Merger Analysis in South Africa Lizel Blignaut lizelb@compcom.co.za +27 13 394 3295

1. Merger Analysis in South Africa Lizel Blignaut lizelb@compcom.co.za +27 13 394 3295

2. Merger Review The Commission’s task is to evaluate the impact of a merger on markets and the public interest.

3. South African Merger Review Categories of mergers Small Intermediate Large Commission decides on small and intermediate mergers, whilst the Tribunal adjudicates over large mergers

4. Merger tests • The first test is whether the merger is likely to substantially prevent or lessen competition. • If a substantial prevention or lessening of competition is found, then the second test is to determine whether the effect can be outweighed by technological, efficiency or pro-competitive gains. • Regardless of the outcome of the above, the third test entails an evaluation on whether the merger can or cannot be justified on public interest grounds.

5. Competitive assessment Step 1: Define the relevant market • Purpose of a market definition: Sets the “stage” where competition takes place • Product, geographic, functional and temporal dimensions • Use the hypothetical monopolist test to determine the boundaries. • Factors considered when defining a product market • Demand side issues • Look at the characteristics of products, functional interchangeability, quality, target customers, convenience, consumer preferences, substitution • Sources of information: interviews with customers and competitors, substitution costs/ switching costs, price patterns (convergence, divergence), price elasticities • Supply side • Defining the geographic market • Hypothetical monopolist, chains of substitution • Players enter new geographic area • The pricing strategies of players • Imports

6. Competitive assessment Step 2: Market share and concentration levels Sources of market share • Turnover values or volumes • Productive capacity Using HHI and CR information Changes in HHI and CR’s Categories of phase 1 cases • Transactions where one of the parties is a new entrant into the market, like management buy-outs or where the parties to the merger are not in the same geographic market, and where the transaction raises no vertical concerns. • Where the parties are in the same relevant market and their combined market share is below 15%, • Where the parties are in the same relevant market and their combined market share is above 15%, but: • The post-acquisition HHI is below 1000 points. • Where the post-merger HHI is between 1000 – 1800 but the increase in HHI is below 100 points. • Where the post-merger HHI is above 1800 but the increase thereof is less than 50 points.

7. Competitive assessment Step 3: The theory of harm • Unilateral effects (horizontal mergers) • Market power • Elimination of an effective competitor • Co-ordinated effects (horizontal and vertical mergers) • Ability to collude, market structure, number of players • Flow of information, detecting cheating • Foreclosure (vertical mergers) • Input or customer • Portfolio effects (conglomerate mergers)

8. Competitive assessment Step 4: Factors considered when assessing the strength of competition in the relevant market • Actual and potential levels of import competition (Gold markets, Namitek/ Altech matter) • Ease of entry, tariff, regulatory barriers, contestability of the market (SAA/ Air Tanzania) • Trends in concentration, history of collusion (Banks/ Compcorp transaction) • Degree of countervailing power (TCCC/ Valpre, Just Juice) • Dynamic characteristics of the market, growth, innovation, product differentiation (IT; Computershare) • Nature and extent of vertical integration: foreclosure, collusion • Failing firm arguments (JD/ Profurn matter) • Removal of an effective competitor (Massmart/Moresport)

9. Weighing of efficiency gains • Evaluation of technological, efficiency or other pro-competitive gains • Defence of an anti-competitive merger • Efficiencies must be quantifiable, sustainable, attainable by no means other than the merger • Total welfare concept vs consumer welfare concept

10. Public interest evaluation • Public interest issues • Effect of the merger on industrial sector or region • Effect on employment (Arvin Industries (“Arvin”) and Zeuna Starker (“Zeuna”) • Effect on small businesses and previously disadvantaged persons to become more competitive (Sasol Oil (Pty) Ltd and Exel Petroleum (Pty) Ltd, Anglovaal Mining and Harmony Gold Mining by Ubuntu Consortium) • Effect on the ability of national industries to compete in international markets

11. Case study: Arvin Zeuna Starker • The Commission found that the merger was unlikely to substantially prevent or lessen competition in any market. • The Commission, however, found that the merger has negative effects on employment and on the Ga-Rankuwa region (126 job losses, 31 new jobs in Cape Town). • The Commission therefore, approved the merger subject to the following conditions:

12. Arvin Zeuna Starker conditions • Retrenchment packages, severance pay and retraining • The employer must provide counseling • The merging parties must offer employment to 31 employees who are directly affected by the relocation • Relocation benefits must be paid • Report on the progress of the implementation of these conditions

13. Case study: LNM Iscor • Trade unions raised concerns about possible job losses resulting from the merger • Foreign ownership of Iscor raised • Job losses in Iscor since restructuring after 1990’s • Efficiency drives had lead to job losses • LNM’s retrenchment history examined • Commission came to the conclusion that the rationalisation process in Iscor had been ongoing and is separate from the merger • The retrenchments are not merger specific

14. Questions and discussion