Brief Summary

Competition — Merger Approval — Conditional approval of merger between South African Breweries Pty Ltd and Diageo South Africa Pty Ltd for licensing rights of specified brands — Concerns raised by third parties regarding competition effects — Tribunal finding that conditions imposed by the Commission adequately address potential competition concerns — Merger approved subject to compliance with specified conditions.

Comprehensive Summary

Summary of Judgment

1. Introduction

These reasons concern large-merger proceedings before the Competition Tribunal of South Africa in which the Tribunal considered whether to approve a transaction implemented through a licensing agreement relating to alcoholic beverage brands.

The primary acquiring firm was The South African Breweries (Pty) Ltd (SAB), controlled in South Africa by Anheuser-Busch InBev SA/NV (AB InBev). The primary target firm was Diageo South Africa (Pty) Ltd (Diageo SA), controlled by Diageo, a multinational alcoholic beverages group. The transaction related to SAB’s acquisition of the rights to manufacture, distribute, market, and sell certain Smirnoff ready-to-drink (RTD) products and specified Guinness products in South Africa, together with the acquisition of 11 000 Diageo SA-branded coolers.

The matter followed an investigation by the Competition Commission, which recommended approval subject to conditions. During the Commission process, third-party customers and competitors raised concerns. The Minister of Economic Development and NUFBSAW filed notices of intention to participate, but did not ultimately advance submissions before the Tribunal. The Tribunal convened a pre-hearing to canvass concerns; Distell Limited (Distell), a competitor, attended and filed written submissions (including an economic note) primarily challenging the adequacy and formulation of the proposed conditions, rather than the Commission’s core competitive findings. The Tribunal heard the merger on 23 August 2019, issued an approval order on 5 September 2019, and issued reasons on 7 October 2019.

The general subject-matter of the dispute was whether the licensing transaction would substantially prevent or lessen competition—particularly through portfolio effects (including leverage into cooler space and bundling/tying)—and whether appropriate merger conditions were required, alongside consideration of public interest effects under the Competition Act.

2. Material Facts

SAB was described as a major brewer and distributor in South Africa with a wide portfolio of beer and flavoured alcoholic beverage products, operating through breweries and depots. SAB also held interests in upstream and related activities, including a 60% shareholding in Coleus Packaging (Pty) Ltd (Coleus), identified as the sole supplier of tin plate metal crowns (bottle closures) in South Africa.

Diageo SA held the South African rights to the relevant licensed brands, with global ownership lying with Diageo group entities. In South Africa, Diageo SA offered Smirnoff RTD variants and Guinness products (with specified exclusions for certain Guinness products).

The proposed transaction consisted of SAB acquiring, in exchange for royalties and subject to performance obligations, the rights to manufacture, distribute, market, and sell in South Africa the Smirnoff RTD products (including identified variants) and Guinness products (subject to stated exclusions), as well as acquiring 11 000 Diageo SA coolers. The licensing arrangement included obligations on SAB relating to marketing and growth targets, and contemplated, in relation to Guinness, a shift toward local production of Guinness draught, with continued importation of certain products until local production became viable at appropriate volumes.

The Commission identified two principal product markets for competitive assessment, namely the national market for the production and supply of clear beer products, and the national market for the production and supply of flavoured alcoholic beverages (FABs) (including ciders and flavoured beers). On the Commission’s analysis, the transaction created horizontal overlaps in beer and FABs, as well as potential vertical relationships (including through bottle closures). The Commission’s assessment also foregrounded portfolio concerns, given SAB’s undisputed strong position in beer and its broad product portfolio.

Certain key facts and concerns were treated as either accepted or not ultimately contested in a manner requiring adjudication. The Commission accepted that a Clean Team Agreement and information barriers in the Licensing Agreement addressed risks of competitively sensitive information exchange, and recommended a condition to entrench those obligations. The Commission also concluded that unilateral effects in beer were unlikely due to minimal share accretion, and that unilateral price effects in FABs were unlikely on the evidence it assessed, notwithstanding submissions by Distell that market share outcomes could be higher if growth targets and distribution effects were considered.

The Tribunal’s engagement with disputed material largely arose in relation to the formulation of conditions, particularly concerning access to cold storage/cooler space and tying/bundling. Distell disputed whether importing earlier AB InBev/SABMiller conditions (especially the cold-space condition) would be adequate or clear, and sought alternative formulations and extended durations. The merging parties and the Commission opposed substantial reformulation, raising concerns about unintended consequences, potential entrenchment, and overlap with separate pending proceedings.

On public interest, the Commission investigated potential employment effects, including possible retrenchments at Diageo SA’s Isipingo plant (addressed by a commitment to redeploy employees within the broader Diageo group), and potential indirect effects on certain third-party suppliers. The Commission did not impose employment-related conditions, including where it was unable to obtain further information from a third party said to face significant exposure. The Tribunal noted that it could not properly verify certain emailed third-party concerns because no representative attended the pre-hearing or hearing to substantiate them.

3. Legal Issues

The central legal questions concerned whether the licensing transaction was likely to substantially prevent or lessen competition in any relevant market, and if so, whether that effect could be appropriately addressed through merger conditions.

The issues involved a mixed inquiry of fact, economic assessment, and application of competition-law standards to market realities, including evaluation of whether the transaction created heightened risks of co-ordinated effects (through information exchange), unilateral effects, vertical foreclosure, and portfolio effects (including leveraging, refrigerator space foreclosure, and exclusionary tying/bundling).

A further legal issue concerned the appropriate treatment of concerns that overlapped with, or risked pre-empting, determination in separate pending proceedings relating to the interpretation of conditions imposed in an earlier merger (AB InBev/SABMiller), particularly in relation to stadia exclusivity and cold-space obligations.

The Tribunal also had to consider relevant public interest considerations under section 12A(3) of the Competition Act, including effects on a particular industrial sector or region and the ability of national industries to compete in international markets, and whether conditions were required to secure claimed public interest benefits (notably local production of Guinness draught).

4. Court’s Reasoning

The Tribunal accepted the Commission’s approach to market definition and the general analytical framework distinguishing unilateral, co-ordinated, vertical, and portfolio effects. In doing so, it treated prior decisional practice as relevant to the segmentation of alcoholic beverage markets and accepted a national geographic market, consistent with the Commission’s analysis.

On co-ordinated effects and information exchange, the Tribunal considered the Commission’s concern that the Licensing Agreement might facilitate the flow of competitively sensitive information between SAB and Diageo SA. It accepted that the Clean Team Agreement, the Licensing Agreement’s information barrier provisions, and a specific merger condition entrenching information-exchange obligations were sufficient to address this risk. The reasoning reflects an assessment that structured safeguards were adequate to prevent the licensing arrangement becoming a conduit for coordination beyond what was necessary for the licensed brands.

On unilateral effects, the Tribunal recorded that the Commission found no likely unilateral effects in beer due to minimal share accretion associated with Guinness. In FABs, although the Commission regarded unilateral effects as more plausible due to market concentration and the combination of major suppliers, it nevertheless concluded that SAB would lack a post-merger incentive to raise prices for Smirnoff-branded products, taking into account the existing high relative pricing of Smirnoff RTDs, expectations of increased volumes through integration into SAB’s distribution network, and performance targets and investments aligned with growth rather than price elevation. The Tribunal noted Distell’s contention that market share outcomes could be higher when growth targets and distribution reach were considered, but treated it as unnecessary to resolve conclusively because the Commission’s incentive-based conclusion remained unchanged even on Distell’s higher share estimate. Consistent with this reasoning, no unilateral-effects conditions were imposed.

On vertical effects, the Tribunal recorded the Commission’s view that input foreclosure risks existed regarding bottle closures because SAB’s subsidiary Coleus was the sole supplier and SAB held a strong downstream position, potentially giving both ability and incentive to foreclose rivals. However, the Tribunal accepted that an existing condition from the AB InBev/SABMiller merger—requiring continued supply of tin metal crowns to third parties on reasonable, non-discriminatory, market-related terms and prohibiting exclusivity or inducement not to supply—already bound SAB for as long as it controlled Coleus. The Tribunal reasoned that this ongoing obligation adequately ameliorated the input foreclosure concern, and did not impose a new vertical remedy.

The Tribunal’s most detailed reasoning addressed portfolio effects, particularly the potential leveraging of SAB’s strong beer position into FABs and the risk of foreclosure through refrigerator/cooler space and tying/bundling.

In relation to stadia exclusivity, the Tribunal accepted the merging parties’ and the Commission’s position that issues raised by Distell were connected to a separate complaint already pending before the Tribunal concerning the interpretation of AB InBev/SABMiller conditions. It considered it premature to make findings or impose merger conditions that could effectively pre-judge that separate dispute.

In relation to access to refrigerator/cooler space, the Tribunal accepted that cold space is a critical input for effective retailing and marketing of alcoholic beverages and noted that SAB’s dominance in beer, together with the acquisition of 11 000 additional coolers and the integration of the licensed brands into SAB’s portfolio, could strengthen SAB’s ability and incentive to leverage cold-space control to rivals’ detriment. The Commission initially proposed extending an earlier cold-space condition (condition 7.3 from AB InBev/SABMiller) to the newly acquired coolers, which requires outlets solely supplied by SAB with coolers to reserve at least 10% capacity for competing South African-owned and produced cider brands for a limited period.

Distell opposed verbatim transplantation of earlier conditions and proposed a “fair share” approach tied to market shares and a longer duration extending beyond the earlier condition’s expiry. The Tribunal took into account the objections of the merging parties and the Commission, including concerns that a market-share-based allocation could entrench an incumbent (including Distell) and could operate as an undue regulation of competition, as well as the limited justification provided for an extension beyond the earlier expiry date.

The Tribunal ultimately adopted a two-part approach. It extended the earlier cider-focused 10% cold-space obligation to the Diageo coolers, but only until the earlier condition’s expiry date, and separately imposed an additional condition resembling the earlier small-beer-producer cold-space remedy but adapted to the case’s competitive context by applying to independent FAB producers (as defined in the condition). In explaining this approach, the Tribunal emphasised the importance of ensuring practical access to cold space for competitors and smaller participants in concentrated markets, while also seeking to avoid pre-empting the outcome of pending proceedings concerning the earlier conditions.

In relation to tying and bundling, the Tribunal accepted the Commission’s portfolio-based concern that SAB could use its beer dominance and enhanced portfolio (including Smirnoff RTDs) to engage in exclusionary bundling or tying that could foreclose rivals. It also accepted that bundling and promotions can be competitively ambiguous, potentially producing consumer benefits through discounts and choice, which informed the Commission’s initial proposal for a prohibition subject to a limited promotional carve-out.

Distell criticised the proposed condition as vague and insufficient, particularly the definition of “specific promotions” and the possibility that three-month promotions could cover peak trading periods and be repeated in ways that disadvantage rivals. The Tribunal sought evidence on SAB’s rebate and promotion practices. Based on SAB’s witness evidence, the Tribunal accepted that SAB’s rebate schemes were not historically structured to condition discounts on combined beer-and-FAB volume targets, that promotions typically lasted more than one month but not more than three months due to data and investment considerations, and that extended consecutive promotions were not presented as commercially efficient.

On this evidentiary basis, the Tribunal imposed a tying/bundling condition broadly aligned with the Commission’s approach but with two key refinements. The prohibition was directed specifically at the combination of ABI-branded products with the licensed brands (reflecting the merger-specific portfolio concern). The promotional carve-out was tightened by reducing the permissible duration from three months to two months and clarifying that such promotions could not be run in consecutive periods, thereby addressing concerns about sustained foreclosure through back-to-back promotions.

On efficiencies, the Tribunal recorded the merging parties’ submissions that the transaction could expand distribution reach and volumes for Smirnoff RTDs and could support initiatives such as investigating a returnable bottle policy. It noted that it made no findings on efficiencies and did not treat them as material to the outcome, while recording that the Commission regarded the claimed efficiencies as plausible.

On public interest, the Tribunal recorded the Commission’s employment-related concerns and the merging parties’ redeployment commitment for Diageo SA employees at the Isipingo plant. It accepted that certain third-party concerns were not substantiated through participation and evidence and therefore did not justify conditions in the absence of verification. It further recorded the merging parties’ submissions under section 12A(3)(a) and (d) regarding local production, sectoral effects, and improved ability to compete, including possible local Guinness production and sales into neighbouring territories. The Tribunal imposed a condition requiring the merging parties to implement their commitment to commence local draught production of Guinness in line with a feasibility threshold being reached within a specified period from implementation, reflecting a cautious approach to ensuring follow-through where the evidentiary detail was limited.

5. Outcome and Relief

The Tribunal conditionally approved the large merger between SAB and Diageo SA in respect of the licensing and rights relating to specified Smirnoff RTD and Guinness brands and the acquisition of 11 000 coolers.

The relief granted was an approval subject to conditions (attached as Annexure A to the order). The conditions included measures addressing information exchange, access to cold storage/refrigerator space (including for competing cider brands up to a specified date and for independent FAB producers for the duration of the licensing agreement), restrictions on tying/bundling between ABI-branded products and the licensed brands subject to limited non-consecutive promotional carve-outs, and a public-interest-related obligation concerning local production of Guinness draught linked to feasibility criteria within a defined timeframe. The reasons also reflect reliance on continuing obligations imposed on SAB under prior AB InBev/SABMiller merger conditions in relation to the supply of tin metal crowns.

No costs order is recorded in the reasons.

Cases Cited

Heineken and Bayerische Brau Holdings / JV (Case No. COMP/M.2387) (European Commission).

Scottish Newcastle and HP Bulmer (Case No. COMP/M.3182) (European Commission).

Diageo South Africa (Pty) Ltd and Brandhouse Beverages (Case No. LM90Aug15) (Competition Tribunal of South Africa).

AB InBev and SABMiller plc (Case no: LM211Jan16) (Competition Tribunal of South Africa).

Legislation Cited

Competition Act 89 of 1998, section 12A(3)(a).

Competition Act 89 of 1998, section 12A(3)(d).

Rules of Court Cited

No rules of court were cited in the reasons.

Held

The Tribunal held that the transaction could be approved because the principal competition concerns identified—particularly risks of information exchange and portfolio effects relating to access to cooler space and tying/bundling—were capable of being addressed through targeted conditions, alongside reliance on continuing obligations from prior merger conditions concerning bottle-closure supply.

The Tribunal further held that certain issues raised by a competitor concerning stadia exclusivity were more appropriately dealt with in separate pending complaint proceedings and were not determined in these merger proceedings.

The Tribunal held that certain public interest claims relating to local production warranted a condition to secure implementation of the commitment to commence local draught production of Guinness subject to feasibility thresholds within a specified post-implementation period.

LEGAL PRINCIPLES

The Tribunal applied the principle that merger assessment requires identifying relevant markets and evaluating whether a transaction is likely to substantially prevent or lessen competition through recognised theories of harm, including co-ordinated effects, unilateral effects, vertical foreclosure, and portfolio effects, and that remedial conditions should be tailored to the merger-specific risks identified on the evidence.

The decision reflects the principle that concerns about competitively sensitive information exchange arising from ongoing commercial relationships (such as licensing arrangements) can be addressed through clean team arrangements, information barriers, and enforceable merger conditions that formalise and entrench those safeguards.

The Tribunal applied the principle that portfolio effects may arise where a firm with a strong position in one market can leverage its position into adjacent markets, including through control over important retail inputs such as refrigeration/cooler space or through tying/bundling. It further applied the principle that remedies must be designed to prevent exclusionary outcomes while recognising that discounting and promotions may, in some circumstances, be competitively benign or pro-competitive, requiring carefully bounded carve-outs.

The reasons also reflect the principle that where a competition concern is already constrained by existing binding conditions imposed in prior merger proceedings (and those conditions remain applicable), the Tribunal may consider that concern adequately addressed without duplicating remedies.

Finally, the Tribunal applied the principle that public interest considerations under section 12A(3) may justify conditions to ensure that asserted benefits, such as localisation of production, are implemented where the evidentiary basis is limited and follow-through requires enforceable commitments.

South African Breweries Pty Ltd v Diageo South Africa Pty Ltd (LM187Oct18) [2019] ZACT 70 (7 October 2019)