Brief Summary

Competition — Merger approval — Acquisition of chrome mining and ferrochrome production assets — Samancor Chrome Limited's acquisition of assets from International Ferro Metals (SA) (Pty) Ltd and Sky Chrome Mining (Pty) Ltd approved unconditionally by the Competition Tribunal — Tribunal found no substantial lessening of competition in relevant markets, with merged entity's market shares remaining below thresholds — Positive employment effects anticipated post-acquisition despite prior retrenchments at target firms.

Comprehensive Summary

Summary of Judgment

1. Introduction

These proceedings concerned an intermediate/large merger (as treated by the competition authorities) before the Competition Tribunal of South Africa, in which the Tribunal was required to determine whether to approve a proposed acquisition and, if so, whether any conditions were warranted on competition or public interest grounds.

The acquiring firm was Samancor Chrome Limited (“Samancor”), a vertically integrated producer of ferrochrome operating in both upstream chrome ore mining/beneficiation and downstream smelting. The target firms were the chrome mining and ferrochrome production assets of International Ferro Metals (SA) (Pty) Ltd (“IFMSA”) (at the time in business rescue) and Sky Chrome Mining (Pty) Ltd (“Sky Chrome”), in which Samancor proposed to acquire 80% of the share capital.

The matter followed an investigation by the Competition Commission (“the Commission”), which assessed the merger’s competitive and public interest effects. The Tribunal heard the matter on 25 May 2016, issued an order on the same date approving the transaction unconditionally, and later furnished reasons on 15 July 2016.

The dispute’s general subject-matter was whether the proposed acquisition would likely substantially prevent or lessen competition in relevant markets for chrome ore and ferrochrome, whether any vertical foreclosure concerns arose (including in relation to electrode paste as an input), and whether the merger raised public interest concerns, particularly regarding employment in the context of IFMSA’s prior retrenchments under business rescue and Samancor’s contemporaneous labour restructuring process.

2. Material Facts

Samancor was described as a vertically integrated ferrochrome producer, conducting chrome ore mining in several South African provinces and operating three smelting plants. It also participated in a 50/50 joint venture (the Ferroveld Partnership) producing electrode paste, an input used in ferrochrome production.

IFMSA, controlled by an Australian-incorporated parent, had been in business rescue since 26 August 2015. Its primary assets—its chrome mining and ferrochrome production operations—were stated to be non-operational at the relevant time. IFMSA owned the Lesedi chrome mine in the North West province, adjacent to one of Samancor’s mines. Sky Chrome, also ultimately controlled within the same corporate group as IFMSA, owned an opencast chrome ore mine that had ceased operations in June 2014.

The proposed transaction entailed Samancor acquiring IFMSA’s chrome mining and ferrochrome production assets and acquiring 80% of Sky Chrome’s shares. Samancor’s stated rationale was that the IFMSA assets, if returned to operation, represented an attractive investment opportunity. IFMSA’s position was that a third-party disposal was the only reasonable prospect for rescuing the business and assets and that a sale offered the best prospects for creditors and employees.

On the competition side, the Commission identified two horizontal overlaps: an upstream overlap in the mining and production of chrome ore, and a downstream overlap in the production and supply of ferrochrome. The Commission also identified two vertical relationships: chrome ore production as an upstream input into ferrochrome production, and the production/distribution of electrode paste (through Ferroveld) as an input into ferrochrome production.

For chrome ore, the Commission considered market shares using total South African production in 2013–2014 (including internal consumption by vertically integrated firms). On that basis, the merged entity’s share was found to be less than 30%, with an accretion of less than 1%. Competitors included Glencore, Assmang, Hernic Ferrochrome, Rustenburg Minerals Development Company, and others. The merging parties also estimated that if only open market sales (excluding in-house sales) were considered, the merged share would be significantly lower than on the total production approach.

For ferrochrome, the Commission assessed an international market using 2013–2014 production figures and found the merged entity would have a post-merger share of less than 15%, with competitors including Glencore, Assmang, Hernic Ferrochrome, and others.

On public interest and employment, it was common cause in the reasons that IFMSA’s business rescue process led to the retrenchment of all IFMSA employees, affecting 723 employees, recorded in a collective agreement with labour constituencies. The retrenchment process commenced on 7 September 2015 and concluded on 5 November 2015. Some limited-duration contracts were later concluded with certain former employees for care and maintenance, metal recovery, and administrative functions.

Concerns were raised by trade unions. Solidarity initially sought a two-year job-loss moratorium but later withdrew that request and indicated the merger would have positive employment effects. UASA reported that Samancor was engaged in a section 189 process (Labour Relations Act process) contemplating retrenchments, but accepted in discussions with the Commission that these contemplated retrenchments were not caused by the merger transaction. UASA sought a condition to protect certain Samancor employees for two years post-implementation. NUMSA alleged Samancor intended to move furnace operations and close a plant, sought undertakings against retrenchments and relocation, and contended that IFMSA employees retrenched in November 2015 should be re-employed when operations recommenced.

Where disputes arose, the reasons reflect that Samancor denied that its section 189 process was merger-related, attributing it to market conditions including declining Chinese demand for chrome and ferrochrome. Samancor also denied having shut down furnaces in Mpumalanga or having long-term plans to do so. The Business Rescue Practitioner explained that retrenchments at IFMSA were undertaken to preserve the company, citing cost pressures and stating that the CCMA found retrenchments the only viable option at the time to preserve the company and ensure severance payments.

At the Tribunal hearing, the merging parties confirmed the 723 retrenchments at IFMSA (approximately 320 in mining and 405 in smelting). They further indicated that Samancor’s initially contemplated retrenchments (in excess of 1,900) had been reduced, and that forced retrenchments at Samancor would reduce to approximately 320 (approximately 60 in smelting/head office and approximately 260 in mining), largely due to restructuring measures and, to an extent, in contemplation of the merger. They estimated that recommissioning IFMSA’s smelting operations could require approximately 300 employees post-merger once ramped up, expected in the course of September 2016, but that mining-side job opportunities were harder to quantify due to dependencies on obtaining necessary DMR approvals.

3. Legal Issues

The central legal questions were whether the proposed transaction was likely to substantially prevent or lessen competition in any relevant market, given the identified horizontal overlaps in chrome ore and ferrochrome and the identified vertical relationships relating to upstream inputs (chrome ore and electrode paste).

A further central question was whether the merger raised public interest concerns—with emphasis on employment effects—that warranted the imposition of conditions, including whether retrenchments at IFMSA and Samancor were sufficiently connected to the merger to justify intervention.

The issues involved an application of established competition-law standards to facts (market shares, competitive constraints, and foreclosure incentives/ability) as well as an evaluative assessment of public interest considerations and the evidentiary linkage (or lack of linkage) between the merger and job losses.

4. Court’s Reasoning

On competition, the Tribunal adopted and agreed with the Commission’s analysis that the transaction created horizontal overlaps in the upstream chrome ore market and the downstream ferrochrome market, but that the available indicators did not point to a substantial lessening of competition.

In the chrome ore market, the Tribunal accepted the Commission’s market share assessment showing a post-merger share below 30% with a minimal accretion. The Tribunal also noted the presence of several competitors identified by the Commission. The reasons further reflected that when considering only third-party/open market sales (excluding internal consumption), the merged entity’s estimated market share would be materially lower, reinforcing the conclusion that market power was unlikely to be materially increased by the merger.

In the ferrochrome market, the Tribunal accepted the Commission’s view that the relevant competitive assessment was international in scope, and that the merged entity’s post-merger share would be less than 15%. The presence of substantial competitors in that market supported the conclusion that the merger was unlikely to alter competitive constraints in a way that would substantially prevent or lessen competition.

On the vertical aspects, the Tribunal accepted the Commission’s findings that foreclosure concerns were unlikely. In relation to chrome ore as an upstream input, the Commission found that Samancor’s chrome ore competitors had alternative customers other than IFMSA, including export opportunities. This reduced the plausibility of a foreclosure strategy causing competitive harm.

In relation to electrode paste, the Tribunal accepted the Commission’s analysis that the merged firm was unlikely to succeed in input foreclosure because Samancor could not consume all electrode paste produced by the Ferroveld Partnership. The Tribunal also noted that IFMSA had already sourced its electrode paste requirements from the Ferroveld Partnership pre-merger, which further undermined the notion that the merger would change input access in a manner harmful to competition.

On public interest and employment, the Tribunal addressed the union concerns and the background that IFMSA’s retrenchments occurred in the context of business rescue. The Commission’s investigation concluded that IFMSA employees were retrenched as a consequence of business rescue rather than the merger, and that Samancor was selected as preferred bidder only later in November 2015, after the IFMSA section 189 process had already begun. The Tribunal agreed with this sequencing-based inference and accepted that the IFMSA retrenchments were unlikely to be linked causally to the merger.

Regarding retrenchments within Samancor, the Commission found these were driven by market conditions rather than by the merger transaction. The Tribunal accepted this assessment. The Tribunal also accepted the Commission’s view, derived from the merging parties’ strategic documents, that it was unlikely Samancor would close furnace operations post-merger in the manner alleged by NUMSA, because such a move would contradict the commercial rationale and strategy presented for the merger.

The Tribunal took further assurance from the hearing, during which it questioned the merging parties on employment issues, including the retrenchments at IFMSA, the Samancor restructuring, and the likely jobs to be created upon restarting IFMSA operations. The Tribunal recorded its satisfaction with the responses provided, and concurred with the Commission’s overall conclusion that the merger would not raise significant public interest concerns warranting conditions, including the types of job protection undertakings sought by certain unions.

5. Outcome and Relief

The Competition Tribunal approved the proposed transaction unconditionally.

No behavioural or structural conditions were imposed, and the reasons reflected the Tribunal’s concurrence with the Commission that the merger was unlikely to substantially prevent or lessen competition and was unlikely to result in significant public interest concerns.

The reasons provided do not record any distinct costs order.

Cases Cited

No cases were cited in the published reasons.

Legislation Cited

Labour Relations Act (reference to section 189 retrenchment process)

Rules of Court Cited

No rules of court were cited in the published reasons.

Held

The Tribunal held that the acquisition by Samancor of IFMSA’s chrome mining and ferrochrome production assets, together with the acquisition of 80% of Sky Chrome’s shares, was unlikely to substantially prevent or lessen competition in any relevant market, despite horizontal overlaps in chrome ore and ferrochrome and vertical relationships relating to key inputs.

The Tribunal further held that the transaction was unlikely to give rise to significant public interest concerns, including in relation to employment, because the IFMSA retrenchments occurred in the context of business rescue and were not shown to be caused by the merger, and because Samancor’s retrenchment process was assessed as market-driven rather than merger-driven. The merger was therefore approved without conditions.

LEGAL PRINCIPLES

The Tribunal applied the principle that a merger should be prohibited or conditioned only if it is likely to substantially prevent or lessen competition in a relevant market, assessed through factors including the extent of horizontal overlap, market shares and accretion, and the presence of effective competitive constraints from identified rivals.

In assessing vertical effects, the Tribunal applied the principle that foreclosure concerns depend on the merged firm’s ability and incentive to foreclose rivals, and on whether such conduct would likely be effective given alternative sources or customers. The Tribunal accepted that where upstream rivals have alternative outlets (including exports), and where the merged firm cannot practically absorb total upstream output (here, electrode paste production), a theory of input foreclosure is less persuasive.

On public interest (employment), the Tribunal applied the principle that employment-related intervention in merger control depends on whether job losses are sufficiently linked to the merger as opposed to independent causes such as business rescue processes or general market conditions. The Tribunal’s acceptance of the Commission’s timing-based and documentary assessment reflected an approach that distinguishes retrenchments caused by the merger from retrenchments occurring for non-merger reasons, and treats only the former as potentially justifying merger conditions.

Samacor Chrome Limited v Chrome mining and Ferochrome Production Assets of International Ferro Metals (SA) (Pty) Ltd and Another (LM004APR16) [2016] ZACT 57 (15 July 2016)