Brief Summary

Competition — Merger Approval — Pioneer Foods acquiring 50.1% of Heinz Foods South Africa — Competition Tribunal conditionally approving merger after finding no substantial prevention or lessening of competition — Concerns regarding potential job losses addressed through conditions ensuring no retrenchments of factory workers for two years — Tribunal satisfied that merger unlikely to negatively impact local manufacturing or employment.

Comprehensive Summary

Summary of Judgment

Introduction

These reasons concern large merger proceedings before the Competition Tribunal of South Africa in Pioneer Foods (Pty) Ltd v Heinz Foods South Africa (Pty) Ltd (LM255Dec17) [2018] ZACT 67; [2018] 1 CPLR 293 (CT) (2 July 2018). The Tribunal was required to decide whether to approve a proposed transaction in which Pioneer Foods would acquire sole control of a joint venture vehicle previously jointly owned with a Kraft Heinz subsidiary.

The primary acquiring firm was Pioneer Foods (Pty) Ltd (Pioneer Foods), a South African firm within a listed group structure (ultimately controlled by Pioneer Food Group Limited). The primary target firm was Heinz Foods South Africa (Pty) Ltd (HFSA), a South African company operating as a joint venture in which Pioneer Foods held 49.9% and Heinz South Africa (Pty) Ltd (a subsidiary of The Kraft Heinz Company) held 50.1%.

The matter followed a standard merger control process. The Competition Commission investigated the proposed large merger and made a recommendation to the Tribunal. The Tribunal heard the matter on 9 May 2018, issued an order on 14 May 2018 granting conditional approval, and later furnished reasons on 2 July 2018. The dispute was not an adversarial contest between the merging parties; rather, it was a regulatory evaluation focusing on competition effects and public interest considerations, particularly employment and local manufacturing in light of changes to the joint venture’s product portfolio.

Material Facts

Pioneer Foods produced a broad range of essential foods, groceries, and beverages. HFSA marketed and distributed branded products in South Africa, including Heinz-branded items (such as ketchup, soups, and baked beans), manufactured and marketed the Wellington’s range of sauces and condiments, distributed the John West range (including canned seafood), and distributed the Today and Mama’s ranges of meals, pies, and pastries.

The proposed transaction entailed Pioneer Foods acquiring the remaining 50.1% of HFSA from Heinz South Africa, resulting in Pioneer Foods moving from a minority shareholding in HFSA to full ownership. The Commission’s investigation proceeded on the basis that, post-transaction, the joint venture arrangement would be dissolved and Pioneer Foods would take control of HFSA’s operations and product set to the extent agreed.

On the competition facts, the Commission found no horizontal overlap between Pioneer Foods and HFSA because Pioneer Foods was not active in the products produced by HFSA. The Commission did, however, identify vertical relationships: HFSA procured flour from Pioneer Foods used in manufacturing products such as pies, pastries, sausage rolls, pizza bases, and sauces, and HFSA also procured dried fruit from Pioneer Foods used in manufacturing chutneys.

In relation to flour, the Commission relied on the facts that Pioneer Foods’ sales of flour to HFSA represented only a small percentage of Pioneer Foods’ total flour sales, that Pioneer Foods would remain able to supply flour to third parties, and that alternative flour suppliers existed in South Africa. In relation to dried fruit, the Commission relied on the facts that the dried fruit supply was ad hoc, not contractually fixed, comprised less than 10% of HFSA’s requirements, and that both Pioneer Foods and HFSA were not constrained from trading with other suppliers or customers.

A further material factual consideration was the product portfolio after dissolution of the joint venture. Kraft Heinz was active in South Africa only through the joint venture, and the joint venture sold 29 products including products associated with both Kraft Heinz and Pioneer Foods. Post-transaction, Pioneer Foods would take over 23 of those products, while six products would not be taken over by Pioneer Foods, namely Heinz Baked Beans, Heinz Soups, Heinz Salad Cream, Kraft Mayonnaise, Kraft Cheese, and Planters Nuts. The merging parties informed the Commission that these six products were unlikely to exit South Africa as a result of the transaction.

On public interest facts relating to industrial activity and manufacturing, the Commission found that among the 23 products to be taken over, only Heinz Ketchup was manufactured in South Africa, and Kraft Heinz intended to grant Pioneer Foods a licence to manufacture and distribute Heinz Ketchup for two years. The merging parties indicated that if the agreement were not renewed, Heinz Ketchup would not be discontinued but would instead be distributed by a third-party distributor.

For the six products not taken over, the Commission found that only Heinz baked beans was manufactured in South Africa (through a third-party manufacturer on behalf of the joint venture), while the other five were imported and distributed in South Africa. The merging parties indicated that Kraft Heinz intended to continue selling those five imported products via a third-party distributor, with an intention that there be no interruption of supply.

On employment, the merging parties stated in their filing that the transaction may result in retrenchment of approximately 27 skilled and semi-skilled employees due to duplicated roles, particularly in management and administrative functions, while stating that no factory employees would face retrenchment as a result of the transaction. Two unions, SACTWU and FAWU, raised job-related concerns, including protection of factory workers and concerns about potential job losses if the Heinz Ketchup manufacturing and licence arrangement were not renewed after two years.

The Commission’s engagement with the merging parties resulted in undertakings and proposed conditions addressing factory workers and, specifically, the risk that 10 employees dedicated to Heinz Ketchup manufacturing could be retrenched if the licence/manufacturing arrangement ended. The Tribunal further requested an additional limitation related to employees with Grade 12 or less, which the merging parties accepted, and the Tribunal incorporated that limitation into the final conditions.

Legal Issues

The central issues before the Tribunal were whether the proposed large merger was likely to result in a substantial prevention or lessening of competition in any relevant market, and whether the merger raised public interest concerns requiring conditions, particularly in relation to local manufacturing and employment outcomes following dissolution of the joint venture and rationalisation of overlapping roles.

The dispute primarily concerned the application of competition and public interest assessment criteria to largely common-cause facts, as developed through the Commission’s investigation and engagements with stakeholders. The Tribunal’s task involved an evaluative judgment about the likelihood and materiality of foreclosure risks in vertical relationships, the competitive significance of potential changes to product distribution and manufacturing arrangements, and the adequacy of employment-related remedies to address anticipated retrenchments and risks arising from contractual uncertainty around Heinz Ketchup manufacturing.

Court’s Reasoning

On the competition assessment, the Tribunal accepted the Commission’s conclusion that there was no horizontal overlap because Pioneer Foods did not compete in the product markets in which HFSA was active. The analysis therefore focused on whether the identified vertical relationships could create a material risk of foreclosure or other anti-competitive effects.

In relation to flour, the Tribunal relied on the Commission’s assessment that the existing supply to the joint venture represented only a small component of Pioneer Foods’ overall flour sales and that Pioneer Foods would not be constrained from supplying flour to other parties post-merger. The presence of alternative flour suppliers in South Africa supported the conclusion that a foreclosure strategy would be unlikely to succeed. The Tribunal therefore accepted that the vertical flour relationship did not create a substantial competition concern.

In relation to dried fruit, the Tribunal similarly accepted that the arrangement was ad hoc, limited in scale relative to HFSA’s needs, and not exclusive. The Commission’s view that these pre-existing commercial arrangements were unlikely to lead to substantial foreclosure concerns was accepted, particularly because neither side would be prevented from trading with third parties.

The Tribunal also addressed the competitive implications of dissolving the joint venture, specifically the fact that Pioneer Foods would not take over six products previously sold by the joint venture. The Commission’s factual findings were that these products were not category-leading in the relevant markets and that there were various competing suppliers in South Africa. The Tribunal accepted the Commission’s conclusion that even a potential exit of those products was unlikely to negatively affect competition, and noted the merging parties’ statement that the products were unlikely to exit the South African market in any event. The Tribunal also noted that customers contacted during the investigation raised no concerns.

On public interest, the Tribunal addressed the likely impact on a particular industrial sector by focusing on local manufacturing implications. It accepted the Commission’s findings that local manufacturing effects were limited because most of the products were either continuing under Pioneer Foods or were imported and would remain distributed by a third party, and because manufacturing arrangements for locally produced items were either continuing or, in the case of Heinz Ketchup, governed by a time-limited licence with a stated plan for continued distribution even if the licence was not renewed. For Heinz baked beans manufactured by a third party, the Tribunal accepted that the manufacturing contract would continue unaffected post-merger, with only distribution changing, and therefore that local manufacturing activity would not be negatively impacted on the evidence presented.

The most substantial public interest reasoning concerned employment. The Tribunal accepted that there were two distinguishable categories of employment risk. The first category concerned the 27 skilled and semi-skilled employees potentially affected by duplication, and the second category concerned the 10 unskilled employees dedicated to the Heinz Ketchup manufacturing and licence arrangement, whose continued employment could be threatened if the arrangement were not renewed.

The Tribunal accepted that the Commission and merging parties had agreed on core protections for factory workers, but it also recorded the Commission’s concern that if Kraft Heinz did not renew the Heinz Ketchup manufacturing arrangement, those dedicated employees could face retrenchment. The merging parties’ remedy was to absorb factory workers post-merger and to ensure continued employment for the Heinz Ketchup-dedicated employees for a longer period irrespective of whether the licence/manufacturing agreement terminated within two years. The Tribunal recorded that SACTWU supported these remedies.

In addition, the Tribunal exercised an evaluative role in refining the employment protections relating to the potential retrenchment of the 27 skilled and semi-skilled employees. The Commission had sought to reduce adverse effects by requesting that employees with Grade 12 or less not be retrenched, a request initially rejected by the acquiring firm. The Tribunal requested reconsideration of that position, the merging parties accepted the limitation, and the Tribunal incorporated this into the conditions. The Tribunal also recorded other enhancements to the proposed conditions which were accepted and included, including consultation-related obligations to offer suitable alternative employment and monitoring and notification mechanisms.

Outcome and Relief

The Tribunal held that the proposed transaction was unlikely to substantially prevent or lessen competition in any relevant market and therefore approved the large merger.

The approval was conditional, with a detailed set of employment-related conditions (attached in the decision as Annexure A) regulating permissible retrenchments, timing limitations, protections for certain categories of employees (including restrictions based on qualifications), obligations to seek and disclose information about the continuation of the Heinz Ketchup licence/manufacturing arrangement, obligations to continue employing certain employees for specified periods if that arrangement ended, obligations to offer alternative employment where suitable, and monitoring and circulation requirements.

The reasons did not record any costs order.

Cases Cited

No prior cases were cited in the Tribunal’s reasons for decision.

Legislation Cited

No legislation was expressly cited in the Tribunal’s reasons for decision.

Rules of Court Cited

No rules of court were expressly cited in the Tribunal’s reasons for decision.

Held

The Tribunal conditionally approved the large merger in which Pioneer Foods acquired the remaining shares in HFSA, thereby obtaining full ownership of the joint venture vehicle. It accepted the Commission’s assessment that the merger presented no material horizontal issues and that the identified vertical relationships relating to flour and dried fruit were unlikely to give rise to foreclosure concerns. It also accepted that the dissolution of the joint venture and non-takeover of six products was unlikely to harm competition given the presence of alternative suppliers and the relatively small position of HFSA in those product categories.

On public interest, the Tribunal held that the transaction was unlikely to harm local manufacturing and that employment concerns could be adequately addressed through conditions. The Tribunal imposed a suite of conditions limiting retrenchments linked to the merger, protecting factory workers for a defined period, providing specific safeguards for the employees linked to Heinz Ketchup manufacturing if the licence/manufacturing agreement ended, and restricting the retrenchment of affected employees with Grade 12 or less for a specified period, together with associated notification, alternative-employment, and monitoring obligations.

LEGAL PRINCIPLES

The Tribunal applied the principle that merger assessment requires an evaluation of whether a transaction is likely to result in a substantial prevention or lessening of competition, considering both horizontal overlaps and non-horizontal relationships where relevant. Where there is no horizontal overlap, the analysis may focus on whether vertical links create a realistic prospect of foreclosure, assessed with reference to factors such as the scale of the input relationship, the ability and incentive to foreclose, and the availability of alternative suppliers or routes to market.

The Tribunal also applied the principle that merger control in this setting includes assessment of public interest considerations, with particular attention to employment impacts and impacts on local manufacturing where these are raised on the facts. Where merger-related retrenchments are anticipated or where contractual arrangements create identifiable risks to job security, the Tribunal may approve a merger subject to conditions designed to mitigate those risks, including limits on retrenchments, temporal protections, obligations to offer alternative employment, and monitoring and disclosure requirements directed at ensuring that undertakings are implemented and that affected employees and their representatives receive relevant information in time.