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Daun et Cie AG and Kolosus Holdings Limited (10/LM/Mar03) [2003] ZACT 49 (17 September 2003)
.RTF of original document
COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case No: 10/LM/Mar03
In the large merger between:
Daun et Cie AG
and
Kolosus Holdings Limited
______________________________________________________________
Reasons for decision
________________________________________________________________
CONDITIONAL APPROVAL
1.
The proposed transaction between Daun et Cie AG and Kolosus Holdings Limited was conditionally approved by the Tribunal on the 29
July 2003. The reasons for this decision follow.
The Transaction
2.
In terms of a sale of shares agreement concluded between Senwes Limited (“Senwes”) and Daun et Cie AG (“Daun”),
Senwes sold its 62.5% share in Kolosus Holdings Limited (“Kolosus”) to Daun for a consideration of R1.31. One of the
conditions of the agreement is that Daun concludes an agreement with ABSA to acquire its shares in Kolosus. Daun thus acquired control
of Kolosus.
3.
Further to this Daun entered into an agreement with a USA producer of automotive leather, Seton, in terms of which Seton will acquire
a 25% shareholding in Kolosus. Seton is a major creditor of Kolosus, a debt which arises from lengthy litigation between the two
companies. Although this transaction is not a separate merger for purposes of the Act, it is a significant aspect of the analysis
of the transaction before us and we return to a detailed discussion of this issue later in the decision.
4.
On the 30 April 2003 the Commission recommended that this merger be unconditionally approved.
THE PARTIES
The primary acquiring firm
5.
The primary acquiring firm is Daun et Cie AG, a German company controlled by Mr Claas Daun and the Daun family trust. Daun and its
subsidiary, Kap Beteiligungs AG (“Kap”), hold controlling interests in approximately 70 subsidiaries worldwide of which
at least 30 are in South Africa. The Daun group is particularly active in the textiles, footwear, furniture and automotive supply
industries.
6.
The group’s subsidiaries relevant to this transaction are Springbok Trading, Riverside Tannery and the joint venture Butterworth
Tannery.
7.
Mr. Daun’s entrepreneurial talents are highly regarded. He is a risk taker who has developed a reputation as a successful ‘turnaround’
specialist, that is, an entrepreneur adept at identifying opportunities for rescuing – often at the behest of anxious creditor
banks – ailing businesses.Mr. Daun’s record of successful turnaround operations includes Morkels, a national chain of furniture retail stores, East Rand
Proprietary Mines, a gold mining company, Da Gama Textiles and Glodina Towels, to name but a few. It appears that Mr. Daun’s
interventions have frequently impacted dramatically on the structure of entire sectors. The furniture manufacturing industry in which
Mr. Daun is said to have initiated the consolidation of the sector and, ultimately, the formation of Steinhof, the dominant player
in furniture manufacturing in South Africa, is an example.
8.
A successful turnaround generally presupposes the identification and elimination of excess costs and, as such, is frequently accompanied
by significant labour retrenchments. Mr. Daun has not escaped some of the controversy and recrimination that inevitably accompanies
the process of workforce reduction. However, in addition to laying off labour, Mr. Daun is also associated with some innovative rescues
that have presupposed high levels of co-operation with organised labour, the rescue of Mooi River Textiles being one well-known case
in point.
The primary target firm
9.
The primary target firm is Kolosus, a public company controlled by Senwes. Kolosus controls various subsidiaries, principally active
in the meat and leather industries.
10.
The subsidiaries relevant to this transaction are the two feedlots, Taaiboschbult and Hurland, African Hide Trading, and the tanneries,
Kolosus Automotive Leathers and Mossop Western Leathers.
11.
We have already referred to the litigation with Seton that has dogged Kolosus’ recent history. This matter has impacted significantly
on both the finances of the target company as well as on its ability to compete effectively in a market clouded by the negative sentiment
surrounding the litigation. It appears that, absent this transaction, the prospect of liquidation exists.
RATIONALE FOR THE TRANSACTION
12.
Daun’s assumption of control of Kolosus portends both financial and reputational relief for the ailing company. So powerful
is Mr. Daun’s reputation, that Seton has, in part settlement of its successful claim, accepted a passive, minority equity stake
in the ailing Kolosus simply because, it avers, it expects Mr. Daun’s presence and his entrepreneurial flare to be manifest
in an upside on the share price over the relatively short term. Furthermore Mr. Daun is a long-standing supplier to the automobile
industry and it is hoped that his reputation and connections with the automobile OEMs, particularly the key German owned OEMs, will
restore market access for Kolosus’ automotive leather operation.
13.
It is more difficult to determine with confidence the acquirer’s rationale for this transaction. Mr. Daun insists that he is
simply attracted by the sheer challenge of turning around the ailing Kolosus and by the profit that he will show in consequence of
this. Be that as it may, there are, on the face of it, structural consequences of the transaction that are potentially troubling
from a competition perspective.
14.
Firstly, as will be elaborated below, the merger of the country’s two largest hide traders is, prima faciecause for concern.
15.
Secondly, we are mindful of a discernible pattern of vertical integration in Mr. Daun’s manufacturing strategy. This is apparent
in respect of his interests in the furniture and textiles sector. We must ask ourselves whether this transaction represents a strategic
step towards vertical integration of the leather products value chain in which – through his interests in furniture and footwear
– he is already a significant player. This, too, may impact on the character and intensity of competition in the affected markets.
16.
Mr. Daun denies that considerations related to vertical integration play any part in his decision to acquire Kolosus. Of course it
is wholly conceivable that sheer opportunism has driven as consummate an entrepreneur as Mr. Daun. However, his clear affinity for
vertical integration speaks for itself. At least, we must be alert to the possibility that the opportunity for turnaround that Mr. Daun discerns is rooted in vertical relations
along the value chain and we must examine the competition implications, if any, of that approach.
THE HEARING
17.
A pre-hearing was held on 2003 and the hearing was held on the following days:
8 July 2003
9 July 2003
10 July 2003
14 July 2003
24 July 2003
25 July 2003
18.
The Commission called the following witnesses:
1.
Mr D Venter, an independent consultant to companies in the meat and leather industries
2.
Mr P Booysen from the Executive Council of the International Meat Secretariat (IMS) and the Meat Exporters of South Africa (MESA)
19.
The merging parties called the following witnesses:
1.
Mr P Schouten from Daun et Cie AG
2.
Mr A Bischoff from Kolosus
3.
Mr P Staples from Springbok Trading
4.
Mr H Roets from African Hide Trading
5.
Mr B Keyser from Kolosus Automotive Leathers
6.
Mr C Daun Chairman of Daun et Cie AG
7.
Mr PTrechack Vice-President of Seton USA
20.
The Tribunal called the following witnesses:
1.
Mr C O’Neill from Eagle Ottawa SA
2.
Mr N G von Durckheim from Bader SA
3.
Ms J C G Terreblanche from EAC
4.
Mr R Nortje and Ms A. Viljoen from BMW SA
5.
Mr B Lappiner from Cape Produce Company Pty Ltd
6.
Mr H Cilliers from Daimler Chrysler
7.
Mr C Austin from Hidskin Pty Ltd.
21.
It is important to note that during the Commission’s investigation of the transaction, various industry players raised their
concerns regarding the impact of the transaction. The Tribunal thus subpoenaed the abovementioned witnesses as a sample representative
of the various players at different levels of activity within the industry.
The Trade unions
22.
Mr E Patel and Mr M Bennett represented the South African Clothing and Textile Worker’s Union (“SACTWU”) during
the proceedings.
23.
Mr P Motaung from Maserumele Inc represented the South African Food and Allied Trade Union (“SAFATU”).
BACKGROUND
24.
The transaction is a complex one. At its core is a horizontal merger, that is a merger involving firms in the same market, but it
also involves firms that are suppliers and customers of these competing firms. Although, as will be elaborated below, the horizontally
related firms are involved in trading and processing both sheep skins and cattle hides, for our purposes it is only cattle hides
that are pertinent and then, particularly those hides that are suitable for ultimate use in the manufacture of automobiles. To provide
a general background to the merger, we firstly describe the automotive value chain in which the firms are active. We then discuss
the relevance of the Motor Industry Development Programme. Thirdly, we provide relevant information on the Seton legal claim against
Kolosus, as well as a brief overview of the establishment of Springbok Trading.
The automotive leather value chain
25.
The automotive leather industry, the most important component of the South African leather industry, is best analysed as a value chain
comprising four levels.
26.
These are:
i.
the feedlots;
ii.
the primary tanners;
iii.
