Brief Summary

Competition Law — Merger Approval — Conditional approval of merger between Shiselweni Forestry Company Ltd and Peak Timbers Ltd and Peak Forest Products (Pty) Ltd — Competition Tribunal assesses horizontal and vertical overlaps — Concerns of input foreclosure addressed through behavioral remedies — Tribunal imposes conditions to ensure security of supply and continued negotiations with existing customers to mitigate potential anti-competitive effects.

Comprehensive Summary

Summary of Judgment

1. Introduction

The proceedings concerned a large merger before the Competition Tribunal of South Africa in which the Tribunal was required to determine whether to approve a proposed transaction under the Competition Act 89 of 1998, and if so, whether approval should be subject to conditions.

The acquiring firm was Shiselweni Forestry Company Ltd (SFC), a company incorporated in eSwatini and wholly owned by TWK Investments Limited (TWK), which is ultimately controlled by TWK Agricultural Holdings (Pty) Ltd (collectively referred to in the reasons as the TWK group). The target firms were the businesses of Peak Timbers Ltd (Peak Timbers) and Peak Forest Products (Pty) Ltd (PFP), which were ultimately controlled by Criterion Africa Partners (Pty) Ltd.

Procedurally, the matter was heard by a Tribunal panel on 17 February 2021, with the last submission on 19 February 2021. The Tribunal issued an order on 24 February 2021 conditionally approving the transaction, and issued its reasons on 6 April 2021.

The dispute concerned the competitive effects of vertical and horizontal integration in forestry and timber product markets, with particular focus on alleged risks of input foreclosure in South African downstream markets supplied from eSwatini operations, and a pricing concern in relation to pulp logs.

2. Material Facts

SFC formed part of the TWK group, whose activities include supplying agricultural and related services and products, including a timber division supplying (among other products) untreated transmission poles, treated transmission poles (supplied only in eSwatini), untreated and treated building and fencing poles, untreated mining timber logs (not sawn), mining timber logs, pulp logs, and woodchips. The TWK group supplied treated building and fencing poles to customers in South Africa and also controlled BedRock (Pty) Ltd (BedRock), which was relevant in relation to treated mining timber products downstream.

Peak Timbers was active in the planting, harvesting, processing and sale of timber and timber-related products, including supply of hardwood saw logs, mining timber logs, pulpwood, untreated transmission pole logs, and untreated building and fencing pole logs. PFP operated a sawmill and supplied mining timber products and woodchips. The target firms were based in eSwatini and supplied products to customers in South Africa.

The proposed transaction was the acquisition by SFC of the businesses of Peak Timbers and PFP as going concerns, resulting in SFC controlling the target businesses post-merger.

In assessing competitive effects, the Competition Commission identified several horizontal overlaps in the supply of untreated transmission poles, untreated building and fencing poles, untreated and unsawn mining timber, pulp logs, and woodchips. The Commission recorded relatively modest market share accretions (described as between 1–5% in the relevant markets it addressed), and found limited scope for unilateral effects in certain markets, but identified specific concerns in other markets based on market shares, competitive constraints, and customer feedback.

The Commission also identified vertical overlaps in which the target firms supplied upstream timber inputs (including untreated transmission poles, untreated building and fencing poles, and untreated mining timber) and the TWK group operated downstream in related treated product markets (treated transmission poles, treated building and fencing poles, and treated mining timber via BedRock). Customer concerns were received, particularly relating to the possibility that, post-merger, the merged entity would divert upstream products to internal operations and reduce supply to existing external customers, thereby increasing customers’ costs or impairing their ability to compete downstream.

The Tribunal record reflected that the Commission and the merging parties proposed behavioural supply remedies aimed at addressing these input foreclosure concerns, and that the Tribunal directed the Commission to canvass the proposed conditions with customers, with conditions being revised and tested in response to customer concerns.

3. Legal Issues

The central legal questions were whether the proposed transaction was likely to result in a substantial prevention or lessening of competition in any relevant market, and, if competition risks existed, whether they could be adequately addressed through conditions.

The issues involved an application of competition-law principles to largely market-structure and conduct-related facts, including the evaluation of horizontal unilateral effects and vertical foreclosure theories of harm. The assessment required predictive and evaluative judgment about the merged entity’s ability and incentive to foreclose and the likely competitive impact on customers and rivals, as well as whether conditions would effectively remedy the identified risks.

In addition, the Tribunal was required to consider whether the merger raised any public interest concerns, particularly in relation to employment, given that the target firms’ operations and employees were in eSwatini.

4. Court’s Reasoning

The Tribunal’s reasoning proceeded from the Commission’s market assessments and the customer concerns recorded during the investigation and hearing process, focusing on both horizontal and vertical dimensions.

On the horizontal assessment, the Commission’s conclusions (accepted by the Tribunal) were that in certain markets the post-merger accretions and the presence of competitors meant the merger was unlikely to produce unilateral effects. In relation to the upstream supply of untreated building and fencing poles in the Mpumalanga and Northern KwaZulu-Natal regions, and the downstream supply of woodchips, the Commission considered the continued presence of competing suppliers and concluded that unilateral effects were unlikely. For untreated transmission poles, the Commission considered the merged entity’s post-merger share (described as between 25–30%) and concluded unilateral effects were unlikely on the basis that the merging parties were not necessarily competitors in a manner that would materially change competitive constraints.

However, the Commission identified a more material concern in the market for pulp logs in Mpumalanga and KwaZulu-Natal, where the merged entity’s post-merger share was described as 20–25%. The Commission’s concern was not framed merely as a structural increase in concentration, but as a question of whether sufficient competitive constraints would remain post-merger and whether the merged entity might have the ability to increase prices, a concern that was reinforced by feedback from a customer. A supply-related condition was imposed to address this pricing concern.

On the vertical assessment, the Commission identified the principal theory of harm as input foreclosure. In relation to untreated transmission poles, the Commission analysed whether vertical integration would provide the merged entity with the ability and incentive to foreclose downstream customers who relied on the target firms for untreated poles. While the Commission considered that the upstream share (25–30%) was unlikely to confer market power sufficient to significantly foreclose access industry-wide, it accepted that specific customers could nonetheless be materially affected if supply were diverted internally, particularly where switching suppliers would increase transportation costs. The Commission recorded that the merging parties tendered a supply condition of sufficient duration to allow a concerned customer to rearrange supply and identify alternatives, and that the customer was satisfied with the proposed remedy. The Commission also found no customer foreclosure concern in the opposite direction because the TWK group already sourced significant volumes of untreated transmission poles from its own shareholders rather than third parties.

For untreated building and fencing poles, the Commission found no material input or customer foreclosure concerns, relying on the merged entity’s low post-merger market share and the fact that neither the TWK group nor the target firms procured those inputs from third parties.

For untreated mining timber, the Commission considered that the geographical distance between BedRock and the target firms, together with high transport costs, constrained the merged entity’s ability and incentive to divert all mining timber to internal downstream operations. Despite that constraint, the Commission accepted a concern raised by a customer that was also a downstream competitor of BedRock, namely that diversion of upstream mining timber supply could disadvantage downstream rivals. The Commission also considered the possibility that the TWK group might stop or reduce procurement from small suppliers post-merger given access to the target firms’ products.

Against that background, the Tribunal approached remedies as the mechanism to address the foreclosure risks identified by the Commission and raised by third parties. It noted that the Commission and the merger parties proposed behavioural remedies, and that the Tribunal required the Commission to test the proposed conditions with affected customers. After considering customer concerns and the revised conditions, the Tribunal imposed conditions directed at ensuring security of supply, good faith negotiations with existing customers on specified product categories, continuity of certain procurement patterns, and constraints around pricing structures for pulp logs and negotiations over price increases during the term of supply arrangements. The Tribunal concluded that the conditions were sufficient to address the input foreclosure concerns and that the transaction was therefore unlikely to result in a substantial prevention or lessening of competition.

On public interest, the Tribunal recorded the merging parties’ submission that the transaction did not raise public interest concerns in South Africa because the target firms were based in eSwatini, while also noting that employees in eSwatini would transfer to SFC’s operations there. The Commission found no other public interest issues, and the Tribunal found no reason to disagree.

5. Outcome and Relief

The Tribunal conditionally approved the proposed transaction in which SFC acquired the businesses of Peak Timbers and PFP.

The approval was subject to a set of behavioural conditions (Annexure A) directed primarily at addressing input foreclosure and related concerns, including obligations to publish a non-confidential version of the conditions, provide them to existing South African customers of Peak, negotiate supply agreements in good faith on Commercial Terms consistent with Industry Norms, maintain specified supply volumes determined by reference to historical purchasing, continue certain purchasing behaviour by BedRock on a spot basis for a defined period, and maintain existing price structures for pulp logs with good faith negotiation over price increases on normal anniversaries taking into account usual regional drivers. The conditions also provided for compliance reporting to the Commission, monitoring, breach procedures, and a mechanism for variation on good cause shown.

No costs order was recorded in the reasons.

Cases Cited

No reported cases were cited in the reasons for decision.

Legislation Cited

Competition Act No. 89 of 1998 (as amended).

Rules of Court Cited

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

Rule 37 of the Rules for the Conduct of Proceedings in the Competition Tribunal.

Held

The Tribunal held that, subject to the imposed behavioural conditions, the proposed acquisition was unlikely to result in a substantial prevention or lessening of competition in the relevant markets. The Tribunal accepted that the principal competition concern identified by the Commission and customers was input foreclosure, and it was satisfied that the final set of conditions imposed adequately addressed those concerns.

The Tribunal further held that the transaction raised no public interest concerns requiring intervention on the record before it, including in relation to employment in South Africa.

LEGAL PRINCIPLES

The decision applied the principle that merger control under the Competition Act requires an assessment of whether a transaction is likely to substantially prevent or lessen competition, including through both horizontal effects (such as unilateral effects in overlapping markets) and vertical effects (including input foreclosure where a vertically integrated firm may have the ability and incentive to deny or worsen supply to downstream rivals or customers).

It further reflected the principle that where a competition concern is identified, approval may be granted subject to conditions, including behavioural supply remedies, if such conditions are considered sufficient to address the theory of harm. In this matter, the remedies were structured around obligations to negotiate supply in good faith on commercially reasonable, non-discriminatory terms aligned with industry norms, with defined volume baselines tied to historical purchases, and with monitoring and reporting obligations to support enforcement.

The conditions also reflected remedial principles concerning transparency and enforceability, including publication of a non-confidential version, provision of the conditions to customers, periodic compliance reporting supported by affidavit, breach procedures under the Commission and Tribunal rules, and the availability of variation on good cause shown.

Shiselweni Forestry Company Ltd v Peak Timbers Ltd and Another (LM120Sep20) [2021] ZACT 13 (6 April 2021)