing customers and sought to
regain the business of Sony;
iv.
CDT closed its loss making distribution business and debt collection
business;
v.
CDT also retrenched its managing director
and consolidated the
senior managerial roles
in CDT with those of other parts of TMG.
b.
They should not be required to prove that they had attempted to find
an alternative buyer. They
argued that on the facts no alternative
buyer was likely as:
i.
CDT was loss making;
ii.
the industry was in decline;
iii.
CTP was the only entity which was able to purchase CDT and reduce the
per unit costs of production;
and
iv.
no other purchaser would have the track record to deal with the
"majors".
c.
CDT would almost certainly exit the market in the short term, which
meant there would likely
be only one long run replicator in South
Africa.
d.
The Commission did not take into account the established
jurisprudence which relates to the
acquisition of a firm failing or
likely to exit the market. Had the Commission applied the correct
counterfactual, it would be
found there is no likelihood of merger
specific unilateral effects.
[15]
With regards to the Commission's proposed conditions the merging
parties submitted the following:
a.
The Commission proposed a condition prohibiting the merged firm from
increasing its prices
above inflation for a period of 5 years from
the Implementation Date and reserved the right to conduct a review to
assess
whether there is a need to extend the application of this
condition for an additional period. The merging parties argued that
much
of their production costs relied on imported material and these
costs increased at levels above inflation.
b.
The Commission required the merged firm to not require minimum orders
of more than 100 for a period
of 5 years. The merging parties argued
that the Commission did not take into account that the standard
minimum order quantities
of the parties pre-merger is 300 units.
These are set as such as it is prohibitively expensive to produce CDs
and DVDs on a smaller
scale. The Commission's condition is therefore
not merger specific, and in any event, absent the proposed merger,
CDT will exit
the market, meaning any change in this regard is not
merger specific.
c.
CTP did indicate it had no objection to the condition that it may not
compel its customers
for its replication services to use its
distribution services.
d.
The Commission did not apply the correct counterfactual in
considering the public interest
considerations. Retrenchments were
inevitable absent the merger and as such the Commission ought to have
concluded the reduction
in employment was not merger specific. The
criticism that a rational process in establishing the impact on
employment was not followed,
was incorrect. Absent the transaction
CDT would close and therefore the entire workforce of CDT (58
employees) would be retrenched.
Therefore this condition was not
warranted given that the proposed transaction was employment
enhancing.
[16]
Based on the above submissions, the merging parties submitted the
proposed transaction should be approved without conditions.
Alternatively if any conditions were imposed these should only relate
to the confirmation that CTP will not compel replication
customers to
use its distribution services.
[17]
At a pre-hearing on 18 February 2016, the Tribunal ordered that the
merging parties tender revised conditions to the Commission.
On 25
February 2016, the merging parties submitted revised merger
conditions to the Commission. The merging parties proposed conditions
which dealt with all the concerns of the Commission other than the
pricing concern.
[18]
Accordingly, at the hearing there was only one issue in dispute for
the Tribunal to determine and that is whether the Commission's
proposal for a pricing cap condition was justified. A key issue to
determine whether a pricing condition was warranted was whether
CDT
was a failing firm. If it was, then a post-merger price rise could be
justified as a consequence of saving the firm from exiting
the
market; or alternatively the counter factual was that if it exited,
because no other buyer for the assets existed, then the
market
outcome would be the same - there would still only be CTP left in the
relevant market. However if it was not a failing firm,
the merger was
clearly anticompetitive - a move from a two firm market to a single
firm one - and then imposing a pricing remedy
or prohibiting the
merger would be justified. For this reason we first consider whether
the failing firm defence applied in this
case.
The
Failing Firm
[19]
Section 12A(2) of the Act recognises that the question of whether the
business or part of the business of a party to the merger
or proposed
merger has failed or is likely to fail is one of the factors to which
regard will be had in considering a merger.
[20]
The Tribunal
in
Iscor/Saldahna
Steel
[1]
made the
following
observation
about
the failing
firm:
"In
our
Act,
the
failing
firm
doctrine
i
s
not used
as
a
'defence'
to
a
merger
that
has
been
found
on
an
initial
market
analysis
to
be
anticompetitive.
Rather
it
i
s
recognised
as
one
of
list
of
'factors'
that
one
takes
into
account
before
one can determine whether
a
merger
i
s
anticompetitive.
"
[2]
However,
the Tribunal made plain that in certain circumstances a finding that
a firm was failing could be decisive:
"A
merger
would
not
be
regarded
as
lessening
competition
if
the
conditions
laid
out in the more stringent EU test [for
a
failing
firm] can be satisfied."
[3]
The
stipulations for the EU test were recorded by the Tribunal in Iscor
as follows:
"a)
the acquired
firm would have withdrawn from the
market if not
taken over
by the
other
firm;
b)
the acquirer
would gain the market
share
of the acquired
firm if the latter
were
to exit the market; and
c)
no
alternatives
were
available
that
were
less
anticompetitive.'
[4]
[21]
The
Tribunal further made clear that even where the EU test conditions
were not met, the
fact that a
party to the merger was failing in
the broad
sense may still be sufficient to
justify the
approval
of an
otherwise
anti-competitive
merger,
"depending
on
the degree
of
the
anti-competitive sting"
[5]
of
the
merger.
[22]
At the hearing we heard the testimony of two witnesses: Mr Andrew
Gill ("Gill"), an Executive of Times Media Group
("TMG"),
who was called by the merging parties and Mr Paul Jenkins
("Jenkins"), the Executive Chairman of CTP
who was called
at the request of the Tribunal.
[23]
According to Gill in his witness statement:
a.
TMG resolved that CDT should be disposed of and if no purchaser was
found CDT would be closed
with effect from June 2016. CDT made
significant losses in the previous financial year and it was forecast
to do so again this
year. Times Media Home Entertainment is CDT's
largest single customer and made a substantial Joss in TMG's latest
financial year,
and thus TMG has decided to
wind down
this
business.
b.
CDT's financial position had worsened considerably as Coleske had
moved their business from
CDT to CTP, and Universal (which accounts
to more than 50% of CDT's turnover) has indicated it will do the same
once its current
contract with CDT ended. Universal had also
cancelled its contract in respect of new releases and now places its
orders on an
ad hoc
basis. CDT had also lost the UNISA tender
for replication of DVD's.
[24]
In his oral submissions before the Tribunal at the hearing on 15
March 2016, Gill submitted that TMG had taken a strategic
decision to
dispose of its non-core businesses and that included CDT. Gill also
submitted that CDT had incurred significant losses
during the
previous financial year, which were exacerbated by the loss of the
major clients mentioned.
[25]
Gill testified that this was a unique market in its final phase of
use, and that there are only two significant players left
(being CTP
and CDT), and that several customers that have left CDT have moved
over
to CTP. It then follows that the market share of CDT
would be gained by CTP anyway if CDT was to exit the market. This,
argued the
merging parties,
satisfies
the second requirement of the EU test for failing firms.
[26]
With regards to the final requirement of the EU test for failing
firms, Gill testified that CDT considered that trying to find
an
alternative buyer, and thus a less anticompetitive outcome, would
have been fruitless because it would make no sense for any
other firm
besides CTP to buy the business given that no other firm had the
expertise and this was a dying market. CTP would be
in a unique
position as it could post-merger, lower production costs. This was
not something any other buyer could do.
[27]
Although the Commission cross examined Gill to test the reasons why
no attempt had been made to find another buyer it did not
lead any of
its own witnesses on this point. Moreover the Commission had during
its investigation approached Jetline which indicated
it would not be
interested in buying the firm, nor was Universal, one of the major
customers. This would vindicate the testimony
of Gill i.e. that the
effort of finding a buyer, although not embarked on, would have
proved fruitless.
[28]
There was also no serious challenge to Gill's testimony that CDT's
market share would, on exit, have all gone to CTP. The evidence
was
that this was already taking place pre merger with some
customers moving across already.
[29]
We find that on a balance of probabilities despite CDTs' lack of
effort to find another buyer the argument why another was
unlikely
given the nature and characteristics of this market was persuasive.
Nor had the Commission identified a likely candidate
e.ither although
it had made the effort to identify one. Further the facts show that
if CDT had exited all its market share would
have gone to CTP. Nor
were we persuaded that CDT was not a failing firm. Its recent
performance in the market and steady loss of
customers to CTP suggest
it was. Therefore, based on the facts before the Tribunal, we find
CDT meets the requirements of
the EU test for failing firms.
[30]
The next aspect to be decided by the Tribunal was whether or not the
imposition of a pricing condition on the failing firm
was warranted.
Pricing
Condition
[31]
Jenkins testimony was relevant to the pricing condition, which
recall, CTP had rejected.
Essentially
he made two main points:
a.
The industry might not even last another two years let alone five
years so a five year cap was excessive.
b.
That basing a pricing cap subject to an annual inflationary increase
would be uncommercial as the firm's costs
were largely dependent on
imports whose prices increase at a supra-inflationary level.
[32]
The Commission cross examined Jenkins to see whether he would agree
to a pricing cap that was not based on inflation as the
index.
Jenkins however rejected any pricing cap. His reasons were that the
acquisition was highly risky and that the prospects
for returns,
given that the CD industry was dying, were short term. Any form of
pricing cap would remove any justification for
doing the merger.
[33]
We have no reason not to accept Jenkins's evidence on these two
aspects.
[34]
As a result we have concluded that the imposition of a pricing cap
condition either in the form proposed by the Commission
or a more
modified form, is not justified. We make this finding for two
reasons:
a.
As noted earlier, applying the approach in
Iscor,
where
the merger meets the stringent EU standard then it would not be
regarded as anticompetitive. This is because on the counterfactual
the market share would have gone to the acquiring firm if the target
firm had exited. We have found on the facts this to be the
case here.
b.
Even if we are wrong about all the elements of the European test
being met in this case,
we have to have regard to the most
significant common cause fact in this case
-
this is a fast declining and potentially dying market. Whilst
undoubtedly post-merger the prices for the products will increase,
the market power enjoyed post-merger will be relatively brief. In the
words used in
/scar,
the anticompetitive
"sting"
whatever its intensity will of necessity be brief. Nor will the
merging parties have carte blanche to charge what they like. The
higher their prices the quicker they will speed up the demise of
their ailing product. This fact alone should disincentivise any
short
term price gouging.
c.
Further the non-pricing concerns have been met by the concessions the
merging parties
made at the hearing including, at the request of the
Tribunal, an undertaking not to require exclusivity in in its
contracts with
customers.
[35]
Further, the merger does have some positive outcomes. By purchasing
the assets, according to Jenkins, some efficiencies will
be achieved
as with increased capacity the merged firm can meet demand quickly at
times such as Christmas where demand spikes.
Increased volumes will
also drive down unit costs of production.
[36]
Further, on public interest grounds the merger will save some jobs at
least for some time. The moratorium on retrenchments
whilst not
protecting all jobs mitigates the effects on some.
Conclusion
[37]
For these reasons we decided on 16 March 2016 to approve the merger
subject to conditions that address the non-price competition
concerns
and the public interest concern. For ease of reference these
conditions are attached again to these reasons as Annexure
A.
11
May 2016
DATE
_______________
Mr
Norman Manoim
Mr
Andreas Wessels and Mr
Anton Roskam concurring
Tribunal
Researchers:
Derrick Bowles and Kameel
Pancham
For
the merging parties:
G. Marriot instructed by Nortons
Inc.
For
the Commission:
Anisa Kessery and Gilberto Biacuana
CONFIDENTIAL
"Annexure
A"
CTP
LIMITED
I
COMPACT DISC TECHNOLOGIES, A DIVISION OF
TIMES MEDIA (PTY) LTD
CT
CASE NUMBER: IM232Feb16
CONDITIONS
1.
Definitions
The
following expressions shall bear the meanings assigned to them below
and cognate expressions bear corresponding meanings -
1.1.
"Approval
Date"
means the date
referred to in the Competition Tribunal's Merger Clearance
Certificate (Form CT1O);
1.2.
"CDT"
means Compact Disc Technologies, a
division of Times Media (Ply) Ltd;
1.3.
"Commission"
means the Competition Commission
of South Africa;
1.4.
"Commission
Rules"
means the
Rules for the Conduct of Proceedings in the Commission;
1.5.
"
Competition
Act"
means
the
Competition Act, 89 of 1998
, as amended;
1.6.
"Conditions"
means these conditions;
1.7.
"CTP"
means CTP Limited, the acquiring firm;
1.8.
"Effective
Date"
means the date,
occurring after the Approval Date, on which the Proposed Transaction
is implemented by the Merging Parties;
1.9.
"Merging
Parties"
means CTP (the
Acquiring Firm) and CDT (the Target Firm);
1.10.
"Proposed
Transaction"
mean the
acquisition by CTP of the fixed assets and stock less certain
liabilities of the business in CDT;
1.11.
"Tribunal Rules"
mean the Rules for the Conduct of
Proceedings in the Tribunal.
2.
Conditions to the approval of the Proposed Transaction
2.1.
CTP will not compel any customer (or potential customer) which wishes
to use its
services to replicate CDs and/or DVDs to use the
distribution services which it offers through RNA. Put differently,
it will not
make the use of its services as a replicator of DVDs or
CDs conditional on the use of its services as a distributor of CDs or
DVDs.
2.2.
CTP will allow customers to place minimum orders of between 100 and
300 CDs.
2.3.
CTP will not require any customer to commit to exclusivity in its
contract with CTP
in respect of replication.
2.4.
CTP will not, after the Effective Date, effect more than 23 merger
specific retrenchments
of employees employed by CDT or by CTP in its
CD and DVD replication division.
2.5.
This condition will not preclude CTP from:
2.5.1.
implementing voluntary retrenchment
or voluntary
separation
arrangements;
2.5.2.
offering voluntary early retirement packages;
2.5.3.
dismissing employees as a result of
unreasonable refusals to be redeployed
in
accordance with the provisions of the Labour Relations Act;
2.5.4.
accepting resignations in the ordinary course of business;
2.5.5.
terminations in the ordinary course of business including dismissals
as a result of the conduct or capacity of the employees
in question
(including misconduct, poor performance, ill-health or incapacity);
and
2.5.6.
not filling positions which become vacant as a result of any of the
eventualities specified in this clause and including
retirement.
2.6.
The conditions contained in paragraph 2.4 read with paragraph
2.5 will apply for a 24 month period after the Approval
Date.
3.
Monitoring of
compliance
with
the
Conditions
and
General
Provisions:
3.1.
The Merging Parties shall notify the Commission of the
Merger
Implementation Date by way of an affidavit within 10 days of the
Merger Implementation Date.
3.2.
The Merging Parties shall circulate a copy of the conditions
to the
employees employed by CDT and those employed within the CD and DVD
replication business of CTP within 7 days of the Tribunal
Order.
3.3.
CTP will for a period of 2 years after the Merger Implementation
Date
notify the Commission of any retrenchment that will take place. The
notification must take place within 3 days of the issuing
of a notice
to employee(s) in terms of section 189 of the LRA.
3.4.
In the event that the Commission determines that there
has been an
apparent breach by the Merging Parties of these Conditions, this will
be dealt with in terms of Rule 39 of Commission
Rules read together
with Rule 37 of the Tribunal Rules.
3.5.
The Merging Parties may at any time, on good cause shown,
approach
the Tribunal for the conditions to be lifted, revised or amended.
3.6.
All
correspondence
in
relation
to these
Conditions should be
forwarded
to
merqerconditions@compcom.co.za.
[1]
ISCOR
Limited and Saldanha Steel (Pty)
Ltd
67/LM/Dec01
[2002]
ZACT 17.
[2]
ISCOR
Limited and Saldanha Steel (Ply)
Ltd
67/LM/Dec01
[2002] ZACT 17
at [101].
[3]
ISCOR
Limited and Saldanha Steel (Pty)
Ltd
67/LM/Dec01
[2002] ZACT 17
at
[110]
.
[4]
ISCOR
Limited and Sa/danha Steel (Pty)
Ltd
67/LM/Dec01
[2002] ZACT 17
at
[82]
.
[5]
ISCOR
Limited and Sa/danha Steel (Pty)
Ltd
67/LM/Dec01
[2002]
ZACT 17
at
[110]
.