BucketFull Nampak

The judgment

The court's own file

COMPETITION TRIBUNAL OF SOUTH AFRICA Case No: 018457 In the maiter between: BUCKET FULL (PTY) LTD : Primary Acquiring Firm And CARTONS AND LABELS BUSINESS OF NAMPAK PRODUCTS LIMITED Primary Target Firm Panel :-Dr T Madima (Presiding Member) :-Ms'A Ndoni (Tribunal Member) :-Prof.F-Tregenna (Tribunal-Member) Heard on :2 July 2014 Order Issued on 29 July 2014 Reasons Issued on : 6 August. 2014 Reasons for Decision Approval (1 On 9 July 2014, The Competition Tribunal (“Tribunal”) conditionally approved the acquisition by Bucket Full (Pty) Ltd for all the issued shares in Cartons and Labels Business. [2]The reasons for approving the:proposed transaction follow hereunder. Parties to the transaction

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[5]The primary acquiring firm is Bucket Full (Pty) Lid (“Bucket Full’), a wholly owned subsidiary of CTP Limited (“CTP”). CTP is in turn a wholly owned subsidiary of CAT Publishers and Printers Limited (‘CAT Publishers”). CAT Publishers is wholly owned by Caxton and CTP Publishers and Printers Limited (“CAT”). CAT is a:publically traded company and fisted on the Johannesburg Securities Exchange: (“JSE”), it is solely controlled by» Mr Moolman through his shareholdings ‘in other companies. It is through: these companies. that..Mr Moolman‘can vote'a majority.at.CAT and appoint or veto. the appointment of the majority of the directors at the firm. Mr Moolman therefore exercises sole control over CAT. Major shareholders of CAT include; Caxton Limited, Publically held (including directors and management), Element One Limited and Allan Gray (Pty) Ltd. The primary target firm is Cartons and Labels Business, a division within Nampak: Products. Limited .(“Nampak..Products”). Nampak Products is a publicly traded company. which is listed on the JSE.’ Nampak Products is a wholly owned: subsidiary of Nampak Limited (‘Nampak’): which is:the parent company of the Nampak-Group. The Cartons and Labels Business does not directly. or indirectly control any other firm. Major shareholders of Nampak include; Allan Gray Investment Council;. Public Investment Commission, Fidelity International Limited, Saniam Investment Management, Red Coral, Black Management Trust, Abax Investments, The Vanguard Group Inc., Capital Group Companies and Stanlib Asset Management. : Proposed Transaction ' Allan Gray Investment Council,.Public Investment Commission, Fidelity International, Sanlam Investment Management and Red Coral. 6]Bucket Full will: acquire the Cartons and:Labels Business as a’going concern. Post-merger, the Cartons and Labels Business‘will: be. solely controlled by Bucket Full. Rationale

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[8]19] There has ‘been a:general decline.in the.cartoons and labels industry in addition, operations and- pricing: pressures have further. forced a number of industry:: players -to consolidate: their operations:or radically--rationalise operations.. The merging parties. have. also been ‘affected by: declines in business; therefore, electing to consolidate their: companies. The CAT. Group views the Carton and Labels Business: as::complementary to: its current packaging. business which will grow the: CAT :Group’s geographic presence. The: consolidation will also. enable the CAT:Group ‘to leverage its expertise and experience ‘in the paper and board market to.achieve economies of scale and thus: realise efficiencies within the Cartons and Labels Business. The: acquisition:is.also a critical ‘part. of ‘the CAT. Group’s -diversification strategy from its. traditional. printed: media. business: This will ensure long-term sustainability and growth:for the CAT. Group and.this.affords :it.an opportunity to.re-invest the proceeds.in other.developments. CAT intends to invest. in the combined. packaging: businesses: to ensure. that. all ‘operations are properly equipped. with: the latest: technology. to. ensure: -the.-sustainability. of -these: businesses. Similarly for Cartons and Labels ‘Business, the industry is.in a mature and declining. market. vulnerable to: imports from low.cost:trading nations. Cartons and --Labels Business requires-.a broader industry consolidation as the business has been ailing for a number of years. Cartons and Labels business’ major customers are global multi-nationals. Numerous restructuring initiatives have been implemented in the past but due to on-going demand, Nampak Products has.decided to dispose of this business to enable consolidation and to create economies of scale required to remain globally competitive and sustainable. Nampak: Products. is. also required to commit significant capital into its future investments in:Africa: Relevant. Market and Impact on Competition

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[13]The CAT Group is a publisher. and printer of books, magazines and riewspapers for itself and:on behalf:of third parties. It-is ‘a commercial printer and manufactures a range: of packaging products and labels: CAT..Group’s businessTM activities::can. be. divided: into; publishing, ° printing, « distribution, advertising, ink:importation and:manufacturing, optical disk replication, digital publishing, stationery:and packaging and labels. Relevant:for this transaction are the following business activities: e General:-Folding Cartons (“GFCs’) e Cigarette Cartons e Wet glue paper beer labels Nampak ‘manufactures a diverse range.of metal, glass, paper and plastic packaging products: The. manufactured: products include; ‘lithographic. printed GFGs, ‘gravure printed. cigarette cartons, gravure: printed paper beer. labels, cigarette cork tipping material and lithographic laminated cartons. The proposed transaction: does result in horizontal overlaps in ‘three product markets.-The first.is in: the market of manufacturing ‘lithographic printed GFCs. GFCs are predominantly used in the Fast-Moving. Consumer Goods (“FMCG”) sector by suppliers:to package a range of products such as food packaging, detergents, beverages, confectionary and household products. The second is in the market of gravure printed cigarette cartons which are only used in the tobacco industry and the ‘third is in the market of long-run gravure wet glue paper beer labels. The relevant geographic market is national with potential competition from imports in the, (i) market of manufacturing lithographic printed GFCs, (ii) the market for gravure printed cigarette cartons; and (ili) the market for wet glue paper beer labels. GEC market

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[16]The' merged entity will have a market share of approximately 40.1%, this represents a 34.1% accretion for CTP’s market share. The market shares indicate that the Cartons and Labels. Business has lost a 14% market share in the last 5 years to competitors other than CTP. Other competitors: in the market include; Golden Era which has a market share of 36%, Shave & Gibson “13.8%, Transpaco’ 5.4%, Triumph: 4.2% and Keypack 0.5%. The Commission is‘of the view that:there area number of smaller players. in the market suchas Propoint, Masterpack: and Magnum and an‘estimated 10% market: sharebelongs: to these «small players. It. must be “noted that competitors have ‘sufficient: spare: capacity to. meet an! increase in demand, should the merged entity decide to increase the price of GFCs. A distinction .must.:be° drawn” between — multi-national. ‘and’ ‘large-national customers on.the.one hand and small-and medium-sized.customers on the other hand. These. are all: customers of the merging parties. Each of these customers .has «varying degrees ‘of countervailing: power, including, multi- nationals using. tenders..for their. regional. requirements which. attracts bids from international suppliers. This results in these customers being able to play these suppliers against one another. They use’ international : benchmarking practices: in order 'to négotiate lower prices from the merging: parties. Whilst small: and médium ‘sized: national firms indicate’ that’ there are. sufficient alternative suppliers, which they. can switch to in the event of a price increase by the merging. parties. The Commission is therefore of the view that the merged entity is unlikely to unilaterally increase the prices of GFCs. The co-ordinated effects are unlikely to facilitate or create co-ordination amongst GFC suppliers as there is significant asymmetry between the market shares and between the market shares of GFC competitors. Customers have countervailing power which reduces: the ability for suppliers to: co-ordinate 5 their competitive behaviour, as..customers: are. able to monitor .and interrogate costs and price increases. The barriers to entry on.a small. scale are relatively low and there are. no regulatory barriers, evidence suggests that small scale entries are able to’ grow their business and compete with incumbent firms. New and second hand equipment is also readily available. Unlike barriers to entry. at'a-larger scale which is much higher and.significant capital investment is.required. Cigarette.Carton market

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[19]The merged entity will havea market share of approximately 77:5%, CTP has a marketshare of 14.3% .and:Nampak.has..a market: share:of:63,.2%: The proposed transaction will:result-in.CTP. being the dominant:competitor in the market. ‘This: is.a highly concentrated: market.with..only.2:other competitors namely, :Rotoprint which has:a market share’ of.17.1% and Golden Era which has a market share of .5.4%. Despite this: the Commission still: considers the transaction unlikely to raise competition concerns as the large customers of the:merging parties have countervailing power. BAT-SA, the merging. parties largest. customer. accounts for 96%.and.86% sales respectively. for CTP: and Nampak::The: balance. of sales is acquired by BAT..Kenya. and. BAT. Nigeria..BAT. SA uses.:international benchmarking exercises and. global.tendersin order: to. compare: the: prices: of: different suppliers: The: Commission is..of the view. that.the above .conduct isa legitimate threat:and is likely to constrain. the merged entities. BAT SA is not concerned about the proposed merger; it has a long term supply agreement in place until 2016 relating to the pricing and quality supply from the merged entity. The Commission is also of the view that BAT SA has additional countervailing power. which includes; (i) BAT SA suppliers are required to provide a cost breakdown, (ii) BAT SA manages and negotiates the price of.raw input material which is supplied to the merging parties directly with the raw material suppliers, and (iii) BAT. SA indicated that it can procure cigarette cartons from 6 international suppliers. The Commission concluded that the proposed transaction is unlikely to result in unilateral effects. Wet glue beer labels market

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[22]The merged entity will have a market share of approximately 63%, CTP has a market share of 43% and Nampak has a market share of 19%. The proposed transaction will result in CTP being the dominant competitor in the market. This market is also highly concentrated with only 2 other competitors, Spear with a market share of lf and Topfer.” SAB is also a significant customer to both the merging parties, accounting for 78% sales for CTP and 89% for Nampak. SAB controls the market share position of all the suppliers by deciding how much of their purchases to allocate to each supplier. SAB imports 19% of its wet glue paper beer labels and has indicated that it is constrained from importing more than 20% due to BBBEE codes and the foreign exchange risk. SAB has raised a concern that the proposed merger is likely to result in unilateral effect, however, the Commission disagrees as SAB has sufficient alternative options for the supply of wet glue paper beer labels and it also exercises countervailing power. Spear is the only other local SA supplier of wet glue paper beer labels and has excess capacity of approximately BB. It has also indicating that it can easily increase its total capacity in one of three ways; firstly, by increasing their current shift from ee ee, secondly by adding a third finishing line at (EEE and thirdly by investing in aeearn enone Spear also indicated that it can reallocate unused capacity that was originally allocated to SAB to its other customers if demand from other customers increases. ? The Commission was unable to obtain Topfer’s sales figures and therefore unable to determines Topfer’s market share.

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[24]NBL is the:only other common customer between the merged entities. It has raised no concerns. as it can make use of.alternative labelling methods (self- adhesive labels) and other wet glue paper beer label suppliers. According to the Commission SAB can switch some of its demand to imports and Spear to discipline the merged entity in.the. event of uncompetitive price increases. The Commission concludes:that SAB appears to‘have alternative options of wet glue:-beer label supply for-its most popular beer. brands. It is also. satisfied that the _procurement. methods. of..SAB: show that it has countervailing power which is likely to. disrupt. any. anti-competitive behaviour that may be caused by the merged entitiés. The Commission is of the view that: co-ordinated.:effects: aré unlikely to disrupt:asymmetry in. the market shares. of the merged-entity.and.its suppliers. Public Interest [25]The are a number of issues. relating to employment; .the first is whether. the retrenchments: are-merger_ related, the..second:is. the actual. number of the non-merger: specific employment retrenchments, and the.last issue. is: how many years the:moratorium shouldbe in place for.The merging parties called the following witnesses to testify in this regard: Mr Morris and Mr Holden. Employment.issues [26]The.Cartons and Labels Business has indicated: that it intends retrenching 151. employees.irespective ofthe merger due to the current .declining profitability. CTP. submits that it would need to retrench 122 employees due to poor financial performance of the target firm,..duplication: of employment positions resulting..from a consolidation: of. manufacturing facilities and investment in more. efficient equipment. The merging parties claim these retrenchments are not merger specific and are necessary in order to lower the employee costs of the target firm in order to become globally competitive and as efficient as its rivals.

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[30]The Commission is of the view that'there is’ sufficient evidence to support the view that.all of the claimed non-merger specific retrenchments are in fact as a result of the merger. Jn support of this view the Commission referred to internal ‘documents ‘reflecting that the target company prepared budgets for retrenchments and e-mail correspondence: between the merging parties at negotiation stage showing that the acquiring firm was not willing to proceed on the basis of the high employment costs at the target firm and had. planned to make significant retrenchments. The Commission finds that the 115:merger specific retrenchments are significant and are of ‘semi or unskilled’ employees.’ This poses ‘a problem as thére’ isa general:decline inthe: cartons ‘and labels industry. It is therefore unlikely ‘that these: employees will find: alternative employment:in: the short term. Thus: the’ merger: specific retrenchments: are substantial and are of concern. The “Commission ‘also: finds. that the. parties’ could -not provide:.evidence showing that they would: be in a worse: competitive position should they not lower their.cost through retrenchments. The: Commission. was unable to demonstrate that: the retrenchments were merger_specific. The evidence produced by the.Commission such as emails and. correspondence was not sufficient to prove that the retrenchments were decided as the result of the merger. Non-merger related retrenchments [31]The Commission is of the view that only 66 employees should be non-merger specific: retrenchments; it asserts that the number provided by the merging parties of 88 employees: is incorrect: and «calculated erroneously. The Commission relies on documents received from the merging parties to reach the conclusion that any other retrenchments would be related to the merger. It highlights that CTP went into the negotiations with Nampak knowing that the

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[34]size: of the. business: of... the: target~ firm. was not. going...to: work «and retrenchments would need-to. occur. According to the Commission, CTP would be compensated for.the retrenched employees. The merging parties dispute the allegations .made by the Commission. Nampak indicated that the division had made substantial losses in-2013 because. of the weak:economy and:.as a result. one of the initiatives identified by management in:a decision .reached : in: May/June.2013 .was retrenchment. These retrenchments are not related to the proposed merger. Mr Morris, the group. executive at Nampak. responsible for a:portfolio of their divisions indicated that the ‘88:.employee retrenchments were..non-merger specific. and:a decision was: taken:-before..discussions ‘of :the..merger took place: After hearing numerous submissions from both parties the Tribunal was of the view-that:clause 3.2 of the conditions in annexure “A” should.be deleted which reads, “Clause 3.1:.excludes’ the retrenchment of 66 .-Non-Management. Employees, who would ‘have been: retrenched: by the..Cartons. and ‘Label Business irréspective of the: Merger’. It was of the view that the hearing does not..have. jurisdiction to. address non-merger related retrenchments and. the parties should rather. address any. retrenchments that. will result from ..the merger.if approved. The Moratorium Commission's view [35]The Commission is of the view that a 3 year moratorium should be imposed on the conditions. They contend that a 2 year moratorium period is academic, in the sense that the time that it takes to implement the merger can be significant and the retrenchments or the moratorium then. for a period of 2 years: becomes insignificant, it is not sufficiently long enough to protect the employees. 10 [36]The Commission: has-also:indicated that-the 3 year. period: should ‘remain: in place if the Tribunal regards: the recommendation. The: Commission has indicated that the process that CTP. has followed in identifying:the number of employees that it intends to retrench'as a result of this merger is not rational. The Commission indicates that this raises concern as .it is ‘unclear what the impact on merger specific retrenchments may be once this merger has been implemented. Therefore a-3 year moratorium is necessary and justifiable in the circumstances. Merging parties view B7]

[38]Mr Holden, the’ executive :director:of. Caxton: group, indicated that -any extension of that 2-year to 3-year period: creates. risk. for the contemplated merger. He indicated that’ they: will:further not’be able to affect the. cost- savings or rationalisation as. quickly:as:they. would: have liked to: He further indicated. ‘that an’ extension will not: sit favourably with. customers..and this could ‘potentially have a negative: influence ‘on ‘the business... The. merging parties need the: moratorium to be as short as possible but as a’compromise they are willing to accept a 2 year. moratorium. The merging parties further indicate that there are measures in-place such as Clause 4,4 of the conditions, which stipulates: that, “The. merging parties have to. submit:a report-to: the. Commission: annuallyon the. anniversary of the merger implementation’ date. This’ report must ‘confirm the number of employees reitrenched ‘as a result: of the merger’. The: merging parties proposed that clause 4.4 could be amended to include:that when the merged entities engage in any section 489° process in terms of the Labour Relations Act, they would inform the Commission. 3 Employers may dismiss employees based on their operational requirement as defined in section 213 of the Labour Relations Act. : 11

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[42]The'merging parties referred-to the CAC Walmart and Massmart* decision, where in. deciding.the moratorium, it was stated. that. one is involved in quite a complicated balancing exercise economically. On the one: hand,: there is a clear consumer benefit to. allowing these retrenchments to occur and you save costs. Those will be: passed. on in.the form of .better pricing to customers, promoting consumer welfare. However on the other hand, there is a detriment to:the interest of the.employees. You are therefore faced. with the challenge of employees losing their jobs or.consumers benefiting: from price reductions. CAC ‘held .that it is a difficult exercise but the ultimately onus lies with the Commission, who must: be in a position to persuade: the Tribunal that the condition that it is proposing is necessary to address the public interest. There must thus‘be evidence to support a.more.extensive moratorium. In the Walmart: decision which eventually imposed. a 2-year moratorium, there was.no: reason .in:the:.circumsiances to.go for.a more extensive remedy.as proposed by the trade unions :and'by: the Minister. The merging parties submit that.the Tribunal must follow a similar approach in this instance. The merging parties are ofthe view. that there is:no need: for a moratorium at.all. The merging: parties. also referred to the Metropolitan and Momentum® decision: where a 2: year moratorium: was imposed. In that case the Tribunal justified that 2-year proposal inter alia'on the basis :of stating that it would take these merging parties:3. years: to realise the synergies. anyway.: According to the merging parties what is of importance is the period that the merged parties would :take in order to realise the synergies. The merging parties argue that similar. to: the Momentum decision, 2 years is more than sufficient to accommodate the welfare.assessment in this scenario. This is not a question of law but ultimately a question of economies and facts. 4 110/CAC/Junt 1 and 111/CAC/Jun11 5 Ibid at par 112-119 § 41/LM/Jull0 and 58/CAC/DECO5 12

[43]After hearing arid considering submissions from both parties, the Commission has failed to provide sufficient evidence to support its .argument that ‘the Tribunal must-impose a 3 year moratorium. The Commission have been unable to discharge the onus required. The merging parties have provided sufficient evidence to satisfy the Tribunal that a 2 year moratorium will be sufficient even though thay are of the view that no moratorium is required at all. We will therefore accept the compromise of 2 years. Conclusion

[44]In light of the above, | approve-the proposed transacfion subject to the condition that the merged entity shall not retrench any employees for a périod of two years from the effective date as a result of the proposed transaction. 2 : 6 August 2014 Or T Madima DATE Prof F Tregenna and Ms A Ndonl concurring Tribunal- Researcher. Moleboheng Moleko and Derrick Bowles For the merging parties: Adv. Jerome Wilson — Bowman Gilfillan For the Commission: Mr Wemer Rysbergen and Mr Hardin Ratshisusu 13