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[2016] ZACT 67
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AFGRI Operations Limited v Pride Milling Company (Pty) Limited (LM237Feb16) [2016] ZACT 67; [2016] 2 CPLR 778 (CT) (10 August 2016)
COMPETITION
TRIBUNAL OF SOUTH AFRICA
Case
No: LM237Feb16
In
the matter between:
AFGRI
Operations
Limited
........................................................................
Acquiring
Firm
And
Pride
Milling Company (Pty)
Limited
............................................................
.
Target
Firm
Panel
.......................
:
...
Yasmin
Carrim (Presiding Member),
Andiswa
Ndoni (Tribunal Member)
and
lmraan Valodia (Tribunal Member)
Heard
on.
...............
:
.........
13
July 2016
Order
issued on
….
:
........
13
July 2016
Reasons
issued on
.
:
........
11
August 2016
Public
Reasons for Decision
Conditional
approval
[1]
On 13 July 2016, the Competition Tribunal ("Tribunal")
approved the proposed transaction between AFGRI Operations
Limited
and Pride Milling Company (Pty) Ltd, subject to conditions.
[2]
The reasons for the conditional approval of the proposed transaction
follow.
Parties
to the Transaction
Primary
acquiring firm
[3]
The primary acquiring firm is AFGRI Operations Limited ("AFGRI"),
a company incorporated in terms of the laws of the
Republic of South
Africa ("RSA").
[4]
AFGRI is controlled by AFGRI (Ply) Ltd, which In turn is controlled
by
AFGRI
Holdings (Ply) Ltd ("AFGRI Holdlngs").
[1]
AFGRI controls a number of firms (the
companies
within
AFGRI that
are
Incorporated
in
RSA
will be
referred
to as the
"AFGRI
Group").
[5]
The AFGRI Group of companies provide a diverse and integrated range
of products and services through four focussed operating
divisions,
namely: AFGRI Agri Services, AFGRI Financial Services, AFGRI Foods
and AFGRI Investments. The AFGRI Agri Services and
AFGRI Financial
Services divisions are relevant for the current analysis as the
operations under these divisions overlap with those
provided by Pride
MIiiing.
[6]
AFGRI Agri Services comprises of divisions that serve the primary
agricultural production sector with a specific focus on the
maize
value chain from land preparation, seeds and other Inputs,
harvesting, grain procurement and storage. Other divisions of
AFGRI
Agri Services include: AFGRI Equipment which provides a range of
equipment, products and services that are available through
AFGRl's
network; AFGRI Grain Management which offers storage of agricultural
products, grain handling and procurement services;
Collateral
Management International business provides collateral and stock
monitoring services to agribusinesses; and Hinterland
which is a
joint venture between AFGRI and Senwes which comprises of their
respective retail stores and the related wholesale businesses.
[7]
AFGRI Financial Services provides financial and credit facilities to
customers that operate in the agricultural sector through
three
business units: GroCapital which provides specialised finance to
businesses involved in the agricultural value chain; the
UNIGRO
Financial Services which acts as an originator and administrator for
the Land and Agricultural Development Bank of South
Africa ("Land
Bank") in the extension of agricultural credit to primary
producers of agricultural products; and the UNIGRO
Insurance Brokers
provides risk solutions and insurance.
[8]
AFGRI Foods comprises three divisions, namely: the AFGRI Animal Feed
division that converts raw grain and other key elements
into balanced
feed for the livestock and dairy industries; Nedan, the oil
extraction and protein plant which processes oil and
raw material
into edible oil, fats and high protein textured vegetable products
for the food processing and animal feed industries;
and AFGRI Milling
which comprises of three yellow maize mills in Mpumalanga which
produce yellow maize grits that are used in the
production of various
maize-based value-added products for human consumplion such as
cereals, crisps and thickeners.
[9]
AFGRI Investment offers agricultural support services in the areas of
retail and commodity brokerage and shipping through its
three
business units: GROCAT which sells and distributes diesel, coal and
other commodities to agricultural customers; Prodist
which is a
wholesale distributor of agricultural requirements, hardware, general
merchandise and irrigation, focused on the development
of an
efficient channel of supply into the agribusiness and hardware retail
store markets in South Africa and neighbouring countries;
and GeoAgro
which offers farmers the opportunity to enhance their farming
operations through technology.
Primary
target firm
[10]
The primary target firm is Pride Milling Company (Ply) Ltd ('Pride
Milling), a company Incorporated in terms of the company
laws of RSA.
Pride Milling is jointly controlled by two individuals. Pride Milling
does not control any firm.
[11]
On 1 August 2001, Pride Milling was established by acquiring the
maize milling business of AFGRI, which consisted of white
maize
milling plants and yellow maize milling plants exclusively operated
by AFGRI. In August 2011, AFGRI repurchased its yellow
maize milling
business from Pride Milling (hereinafter referred to as the "2011
Yellow Maize Acquisition") and thus Pride
Milling retained the
white maize milling operations.
[12]
Pride Milling owns and operates three white maize mills of which one
is located in Nigel in Gauteng and two located
in Ogies
and Devon in Mpumalanga. Pride Milling is principally involved in the
milling of white
maize for
the production of staple food products for human consumption (e.g.
white maize
meal) as well as hominy chop.
[2]
Pride Milling also owns and operates a food and feeds mill that
manufactures and packs a range of grains, beans and pulse related
products.
Proposed
Transaction
[13]
AFGRI intends to acquire all the issued share capital of Pride
Milling and its business as a going concern. Post-merger, AFGRI
will
have sole control over Pride Milling.
[14]
According to the Draft Sale of Shares and Claims Agreement ("Draft
Agreement"), the proposed transaction will be
implemented in two
(2) stages: the first stage involves AFGRI acquiring an initial
number of shares In Pride Milling ('the Tranche
A Sale") and the
second stage involves AFGRI acquiring the remaining shares in Pride
Milling ("the Tranche B Sale").
According to the Draft
Agreement, Tranche A Sale and Tranche B Sale will not take place
simultaneously (the date on which the Draft
Agreement stipulates that
the Tranche B Sale will take place will be referred to as the
'Tranche B Effective Date"). The merging
parties testify that
the rationale for structuring the deal in 2 steps is for the
calculation of the transaction price for the
Tranche B Sale and that
it Is unlikely that the Tranche B Sale will not occur for whatever
circumstances that occur after the Tranche
A Sale.
[15]
The merging parties submit that the two stages are indivisible and
constitute a single transaction and that AFGRt will exercise
control
over Pride Milling in terms of section 12(2)(g) of the Competition
Act 89 of 1998 ("the Act") following the implementation
of
the Tranche A Sale. It must be noted that this assertion is based on
a draft and not a final agreement.
[16]
The Commission is of the view that the two stages are divisible and
that the Tranche B Sale is a separate transaction which
constitutes
an acquisition of control in terms of section 12(2)(a) of the Act.
The time period between the Tranche A and Tranche
B Effective Dates
is significant (more than 12 months), and any extension of the period
would warrant further investigation by
the Commission. Thus the
implementation of the Tranche B Sale may trigger a separate
notification in terms of section 13A of the
Act, as AFGRI will "cross
the bright line". The Commission proposed the institution of
Conditions to this transaction
in order to guard against these risks.
[17]
The Commission agreed with the merging parties that the proposed
transaction be approved subject to the Conditions. At the
hearing the
Tribunal amended the wording of these Conditions to ensure that they
are clear. The Merging Parties shall:
a.
Submit a copy of the Final Sale Agreement within 10 (ten) Business
Days following final signature by the Merging Parties.
b.
Advise the Commission of the implementation of the Tranche B Sale
should they implement the Tranche B Sale on or before the Tranche
B
Effective Date.
c.
Submit a notification in terms of
section 13A
of the
Competition Act,
should
the Tranche B Sale be implemented after the Tranche B
Effective Date.
Rationale
[18]
Upon implementation of the 2011 Yellow Maize Acquisition, AFGRI
re-entered the maize milling market but only as a yellow maize
miller. AFGRI now wants to re-acquire the remaining Pride Milling
mills as it wishes to re-enter the white maize milling market
to
expand its operations in the downstream processing sector for
agricultural products by utilising the proximity of Pride Milling's
mills to AFGRl's geographic area of operation.
[19]
The proposed transaction presents an opportunity for the owners
to realise their investment.
Impact
on Competition
Horizontal
assessment
[20]
Pride Milling is a white maize miller that produces maize products
for human consumption whereas AFGRI is a yellow maize miller
that
produces maize grits that are used as inputs in the production of
animal feed and products for human consumption. All yellow
and/or
white maize mills produce hominy chop as it is generated as a
by-product of the maize milling process - therefore both AFGRI
and
Pride Milling are suppliers of hominy chop.
[21]
Although the Commission found that the markets for yellow maize and
white maize are separate markets, the Commission identified
the
relevant
market as
the market for the production and supply of hominy chop, where there
is
a
horizontal overlap
in the
activities
of the
merging
parties
in
that
market. The
Commission found that hominy chop produced from yellow maize and
white maize
is substitutable on the supply-side because the machines used by
yellow and white maize millers are the same; and on
the demand-side
based on the views of customers that the different value of hominy
chop
produced
from white and yellow maize is not a factor in
their
purchasing.
[3]
[22]
In determining the appropriate geographic market, the Commission
considered a narrow market within a radius of approximately
300
kilometres ("km") of Pride Milling's mills in an area that
includes mills plants in Mpumalanga and Gauteng. The narrowness
of
the market is largely due to the short shelf life of hominy chop
making it imperative to supply within a localised area to avoid
the
product from degrading and to reduce transportation costs. There is a
geographic overlap in the activities of the merging parties.
[23]
The Commission received concerns from
a
competitor of the merging parties in respect to yellow maize milling
(competing directly with AFGRI) and in the supply of hominy
chop
(competing with both
AFGRI and
Pride Milling) submits that the merged entity might have significant
market
share post-merger
which will
enable the merged entity to engage in
unilateral
conduct by
dictating
the price
of hominy
chop
post-merger. The Commission
found that
the merged
entity will
have
a
post
merger market share of 17,2% in
the defined
geographic market.
[4]
Pioneer
Foods (Pty) Ltd
("Pioneer")
(35,3%) and Premier FMCG (Pty) Ltd
("Premier
Foods")
(21,7%)
have higher market shares than the merged entity and
are likely
to continue to constrain the merged entity post-merger. The
Commission further notes that there are many smaller
competitors
that supply hominy chop in the market and that any yellow or white
maize mill that processes maize can
produce and
supply
hominy
chop. In
addition, none
of the
customers identified by the merging parties raised concerns with the
proposed transaction
and the
customers stated
that they
have
more than
one supplier of hominy chop at any
given point
in time as
their
required hominy chop cannot be sufficiently
met by one
supplier. Therefore,
the
Commission
is of the
view that the merged entity is unlikely to have the market power to
engage in
unilateral
conduct post-merger. The Tribunal therefore concludes that the
proposed transaction will not substantially prevent
or
lessen competition
in the
horizontal market
[24]
Against the backdrop of the history of collusion in the market the
Commission considered whether the proposed transaction is
likely to
facilitate coordinated conduct in the market for the supply of hominy
chop post-merger. In
this regard
the merging parties have been implicated in a number of
cartel
investigations and have been
fined by
the
Tribunal under section 59 of the Act for conduct in contravention of
section 4 of the Act
[5]
.
[25]
The Commission found that the market conditions are conducive for
collusion by identifying the structural features of the market.
The
structural features identified include that hominy chop can be
regarded as a homogenous product; barriers to entry appear to
be high
in the market; and competitors regularly interact in other
geographical and products markets. Al the same lime the Commission
noted that the large number of firms active in the market and the
asymmetry in the market shares amongst competitors is not conducive
for coordinated conduct.
[26]
The Commission argued
that it
is unlikely
that market participants
will be
able to
find a suitable and sustainable collusive mechanism in the market.
The
prevailing market
conditions
making
this
unlikely
include:
the
price
of
hominy chop
which is calculated on the basis of the price of maize that is set on
a common,
publically
available,
reference
index
for
white
and
yellow
maize
(the South
African
Futures
Exchange
Division
[SAFEX]);
[6]
the
fragmented
market; the
short shelf life
of the
product; the fact that the product is a secondary by product;
and that the high demand for hominy chop cannot be met
by
any single
supplier.
[27]
In light of the above the Tribunal concluded that the merger does not
increase the likelihood of co-ordination post-merger.
Vertical
assessment
[28]
The Commission found that there are six services and/or products that
the merging
parties procure from each other. The Commission did not assess the
vertical overlap in the markets for the grain screening
services
Pride
Milling
provides to AFGRI and in grain trading where AFGRI sells maize to
Pride Milling because the proposed transaction Is unlikely
to raise
foreclosure
concerns In these markets.
[7]
The Commission looked al the following markets:
(a)
The market for the supply of cattle and sheep feed In
South Africa and
within Gauteng and Mpumalanga
[29]
In the upstream market for the production and supply of hominy chop,
Pride Milling supplies hominy chop to AFGRI to use as
an input to
produce animal feed which it supplies in the downstream market for
the production and supply of cattle and sheep feed.
[30]
In assessing the likelihood of input foreclosure post-merger, the
Commission found that hominy chop Is substitutable as an
input for
the production of animal feed. The Commission also found that Pride
Milling does not supply hominy chop on a sustained,
regular basis to
AFGRI or any other animal feed manufacturers that compete with AFGRI.
These factors indicate that the merged entity
does not have the
ability and incentive to engage In input foreclosure.
[31]
The Commission found that the downstream market is fragmented and
that AFGRI
has approximately 1% market share in the market for the production of
cattle and sheep feed.
[8]
AFGRI
also does not purchase chop from Pride Milling or any other mills on
a sustained, regular basis, as it currently
fulfils
nearly all of Its maize input requirements from its own maize
processing plants in the region; AFGRI only purchases chop
from Pride
Milling when it is available at an attractive price (relative to
other substitutes). Therefore AFGRI does not have sufficient
market
power to engage in customer foreclosure.
(b)
The national market for the production and distribution
of white maize milled products
[32]
In the upstream market for the production and supply of white maize
products, Pride Milling mills white maize to produce maize
products
and in the downstream market for the retail of white maize products,
AFGRI owns retail stores which sell maize products.
[33]
The Commission found that Pride Milling will continue to face
competitive constraints from other large millers such as Pappas,
Premier Foods, Tiger Consumer Brands Limited ("Tiger Brands")
and Pioneer Foods. The merged entity will therefore not
have the
ability to engage in input foreclosure conduct.
[34]
In the downstream market for the retail of maize, the Commission
finds that there are a number of alternatives which include
established retailers such as Spar Group Limited, Shoprite Holdings
Limited, Massmart Holdings {Ply) Ltd and Pick 'n Pay Retailers
Limited that will constrain the merged entity post merger. The
Commission found that none of the competitors in the downstream
market identified AFGRI as a significant purchaser of these products
and as such did not raise any concerns with the proposed transaction.
Therefore, the Commission is of the view that the proposed
transaction is unlikely to lead to customer foreclosure concerns in
the market, as the merged entity will have no incentive to cease
supplying these products to other purchasers and current customers
of
Pride Milling.
(c)
The provision of retail lending in South Africa
[35]
AFGRI supplies retail lending to agri-buslnesses such as Pride
Milling.
[36]
The Commission found
that AFGRI
does
not have
market
power,
as
it
holds
approximately 10% of the market and continues to face a competitive
constraint from financial
i
nstitutions
with
l
arge
scale finances such as the Land Bank
(26,9%
market share),
ABSA Bank
Limited
(28,9%) and
Standard Bank
of
South
Africa
Limited
(14,5%)
and any
of the
other
financial
service providers.
[9]
The
Commission
i
s
of the view that AFGRI would not have the ability or
incentiv
e
l
o
engage
i
n
input foreclosure
as
Pride
Milling contributes an
insignificant
portion to
Its
financial services
business
and there
are viable
alternative
suppliers.
There are also many other
agribusinesses
in the market which providers of retail
l
ending
competing with AFGRI
can
continue to supply post-transaction, meaning that it is unlikely
that
customer
foreclosure
would
occur.
(d)
The provision of grain storage facilities (silos)
within the 60 kilometre radius
of
AFGRl's silos
[37]
AFGRI provides grain management service - which include grain storage
and handling services - to customers such as Pride Milling
In
commercial silos.
Customers
tend to store their grain in the closest silo and do not want to
travel far for the risk of losing their crop. The Commission
is of
the view that the effects of the proposed transaction are likely to
be local as Pride Milling uses the adjacent AFGRI silos
to store its
maize.
[38]
AFGRI
i
s
the only silo operator
i
n
the geographic market, making ii dominant and able to engage
i
n
i
nput
foreclosure conduct post-merger. The Commission
found that
AFGRI is
unlikely
to
have
an
i
ncentive
to
engage
in foreclosure conduct post-merger as Pride Milling uses
l
ess
than 5% grain storage space
i
n
AFGRl's silos.
[10]
It
would therefore not be profitable for AFGRI
l
o
foreclose
other
customers that utilises 95%
of their
grain
storage
facilities
i
n
favour of
Pride Milling.
[39]
The Commission also found that Pride Milling only stored grain in
AFGRl's silos In the last 24 months. Pride Milling is an
insignificant customer of AFGRI , therefore the proposed transaction
is unlikely to raise customer foreclosure concerns.
(e)
Conclusion
[40]
Pride Milling and AFGRI have a long history and close relationship,
given that Pride MIiiing was historically owned by AFGRI
prior to it
selling Pride to its current shareholders. Accordingly, to the extent
that Pride Milling has needed products and services
which AFGRI
supplies to agribusinesses in South Africa, Pride has typically
turned to AFGRI as a supplier. The proposed transaction
is,
therefore, unlikely to result in any customer foreclosure concerns
for competitors of AFGRI in the supply of these products
and services
in the market, as Pride is typically already procuring these products
and services from AFGRI.
[41]
The Tribunal concluded that the merged entity does not have the
incentive in any of the markets to raise any input or
customer
foreclosure concerns. The transaction will, therefore, not result in
any substantial prevention or lessening of competition
in the
vertical markets identified.
Public
interest
[42]
The proposed transaction is unlikely to raise employment concerns, as
AFGRI is acquiring the Pride Milling's operations with
the employees
and intends to operate Pride Milling's operations as they are
operating pre-merger.
[43]
The proposed transaction further raises no other public interest
concerns.
Conclusion
[44]
In light of the
above,
we concluded that the proposed
transaction is unlikely to substantially prevent or lessen
competition in any relevant market. In
addition, no public interest
issues arise from the proposed transaction. Accordingly, we approved
the proposed transaction subject
to the conditions outlined in
paragraph [17].
_______________________
Yasmin
Carrim
Andiswa
Ndoni and Imraan Valodie concurring
10
August 2016
10
August 2016
DATE
Tribunal
Researcher: Derrick
Bowles assisted by Thalalolwazi
Msutu
For
the merging parties: Shawn
van der Meuien of Webber Wentzel
For
the Commission:
Dineo Mashego
[1]
Please note that AFGRI has claimed confidentiality over their group
structure.
[2]
Hominy chop is a by-product produced as a result of the maize
milling process that is mainly used as a feed supplement at feedlots
and in the manufacturing of animal feeds as an input. Millers sell
hominy chop to generate a supplementary income stream.
[3]
There are small differences in the prices of yellow and white maize
chop, due to the differences in grading and energy content
and the
availability and demand for yellow and white maize in the market at
any point in time.
[4]
Based on volume sales supplied by the market participants for 2015.
[5]
See Paramount Mills (Ply) Ltd v The Competition Commission In the
matter between: The Competition Commission v Pioneer Foods
(Pty) Ltd
And 16 Other Respondents 15/CR/Mar where Pride Milling was
implicated for price fixing in the white maize milling industry
and
settled with the Commission to pay an administrative fine (AFGRI was
not implicated in the cartel); The Competition Commission
v AFGRI
Operations Limited and 16 Other Respondents 43/CR/Jun11 where AFGRI
was implicated in a cartel that fixed the tariffs
for silo storage
and settled with the Commission to pay an administrative fine (Pride
Milling was not implicated in the cartel);
the Commission initiated
a complaint relating to possible collusion in the bran and hominy
chop markets on 22 April 2010 implicating
both Pride Milling and
AFGRI but this was not referred for prosecution due to lack of
evidence. The Commission did not find any
cases where AFGRI and
Pride Milling were implicated for coordinated conduct in respect to
the supply of hominy chop.
[6]
The price of hominy chop is set between 80 and 85% of the SAFEX
price for maize and the industry regards this as the competitive
norm price. The price determined by SAFEX is dependent on the
grading of the maize (which is based on nutritional value and energy
content) and the merging parties attested that they do not have the
power to change the SAFEX price. If the merging parties charged
a
price above the competitive norm, customers would substitute hominy
chop with maize - suggesting that hominy chop suppliers
have no
Incentive to raise hominy chop prices above 85% of the SAFEX maize
price.
[7]
In the grain screening market the merging parties provide these
services exclusively to each other and not to any third parties.
In
the grain trading market the market is fragmented, constraining the
merged entity.
[8]
Based on the sales volumes published by the Animal Feed
Manufacturers Association during the 2014/2015 financial year.
[9]
Based on the Commission's findings on case LM226Feb16.
[10]
Based on the Commission's findings.