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[2018] ZACT 46
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Philafrica Foods (Pty) Ltd v Sunshine Bakery Holdings (Pty) Ltd (LM160Aug18) [2018] ZACT 46 (15 November 2018)
COMPETITION
TRIBUNAL OF SOUTH AFRICA
Case
No: LM160Aug18
In
the matter between:
Philafrica
Foods (Pty)
Ltd
Primary
Acquiring Firm
And
Sunshine
Bakery Holdings (Pty)
Ltd
Primary Target
Firm
Panel
: Enver Daniels (Presiding Member)
:
Medi Mokuena (Tribunal Member)
:
Fiona Tregenna (Tribunal Member)
Heard
on
: 07 November 2018
Order Issued on
: 07 November 2018
Reasons Issued on
: 15 November 2018
REASONS
FOR DECISION
Approval
[1]
On 07 November 2018, the Competition Tribunal (Tribunal)
unconditionally approved
the large merger transaction between
Philafrica (Pty) Ltd (Philafrica) and Sunshine Bakery Holdings (Pty)
Ltd (Sunshine Holdings),
hereunder collectively referred to as 'the
merging parties'.
[2]
Our reasons for approving the merger follow.
Parties
to the transaction
Primary
Acquiring Firm
[3]
Philafrica
Foods is in an investment company involved in food processing and
owns and operates maize mills, wheat mills, refining
plants, oil
seeding, extraction and other operations alike.
[4]
Philafrica
Foods is controlled by AFGRI Group Holdings (Pty) Ltd (AFGRI) which
is ultimately controlled by Fairfax Financial Holdings
Limited
(Fairfax), a Canadian investment company. All firms directly and
indirectly controlled by AFGRI are collectively referred
to as 'the
AFGRI Group'.
[5]
In
essence, the AFGRI Group is an agricultural commodity trading company
that operates through four focused divisions: AFGRI Agri
Services,
AFGRI Investment Services, AFGRI Technology Services and Philafrica
Foods.
Primary
Target Firm
[6]
Sunshine
Holdings is an investment holding company that does not run any
business activities but owns and controls two companies:
Scenic Route
Trading 412 (Pty) Ltd (Sunshine Pietermaritzburg) and Sunshine Bakery
Durban (Pty) Ltd (Sunshine Durban).
[7]
Sunshine
Pietermaritzburg and Sunshine Durban operate the Sunshine Bakery
Business which produces white bread, rolls and confectionaries
supplied to various customers in KwaZulu Natal (KZN).
[8]
Sunshine
Holdings is jointly controlled by the Familia Trust and Sunshine
Bakery Investment Property Limited (SBI).
Proposed
transaction and rationale
[9]
Philafrica Foods intends to
acquire joint control of Sunshine Holdings by acquiring 51% of its
issued share capital. Post-merger,
Philafrica Foods and SBI will have
joint control over Sunshine Holdings.
[10] The
AFGRI Group submitted that the proposed transaction will allow for
Philafrica Foods
to invest in a profitable business which is in line
with its business strategy. Sunshine Holdings was of the view that
the proposed
transaction is an opportunity for the shareholders of
Sunshine Bakery Business to realise a part of their investments.
Competition
assessment
[11]
The
Commission considered the activities of the merging parties and found
a vertical relationship as the AFGRI Group has a wheat
mill it
operates in the upstream of the bakery level of the supply chain and
Sunshine Holdings supplies flour, which it uses to
bake bread.
[12]
The
Commission therefore considered the merger in i) the upstream
regional market for the production of flour as well as ii) the
downstream market for the baking of bread and confectionary goods.
[13]
In
the upstream regional market for the for the production of flour, the
Commission found that AFGRl Group has a market share of
less than 5%
given the total tons of flour produced in Gauteng and Free State. The
Commission considered the market share to be
minimal compared to
AFGRI Group's competitors such as Kromdraai Flour Mills and VKB Flour
Mills who produce a lot more tonnage
of flour than the AFGRI Group.
[14]
In
the downstream market for the baking of bread and confectionery
goods, the Commission found that the Sunshine Bakery Businesses
are
not large players in the KZN area as their market share accounts for
less than 10%. Other players in the market such as Premier
Foods and
Tiger Brands are vertically integrated and self-supply flour. In
addition, the Sunshine Bakery Business also competes
with other
in-store bakery chains such as Pick n Pay, Food Lovers Market and the
like.
[15]
Given
the vertical nature of the proposed transaction, the Commission also
considered whether the merger will raise any input foreclosure
or
customer foreclosure concerns. In the hearing we also raised
questions pertaining to possible unintended consequences on
competition
in KZN and effects on other small KZN bakeries given that
a large entity such as the AFGRI Group is acquiring a small bakery.
[16]
Through
its investigation, the Commission found that AFGRI did not have the
ability to foreclose as it does not supply any flour
to the Sunshine
Bakery Business' competitors in the KZN area. Both AFGRI and the
Sunshine Bakery Business have low market shares
in their respective
markets and thus are unlikely to exercise any market power. In
addition, AFGRI supplies its clients that are
closer to its business
operations and the Sunshine Bakery Business is located approximately
250km from AFGRl's flour mill. It is
therefore unlikely that AFGRI
will stop supplying its nearest customers in favour of the Sunshine
Bakery Business.
[17]
In
the absence of an ability to foreclose, the Commission was therefore
of the view that it would not be necessary to assess whether
AFRGI
would have the incentive to foreclose.
[18]
With
regards to customer foreclosure, the Commission found that proposed
transaction was unlikely to cause an effect of this nature
as the
Sunshine Bakery Business obtains its flour requirements from three
mills in KZN. From the acquiring group's strategy documents,
it was
apparent that it would be unviable to supply the Sunshine Bakery
Business as it would be cheaper for the Sunshine Bakery
Business to
obtain its flour requirements from mills based in KZN. Because the
AFGRI Group's mills are based in Harrismith, it
cannot compete on
price against mills that are located in KZN. ln addition, the
Sunshine Bakery Business has a very low market
share and if it denied
the competitors of the AGRI Group from supplying them, it will not
result in any harm as the Sunshine Bakery
Business is not a major
player in the downstream market.
[19]
The
Commission also advised us that other bakeries in the downstream
market did not raise any concerns regarding the proposed transaction.
The merging parties concurred with the Commission's findings.
[20]
In
view of the above, we were satisfied with the Commission's findings
and concluded that the proposed transaction was unlikely
to have any
negative impact on competition.
Public
interest
[21]
The
merging parties submitted that no adverse effects on any of the
public interest grounds are envisaged as a result of the proposed
transaction and no employees will be retrenched.
[22]
The
employees of the merging parties were served with a copy of the
merger filing through their employee representatives. None of
the
employees raised any concerns.
[23]
The
Commission was therefore satisfied that the proposed transaction is
unlikely to result in any job losses or have adverse effects
on any
of the public interest grounds. We accordingly agreed.
Conclusion
[24]
ln
light of the above, we concluded that the proposed transaction is
unlikely to lead to a substantial lessening or prevention of
competition in any market. Further, no other public interest issues
arise as a result of the proposed transaction. Accordingly,
we
approved the proposed transaction without conditions.
Mr
Enver Daniels
Mrs
Medi Mokuena and Prof. Fiona Tregenna concurring.
15 November 2018
Date
Tribunal
Case Manager
: Ndumiso
Ndlovu
For
the Merging Parties
: D Rudman
of Webber Wentzel
For
the Commission
: T Masithulela