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CompetitionNews 01

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Commission uncovers anti-competitive practices in the steel industry

Ardutch and Defy merger approved with conditions

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CompetitionNEWSThe Official Newsletter of the Competition Commission of South Africa

Towards a fair and efficient economy for all

EDITION 42 | MARCH 2012

IN THIS ISSUE...

Apollo Tyres settles with the Commission

1808

Chemical merger prohibited after second review

01 Breakthrough in Cement

02 Editorial Note

04 Commission uncovers anti-competitive practices in the steel industry

06 Analysis of the Healthcare merger

08 Chemical merger prohibited after second review

10 Thaba Chueu and Samquarz merger prohibited

12 Mergers and acquisitions quarterly review

14 Ardutch and Defy merger approved with conditions

16 Bitumen cartel settlements

18 Apollo Tyres settles with the Commission

19 The 2011 ICN Cartel Workshop

20 Where to get hold of us

Breakthrough in CementBakhe Majenge

Professor Richard Whish famously remarked that:

“The first thing for any new competition regulator is to go out and find the cement cartel. Because my experience of this subject is, it is always there. There only countries in which I had been unable to find the cement cartel is where there’s a national state-owned monopoly for cement.”

Professor Whish’s observations about the cement market appear to be vindicated by the fact that in several countries, running the entire gamut from Brazil to Germany, the cement market has been subject to cartel investigations and prosecutions. South Africa is no exception.

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EDITORIAL NOTEThis edition of the newsletter reflects on settlements in different markets relating to cartel conduct. Our lead story relates to the cement cartel involving four main cement producers in price fixing and market division. The article by Bakhe Majenge highlights the latest settlements that were concluded with Afrisam and Lafarge.

Other notable settlements were concluded in other cartel cases, as described by Reena Das Nair the Commission reached settlement with Engen and Shell for their involvement in the bitumen cartel. Both these oil companies admitted to having fixed the price of bitumen with other oil companies by collectively determining and agreeing on pricing principles, including a starting reference price

and monthly price adjustment mechanism.There was also a settlement with Apollo Tyres regarding its participation in the tyre manufacturers’ cartel as reported by Nelly Sakata.

An article by Itumeleng Lesofe looks at the Commission’s recent referral of its collusion case against steel producers, ArcelorMittal

South Africa and Highveld Steel and Vanadium Corporation to the Competition Tribunal for adjudication. This case relates to price fixing and market allocation conduct in respect of flat steel products.

In terms of recent merger decisions, we look at three mergers that were prohibited and one that was subjected to conditions. Grace Mohamed and Thando Vilakazi

review the chemicals merger and health merger respectively. While, Linton Reddy, Raksha Darji and Nicholas Ngepah look at the contested Thaba Chueu & SamQuarz merger, which is yet to be heard in the Competition Tribunal.

Alex Constantinou and Linton Reddy review the Ardutch and Defy merger on which conditions were imposed to allay the public

interest concerns. The conditions in this transaction also sought to support the local white goods manufacturing sector.

Finally, this issue ends with Mervin Dorasamy’s report on the recent ICN Workshop on Cartel Conduct held in Belgium.

Happy reading!

Breakthrough in Cementcontinues...

There are several features of cement production that serve as a fertile breeding ground for cartel formation. The cement production market is characterised by formidable barriers to entry. These include high production costs such as energy costs, high transportation costs, operating costs and access to key inputs such as limestone. To compound the problem, cement demand also presents its own unique set of challenges. Cement demand is a derived demand from the construction industry, and as a result, cement demand tends fluctuate over time. The cyclical nature of cement demand may translate into instability and uncertainty of sales. The attraction of a cartel is that it may manage the inherent instability in market shares. Joseph E. Harrington, in his insightful book, How Do Cartels Operate (2006: 30) points out that a stable market over time is a collusive marker.

The South African Competition Commission (“the Commission”) has for some time been concerned about collusion in the cement production market in South Africa. These concerns date as far back as 1999 when the Commission received a complaint from Ashcor Secunda (Pty) Ltd (“Ashcor Secunda”) against the big four main cement producers in South Africa – Pretoria Portland Cement Company Limited (“PPC”); AfriSam (South Africa) (Pty) Ltd (“AfriSam”); Lafarge South Africa (Proprietary) Limited (“Lafarge”) and Natal Portland Cement Cimpor (Pty) (“NPC”) as well as Slagment (Pty) Ltd (“Slagment”) involving allegations of collusion. The investigation of Ashcor Secunda’s complaint was effectively nipped in the bud by a decision of the Supreme Court of Appeal in Pretoria Portland Cement Company v The Competition Commission 2003(2) SA 385(SCA), which, on technical grounds, set aside dawn raids conducted

by the Commission at the premises of PPC and Slagment.

However, signs of underlying coordination in the cement production market did not disappear. In the period 2007 and 2008, the Commission conducted economic research into the market structure, firm behaviour and outcomes, including pricing, of various construction-related products including cement. On 02 June 2008, on the basis of, inter alia, information gleaned in its economic research, the Commission initiated its own complaint against the four main cement producers.

It became clear that an investigation into the cement production market cannot be conducted without an understanding of the evolution of cement cartels internationally. In 2009, as part of its investigation process, the Commission had fruitful engagements with

competition authorities in other jurisdictions – the European Commission, the German Cartel Office (BundesKartelAmpt) and the Brazilian Secretariat of Economic Law – on their cement cartel investigations involving cement companies which have some ties with some of the cement producers in South Africa. International experience confirms, inter alia, two important points:

• cement cartels internationally have evolved over time to become complex and sophisticated, thus making detection and prosecution difficult; and

• the cement market has a propensity of re-cartelising after investigative intervention by competition authorities.

On 24 June 2009, the Commission successfully conducted dawn raids at the premises of the four main cement producers located in different provinces. Following the dawn raids, on 07 August 2009, PPC applied for and was granted conditional leniency by the Commission for its participation in the cement cartel. The consent agreements concluded by the Commission and two cement producers in South Africa – AfriSam and Lafarge – mark an important milestone in realising Professor Whish’s clarion call to competition authorities - “go out and find the cement cartel”.

The two consent agreements with Afrisam and Lafarge were endorsed by the Competition Tribunal (“the Tribunal”) on 16 November 2011 and 28 March 2012 respectively. AfriSam agreed to pay an administrative penalty in the sum of R124, 878, 870 representing 3% of its annual turnover for cement in the SACU region (South Africa, Botswana, Lesotho,

Swaziland and Namibia) for the financial year ended 31 December 2010 for its participation in the cement cartel in the period between 1995 - 2009. Lafarge agreed to pay an administrative penalty in the sum of R148, 724, 400. 00 representing 6% of its annual turnover for cement in the SACU region for the financial year ended 31 December 2010 for its participation in the cement cartel in the relevant period. Differences in the administrative penalties reflect, inter alia, different degrees of cooperation and timing of settlement. This illustrates the Commission’s favourable attitude towards early settlement. The two settlements leave NPC as the remaining respondent if the matter is referred to the Tribunal in view of the fact that PPC has been granted conditional leniency.

The context to the two settlement agreements reflects the dynamic and resilient nature of the cement cartel in South Africa. Historically, cartelisation was the kernel of the cement production market in South Africa. It was an inextricable part of the DNA of the cement production market. For decades, dating back to the 1940s, the cement production market was granted exemptions by the state to operate as a self-regulating cartel. The state-sanctioned cartel regulated market shares, pricing and distribution. Shortly after the advent of the new constitutional dispensation, the competition board, the predecessor to the Commission, withdrew the exemption in 1995.

The impact of the withdrawal of the exemption was abrupt and dramatic – a culture shock for an industry that had for years thrived under the protection of state-sanctioned cartel arrangements. The withdrawal of the exemption created a shift

in the tectonic plates of the industry. For the first time, after years of centralised and coordinated pricing and distribution, cement producers in South Africa had to establish their own sales, marketing and distribution functions and learn new ways of doing business. The authorities afforded the cement producers a grace period until September 1996 to dismantle the state-sanctioned cartel arrangements.

However, old habits die hard – international experience shows that the cement market has a propensity of re-cartelising. At the time of the withdrawal of the exemption, cartelisation was already fossilised into the structure of the cement industry. Whilst the institutional scaffolding that supported the state-sanctioned cartel was dismantled, the system of managing and targeting market shares was replicated in the post-exemption period. The system of managing and targeting market shares could not be achieved without a scheme to exchange sales data. To this end, an elaborate scheme of exchanging disaggregated sales data was put in train to buttress the system of managing and targeting market shares. This evidences the fact that horizontal exchange of disaggregated information can be used to facilitate coordination.

The cement cartel was arguably one of the most sophisticated and experienced cartels. The Commission’s relentless investigation efforts have brought the structure and organisation of this cartel to light. The Commission’s intervention is an opportunity for each of the cement producers to close the old chapter and move on, as PPC, AfriSam and Lafarge have demonstrated. The challenge is to resist the ever-present temptation of re-cartelisation.


On 30 March 2012 the Commission referred a collusion case against ArcelorMittal South Africa Ltd (“Mittal”) and Highveld Steel and Vanadium Corporation Ltd (“Highveld”) to the Competition Tribunal (“Tribunal”).

The Commission received a complaint from Petrel Engineering (Pty) Ltd (“Petrel”) alleging that there appeared to be price fixing by Mittal and Highveld as both companies increased their prices by the same amount, effective from the same date. In support of its complaint, Petrel provided the Commission with copies of price adjustment letters demonstrating the alleged coordinated pricing between Mittal and Highveld.

In April 2008, the Competition Commissioner initiated another complaint against the producers of flat steel and long steel products in South Africa, including Mittal and Highveld. At the core of the Commissioner’s complaint was the allegation that the steel producers reached agreements or engaged in concerted practices to fix steel prices and divide markets by specific types of goods and by allocating supply quotas for exports, in respect of their steel products. The two complaints were consolidated and investigated jointly.

The complaint against the long steel producers was referred to the Tribunal for determination in September 2009. The scope of this article is limited to the Commission’s investigation and findings in the flat steel market. Mittal and Highveld are the only two local producers of flat steel products in South Africa. Mittal is the biggest player of the two, accounting for around 80% of the broader flat steel market with a greater product range than Highveld.

Commission uncovers anti-competitive practices in the steel industryItumeleng Lesofe

The Commission’s investigation and findings

As part of the investigation of the two complaints, the Commission conducted search and seizure operations at the premises of Highveld and the South African Iron and Steel Institute (“SAISI”). SAISI is a non-profit organisation that serves the interests of the steel producers. At all material times, both Highveld and Mittal were members of SAISI.

The Commission’s investigation revealed that in terms of pricing, Mittal had until 2006 priced its flat steel products at import parity pricing (“IPP”).1 This is despite South Africa being a large net exporter of flat steel products, reflecting its cost advantages in producing these products. An IPP based price is not cost related and therefore does not take into account these advantages. Highveld simply followed Mittal’s pricing by selling its flat steel products at IPPand this mechanism did not yield a competitive price. If there was competition in the local market the local price would be below the IPP and would tend towards an export price as competitive pressures would drive firms to undercut each other in order to gain local market share.

Mittal changed its pricing mechanism around 2006/2007 to one that largely benchmarks domestic steel prices against those in a basket of at least six countries, four of which include the United States of America, Germany, China and Russia. The remainder of the countries that are referenced are developing countries and, depending on the availability of data, would include Korea, India, Brazil or Iran

and so forth. Mittal also takes into account competitor activities in the domestic market, in terms of prices and volumes in determining the final price level. However, Highveld continued to follow Mittal’s pricing mechanism despite this change.

The Commission’s investigation also showed that Mittal and Highveld used a similar transport tariff structure even though their production facilities are about 200 kilometres apart. Given that these producers manufacture their products from plants located in different regions (Highveld’s plant is in the Witbank area and Mittal’s plant is in Vanderbijlpark), it is strange that they are able to use a similar transport tariff structure with more or less same transport costs. By adopting similar or identical transport tariffs the two firms avoid undercutting each other and introducing normal competition for customers.

On the basis of these findings, the Commission has taken a view that Mittal and Highveld have reached understandings, or concerted practices2, to directly or indirectly fix the selling prices or other trading conditions of their flat steel products, in contravention of section 4(1)(b)(i) of the Competition Act 89 of 1998 (“the Act”).

In addition, evidence gathered shows that Mittal and Highveld have also engaged in an explicit volume allocation agreement in relation to products destined for the export market to ‘sensitive’ regions and countries such as the EU, USA, Canada and China. This volume allocation agreement was linked to a European

steel industry association called Eurofer. SAISI and its members would coordinate with this industry association in terms of determining export quotas that South Africa could export to the EU, as well as allocate between themselves volumes that each firm would export within this quota. The Commission is of the view that this conduct contravenes section 4(1) (b) (ii) of the Act.

The Commission also found that there was extensive information sharing between Mittal and Highveld. Both firms

submitted monthly sales information by flat steel product type and size destined for the local and export markets to SAISI. In return, each received its own market share and the industry total, which in a market with only two players precisely revealed the competitor’s market share. The information exchanged through SAISI also involved that pertains to strategic future activities, such as capital expansion plans. Exchange of information regarding expansions in output in the near future removes uncertainty as to how competitors are likely to act in the

future. It removes the element of surprise if plans of increased output are visible to competitors. It also allows for better coordination on future behaviour. The Commission has reached a conclusion that this conduct is in contravention of section 4(1) (b) (i), alternatively 4(1) (a) of the Act.

1 Since 2006/2007, Mittal changed its pricing to one based on a basket of international countries.

2 The Act defines a concerted practice as co-operative or co-ordinated conduct between firms, achieved through direct or indirect contact, that replaces their independent action, but which does not amount to an agreement.

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The large merger between the listed firm Life Healthcare Group (“Life”) and privately-owned Joint Medical Holdings (“JMH”) presents an interesting case study in the analysis of substantive control and the counterfactual scenario in a merger. In this merger, an analysis of the counterfactual scenario, that is, a world without the merger is confounded by the debate surrounding the nature of the relationship of control that exists and has existed between Life and JMH. This discussion will be critical to assessing whether this merger is likely to have a substantial anti-competitive effect on the market for the provision of private acute general hospital services in the greater Durban region (where the activities of the parties overlap). The Tribunal will hear the case in May 2012.

Life, which is amongst the three major hospital groups in South Africa, already has a 49% shareholding in JMH and through this merger wishes to acquire a further 21% of shares which are currently held by minority doctor shareholders. The critical question is whether Life and JMH have exercised joint control over the JMH group which has 5 hospitals in this area, or whether Life has exercised sole control over JMH since its move from 21% to 49% shareholding at JMH in 2003 as the parties have argued (a transaction which the Commission did not require the parties to notify). The Commission has argued that the parties have exercised joint control over JMH since then.

The market share accretion in the greater Durban area post-merger is approximately

15% which results in the parties holding approximately 50% of that market. In hospital markets, competition takes place on both price and non-price factors. Importantly, because the private hospital groups negotiate tariffs with funders (medical schemes) at a national level, individual hospitals cannot compete on price per se. Instead, competition at the local level is primarily concerned with non-price competition. Hospitals will compete with other hospitals in their area for the services of a specialist because ultimately it is the specialist that attracts patients and also refers patients to a particular hospital for treatment. It follows therefore that a hospital group that establishes a position of regional dominance will attract a large proportion of patients in that area. Regional dominance will in turn also result

in increased bargaining power for the merged entity to the detriment of other smaller competitors; medical funders; and ultimately private hospital patients who will have a reduced set of choices available to them in gaining access to specialists and treatment options.

If a hospital group has a high level of bargaining power in a region, it translates to high bargaining power vis-à-vis funders. The Commission has argued that the advent and growth of designated service provider or managed care medical scheme options has served to make healthcare and medical insurance more accessible to low income earners. These options basically entail medical schemes being able to pick a network or subset of hospitals to which their low cost option members can go

to receive care, and in most instances a discount is negotiated with that network of hospitals for this specific group of patients. In this light, if one hospital group were to gain substantial market power in a region over a large group of private hospitals, they effectively become a must-have group for funders in that region and the bargaining power of funders is therefore eroded.

While much of the information related to the on-going merger hearing before the Tribunal is still protected under confidentiality, there are several parallels that can be drawn between the proposed transaction and the Netcare/CHG merger which was approved by the Tribunal in 2007. The Commission had also recommended a prohibition of that merger wherein Netcare sought to acquire the

remaining shares in Community Hospital Group to add to their 43.75% shareholding. Indeed, the issue of sole versus joint control was central in the analysis in Netcare/CHG and this was directly linked to an issue of prior implementation and an assessment of the counterfactual absent that implementation.

The proposed merger takes place in the context of increasing public concern about the rising cost of hospital care in South Africa. Some stakeholders have argued that the ever-increasing levels of concentration in the private healthcare sector are to blame for this increase in healthcare costs. While the proposed transaction will take effect only in one region of South Africa, its implications may certainly extend well beyond that.

Analysis of Healthcare mergerThando Vilakazi


The Competition Commission, on 23 January 2012, prohibited the acquisition of Cellulose Derivatives (Pty) Ltd (“Cellulose Derivatives”) by Senmin International (Proprietary) Limited (“Senmin”), a wholly owned subsidiary of Chemical Services Limited (“Chemserve”) which in turn is controlled by AECI Limited.

This was the second review of a merger involving both these parties. In February 2009, the Commission’s investigation found substantial foreclosure concerns and prohibited the acquisition of Cellulose Derivatives by Senmin. The parties in their new filling of 2011 indicated that market conditions have changed since 2009 with increased imports being present in the local market and as such the acquisition of Cellulose Derivatives would not raise competition concerns.

Cellulose Derivatives is the only manufacturer of carboxymethyl cellulose (CMC) of technical mining grade in South Africa. This specific CMC produced by Cellulose Derivatives is used mainly in the platinum mining industry for the extraction of the platinum mineral. Senmin on the other hand is largest of the two major distributors of technical grade CMC in South Africa.

The Commission found significant competition concerns relating to the ability and incentive to foreclose competitors of Senmin of a critical input. The competition concerns arise from the possibility that Senmin post-merger will be able to extend its market power in the upstream market for the production of CMC to the downstream market that involves distribution to platinum mines. Due to this market power in the upstream market, the merged entity will be in a strong position to foreclose its main downstream rival of a critical input. The incentive to foreclose competitors is enhanced by the Vendor Management System (“VMS”) introduced by Senmin. The VMS allows Senmin to control the full chemical refining process of a mine which includes the supply of all the necessary chemicals which consist of CMC, flocculants, xanthate, labour and equipment on the plant site. Senmin is also the only manufacturer of liquid xanthate which together with CMC account for approximately 70% of chemicals used in the flotation process (to separate the platinum from the ore body). Therefore, the transaction increases Senmin’s incentive to foreclose downstream rivals as it places Senmin in a position to control the downstream market.

The Commission’s investigation has also not found evidence of increased imports into South Africa that is sufficient to constrain Cellulose Derivatives. Imports currently only represent approximately 8% of CMC sales in South Africa.

Barriers to enter the CMC production market are also relatively high. It is unlikely that entry would occur in the market for the

Chemical merger prohibitedafter second review

Grace Mohamed

production of CMC because the domestic market is deemed to be too small to warrant the entry of another player. Moreover, the capital investment required to meet the economies of scale to effectively compete are high and not supported by the return on investment.

In order to address the Commission concerns relating to foreclosure, the merging parties presented the Commission with potential conditions. After due consideration of the proposed conditions, the Commission found that these would not address the real issue of foreclosure as the merged entity can still effectively foreclose downstream competitors through stratagems such as margin squeeze. Furthermore, the proposed conditions may create a platform for anti- competitive conduct as the two main competitors in the CMC industry will through a supply agreement be able to discuss and exchange commercially sensitive information which may lead to coordination of prices.

It is the Commission’s view that the proposed merger will profoundly change the structure of the CMC industry. The merged entity, as the monopoly provider of CMC, will be the only source of supply of this critical input for its most significant competitor downstream. Consequently, the merging parties may, through supplying on CMC prejudicial terms, threaten the existence of downstream competitor(s).

Upon filling the merger, the parties submitted that there were no job losses anticipated as a result of the proposed acquisition. However, subsequent to the Commission informing the parties that the merger raises significant foreclosure concerns and the proposed conditions do not ameliorate the competition issues particularly the structural change brought to bear by acquisition, they then submitted that Cellulose Derivatives will shut down one production line as result. The merging parties, however, have not made any substantial submission other than to state that the closure is inevitable should the merger be blocked. A synopsis of Cellulose Derivatives’s financials reveals a very profitable operation and as such there is no credible information before the Commission to support that the firm will indeed shut down.

Despite the public interest issues raised by the parties, the Commission is of the view that the acquisition of Cellulose Derivatives is unlikely to raise substantial public interest issues.

Based on Senmin’s ability and incentive to foreclose downstream competitors, high barriers to entry and absence of sufficient imports to constrain the merged entity, the Commission prohibited the proposed merger. The merging parties have since applied for the merger to be reconsidered by the Competition Tribunal.

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On 13 January 2012, the Competition Commission (“the Commission”) prohibited the acquisition of SamQuarz (Pty) Ltd (“SamQuarz”) by Thaba Chueu (Pty) Ltd (“Thaba Chueu”). Thaba Chueu, a private company, is controlled by Silicon Smelter (Pty) Ltd (“Silicon Smelters”). Silicon Smelters is in turn controlled by Ferroatlantica S.L.

Thaba Chueu develops and mines quartz mineral deposits or silica from its eight active mines situated in the Limpopo Province. Silicon Smelters, through its Polokwane Plant, is active in the production of silicon metal, ferrosilicon, silica fume, and electrode paste.

The primary target firm is SamQuarz, a company incorporated in accordance with the laws of the Republic of South Africa. SamQuarz is controlled by Petmin Limited (“Petmin”), a public company incorporated in accordance with the laws of the Republic of South Africa. SamQuarz develops and mines quartz mineral deposits and is a producer of silica, specifically high quality silica.

The Commission in its investigation found that the merger presented both horizontal and vertical dimensions. The horizontal dimension occurs in the sense that both parties are active in the mining and development of quartz mineral deposits and silica products. The acquiring firms mining of silica is solely for its own use and none is sold to the open market. The vertical dimension occurs through the fact that Silicon Smelters and Rand Carbide (the acquiring firms) operate downstream in the production of ferrosilicon and silicon metal and also source silica input from SamQuarz, which operates in the upstream market for the mining and production of silica.

The Commission’s investigation distinguished silica rock, chips and sand within the broad silicon market. One-way substitutability can be established from rock to chips to sand, but not vice versa. Silica rock is mainly used in the manufacture of silicon metal, ferrosilicon, silica fume and inoculants. Silica chips are used in the silicon carbide industry while ferrosilicon is used in the glass industry. At the upstream level, the Commission identified the product as silica, which can be purchased competitively within a distance of about 300km.

Generally, there are four suppliers of silica identified within an economically accessible distance. However, the (at least 99%) purity requirements in the manufacturing of silicon metal, ferrosilicon and silicon carbide limits the number to only two, including the merging party. Further, the reliability of the viable competitor’s product is yet limited in that its ferric Oxide contents are higher than the maximum required limit (of 0.015%) in the manufacturing of silicon carbide.

Thaba Chueu and SamQuarz merger prohibitedLinton Reddy, Raksha Darji and Nicholas Ngepah

Downstream, Silicon smelters use pure grade silica to manufacture silicon metal and ferrosilicon. It is a monopoly in the manufacture of silicon metal and competes with one other firm in the manufacture of ferrosilicon. The manufacturer of silicon carbide, together with those of ferrosilicon compete with the acquiring firm for the purchase of inputs (>99% grade silica) supplied mainly by the target firm. The acquiring firm has revealed its incentive in increasing capacity in the production of the more lucrative silicon metal.

The Commission engaged with various market participants in both the upstream and downstream levels in order to obtain a better understanding of the market. The outcomes of these engagements resulted in the Commission adopting the view that the proposed merger would substantially lessen competition in the relevant market.

Specifically, the Commission prohibited the proposed merger as a result of the significant input foreclosure concerns in both the ferrosilicon market and silicon carbide market. Base on its investigations, the Commission adopted the view that the acquiring firm will post-merger, have the incentive and ability to foreclose its direct and indirect competitors of inputs. The direct competitor is in the manufacture of ferrosilicon and it can be foreclosed of inputs for direct competition reasons. The indirect competitor is the silicon carbide manufacturer. The Commission has established that the expansion of capacity by the acquiring firm into silicon metal will inevitably limit inputs from both direct and such indirect competitors. This is mainly because of the lack of significant and viable alternative input suppliers for the downstream competitors to counteract the likely input foreclosure strategy by the merged entity. The Commission also found that barriers to entry into this market are significantly high.

Thus the proposed merger would have resulted in a substantial lessening of competition in the ferrosilicon market and silicon carbide market. Further, the proposed merger would have created a market structure susceptible for collusion in the downstream market for the production of ferrosilicon.

The parties are appealing the Commission’s decision to block this sale at the Competition Tribunal.

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Mergers and acquisitionsquarterly reviewHardin Ratshisusu

In the third quarter, October 2011 to December 2011, merger notifications have slightly decreased from 83 in the previous quarter to 79 (see Table 1 and Figure 1). Overall, there has been a high merger activity in the second and third quarters compared to the first quarter.

Table 1: Number of notifications per quarter

Category of merger

Quarter 1 (April to June 2011)

Quarter 2 (July to August

2011)

Quarter 3 (October to

December 2011)

Small 4 4 6

Intermediate 48 50 52

Large 18 29 21

Figure 1: Number of notifications per quarter During the quarter the Commission conditionally approved 11 cases, a small merger was prohibited and 54 cases were approved. Most of the conditional approvals were behavioural, whilst one was structural. Of the behavioural conditions, the majority were imposed to alleviate public interest concerns mainly in relation to the preservation of jobs to lessen the effect of mergers on unemployment.

The structural condition to allay the competition concerns was imposed on the acquisition of Rhino Group by Massmart/Wal-Mart requiring the divestiture of some stores owned by the Rhino Group located in Nongoma and Matatiele. This condition will ensure that competition in

0

5

10

15

20

25

April 2011

May 2011

June 2011

July 2011

Aug 2011

Sept 2011

Oct 2011

Nov 2011

Dec 2011

Small Intermediate Large

Nongoma and Matatiele is not lessened to the detriment of consumers, majority of which are the poor.

Another significant condition related to the acquisition of Defy by Ardutch B.V, a Netherlands based company, and is covered in an article in this newsletter.

A merger between Paarl Media (a Media 24 company) and Primedia@Home (a Primedia company), two major distributors of leaflets by knock and drop, was prohibited based on competition grounds, and it is under reconsideration before the Competition Tribunal. There are some mergers that were prohibited early in the fourth quarter and are also covered in this newsletter.


Ardutch and Defy merger approved with conditions Alex Constantinou and Linton Reddy

The Commission recently approved the proposed acquisition of Defy Appliances (Pty) Ltd (“Defy”) by Ardutch B.V (“Ardutch”) with conditions to support local white goods manufacturing in order to address public interest concerns that arise from the transaction. These concerns stemmed from the fact that numerous local South African suppliers of inputs into white goods appliance manufacturing rely heavily on Defy as a customer. Hence, the Commission was concerned about the possibility of Ardutch shutting down local manufacturing plants and relocating production offshore, which would have a negative impact on suppliers throughout the value chain and result in job losses at the Defy factories.

Ardutch is a subsidiary of Arcelik A.S (“Arcelik”) and is involved in the durable goods sector which includes the manufacturing of large domestic appliances such as refrigerators, washing machines, dishwashers, dryers and gas stoves. Defy manufacturers and distributes domestic appliances in Southern Africa and represents an essential customer base for some of its local suppliers.Pre-merger, Arcelik and Defy shared a vertical relationship as Arcelik supplied Defy with various fully assembled products. Hence, the Commission assessed the likelihood of foreclosure of local suppliers from a competition and public interest perspective.

In its investigation, the Commission found that though Arcelik has the ability to source inputs from abroad, the incentives to do so are mitigated by a strong base that has been developed between Defy and its local suppliers. Given the nature of this market, a steady on-demand supply of inputs is required for efficient manufacturing. Thus, resorting to only importing inputs would place considerable strain on meeting surges in demand. Arcelik’s business model in other countries shows that it encourages local suppliers to maintain close proximity to their manufacturing plants thereby ensuring consistent on-demand availability of input products.

Arcelik also indicated that the Defy plants will continue to operate and procure from local suppliers. Hence the Commission found that this transaction was unlikely to give rise to anti-competitive foreclosure as there was no incentive to pursue such a strategy.

However, from a public interest perspective the concern was the foreclosure of local suppliers that may arise as a result of commercial reasoning and efficiencies that Arcelik wishes to extract from being vertically integrated. This foreclosure of suppliers would have a negative impact on employment and growth of the white goods industry in South Africa.

Also, Defy employs more than 2500 workers and any potential shutting down or downsizing of plants in South Africa would have serious repercussions on employment in this sector. However, the parties gave undertakings that there will be no job losses as a result of this merger and suggested that given the increased output from the planned investments in expanding capacity at the Defy plants, they may create more jobs.

To allay the public interests concerns, the merging parties have agreed to the following conditions:

• For a period of 1 (one) year after the approval date, the merging parties shall not, outside of commercial reasons, terminate supply arrangements with Defy’s local suppliers.

• In the event that the merging parties intend to terminate the supply arrangements with Defy’s local suppliers after the 1 (one) year period referred to above has elapsed, the merging parties will notify the local suppliers at least 6 months prior to the termination of the arrangement, giving the reasons thereof.

• The acquiring firms (Arcelik/Ardutch) shall invest in the local production capacity of Defy within 2 (two) years after the approval date, for the improvement of Defy’s technology.


After the exemption lapsed in the latter part of 2000, there was no longer a standard method by which list prices for bitumen could be changed according to the changes in crude oil prices. The primary producers agreed to set the WLSP each month by setting a ‘starting’ price (R/ton) for February 2002 and escalating this by a factor determined through a formula, the Bitumen Price Index (BPI) which later became the Bitumen Price Adjustment Factor (BPAF).

The BPI/BPF was developed as an acceptable formula to track the changes in bitumen prices in line with changes in international crude oil prices and local inflationary pressures. The formula developed, according to the industry association, Southern African Bitumen Association’s (SABITA) calculations closely tracked past list prices (prices under the exemption period) as a test of robustness, and it was deemed a suitable escalation formula by SABITA for long term road construction contracts.

In the years immediately following the lapsing of the exemption, the primary producers agreed that they would consult each other before making adjustments to the WLSP (through the BPAF) and that the date for notifications of changes to customers would be the first of every month, with agreement being reached on the 25th of the month before.

The development and implementation of the BPAF was done through the SABITA platform, through SABITA board meetings as well as through regular e-mail communications where BPAF percentages and/or Rand per ton escalation figures were circulated to all the primary

producers only. The BPAF then would be added to the present month’s WLSP to arrive at the following month’s WLSP. It was therefore clearly forward-looking and gave an indication of what the market was likely to do in terms of magnitude of list price increases the next month.

It was also the Commission’s case that, aside from the SABITA-led communications and e-mail exchanges, there was bilateral communication between certain primary producers around what the following month’s list price was going to be. This conduct continued at least until December 2009, long after the BPAF focused e-mails and discussions in SABITA purportedly ceased around mid-2007.

While the original intended purpose of the adjustment factor may have been for it to be used as a rise and fall provision in long term contracts between civil engineering/road construction firms and end customers (roads agencies, municipalities), it was evidently used by the primary producers of bitumen to set future WLSPs.

The Commission initiated a complaint against Chevron SA Pty Ltd (“Chevron”), Engen Petroleum Limited (“Engen”), Shell SA Pty Ltd (“Shell”), Total SA Pty Ltd (“Total”)and Masana Petroleum Solutions Pty Ltd (“Masana”) following information received from Sasol Limited (“Sasol”) and its subsidiary Tosas SA Pty Ltd (“Tosas”) in a leniency application. Thus, the Commission did not seek a penalty from Sasol and its subsidiary, Tosas, which were granted conditional immunity.

The Commission referred its findings against the respondents to the Tribunal for adjudication on 04 March 2010.


Bitumen cartel settlementsReena das Nair

After the lapsing of the petroleum industry-wide exemption in 2000, major oil companies, entered into an agreement and engaged in conduct that involved concerted practices and/or took decisions that were intended to directly or indirectly fix the price of bitumen and bituminous products.

Bitumen is one of the by-products from crude oil refining through the fractional distillation process and is made from the residue at the bottom fraction of the oil barrel. The primary and more valuable products that oil companies produce from the fractional distillation process include petrol, diesel, jet fuel and illuminating paraffin. Bitumen and modified bitumen products are used to surface and rehabilitate roads, as waterproofing products and to suppress dust.

During the exemption period, the petrochemical companies jointly calculated the prices for bitumen with reference to an industry-wide retail price list. This was referred to as the Wholesale List Selling Price (“WLSP”), or national WLSP. From 1986 until 2000 the petrochemical companies were exempted from the price-fixing prohibitions that applied at the time.

Subsequent to this, the Commission settled with Masana with a penalty of R13million. This was confirmed by the Tribunal in 2010. Masana admitted that it met and shared competitively sensitive information with primary producers relating to pricing of bitumen and associated products, made use of a common platform to transparently share and exchange pricing information and used/made use of and implemented the agreed pricing formula.

SABITA also settled with the Commission with a penalty of R500 000 and the order was confirmed by the Tribunal in 2011. SABITA admitted that the conduct occurred through its function as a trade association, which gave rise to the BPAF and to facilitating and updating the publication of BPAF.

In February 2012 the Commission reached settlements with Engen and Shell for their involvement in the cartel. Both these companies admitted to having fixed the price of bitumen with other oil companies by collectively determining and agreeing on pricing principles, including a starting reference price and monthly price adjustment mechanism. Engen and Shell agreed to pay R28 800 000 and R 26 259 480 respectively.

On 21 February 2012, the Commission issued notices of withdrawal for its case against Chevron and Total based on evidence, consultations with potential witnesses and review of the documents obtained during the discovery process. Thus, the Commission has decided not to pursue the complaint referral against Chevron and Total.

The Commission’s investigation against Apollo, Bridgestone, Goodyear, Continental and the SATMC was triggered by a complaint lodged by a vehicle fleet owner in 2006. The complainant alleged that the four local tyre manufacturers simultaneously increased their prices around the same time and within the same parameters, and used the SATMC as a forum for their collusive activities. As part of its investigation, on 4 April 2008, the Commission conducted raids on the premises of Apollo, Bridgestone and the SATMC. Further investigation and interrogations conducted by the Commission led Bridgestone to apply for and to be granted conditional immunity from prosecution in terms of the Commission’s Corporate Leniency Policy (“CLP”).

On 31 August 2010, the Commission referred the matter to the Tribunal, and soon thereafter, Apollo approached the


Apollo Tyres settles with the CommissionNelly Sakata

The Competition Tribunal confirmed a settlement agreement concluded between the Competition Commission and Apollo Tyres South Africa (Pty) Ltd (“Apollo”) on 14 December 2011.

Apollo is the former Dunlop Tyres International (Pty) Ltd (“Dunlop”), which was acquired by the Indian incorporated company, Apollo Tyre Ltd, in January 2006. In February 2009, Dunlop changed its name to Apollo Tyre South Africa.

The settlement agreement relates to Apollo’s participation in the alleged cartel conduct that was subject of the Commission’s investigation against the four local tyre manufacturers, namely Bridgestone South Africa (Pty) Ltd, Goodyear South Africa (Pty) Ltd, Continental Tyres South Africa (Pty) Ltd and Apollo, and the industry association, namely the South African Tyre Manufacturers Conference (Pty) Ltd (“SATMC”).

Commission to settle the matter. The settlement offer was prompted by the change of control over Apollo (the former Dunlop), where it admitted that the conduct the company engaged in contravened section 4(1)(b)(i) of the Competition Act 89 of 1998, as amended. As a result, Apollo agreed to pay a penalty in the sum of R45 Million rand, which represents approximately 4,75% of Apollo’s affected annual turnover for the financial year end 2008.

As part of the settlement agreement, Apollo has undertaken to issue a compliance programme designed to ensure that its senior employees are aware of the provision of the Competition Act and do not contravene them. Apollo has also undertaken to cooperate and assist the Commission in the prosecution of the other members of the cartel, namely Goodyear and Continental.

- Regional Cooperation - Evidence Gathering via Searches/Raids/Inspections & Digital

Evidence Gathering - Enhancing the effectiveness of leniency programmes in the

fight against international cartels - Disincentives for leniency resulting from contradicting/onerous

requirements in different jurisdictions and actions taken by authorities to address such concerns

- The impact of criminal and/or administrative sanctions against individuals and companies on incentives for leniency

In outlining jurisdictional experiences, delegates representing newer competition authorities gained the advantage of gleaning from the more developed agencies such as South Africa. It became evident as the event progressed that there was enormous strides being made in the fight against cartels. The presentation of case studies emphasised the uniformity of a rigorous approach to cartels being adopted worldwide. Hence the stress on cooperation and information sharing throughout.

The ICN Cartel Working Group has begun its practical work on matters that were deliberated upon at Bruges, particularly to facilitate international cooperation on anti-cartel enforcement and increasing agency effectiveness.

The European Commission hosted the International Competition Network’s (ICN) Cartel Workshop in Bruges, Belgium around October 2011 with a theme titled “Enhancing the effectiveness of the fight against cartels”

It goes without saying that Belgium is the land of beers and ales. What you may not know however, is that with over 50 chocolate boutiques, the chocolate museum Choco-Story, a chocolate trail and a chocolate fair, Bruges is the world’s capital of chocolate. You can get to Bruges for this chocolate gastronomy by car, train, coach, ferry, or plane. Belgian fries is another thing! There is a didactical museum that just sketches the history of the potato. The entire city of Bruges is a World Heritage Site (City). The town hall dates back from 1376, making it one of the oldest.

It was within these sacred ancient halls of the city that thoughtful discussion ensued on cartels. On a serious note the delegates discussed and debated seminal topics such as:

- Coordinating Investigatory Measures and Information Sharing between Agencies

- Cooperation with procurement authorities: bid-rigging - The impact of private enforcement on leniency and on

cartel investigations - Case resolution methods and factors for effectively

choosing them

The 2011 ICN Cartel WorkshopMervin Dorasamy

20 CompetitionNews

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THE EDITOR Advocacy and Stakeholder Relations Division

Private Bag X23, Lynnwood Ridge, 0040E-mail: [email protected] Tel: (012) 394 3200Fax: (012) 394 0166

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