Brief Summary

Competition — Merger Approval — Conditional approval of merger between K2018414696 (to be renamed Karan Beef Holdings) and Karan Beef (Pty) Ltd — Tribunal finding that the merger unlikely to substantially prevent or lessen competition in the relevant market — Public interest benefits identified, including support for previously disadvantaged black cattle farmers through a development programme and fund — Conditions imposed to ensure compliance with public interest objectives.

Comprehensive Summary

Summary of Judgment

Introduction

This matter concerned a large merger proceeding before the Competition Tribunal of South Africa, in which the Tribunal was required to decide whether to approve a proposed transaction in terms of which K2018414696 (South Africa) (Pty) Ltd (a special purpose vehicle to be renamed Karan Beef Holdings (Pty) Ltd) would acquire control over Karan Beef (Pty) Ltd and the cattle farming business conducted by I.M Karan Farming t/a Karan Beef Feedlot.

The primary acquiring firm was K2018414696 (South Africa) (Pty) Ltd (to be renamed Karan Beef Holdings (Pty) Ltd), controlled through Pelo Capital Holdings (Pty) Ltd, in turn controlled by the Public Investment Corporation SOC Ltd (PIC) (representing the Government Employees Pension Fund, the Unemployment Insurance Fund, and the Compensation Fund) together with Pelo Agricultural Ventures (Pty) Ltd (Pelo Ventures). The primary target firms were Karan Beef (Pty) Ltd (owned and controlled by the Ivor Karan Trust) and Karan Beef Feedlot (owned and controlled by Mr Karan).

The procedural history reflected that the Competition Commission investigated the transaction and concluded that it was unlikely to substantially prevent or lessen competition. The matter served before the Tribunal on 16 January 2019, when the Tribunal conditionally approved the merger and issued an order on the same date. The Tribunal’s reasons were issued on 29 January 2019, with a public version issued on 5 February 2019.

The general subject-matter of the dispute was the merger’s impact on competition in the relevant markets (particularly an identified horizontal overlap in cattle feedlotting) and the public interest implications, specifically transformation-oriented commitments relating to market access and development support for black cattle farmers, which were made enforceable through merger conditions.

Material Facts

K2018414696 (South Africa) (Pty) Ltd was a newly incorporated special purpose entity established to implement the proposed transaction and had no operating activities of its own. The Tribunal identified that, for competitive assessment purposes, an important feature of the acquiring group was the UIF’s controlling interest in Berlin Beef, described as a black-owned feedlot operator located in the Eastern Cape, with planned activities including a cattle feedlot, beef backgrounding, and meat processing. The Tribunal recorded that Berlin Beef had not commenced operations at the time relevant to the merger assessment, had not sold cattle, and had not constructed its abattoir, with the consequence that it had not processed meat.

On the target side, Karan Beef (Pty) Ltd was engaged in the slaughtering of cattle, the deboning and packaging of beef, and the sale of beef carcasses and deboned/primalised cuts. Karan Beef Feedlot conducted a feedlotting business involving the purchase of calves from breeders and feeding them until maturity. Karan Beef Feedlot also wholly owned and controlled subsidiaries (Manjoh Ranch (Pty) Ltd and M&J Da Costa Brothers), whose activities included cattle backgrounding, silage production, and crop farming, as recorded by the Tribunal.

The proposed transaction contemplated that Karan Beef Holdings would acquire the entire issued share capital of Karan Beef and would acquire the Karan Beef Feedlot through a described three-step process, resulting in Karan Beef Holdings acquiring sole control over Karan Beef and indirect control over Karan Beef Feedlot.

In relation to competitive effects, the Commission identified a horizontal overlap in the upstream market for cattle/beef feedlotting in South Africa, arising indirectly from the UIF’s shareholding in Berlin Beef and the fact that Karan Beef (through its operations) was involved in cattle production through feedlotting. A key factual premise relied upon was that Berlin Beef had not commenced operations, meaning there would be no immediate market share accretion. The Commission’s assessment (accepted by the Tribunal) further recorded that, even if accretion were to occur, it was unlikely to increase Karan Beef’s existing market share of less than 5% by more than less than 5%.

The Commission also found, and the Tribunal accepted, that alternative feedlots would constrain the merged entity post-merger and that Berlin Beef and Karan Beef were less likely to be close competitors, because there was no geographic overlap between them.

On public interest, the Tribunal recorded that the transaction did not raise public interest concerns in the sense of adverse effects identified in the reasons, but that the merger presented public interest benefits associated with the acquisition of shareholding by a firm owned by previously disadvantaged individuals (Pelo Ventures) in a firm well established in the beef and commercial farming industry. The Tribunal further relied on the merging parties’ submissions that Pelo Ventures was negotiating with the Department of Rural Development and Land Reform regarding a Black Emerging Beef Farmers Development Programme and a Development Fund, intended to improve market access, provide technical support, and provide tailored funding support to existing black cattle farmers, thereby integrating them into mainstream beef production.

These asserted benefits were accepted as likely to benefit marginalised black farmers in the industry, and the Commission proposed (with the merging parties’ agreement) that they be made conditions of approval. The Tribunal’s material factual basis included that the merged entity would be required to develop the Programme, establish the Fund (subject to investment committee approvals and third-party funding being raised), and increase procurement of weaners from black cattle farmers, together with a monitoring and reporting framework.

Legal Issues

The central legal questions before the Tribunal were whether the proposed transaction was likely to result in a substantial prevention or lessening of competition in any relevant market and, separately, whether it raised any public interest issues requiring intervention, including whether asserted public interest benefits should be made enforceable through merger conditions.

The dispute primarily concerned the application of competition law standards to the facts found during the Commission’s investigation. In relation to competition, the assessment turned on factual and predictive considerations such as the existence and significance of the horizontal overlap, whether there would be meaningful market share accretion given Berlin Beef’s non-operational status, and whether competitive constraints (including alternative feedlots and geographic separation) would limit any potential harm.

In relation to public interest, the Tribunal was required to exercise a value judgment on whether conditions were appropriate to secure transformation-related benefits described by the merging parties and acknowledged by the Commission, and whether those conditions adequately addressed the exclusion of black cattle farmers from mainstream beef production.

Court’s Reasoning

The Tribunal approached the competition assessment by considering the Commission’s market definition and competitive analysis. It accepted that a horizontal overlap existed in the upstream market for cattle/beef feedlotting, but noted that this overlap arose indirectly through the UIF’s shareholding in Berlin Beef and the fact that Berlin Beef was not yet operational. On this factual foundation, the Tribunal accepted the Commission’s conclusion that there would not be an immediate market share accretion, and that any future accretion was unlikely to be significant, given the small market shares recorded.

The Tribunal further accepted the Commission’s view that the merged entity would remain constrained by various alternative feedlots after the merger. It also accepted that Berlin Beef and Karan Beef were unlikely to be close competitors due to the absence of geographic overlap, which reduced the risk that combining the interests would materially lessen rivalry in a particular geographic competitive space.

Having endorsed these considerations, the Tribunal stated that it had no reason to disagree with the Commission’s finding that the transaction was unlikely to substantially prevent or lessen competition in any relevant market.

On public interest, the Tribunal did not identify adverse public interest effects in the reasons, but highlighted that the transaction carried potential public interest benefits, particularly in relation to transformation. The Tribunal recorded that Pelo Ventures’ role as an entity owned by previously disadvantaged individuals acquiring a stake in a prominent firm in the beef and commercial farming sector was significant.

The Tribunal relied on the merging parties’ submissions about the intended Programme and Development Fund aimed at facilitating market access, providing technical support, and funding support to black cattle farmers. It noted the Commission’s position that, in order to ensure these benefits were realised, the commitments should be imposed as merger conditions, and it recorded that the merging parties were amenable to this approach.

In evaluating the appropriateness of the conditions, the Tribunal expressed satisfaction that the conditions would adequately remedy the exclusion of black cattle farmers from mainstream beef production. The conditions were framed to require the development of the Programme (including engagement with relevant governmental and development institutions), the establishment of a Development Fund (funded by third parties and to be raised by the acquiring group, subject to internal approvals), and increased procurement of weaners from black cattle farmers subject to sustainability and quality/volume requirements, alongside reporting and compliance monitoring obligations.

Outcome and Relief

The Tribunal conditionally approved the proposed transaction. Approval was granted on the basis that the merger was unlikely to substantially prevent or lessen competition in any relevant market and that no adverse public interest issues were identified, while recognising public interest benefits secured through conditions.

The relief took the form of an approval subject to conditions set out in Annexure A, which required the development of a Black Emerging Farmers Development Programme, the establishment and funding-raising efforts for a Development Fund, and commitments concerning increased procurement of weaners from black cattle farmers, together with compliance reporting to the Commission and mechanisms for complaints and potential amendment of conditions.

No costs order was recorded in the reasons.

Cases Cited

None cited in the published reasons.

Legislation Cited

Competition Act 89 of 1998 (as amended).

Rules of Court Cited

Rule 39 of the Rules for the Conduct of Proceedings in the Competition Commission.

Held

The Tribunal held that the proposed merger, whereby Karan Beef Holdings would acquire control over Karan Beef (Pty) Ltd and the Karan Beef Feedlot, was unlikely to substantially prevent or lessen competition in any relevant market. This conclusion rested on the Commission’s findings, accepted by the Tribunal, that the only identified horizontal overlap in feedlotting arose indirectly through an interest in Berlin Beef, that Berlin Beef had not commenced operations (so there was no immediate market share accretion), that any accretion was unlikely to be significant given the small market shares noted, that alternative feedlots would constrain the merged entity, and that the firms were not close competitors due to lack of geographic overlap.

The Tribunal further held that, while the merger did not raise adverse public interest concerns in the reasons, it presented public interest benefits linked to transformation in the beef and commercial farming sector. To secure these benefits, the Tribunal approved the merger subject to conditions requiring the development of a programme and fund to support black emerging cattle farmers and increased procurement from such farmers, supported by compliance monitoring and reporting obligations.

LEGAL PRINCIPLES

The Tribunal applied the principle that merger control requires an assessment of whether a transaction is likely to result in a substantial prevention or lessening of competition in any relevant market, evaluated by reference to the competitive significance of overlaps, expected market share effects, and the presence of competitive constraints such as alternative suppliers and the degree of competitive proximity (including geographic considerations) between the merging parties.

The Tribunal also applied the principle that merger control includes consideration of public interest dimensions and that where public interest benefits are asserted and accepted as credible, it is permissible and appropriate to impose conditions to ensure that such benefits are realised in practice. In this case, the Tribunal accepted that transformation-related measures could be made enforceable through conditions requiring the design and implementation of a development programme, the establishment of a fund (subject to stated constraints), procurement-related commitments, and ongoing compliance reporting and monitoring, with provision for complaints and for seeking amendment or lifting of conditions on good cause shown.

K2018414696 (South Africa) Proprietary Limited (To be renamed "Karan Beef Proprietary Limited") v Karan Beef Proprietary Limited and Another (LM214Nov18) [2019] ZACT 18 (5 February 2019)