Brief Summary

Competition — Merger approval — Conditional approval of merger between AFGRI Operations Limited and Pride Milling Company (Pty) Ltd — AFGRI proposed to acquire Pride Milling in two stages, with the first stage granting control — Competition Commission identified potential market share concerns in the hominy chop market — Tribunal approved the merger subject to conditions to mitigate risks associated with the second stage of the transaction — Conditions included notification requirements and submission of final agreements.

Comprehensive Summary

Summary of Judgment

1. Introduction

This judgment concerns intermediate merger proceedings before the Competition Tribunal of South Africa. The Tribunal was required to decide whether to approve a proposed acquisition and, if so, whether approval should be granted conditionally.

The acquiring firm was AFGRI Operations Limited (“AFGRI”), part of the AFGRI group of companies offering, among other activities, grain-related services and financing in the agricultural sector. The target firm was Pride Milling Company (Pty) Ltd (“Pride Milling”), a firm operating white maize mills and producing white maize products for human consumption as well as hominy chop as a milling by-product.

The matter followed the usual merger-control procedure under the Competition Act 89 of 1998. The merger was investigated by the Competition Commission (“Commission”), which engaged with market participants and identified issues arising from the merger’s two-stage implementation structure and from overlaps in the supply of hominy chop. The Commission and the merging parties ultimately supported approval subject to conditions, and the Tribunal heard the matter on 13 July 2016, issued an approval order the same day, and later published reasons on 11 August 2016.

The general subject-matter of the dispute was whether the proposed acquisition would be likely to substantially prevent or lessen competition in any relevant market (including risks of unilateral effects, coordinated effects, and vertical foreclosure), and whether any public interest concerns (particularly employment) arose. A further practical regulatory issue was whether the transaction’s staged structure could create a later, separate notifiable event requiring a fresh notification.

2. Material Facts

AFGRI was described as a diversified agribusiness operating through multiple divisions, with the Tribunal focusing on those relevant to overlaps with Pride Milling, including grain handling and procurement, storage, and related services, as well as animal feed and certain retail and financial services. Pride Milling operated three white maize mills (one in Nigel, Gauteng, and two in Ogies and Devon, Mpumalanga) and was principally involved in milling white maize into staple food products, while also producing and supplying hominy chop as a by-product of maize milling.

The proposed transaction entailed AFGRI acquiring all issued share capital in Pride Milling and its business as a going concern, resulting in AFGRI obtaining sole control over Pride Milling. A central factual feature, relied on in the Tribunal’s assessment, was that the draft sale arrangements contemplated implementation in two stages, described as Tranche A (an initial share acquisition) followed by Tranche B (acquisition of the remaining shares). The time between Tranche A and the Tranche B “Effective Date” was described as significant (more than 12 months), and the Commission regarded this gap as creating a risk that the later step might constitute a separate notifiable transaction if implemented outside the agreed timeframe.

In relation to market effects, the Commission treated yellow maize milling and white maize milling as separate markets, but identified a horizontal overlap in the production and supply of hominy chop, because both yellow and white maize milling processes generate hominy chop. The Commission’s market definition treated hominy chop produced from yellow and white maize as substitutable on both supply and demand considerations as accepted in the reasons.

Geographically, the Commission assessed a relatively narrow area, approximately within a 300 km radius of Pride Milling’s mills, based largely on the short shelf life of hominy chop and the associated transport and degradation considerations. Within that geographic framing, the Commission calculated the merged entity’s post-merger market share in hominy chop supply to be 17.2%, with larger competitors such as Pioneer Foods (Pty) Ltd (35.3%) and Premier FMCG (Pty) Ltd (21.7%) present in the area, along with a number of smaller suppliers.

The Commission received a concern from a competitor that the merged firm could obtain a significant position and potentially dictate hominy chop prices. The Commission also considered the market’s history of collusion-related conduct involving various firms (including the merging parties in other contexts), and evaluated whether the merger could facilitate coordinated conduct post-merger. It relied on structural features identified as potentially conducive to collusion (including product homogeneity and regular interaction across markets), but also relied on countervailing features (including fragmentation, asymmetry in shares, and pricing linked to a public reference index).

On vertical effects, the Commission identified several product and service relationships between the parties and assessed foreclosure risk in specific areas, including animal feed, white maize milled products and downstream retail, retail lending, and grain storage. One salient fact was that in a localised area (within about 60 km of AFGRI’s silos), AFGRI was the only silo operator and thus regarded as dominant in that local market for storage and handling, but Pride Milling was found to use less than 5% of AFGRI’s grain storage capacity.

On public interest, the factual basis relied on by the Tribunal was that the transaction was not expected to raise employment concerns because AFGRI was acquiring the operations with employees and intended to continue operating the business as it had been operated pre-merger.

3. Legal Issues

The central legal questions were whether the merger was likely to substantially prevent or lessen competition in any relevant market and whether any public interest grounds warranted prohibition or conditions. The competition assessment required determinations involving the application of law to fact, including market definition, analysis of unilateral effects, assessment of the likelihood of coordinated effects (given the market history and structure), and analysis of vertical foreclosure (ability and incentive).

A further legal and procedural question concerned the staged implementation: whether the two tranches were properly treated as one indivisible transaction (as the merging parties contended, including by invoking control considerations under section 12(2)(g) of the Competition Act), or whether the later tranche could amount to a separate acquisition of control (as the Commission considered possible, with reference to section 12(2)(a)), potentially requiring a further notification under section 13A if implemented outside the stipulated timeframe.

4. Court’s Reasoning

The Tribunal’s reasoning proceeded from the merger-control framework under the Competition Act, focusing on whether the transaction would materially harm competition in horizontal and vertical dimensions and whether public interest concerns arose. It also addressed the need for conditions to manage regulatory risk created by the transaction’s staged structure and the fact that the merging parties’ position on control was based on a draft rather than final agreement.

On the horizontal assessment, the Tribunal accepted the Commission’s identification of hominy chop as the market where a direct overlap existed. Although the parties were active primarily in different milling segments (white versus yellow maize), both supplied hominy chop as a by-product, and the Commission’s approach treated hominy chop from white and yellow maize as sufficiently substitutable on both supply-side and demand-side considerations.

In evaluating the risk of unilateral market power, the Tribunal relied on the Commission’s market share assessment and competitive landscape within the defined local geographic area. The merged entity’s estimated share (17.2%) was not the largest in the market, with larger firms (including Pioneer and Premier) expected to continue constraining the merged entity. The Tribunal also relied on evidence noted by the Commission that customers typically source from multiple suppliers and that no single supplier could meet demand, which reduced the likelihood that the merged entity could profitably dictate prices.

Regarding coordinated effects, the Tribunal accepted that there had been collusion-related matters involving firms in associated contexts, and it considered whether this market’s structural conditions would make coordination more likely post-merger. It relied on the Commission’s reasoning that, notwithstanding some potentially conducive features, sustained coordination was unlikely due to the market’s fragmentation, the short shelf life of hominy chop, the fact that it is a secondary by-product, and the pricing linkage to a publicly available reference price (SAFEX) for maize. These factors were treated as making a stable collusive mechanism less likely and, on the Tribunal’s conclusion, the merger did not increase the likelihood of coordination.

On vertical effects, the Tribunal relied on the Commission’s analysis across several upstream/downstream relationships and consistently assessed whether the merged entity would have the ability and incentive to foreclose rivals. For animal feed, the Commission’s findings accepted by the Tribunal included that hominy chop is substitutable as an input, that Pride Milling did not supply hominy chop to AFGRI or competitors on a sustained basis, and that AFGRI’s downstream position in cattle and sheep feed was small, all of which reduced foreclosure concern.

In the white maize products chain, the Tribunal relied on the Commission’s finding that Pride Milling would remain constrained by other large millers, and that downstream retail competition included numerous established retailers, which reduced both the feasibility and incentive for foreclosure. In financial services, AFGRI was not found to possess sufficient market power given the presence of large financial institutions, and Pride Milling was considered an insignificant part of that financial-services business, again undermining foreclosure theories.

In the grain storage (silo) assessment, the Tribunal accepted that AFGRI was the only operator in the narrowly framed local market and thus dominant, which supported a theoretical ability to foreclose. However, the Tribunal relied on the Commission’s incentive analysis: Pride Milling used less than 5% of silo capacity, and foreclosing other customers who used the remaining majority of capacity would not be profitable. Pride Milling was also described as an insignificant customer in this regard, which further weakened any customer foreclosure concern.

A distinct part of the Tribunal’s reasoning concerned the staged implementation of the transaction. The Tribunal recorded the disagreement: the merging parties characterised the two stages as indivisible and asserted control would arise after Tranche A under section 12(2)(g), while the Commission regarded the stages as divisible and considered that Tranche B could amount to a separate control acquisition under section 12(2)(a), particularly if implemented after a significant delay. Rather than resolving this as a purely abstract question on the draft agreement, the Tribunal endorsed conditional approval designed to ensure regulatory oversight and to require notification should Tranche B occur after the stipulated effective date, thereby guarding against the risk that a later step could “cross the bright line” and trigger a separate notifiable event.

On public interest, the Tribunal accepted that the transaction was not likely to raise employment concerns because the acquiring firm intended to take over the operations with employees and continue operating them substantially as before, and it identified no other public interest impediments on the facts before it.

5. Outcome and Relief

The Tribunal approved the proposed transaction between AFGRI Operations Limited and Pride Milling Company (Pty) Ltd, but subject to conditions directed at managing the regulatory risk associated with the two-stage structure.

The conditions (as amended for clarity at the hearing) required that the merging parties submit the signed final sale agreement to the Commission within 10 business days of signature, inform the Commission if Tranche B is implemented on or before the Tranche B Effective Date, and submit a merger notification in terms of section 13A of the Competition Act if Tranche B is implemented after the Tranche B Effective Date.

No separate costs order is recorded in the published reasons.

Cases Cited

Paramount Mills (Pty) Ltd v The Competition Commission.

The Competition Commission v Pioneer Foods (Pty) Ltd and 16 Other Respondents (Case No. 15/CR/Mar).

The Competition Commission v AFGRI Operations Limited and 16 Other Respondents (Case No. 43/CR/Jun11).

Legislation Cited

Competition Act 89 of 1998, including section 4, section 12(2)(a), section 12(2)(g), section 13A, and section 59.

Rules of Court Cited

No rules of court are cited in the published reasons.

Held

The Tribunal held that the merger was unlikely to substantially prevent or lessen competition in any relevant market. In the horizontal overlap market for the supply of hominy chop within the defined local geographic area, the merged entity was not found likely to obtain unilateral market power, and the transaction was not found to increase the likelihood of coordinated conduct, notwithstanding the market’s broader history of cartel investigations in related areas.

The Tribunal further held that the transaction was unlikely to raise vertical foreclosure concerns in the assessed upstream and downstream relationships, including animal feed, white maize products and retail, retail lending, and local grain storage, because the merged entity was not found to have both the ability and incentive to foreclose in a way that would harm competition.

The Tribunal also held that no public interest concerns arose on the evidence relied upon, including employment effects. However, due to the two-stage structure and the risk that the second tranche could later constitute a separate notifiable transaction if implemented after the relevant effective date, approval was granted subject to conditions ensuring disclosure of the final agreement, monitoring of implementation timing, and a mandatory notification obligation if Tranche B is implemented after the stipulated date.

LEGAL PRINCIPLES

The decision applied the merger-control principle that a transaction should be prohibited or conditioned only if it is likely to substantially prevent or lessen competition, assessed with reference to properly identified relevant product and geographic markets, and considering unilateral and coordinated effects.

In assessing unilateral effects, the Tribunal applied the principle that market shares and competitive constraints from rivals and customers’ ability to switch suppliers are central to determining whether the merged firm is likely to exercise market power post-merger.

In assessing coordinated effects, the Tribunal applied the principle that a history of collusion and certain market features may be relevant, but that coordination also depends on whether market conditions allow for a stable collusive outcome. The Tribunal accepted that fragmentation, asymmetry, product characteristics (including shelf life and by-product status), and pricing mechanisms (including linkage to public reference indices) may reduce the likelihood of sustainable coordination.

In assessing vertical effects, the Tribunal applied the principle that foreclosure concerns require examining both the ability and the incentive to foreclose, alongside the likely competitive effect. Even where a firm is dominant upstream in a narrowly defined local market, foreclosure may be unlikely if the economic incentives do not support it on the facts.

The Tribunal also applied the merger-control principle that transaction structure and timing can create regulatory risk of later, separate notifiable events. Conditions may be imposed to ensure that the Commission receives final documentation, is informed of implementation steps, and receives notification if later implementation potentially triggers a separate notifiable transaction under the Act.

Anheuser-Busch InBev SA/NV v SABMiller plc (LM211Jan16) [2016] ZACT 72 (4 August 2016)