Feltex-National Converter Industries merger to go ahead on public interest grounds

Bayer-Aventis merger gets the green light

Anti-competitive behaviour in Eastern Cape referred to Tribunal

Anti-competitive behaviour in South African basketball

Competition Commission grants exemption to SASOL

Competition Commission refers Intensive Air complaint to the Competition Tribunal

The mergers are between the following dealerships, operating in metropolitan markets (Gauteng, Western Cape andDurban): Sandown Motor Holdings (Pty) Ltd and McCarthy Limited; Sandown Motor Holdings (Pty) Ltd and Barloworld Motor(Pty) Ltd; Barloworld Motor (Pty) Ltd andDurban South Motors (Pty) Ltd; Durban South Motors (Pty) Ltd and BarloworldMotor (Pty) Ltd (Joint venture) andMcCarthy Limited; Sandown MotorHoldings (Pty) Ltd and Imperial Holdings(Pty) Ltd; and Imperial Holdings (Pty) Ltdand Sirius Motor Corporation.

The new dealer network strategy (DNS) is basically a reallocation of franchise territories between DCSA and its major dealer groups. In order to facilitate the proposed DNS, the parties entered into five horizontal transactions and the establishment of a joint venture. For the merger analysis, DCSA's 75% shareholding in Sandown Motor Holdings, a prominent acquirer in the proposed DNS, brought an element of vertical integration to the strategy. Therefore, the Commission decided to analyse the effect on competition and the public interest of the mergers as an integrated strategy.

According to DCSA, the DNS involves brand separation and is in keeping with the global marketing strategy of DaimlerChrysler AG. Motor vehicle dealers will be expected to focus on particular DCSA brands (Mercedes-Benz, Chrysler & Jeep, Mitsubishi with Colt and Pajero, Freightliner and Mitsubishi, Fuso Trucks and Buses). The Commission's research showed that DCSA brands (in the different market segments) face competition from approximately 16 brands of other vehicle manufacturers.

Submissions to the Commission from the Retail Motor Industry (RMI) outlined concerns around vertical integration issues as well as franchise agreements and the power imbalance between manufacturers and dealers. The RMI was concerned that there would be a spill-over effect into the sector and that other manufacturers would imitate the transactions, essentially eliminating dealers from the distribution chain and chances of inter-brand competition through multi-brand franchises. They further urged the Commission to adopt a similar approach to that of a recent EU Block Exemption Regulation governing the motor vehicle industry in the European Common Market.

DCSA is a motor vehicle manufacturer. It is vertically integrated into retail through its 75% shareholding in Sandown Motor Holdings. The vertical aspects of the merger did not raise concerns for the Commission.

It was the Commission's view that as a strategy, it would not make sense for DCSA to use the vertical integration to foreclose the downstream markets (their own dealers), or to use their position to facilitate collusion. Very little intra-brand competition existed and the relationship between manufacturer and dealer did not allow for serious price competition in the downstream markets.

The Commission's investigation confirmed that DCSA's strategy was not the norm and it would be unlikely that other manufacturers in the sector would follow the move.

The power imbalance between manufacturers and dealers highlighted by the RMI submission was a point of concern for the Commission. Dealers operate under uncertain (yet profitable) circumstances. The one-sided franchise agreements did raise certain issues.

However, the situation was outside the ambit of merger analysis and the Commission could only address the effect of the merger. As the merger did not change this situation, it was powerless to impose conditions to change these franchise agreements.

While DCSA's strategy was not in line with the policy measures taken by the EU's Block Exemption, the Commission found that an alternative to merger control mightbe necessary to address the competition and contractual concerns in the motor vehicle distribution industry in South Africa.

The EU's Block Exemption Regulation for the motor vehicle industry was released recently, but addressed, among other concerns, the Commission's desire to eliminate price differentials that persist across the European Member States. That problem was not relevant to South Africa. This transaction raised no public interest concerns with regard to employment, sector or regional impact, and the ability of small or black businesses to compete. The transaction had a BEE component in that Durban South Motors was owned by a previously disadvantaged person and was through the strategy positioned to improve its competitiveness. The transaction had no effect on the ability of the industry to compete internationally.

Feltex-National Converter Industries merger to go ahead on public interest grounds

The Competition Commission approved the acquisition of Automotive Trim Division (NCI Autotrim), a division of National Converter Industries (Pty) Ltd by Automotive Trim (Feltex Autotrim), a division of Feltex Ltd, with no conditions despite some initial competition concerns. Based on the analysis of the failing firm argument raised by the parties and the eventual job losses that would have occurred had the target firm been allowed to exit the market through liquidation, the Commission concluded that the transaction should be allowed in light of countervailing powers and on public interest grounds.

The Competition Act of 1998 requires the Commission to review public interest issues when notified of M&A activity, including impact on employment, black empowerment and international competitiveness. In this case, 450 employees would have been retrenched in the East London area, exacerbating chronic unemployment in the region.

Following the transaction, it was estimated that 23 retrenchments would occur. The Commission found product overlap in respect of the manufacture and supply of moulded carpets and headliners to the motor industry. While the market share concentration for the acquiring party would have been significantly higher, customers and imports posed a competitive constraint. Further, the public interest issues were more compelling for the Commission, saving 427 jobs and allowing creditors to recoup their investments.

Bayer-Aventis merger gets the green light

The Competition Commission recommended that the merger between Bayer (Pty) Ltd and Aventis CropScience (Pty) Ltd go ahead, providing Bayer divested itself of several of its brands of agricultural insecticides and fungicides. In the horizontal merger between competitors, Bayer proposed acquiring all shares in the ACS business. Bayer ranks seventh of all agrochemical companies in terms of worldwide sales. ACS ranks fourth on the worldwide scale. Together they would become the second largest in the world with a market share of about 25%.

Bayer is a broad-based and highly diversified chemical and pharmaceutical company and has four main business segments; namely healthcare, agriculture, polymers and chemicals. Aventis is a life sciences company born out of a merger in 1999 between the agriculture and pharmaceutical businesses of Hoechst and Rhone Poulenc. Aventis Life Science has two major segments, namely, Aventis Agriculture and Aventis Pharma. Aventis CropScience (ACS) is the crop protection division, which includes agrochemicals, seeds and products for non-agricultural use in public health and safety.

The transaction related only to crop protection chemicals. The crop protection products protect crops against all manner of damage that might be caused by weeds (herbicides), insects (insecticides) or fungi (fungicides).

The crop protection industry is characterised by a few large international companies involved in research and development (R&D) of new and more effective products, and a large number of so-called generic producers without substantial research and development activities.

The agrochemical industry is also highly regulated. There is strong public interest in new, innovative, effective and safe treatments and despite industry fragmentation, there are typically competitors for every particular treatment.

One of the competition concerns explored was that new entrants would likely face high barriers to entry. The Commission examined the following market areas under the proposed transaction for product overlaps: insecticides, herbicides, fungicides and seed treatment products. Competition concerns arose in the agricultural insecticide and fungicide markets, where the divestiture of products and production is to take place.

The Commission also examines public interest issues when evaluating merger and acquisition activity, including the impact on employment, black empowerment and international competitiveness. In this merger, the Commission notified the relevant trade union, the South African Chemical Workers Union (SACWU), which did not file a notice of intention to participate. In its analysis, the parties notified the Commission that they expected 61 job losses to occur, but were offering skills training and placement services to ameliorate the negative effect on the economy.

The Commission found that the proposed transaction was likely to prevent or substantially lessen competition in the cereal fungicides market, fungicides for foliar treatments market, grape fungicides (botrytis) market, soil insecticides market, nematicides market, pyrethroids market and foliar insecticides market, and insecticides for the control of aphids in various crops. The Commission consequently recommended the following divestitures in the market:

• Fipronil (Regent)

• Cyfluthrin (Baythroid)

• Beta - Cyfluthrin (Bulldock)

• Oxydemeton-Methyl (Metasystox R)

• Fenamiphos (Nemacur)

• Curaterr GR and Yaltox GR (Carbofuran)

• Gusathion-M (Azinphos Methyl).

Further, the Commission requested the merged enterprise to discontinue third party distribution of certain products. The Commission also found that the proposed transaction would create or strengthen a dominant position in the market for certain agricultural fungicides protecting cereal and fungicides for treating botrytis on grapes in South Africa. The Commission consequently recommended the following divestitures in the agricultural fungicides market:

 

Anti-competitive behaviour in Eastern Cape referred to Tribunal

An investigation by the Competition Commission found that medical practitioners operating in the Eastern Cape as members of the Uitenhage Independent Practitioners Association (UDIPA), who are competitors, may have acted together to fix prices, trading conditions and divide markets by allocating territories. Ninety percent of the practitioners practising within the relevant geographic market belong to UDIPA. Consequently, the Commission referred the matter to the Competition Tribunal.

The complaint was investigated under the provisions of Section 4(1)(b)(i) and (ii) of the Competition Act by the Enforcements and Exemptions division of the Commission. These prohibited practices - collusive agreements between competitors in a horizontal relationship - were allegedly documented in the agreement between the medical practitioners and UDIPA, its Constitution, and were evidenced in competitors' behaviour towards the complainant.

UDIPA is a voluntary association and regards itself as a managed health care organisation designed to contain costs and maintain adequate standards of health care with pre-determined payments known as "capitation fees".

Members of medical schemes or other organisations choose from a list of member practitioners/dentists/optometrists. Competition is based not on price, but service, location, word-of-mouth and personal preference. The complainant agreed to treat patients of a medical scheme not referred to him by UDIPA. The complainant had his membership in UDIPA terminated and the constitution of UDIPA was amended to prohibit other competitive channels for business.

Despite certain efficiencies demonstrated by UDIPA, the Commission believed the conduct of UDIPA constituted a contravention of the Competition Act. In addition to referring the act to the Tribunal, the Commission recommended that an investigation be launched into similar organisations in nearby localities: The Eastern Cape Practitioners Association (ECPA), the Port Elizabeth General Practitioners (PEGP) and Winterhoek Independent Practitioners Association (WIPA).

The Commission also recommended a fine be imposed on UDIPA. However, in light of the intention of the organisation to limit the costs associated with medical care, the Commission also recommended UDIPA should be advised to apply to the Minister of Trade and Industry for designation in terms of Section 10(3)(b)(iv) of the Act, for a possible exemption application.

Anti-competitive behaviour in South African basketball

The Competition Commission has referred a case involving professional basketball to the Competition Tribunal for alleged contravention of the Competition Act.     During an investigation the Commission found that an agreement between Basketball South Africa (BSA), Professional Basketball League Management (Pty) Ltd and five geographically diverse basketball clubs, might be in contravention of Section 5(1) of the Competition Act of 1998. This clause prohibits parties in a vertical relationship from entering into agreements which can prevent or lessen competition.   BSA comprises the various Basketball Associations and Structures as a National Sports Federation. Its aim is to control, integrate and foster participation in professional basketball. In 1993 BSA, the complainant, entered into the agreement with the respondents which included a clause stating: "... the participants will not establish or institute proceedings or take any steps to establish any competitive league which is in competition with the Professional Basketball League."

It was the Commission's view that such an agreement could not be allowed since it suppressed competition, particularly as the participants enjoyed market power.

Competition Commission grants exemption to  SASOL

During the so-called years of isolation the Government of the day considered it of crucial importance to increase the country's self-sufficiency in liquid fuels.   Government's regulation of the industry, mostly through administrative intervention and participation, created a situation where the oil companies' ability to expand their refinery operations inland were effectively curtailed. In an effort to render SASOL economically viable, oil companies were encouraged to source their liquid fuel requirements for the inland markets from SASOL. A similar situation continues to exist in respect of MOSSGAS.

During 1999 and again in 2000, the Commission wrote to the oil companies advising them that the exemption that was granted in terms of the previous dispensation would lapse on 30 August 2002, and that it would be prudent to apply for an exemption.

In November 2000 SASOL applied for an exemption of the agreements from Chapter 2 of the Act until June 2002. It was their view that 18 months would be sufficient to phase out the existing contracts and to put new contracts into place that complied with the tenets of the Act.  

With the backing of competing players in the oil industry, the Commission decided to grant an exemption to SASOL from certain provisions of the Competition Act.

SASOL applied for an exemption from the provisions of section 4(1) of the Act, which prohibits agreements between parties in a horizontal relationship (competitors), based on the grounds available in section 10(3)(iv) of the Act. Under that section, the Minister of Trade and Industry, in consultation, in this case with the Minister from the Department of Minerals and Energy, can designate an industry to ensure the economic stability of that industry.

The Minister of Trade and Industry granted the designation in April 2002 by way of a notice in the Government Gazette. SASOL subsequently applied for an exemption until December 2003.

The requested exemption related to a number of market allocation agreements between SASOL and the oil companies that have been in existence for some time and were entered into at the behest of Government as a key element of its liquid fuels policy during the 1960s to 1990s and which were based on the support of the synfuel industry. As a quid pro quo SASOL's involvement in the retail sector was curtailed.

On 1 January 1999, SASOL gave notice of its intention to terminate these supply agreements on 31 December 2003. The reason for the delay in applying for exemption may be ascribed to the way in which the Competition Act was worded prior to the amendments on 1 February 2001, as well as the time that it took for the applicant to obtain the necessary designation.

The Commission was satisfied that the exemption was necessary.  

The unique structure and complexity of the South African liquid fuels industry made exemption from the Act compelling. Our industry has the only coal-to-liquid fuel refineries in the world. Further, unlike conventional refineries, they are not situated at the coast, but inland, as is the crude oil refinery, Natref. These factors led, inter alia, to the development of an intricate supply sector and retail market sector in the petroleum industry that cannot be undone overnight.

In addition, the participants need to phase out the current anti-competitive agreements and enter into new supply agreements should they wish to do so.

These new agreements will have to be formulated in such a manner that they do not fall foul of the Act. Consequently, the Commission recommended that exemption be granted until 31 December 2003.

Furthermore, South Africa's oil companies supported the application. One testified, "...abrupt cessation of the Petroleum Products Agreements will seriously disrupt the manufacturing, refining, supply, distribution and marketing of petroleum products in the inland market."

However, that company has pointed out that there are a number of longer-term issues that would have to be addressed to ensure a competitive landscape. For example the current synfuel protection subsidy, the indirect pipeline subsidies regarding crude oil pumping, the transport tariff benefit and the pipeline network available to coastal liquid fuel refiners that has been seriously curtailed.

The Commission agreed and will, in accordance with its advocacy function, consult with the Department of Minerals and Energy regarding the subsidisation of SASOL.

An immediate cancellation of the agreements reviewed by the Commission would leave SASOL with petrol to sell but nowhere to sell it, and the oil companies with retail outlets to supply but no petrol to supply to them. This, in the Commission's view, holds a real potential for instability that would serve no one.

Competition Commission refers Intensive Air complaint to the Competition Tribunal

Competition Commission refers Intensive Air complaint to the Competition Tribunal The Commission referred a complaint, filed by Intensive Air, to the Competition Tribunal alleging a restrictive vertical agreement between SA Airlink (Pty) Ltd and Hibiscus Municipality, wherein exclusive landing rights were granted at Margate Airport to SA Airlink in exchange for the upgrading of landing lights at the airport.

In the opinion of the Commission, the agreement represents a contravention of Section 5(1) of the Competition Act, prohibiting agreements between parties in a vertical relationship if they have the effect of substantially preventing or lessening competition. There is no proof that efficient technological or pro-competition factors outweigh the substantial lessening of competition. Despite the subsequent insolvency of the complainant, the Commission continued with its investigation as the agreement would exclude other airlines from obtaining landing rights at the Margate Airport for the Johannesburg – Margate flight route.

Although the agreement was for a period of five years, the Commission had evidence that the agreement had already negatively affected competition and consumers' right of choice.