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[2019] ZACT 17
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Farmisco (Pty) Ltd t/a Kynoch Fertilizers v The Profert Cluster (LM176Sep18) [2019] ZACT 17 (26 March 2019)
COMPETITION
TRIBUNAL OF SOUTH AFRICA
Case No: LM176Sep18
In
the matter between:
Farmisco
(Pty) Ltd t/a Kynoch Fertilizers
Primary Acquiring Firm
And
The
Profert Cluster
Primary
Target Firm
Panel
: Enver Daniels (Presiding Member)
: Mondo Mazwai (Tribunal Member)
: Fiona Tregenna (Tribunal Member)
Heard
on
: 26 February 2019
Order
issued on
: 27 February 2019
Reasons
issued on : 26 March 2019
REASONS
FOR DECISION
APPROVAL
[1] On 19 February 2019, the
Competition Commission ("Commission") recommended
to the
Competition Tribunal (''Tribunal") that the large merger
transaction whereby Farmisco Proprietary Limited
Us
Kynoch
Fertilizer ("Kynoch") intended to acquire sole control of
the Profert Cluster ("Profert Cluster") be
approved with
conditions. On 27 February 2019, the Tribunal approved the merger
without conditions.
[2] The reasons for
unconditional approval follow.
PARTIES
TO THE TRANSACTION
Primary
Acquiring Firm
[1] Kynoch is an
importer, manufacturer and distributer of NPK fertiliser and
fertiliser
straights in South Africa and in the SADC territories. The
majority of products sold by Kynoch are imported, blended, packaged
and sold to wholesalers and bulk blenders.
[2] Kynoch is a wholly
owned subsidiary of ETG Inputs HoldCo Limited (Dubai) ("ETG
Inputs") which is ultimately control by Export Marketing BVI
Limited. Kynoch and its controllers are collectively referred
to as
the ETG Group. ETG Inputs recently attained sole controls Sidi Parani
(Pty) Ltd following approval of a merger transaction
heard on the
same day as this merger transaction.
[3] As a diversified
agricultural trading and processing business, the ETG Group
has
activities in 27 countries in Africa as well as in India, Canada,
Singapore, Vietnam and China.
Primary
Target Firm
[4] The Profert
Cluster is involved in the manufacturing, blending and distribution
of NPK fertiliser and fertiliser straights in all provinces except
the Western Cape and Gauteng.
[5] The Profert
Cluster comprises of certain operations and assets of a group of
companies and subsidiaries of which Profert Holdings Proprietary
Limited ("Profert Holdings") is the ultimate holding
company.
[6] Profert Holdings
is currently in business rescue.
PROPOSED
TRANSACTION
[7] In terms of the
Sale of Assets Agreement, Sale of Business Agreement and Preference
Share Subscription Agreement, Kynoch intends to acquire sole control
of the assets and business operations of Profert Cluster which
includes equipment and plant in Delmas, Free State. Post-merger,
Kynoch will have control and ownership of Profert Cluster.
[8] The ETG Group
submitted that the merger transaction is an attractive proposition
because Profert Cluster is the owner of a well-established brand,
product range and strategic plant locations in South Africa and
will
be a good strategic fit within the ETG Group's existing business.
Profert Cluster submitted that ETG Group's purchase proposal
was the
most suitable.
COMPETITON
ANALYSIS
[9] The Commission
considered the activities of the merging parties and found that
the
merger transaction results in a horizontal overlap in the supply of
fertiliser straights, blended liquid NPK fertiliser and
granular NPK
fertiliser. The Commission further found that the merger transaction
results in a vertical relationship as Kynoch
supplied the Profert
Cluster with fertiliser straights used in fertiliser blending.
[10]
As such, the Commission considered the merger transaction in the
following markets:
[10.1] the national upstream market for the supply
of fertiliser straights;
[10.2] the national downstream market for the
supply of granular NPK blended fertilisers and;
[10.3] the downstream market for the supply of
liquid NPK blended fertiliser in the Free State, Limpopo, Mpumalanga
and North
West provinces.
[11] The Commission found that in
the market for the supply of fertiliser straights, the merging
parties will have a post-merger market share of less than 4% with a
de minimis
market share accretion. In turn, in the market for
the supply of granular blended NPK fertiliser, the merging parties
will have
a market share of less than 16% with a minor market share
accretion. The Commission noted that the merging parties will
continue
to be constrained by the competitors in both markets. The
Commission also highlighted that South Africa is a net importer of
fertiliser
and thus the merging parties can be constrained by
imports.
[12] In the downstream market for
the supply of liquid NPK blended fertiliser in the Free State,
Limpopo, Mpumalanga and North West provinces, the Commission found
that the merging parties will have low post-merger market shares
in
the respective provinces. The Commission noted that the market shares
may be overstated as they did not include all the players
in the
market. A true reflection of the market would indicate much lower
market shares.
[13] The Commission received
various submissions from customers in the market. In their
submissions,
no concerns were raised as the market has alternative
players which they could source from if the merged entity increased
its prices.
[14] In view of the above, the
Commission concluded that the merger transaction is unlikely
to
lessen or prevent competition in the respective markets.
Vertical
assessment
[15] When assessing the vertical
relationship between the merging parties, the Commission considered
whether the merger transaction could result in input foreclosure or
customer foreclosure concerns.
[16] The Commission found that the
merger transaction was unlikely to result in any input foreclosure
because the merging parties have low market shares in the upstream
market; there several larger market participants, who would
be
alternatives to customers if the merged parties engage in input or
customer foreclosure strategies and imports, account for
over 60% of
the market.
[17] In terms of customer foreclosure,
the Commission found that the merger transaction was unlikely
to have
this effect as the merging parties have relatively low market shares
and there are other suppliers from whom the merging
parties'
customers can procure their products, if a foreclosure strategy were
implemented.
[18] In view of the above assessments,
the Commission concluded that the merger transaction is unlikely
to
lead to any substantial prevention or lessening of competition in any
market. We had no reason to differ with the Commission's
conclusion.
DIVERSTITURE
CONDITION
[19] As previously stated, the
Commission had recommended that this merger transaction be approved
subject to a condition, which the merging parties had accepted. The
condition envisaged that the Land and Agriculture Development
Bank of
South Africa ("Lank Bank") which is a major creditor of the
Profert Cluster would acquire Land Bank Equity and
following a period
of 5 years, the Land Bank would enter into a Divestiture Agreement
with one or more Purchasers within the Divestiture
Period for the
disposal of the Land Bank Equity. The disposal would have been to
historically disadvantaged persons, to assist
the entry of a BEE
established firm in the fertiliser market.
[20] This condition emendated from the
first intermediate transaction between Vitas and Profert (Vitas
transaction) which was never implemented. The Commission explained
that the Land Bank intended to sell the shares to historically
disadvantaged persons in the Vitas transaction and that the condition
should be imposed in this merger transaction.
[21] The Tribunal wanted to know
from the Commission why this condition ought to be imposed
in this
merger transaction because the Land Bank was neither a party to the
merger transaction nor forms part of the Primary Acquiring
Firm nor
the Primary Target Firm. In other words, did the Tribunal have the
power to confirm the condition in these circumstances
and, if it did
not, does it not risk acting ultra vires its powers envisaged in the
Act?
[22] The Commission submitted that
since the Land Bank was indeed not part of the merger transaction,
it
would not be opposed to the Tribunal approving the merger without the
condition. The merging parties submitted that it did not
oppose an
unconditional approval and that the Land Bank was not opposed to
giving an undertaking similar to the impugned condition.
[23] The Tribunal was of the view
that the condition was not merger specific and that it would
not have
the power in terms of the Act to impose such a condition. As such,
the condition was excluded.
PUBLIC
INTEREST
[24] The merging parties submitted that
the merger transaction will not negatively affect employment.
The
merging parties envisaged transferring an agreed number of Profert
Cluster's employees located in Potchefstroom to Kynoch's
Johannesburg
facilities and a certain number of Profert Cluster employees in
Delmas to Vilijoenskroon. Those employees who were
not willing to
relocate would be offered a voluntary separation agreement.
[25] Solidarity, one of the trade
unions representing the Profert employees expressed dissatisfaction
with this agreement as it would deprive employees of certain
benefits. Consequently, the merging parties and Solidarity entered
into an agreement in which the merging parties will implement a
process of dismissal based on operational retrenchment requirements
under section 189 of the Labour Relations Act
[1]
(LRA) for non-relocating employees. A certain number of employees
were part of the process. Several employees elected to be retrenched
and some employees elected to be transferred under section 197 of the
LRA. This option was also offered to non-Solidarity members.
[26] The Commission concluded that
it was unnecessary to impose a condition on the approval
of the
merger to address this particular concern, because of the process
between the merging parties and Solidarity.
CONCLUSION
[27] In light of the above, we
concluded that the merger transaction is unlikely to result in any
substantial
or lessening of competition in any market. In addition,
we were of the view that the divestiture condition was not merger
specific
and therefore the merging parties need not be bound by it.
Lastly, the merger transaction did not raise any employment concerns
or issues on any other public interest grounds.
[28] Accordingly, we
unconditionally approved the merger transaction.
Mr Enver Daniels
Ms Mondo Mazwai and Prof . Fiona Tregenna concurring
26 March 2019
Date
Tribunal
Case Managers: Lumkisa Jordaan and Ndumiso Ndlovu
For
the merging parties: M Griffiths of Norton
Rose Fulbright South Africa·and A
van
der Westhuizen of Glyn Marais Attorneys
For
the Commission:
N Msiza and M Aphalie
[1]
Act 66 of 1995.