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[2016] ZACT 123
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Rosewild Trade and Invest (Pty) Ltd and Chlor-Alkali Holdings (Pty) Ltd (LM035May16) [2016] ZACT 123 (15 September 2016)
COMPETITION TRIBUNAL
OF SOUTH AFRICA
Case No: LM035May16
In
the matter between:
ROSEWILD
TRADE AND INVEST (PTY) LTD
Primary
Acquiring Firm
and
CHLOR-ALKALI
HOLDINGS (PTY) LTD
Primary
Target Firm
Panel
: AW Wessels (Presiding Member)
: Medi
Mokuena (Tribunal Member)
:
Andiswa Ndoni (Tribunal Member)
Heard
on
: 31 August 2016
Order Issued
on
: 31 August 2016
Reasons Issued on
: 15 September 2016
Reasons for Decision
Approval
[1] On 31 August
2016, the Competition Tribunal (“Tribunal") approved the
proposed transaction between Rosewild
Trade and Invest (Pty) Ltd
("Rosewild") and Chlor Alkali Holdings (Pty) ltd
("CAH").
[2]
The reasons for approving the proposed transaction
follow.
Parties to proposed
transaction
Primary acquiring firm
[3]
The primary acquiring is firm is Rosewild, a
company incorporated in terms of the laws
of
the
Republic
of
South
Africa.
Rosewild
is
a
wholly-owned
subsidiary
of
Investec Equity Partners Portfolio 1 (Pty) Ltd ("IEPP1"),
which is ultimately controlled by Investec Limited ("Investec").
[4]
Rosewild is an investment holding company,
which upon implementation of the proposed transaction will hold
inter
alia
the following investments which
are of relevance to the competition assessment
of the proposed transaction:
(i)
a
68.29% interest in ldwala Industrial Holdings Limited ("ldwala").
[1]
ldwala is a supplier of limestone, lime and calcium carbonates as
well as a broad range of industrial minerals, including pyrophylite
and magnetite;
(ii)
a 57.24% interest in Ferro South Africa
(Pty) Ltd ("Ferro"). Ferro is a local manufacturer and
supplier of base coating
materials operating within the
industrial chemicals sector; and
(iii)
a 61.66% interest in CJP Chemicals (Pty)
Ltd ("CJP"). CJP is an importer, stockist and distributor
of both speciality
and commodity raw chemical materials.
[5]
Investec and all its relevant subsidiaries
will collectively be referred to hereinafter as the "Acquiring
Group".
Primary target firm
[6]
The
primary target firm is CAH, a company incorporated in terms of the
laws of the Republic of South Africa. CAH controls a number
of
firms.
[2]
Of specific relevance
to
the
competition analysis are the following two firms controlled by CAH:
(i)
NCP Chlorchem South Africa (Pty) Ltd
("NCP"), a manufacturer of chlorine, caustic soda and
chlor-alkali derivatives; and
(ii)
Botswana Ash (Pty) Ltd ("Botash"),
a producer of soda ash and salt situated in Botswana.
Proposed transaction
and rationale
[7]
The
proposed
transaction consists of three interrelated steps:
(i)
Rosewild will acquire Mr Christiaan
Johannes Hattingh Van Niekerk's ("Van Niekerk") 18.6%
shareholding in CAH;
(ii)
CAH will buy-back Friedshelf 266 (Pty)
Ltd's {"Friedshelr) 13.2% shareholding in CAH; and
(iii)
Rosewild will simultaneously subscribe for
a further 13.2% shareholding in CAH such that Rosewild will, in
total, acquire a further
31.8% of the issued share capital in CAH
which will result in its shareholding increasing from
49.9% to 81.7%.
[8]
Following the implementation of the
proposed transaction, Rosewild will have direct and sole control over
CAH.
[9]
The Acquiring Group submitted that it is
Investee's intention to, through Rosewild, form a chemicals group
made up of its existing
investments in the chemical sector.
[10]
Van Niekerk and Friedshelf submitted that
the proposed transaction is an attractive opportunity to realise
their investment.
Impact on competition
[11]
The Competition Commission ("Commission")
assessed the competition effects of the proposed transaction in
the following
markets where it
identified horizontal overlaps in the
merging parties' activities:
(i)
the market for the distribution of light soda ash
in South Africa;
(ii) the market for
the distribution of flocculants in South Africa;
(iii) the market for the
distribution of caustic soda ash in South Africa; and
(iv) the market for the
distribution of dense soda ash in South Africa.
Light soda ash
[12]
In respect to the market for the
distribution of light soda ash in South Africa, the Commission found
that the merged entity will
have a post-merger national market share
of
below
10%.
The
Commission
further
found
that
the
merging
parties
will continue to face competition from
competitors such as Protea Chemicals, CIM and Manuchar. The
Commission was of the view that
the proposed transaction is unlikely
to substantially prevent or lessen competition in this market given
the merged entity's low
market share and the existence of alternative
players in the market in South
Africa.
[13]
We
concur
with the Commission's
conclusion.
Flocculants
[14]
In respect to the market for the
distribution of flocculants, the Commission found that the merged
entity's post-merger national
market share will be below 30%, with a
market share accretion of less than 1% as a result of the proposed
transaction. The Commission
found
that
the
Acquiring Group currently has minimal
market
share in
the distribution of flocculants in South Africa since it only
supplies one type of flocculant, aluminium sulphate, whereas
the CAH
Group supplies a number of flocculants including ferric chloride,
polyamine, aluminium chlorohydrate, polyamine blends,
DADMAC Blends,
ferric floe 1820 and aluminium chloride. Competitors in this market
comprise chemical distributors such as Protea
Chemicals, Zetachem and
CureChem South Africa. Based on the above, the Commission was of the
view that the proposed transaction
is unlikely to substantially
prevent or lessen competition in the market for the distribution of
flocculants in South Africa.
[15]
The
Commission
further
at
the hearing confirmed
that
no customer
raised
concerns
in relation to the proposed merger regarding the market for the
distribution of flocculants in South Africa.
[3]
[16]
We concur with the Commission's conclusion
on the horizontal competition assessment.
[17]
The
proposed
transaction
also
presents
a
vertical
overlap
in
the
activities
of
the merging parties since the CAH Group
manufactures flocculants whereas the Acquiring Group distributes
flocculants.
The
Commission
specifically
assessed
whether
the merged entity would have the incentive
to engage in input foreclosure by reducing or ceasing to supply
traders who compete with
the Acquiring Group in the distribution of
flocculants.
The
Commission
however
identified
a
number
of
alternative
upstream flocculants suppliers
including
lmprochem,
Zetachem, Protea
Chemicals
and
MCFI. More importantly, the Commission found that CAH imports its
flocculants from India and China and as such does not purchase
any
flocculants
in
South Africa. The Commission therefore concluded that the proposed
transaction is unlikely to result in any customer foreclosure
concerns.
[18]
We
concur
with the Commission's
conclusion
on the vertical aspect.
Caustic soda ash
[19] In respect to
the market for the distribution of caustic soda flakes in South
Africa, the Commission found that the merged
entity's post-merger
national market share will be below 25%. The Commission further found
that the same competitors as identified
in paragraph 14 above will
continue to constrain the merged entity post-merger. The Commission
therefore was of the view that the
proposed transaction is unlikely
to substantially prevent or lessen competition in the market for the
distribution of caustic soda
flakes in South Africa.
[20]
We concur with the Commission's
conclusion.
Dense soda ash
[21] In respect to
the market for the distribution of dense soda ash in South Africa,
the Commission found that the merged
entity's post-merger national
market share will be [55-65]%. The Commission further found that the
market is concentrated with
TaTa Chemicals South Africa (Pty) Ltd
("TaTa Chemicals") as the second largest player, and other
smaller competitors,
including Mserve, with market shares of below
10%.
[22] However, the
Acquiring Group currently has a
de minimus
market share
in this market. The Commission also found that the customers are
large companies such as Consol Glass (Pty) Ltd, lllovo
Sugar Limited
and PFG Building Glass, a Division of the PG Group (Pty) Ltd ("PG
Glass"), that use tender processes to
purchase dense soda ash
and thus exercise some form of countervailing power. Notwithstanding
the high levels of concentration and
high barriers to entry, the
Commission concluded that the proposed transaction is unlikely to
substantially prevent or lessen competition
in the market for the
distribution of dense soda ash in South Africa. The Commission
stressed that given the Acquiring Group's
insignificant market share,
the proposed transaction does not alter the market structure. This
the Commission said further means
that there is unlikely to be a
winnowing of potential countervailing power as a result of the
proposed transaction. In addition,
the Commission stated that
competitors and customers can also directly import dense soda ash and
as such, imports are likely to
constrain the merging parties' conduct
post-merger.
[23] The Tribunal
questioned the Commission and the merging parties regarding the
potential importation of dense soda ash
into South Africa and the
concerns raised by PG Glass regarding the proposed transaction.
[24]
The
Commission stated that dense soda ash is mainly imported into South
Africa and confirmed that the customers contacted, indicated
that
there are other international companies that they can (directly)
import dense soda ash from.
[4]
[25]
Counsel
for
the merging
parties
clarified
that
it
is
Botash South
Africa
that
imports and distributes dense and light soda ash and that it obtains
this from its effective holding company,
Botash
Botswana.
[5]
He
further said that CJP does not obtain its dense
soda
ash from Botash,
[6]
but from
Indian and Chinese suppliers.
[7]
CAH sees its largest competitors
in
the
dense
soda
ash
distribution
market
as
TaTa
Chemicals,
Mserve,
Manuchar, Protea Chemicals and CIM.
[8]
[26]
As stated above, we also questioned
the Commission and the merging parties in relation to a concern
raised by PG Glass regarding
the proposed merger. The concern raised
was
that
the
purchaser
might
convert
the current
capacity
at
Botash from soda ash to different products such as bicarbonate of
soda or other products used by CJP so that customers may not
receive
the same soda ash volumes as pre-merger.
[27]
The
Commission stated that it did not find any evidence that the merged
entity might cease its production of soda ash in favour
of the
production of other chemicals post merger. The Commission
analysed Botash's volumes of soda ash sold to South Africa
in recent
years (i.e. 2011 to 2015). It indicated that Botash supplies more
than half of its soda ash production to South Africa
of which PG
Glass is one of its main customers.
The
Commission
further
found
that
Botash
is
increasing
its
volumes
of
soda
ash
sold
to
South Africa and thus concluded that any potential concern regarding
Botash ceasing soda ash production post-merger seems unfounded.
The
Commission further noted that given the pre-merger
control
structure of
the
target firm, it is unlikely that the acquiring firm would have an
incentive to cease soda ash production.
[9]
[28]
In
reaction to questions from the Tribunal, Mr Duncan Bettesworth,
the
CFO of CAH, indicated that PG Glass is one of CAH's most valuable
customers and that
"It's
highly unlikely
we
would
give
up
that
customer
and
going
to
different
directions
It's
a
very
valuable customer to
us."
[10]
He added, from a production capacity perspective, that the
"well
fields contain the ability to actually go well beyond the current
capability
as
far
as production is concerned.
So,
you would increase your pumping from the well fields to cater for
that, if that
was
the
eventuality.
So,
once again, it's [total or partial foreclosure
of
PG Glass] very
unlikely.
"
[11]
He further confirmed that there is a supply contract in place with PG
Glass
and
explained
that
"the
relationship
[with
PG Glass] has been long ongoing
as
well.
It's not
a
spot
relationship at all. It's long-term. That's all I can tell you. I
don't know exactly where we are as far as the period is concerned,
but
you know, normally
these
are between
5
and
10-year type of contracts
...
".
[12]
He
concluded by saying that there is no intention to
"cut
back on soda ash production. That would not happen."
[13]
[29]
We concur with the Commission's
finding that the market structure of the
market for the distribution
of
dense soda ash in
South
Africa does not significantly change
as
a result of the proposed
transaction
given the Acquiring Group's
de minimus
market share in this market. We have no
reason to believe that the proposed transaction would significantly
prevent or lessen competition
in
this
market.
Public interest
[30]
The
merging parties confirmed that the proposed transaction will have no
negative effect on employment.
[14]
[31]
The proposed transaction further
raises
no other public interest concerns.
Conclusion
[32]
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, no public interest issues arise from the proposed
transaction. Accordingly, we approve
the
proposed transaction unconditionally.
Mr. AW
Wessels
15 September 2016
DATE
Ms Andiswa Ndoni and
Ms Medi Mokuena concurring
Tribunal Case
Manager: Busisiwe Masina
For the merging parties:
Paul Coetser of Werksmans
For the Commission:
Attorneys Dineo Mashego
[1]
We
note that although the ldwala merger has been served before the
Competition Tribunal and has been approved,
counsel
for
the merging parties
informed
us at the hearing that
the
transaction
has
not yet been implemented
since
it is
still
subject
to
further
suspensive
conditions.
See
Transcript, page 14.
[2]
See
Merger Record,
inter
alia
pages
14 to 16.
[3]
Transcript
,
page
5
.
[4]
Transcript,
page
10.
[5]
Transcript,
page
12.
[6]
Transcript
,
page
13.
[7]
Transcript,
page
14.
[8]
Transcript,
page
13.
[9]
See
Transcript
,
pages
11
and
12
.
[10]
Transcript
,
page
16.
[11]
Transcript
,
page
17
.
[12]
Transcript
,
page
17.
[13]
Transcript
,
page
18.
[14]
Merger
Record,
inter
alia
page
9.