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[2020] ZACT 84
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Arcelormittal South Africa Ltd v Highveld Structural Mill (LM116Oct19) [2020] ZACT 84 (11 March 2020)
COMPETITION
TRIBUNAL OF SOUTH AFRICA
Case
No: LM116Oct19
In
the matter between
ARCELORMITTAL
SOUTH AFRICA LTD Primary
Acquiring Firm
And
THE
MANUFACTURING AND PRODUCTION Primary
Target Firm
OF
STRUCTURAL STEEL AND RAIL BUSINESS
OF
HIGHVELD STRUCTURAL MILL (PTY) LTD
Panel:
Mr E Daniels (Presiding Member), Ms Y Carrim (Tribunal Member), Prof.
F Tregenna (Tribunal Member)
Heard
on: 12 February 2020
Order
Issued on: 12 February 2020
Reasons
Issued on : 11 March 2020
REASONS
FOR DECISION
APPROVAL
[1]
On 12 February 2020, the Competition Tribunal ("Tribunal")
unconditionally approved a large merger between ArcelorMittal
South
Africa Ltd and "the manufacturing and production of structural
steel and rail business" of Highveld Structural
Mill (Pty) Ltd.
[2]
The reasons for the approval of the proposed transaction follow.
PARTIES
TO THE PROPOSED TRANSACTION
Primary
acquiring firm
[3]
The primary acquiring firm is ArcelorMittal South Africa Ltd
("AMSA"), a public company listed on the Johannesburg
Stock
Exchange.
[1]
AMSA is ultimately
controlled by ArcelorMittal S.A, a company incorporated in
Luxembourg.
[4]
AMSA is a producer of long and flat steel which it produces from its
plant in KwaZulu-Natal. Long steel products, for
the purposes of this
proposed transaction, can broadly be classified as heavy sections
("HS"), light and medium steel
sections ("LMS")
and other long products ("OLP"). AMSA produces a wide range
of LMS and OLP products, but it
does not have the capacity to produce
HS products. Of relevance to the proposed transaction is AMSA's
production of LMS.
Primary
target firm
[5]
The primary target firm is the manufacturing and production of
structural steel and rail business (the "structural
mill
business") of Highveld Structural Mill (Pty) Ltd ("HSM").
The structural mill business comprises various assets
that HSM owns
and uses to conduct its business.
[2]
[6]
HSM is a wholly owned subsidiary of EVRAZ Highveld Steel &
Vanadium Ltd ("Highveld"). Highveld has been
under business
rescue since April 2015 and is controlled by its business rescue
practitioner ("BRP"), Piers Marsden.
Before Highveld
entered business rescue, the structural mill business produced both
LMS and HS products from its location in Mpumalanga.
Following
business rescue, all steel production at the structural mill business
ceased in July 2015. In December 2016, the BRP
reached an agreement
with AMSA that enabled the structural mill business to restart a
limited production of HS products on behalf
of AMSA. The structural
mill business is currently the only producer of HS in South Africa.
PROPOSED
TRANSACTION AND RATIONALE
[7]
AMSA intends to purchase the structural mill business of HSM as a
going concern. Post-merger, AMSA will own the structural
mill
business.
[8]
The merging parties' rationale for the proposed transaction is
motivated by Highveld's business rescue plan which mandates
the
wind-down sale of Highveld's assets. The sale of the structural mill
business as a going concern will maximise its sale value
to the
benefit of Highveld's creditors. The proposed transaction would also
ensure the continued local supply of HS. It is anticipated
that
post-merger, further development of the structural mill business by
the merged entity could potentially result in South Africa
being able
to source its main line rail domestically, instead of importing it as
it has been the custom to do.
BACKGROUND
TO THE PROPOSED TRANSACTION
[9]
The Competition Commission ("Commission") found that prior
to Highveld entering business rescue, it produced
its own steel
inputs to produce HS and limited LMS products. It found that
Highveld's business rescue was caused, inter alia, by
continued
loss-making since 2010, weakened global steel markets and a reduction
in domestic steel demand. As a result of these
factors, the
structural mill business shut down all production in July 2015
resulting in substantial retrenchments.
[10]
Highveld's adopted business rescue plan initially prioritised a
bidding process to find a buyer that could purchase Highveld
as a
whole, failing which, the BRP would then conduct a wind-down sale of
Highveld's assets. After failing to agree on the terms
of Highveld's
sale with the only viable bidder, the BRP was mandated to proceed
with the wind-down sale.
[11]
To effect the wind-down sale, the BRP sought buyers for Highveld's
various assets. In December 2016, the BRP concluded an agreement
between AMSA and HSM
[3]
relating
to the structural mill business. The agreement sought to maximise the
structural mill business's value by restarting production
in order to
sell it as a going concern. The agreement also contained an option
for AMSA to purchase the structural mill business.
[12]
This agreement stipulated that AMSA would supply HSM with the
necessary steel inputs to produce HS.
[4]
HSM would then manufacture HS products only on behalf of AMSA, which
AMSA would then sell to its customers. AMSA would then pay
a tolling
fee to HSM for these HS products. Production of HS under this
agreement began in April 2017 resulting in the reinstatement
of 176
jobs at HSM. HSM has since then only produced HS products for AMSA,
and HSM does not take ownership of the manufactured
products as per
the agreement.
RELEVANT
MARKET AND IMPACT ON COMPETITION
[13]
The Commission considered the activities of the merging parties and
identified overlaps in three LMS products (certain rails,
taper
flange channels and round bars) that AMSA and HSM are each capable of
producing.
[5]
The Commission
concluded that the relevant market is the market for the production
and supply of these three LMS products in South
Africa.
[14]
When analysing the unilateral effects of the proposed transaction,
the Commission assessed the market shares of the merging
parties
based on HSM's production capacity for the overlapping LMS products.
The Commission found that there would be no structural
change to the
market and was satisfied that the proposed transaction was unlikely
to result in unilateral effects. This was also
due to HSM's inability
to produce steel independently as well as the competitive constraints
from LMS imports.
[15]
When analysing the conglomerate effects of the proposed transaction,
the Commission assessed whether AMSA's expansion into
the HS market
is likely to result in anticompetitive effects through AMSA bundling
HS products with other steel products that it
produces and supplies
domestically. After consulting with AMSA's customers and other LMS
suppliers, the Commission found that imports
would place a
significant constraint on the merged entity were it to attempt to
bundle its steel products. As a result of the above,
the Commission
was satisfied that the proposed transaction is unlikely to result in
conglomerate effects.
[16]
When assessing the relevant counterfactual, the Commission considered
scenarios in which the merger did not occur. The Commission
found
that each counterfactual scenario would most likely result in the
shutting down and wind down sale of the structural
mill
business. This is because the BRP's mandate, as approved by
creditors, would be to wind-down the business should the transaction
not take place. The wind-down mandate cannot be reversed and the
agreement between AMSA and HSM does not change this fact.
[17]
Due to the above, the Commission concluded that the proposed
transaction is unlikely to substantially lessen or prevent
competition
in any market. We found no reason to disagree.
PUBLIC
INTEREST
[18]
The Commission found that the proposed transaction could potentially
benefit South Africa's steel industry by creating capacity
to
domestically produce main line rails. The (erstwhile) Economic
Development Department also informed the Commission of its support
for the merger.
[19]
The Commission also engaged Transnet and found that the merging
parties had brief consultations with Transnet regarding localising
the production of main line rails. During the hearing, the Tribunal
questioned the probability for capacity creation in the market
for
the production of main line rails post-merger. The merging parties
confirmed that creation of this kind of capacity was not
a
certainty.
[6]
[20]
The Commission found that the proposed transaction would have a
positive impact on employment as 176 employees of HSM would
be
retained by AMSA. Additionally, the unions and employee
representatives of the merging parties all confirmed that they had no
objections to the proposed transaction.
CONCLUSION
[21]
In light of the above, we conclude that the proposed transaction is
unlikely to substantially prevent or lessen competition
in any
relevant market. In addition, we believe that all public interest
concerns were addressed satisfactorily.
[22]
Accordingly, the Tribunal approved the transaction without
conditions.
Mr
E Daniels
Ms
Y Carrim and Prof. F Tregenna concurring
DATE:
11 March 2020
Tribunal
Researchers: P Kumbirai
Tribunal
Economist: K
Moothoo Padayachie
For
the Merging Parties: V Cadman and C Thomas of CDH for
AMSA J
Katz of ENSafrica for
Highveld
For
the Commission: R Darji
and G Mutizwa
[1]
The merging parties had cited AMSA as the primary acquiring firm,
but subsequently informed the Commission that they intended
to
change it to ArcelorMittal Rail and Structures (Pty) Ltd ("AMRAS"),
a wholly owned subsidiary of AMSA. The Commission
was of the view
that the change in the structure of the merger post notification did
not have a bearing on the merger's assessment.
[2]
These include mill rolls; designated vehicles; property, plant and
equipment; furniture and fittings; office equipment; computers;
and
sundry assets.
[3]
HSM is a special purpose vehicle created for the purpose of
executing this agreement with AMSA and performing the obligations
thereunder.
[4]
AMSA was the only domestic firm capable of producing the necessary
inputs for HS.
[5]
22kg/m and 30.2kg/m Rails; 152mm x 76mm Taper flange channels;
80mm-160mm Round bars.
[6]
Transcript page 7, line 12.