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Chemical Services Limited and Chemiphos S.A (Pty) Ltd (100/LM/Dec04) [2005] ZACT 25 (26 April 2005)

.RTF of original document

         COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA

                                                                        Case No: 100/LM/Dec04


In the large merger between:

Chemical Services Limited                                                     Acquiring Firm

         and

Chemiphos S.A (Pty) Ltd                                              Target Firm

___________________________________________________________________________

         REASONS FOR DECISION
 ___________________________________________________________________________


         CONDITIONAL APPROVAL
1.      
The Competition Tribunal issued a Merger Clearance Certificate on 26 April 2005 approving with conditions the proposed large merger between Chemical Services Limited (“Chemserve”) and Chemiphos S.A (Pty) Ltd (“Chemiphos”).
2.      
The reasons for our conditional approval follow and the condition is appended.


The Transaction

3.       In terms of this transaction, Chemserve acquired 100% of the issued share capital in Chemiphos from a number of individuals and a trust.


The Merging Parties

4.       The primary acquiring firm is Chemserve, a wholly owned subsidiary of AECI Limited (“AECI”), a listed chemicals company. None of AECI’s shareholders controls (directly or indirectly) AECI. AECI owns a number of subsidiaries. Below is a diagram setting out the Chemserve subsidiaries.

Chemical Services Ltd



        


100%    100%     100%     100%     100%     100%
Akulu Marchon (Pty) Ltd
Atlas Consol-idated Industries
Chemical Initiatives (Pty) Ltd
Chemoleo (Pty) Ltd
Chemserve Perlite (Pty) Ltd
Chemserve Polymer Sciences
                                            








100%    100%     100%     50%               100%     100%
Chemserve Systems (Pty) Ltd
Lake International Technologies (Pty) Ltd
Chemserve Trio (Pty) Ltd
Crest Chemicals (Pty) Ltd
Industrial Oleochemicals Products
Pelichem (Pty) Ltd
                                            











100%    100%    100%             100%              100%
Plaaskem (Pty) Ltd
Plastamid (Pty) Ltd
SA Paper Chemicals (Pty) Ltd
Senmin (Pty) Ltd
Improchem (Pty) Ltd
                                   

•        
%.

5.      
The primary target firm is Chemiphos, a private company owned and controlled by four shareholders consisting of individuals and a trust, who all manage the business of
Chemiphos and are also responsible for chemical sales, product management and supplier contracts. Chemiphos has no subsidiaries.

Rationale for the transaction

6.      
According to the parties, two of the four shareholders owning 80% of the shares in Chemiphos wish to exit the business and cash in their investment. Chemserve considers this an opportunity to expand its product applications and offerings, particularly through the acquisition of a polyphosphoric and phosphoric acid manufacturing facility. Chemserve
anticipates that the acquisition would enhance shareholder value as it is expected that there would be a growing demand in the market for polyphosphoric and phosphoric acid.
The hearing of the present merger

7.      
The hearing was held on 25 April 2005. The Tribunal called Mr Jack Chiang (“Mr Chiang”) of Soyo Chemicals as a witness to the hearing. The merging parties called three representatives of the merging parties.
The parties’ activities

8.      
AECI’s main interests lie in the chemical industry through its various subsidiaries. It provides mining solutions, speciality chemicals, speciality fibres and decorative coatings to both the global and regional markets. It also has interests in surplus land, managed by Heartland, which they offer for commercial, residential, industrial development and leasing. The only relevant subsidiary for the Commission’s investigation is SANS Fibres (Pty) Ltd (‘SANS Fibres”). SANS Fibres produces nylon and polyester yarn, and supplies filament yarn to local and export markets. It also produces high-grade polyester polymers for its own yarn processes and for diverse packaging applications.

9.      
Chemserve is involved in the manufacturing, marketing, distribution and sale of chemicals to customers in a number of South African industries. It conducts its business through approximately 17 subsidiaries listed above and through joint ventures (“JV’s”). Chemserve’s website describes it as the largest specialty chemicals operation in Southern Africa. The Chemserve group supplies, markets and distributes a diverse range of speciality chemicals, raw materials and related services to a broad spectrum of industries.

10.     
During its investigation, the Commission focussed on the following Chemserve subsidiaries: (1) Crest Chemicals; (2) Chemserve Systems; (3) Improchem; and (4) Plaaschem. This is in addition to SANS Fibres, a wholly owned subsidiary of AECI. We agree with the Commission that these are the subsidiaries relevant for the purposes of a competition assessment. The activities of these subsidiaries briefly are:

10.1.   
Crest Chemicals is a 50% owned distributor, which includes First Chemicals. It is a distributor and supply chain management partner for global and local chemical raw material manufacturers. It also supplies industrial and fine chemicals and raw materials.
10.2.   
Chemserve Systems, a 100% subsidiary of Chemserve, is active in the markets for industrial cleaning and maintenance as well as in the market for the provision of metal surface treatment.
10.3.   
Improchem, also a Chemserve wholly owned subsidiary, used to be the former Ondeo Nalco South Africa. It focuses on water treatment solutions, and competes with Banchem in the downstream market. It also competes with Chemitor and Henkel.
10.4.   
Plaaschem supplies a complete range of complementary products to the farming community, foundry, water treatment and other related industries.

11.     
Chemiphos is primarily involved in the business of manufacturing phosphoric and polyphosphoric acid. It is also active in the importing, marketing and distribution of speciality chemicals within South Africa on behalf of local and international manufacturers. A detailed analysis of each of the relevant activities of Chemserve and Chemiphos is provided below.
Relevant market

12.     
As can be seen from above, Chemserve and Chemiphos are both active in the market for the manufacturing and distribution of chemical products in South Africa. In addition, Chemiphos currently supplies a number of Chemserve subsidiaries with various chemical products. Chemiphos further supplies SANS Fibres, a subsidiary of AECI Limited, with some of its chemical requirements. Therefore, the proposed merger entails both a vertical and horizontal dimension.

13.     
We now turn to consider the horizontal product overlap in the markets for the manufacture and distribution of chemical products.

The chemical manufacturing market

14.     
As mentioned earlier, the horizontal effects arise from product overlaps between the merged entity as they are both active in the manufacturing and distribution markets of chemical products. From a broad market perspective, a product overlap exists.

15.     
On the upstream manufacturing side, both Chemserve and Chemiphos manufacture chemicals. However, the only chemicals manufactured by Chemiphos are phosphoric and polyphosphoric acid. No subsidiary of Chemserve or AECI manufactures phosphoric and polyphosphoric acid. According to the Commission, there would be no product overlap on a narrow market definition based on the application of each chemical. There would be a product overlap if a broader market definition is used, but the market shares of the merged entity would be negligible irrespective of whether a national or international market is adopted. The Commission’s investigation revealed that the merged entity’s post-merger market shares would not be in excess of 2% in the broad national market for chemical manufacturing. Given the low market share of the merged entity we are persuaded that the transaction would not lead to a substantial prevention or lessening of competition in the upstream market.

Chemical distribution market

16.     
We found that an overlap exists in the downstream distribution side of the market as both Chemserve and Chemiphos are active in the distribution of chemical products on behalf of national and international chemical manufacturers. The Commission found that most manufacturers distribute or supply their own products. The Commission also found that third party distributors account for only 15% of the chemicals distributed in South Africa.

17.     
The Commission proffered three possible chemical distribution market definitions. Firstly, on the broadest possible definition, the market may be the one for the provision of distribution services within South Africa. Secondly, the market can be narrowed to include the market for distribution of chemicals only within South Africa. Thirdly, a further narrowing of the market could result in a market for the distribution of speciality chemicals or commodity chemicals or for each specific chemical.

18.     
Both the Commission and the merging parties contended that there is probably a high level of substitutability in the market for the distribution of chemical products and that the delineation should not necessarily be based on the application of that chemical, but rather on the characteristics of that chemical.

19.     
The Commission argued that “if the chemical is suitable to be transported or distributed with any other chemical, it should therefore form part of that distribution market”. Hence the delineation should be on the characteristics of that product that impacts on its distribution rather than on its application. According to the parties, chemical manufacturers do not require unique distribution services to distribute chemical products. Further to this, the parties were of the view that the relevant downstream market could under certain conditions be defined as broadly as the market for the provision of distribution services within South Africa. The Commission’s market enquiry revealed that the distribution requirements of chemicals differ from one chemical to another, and that for the distribution of speciality chemicals the distribution mechanism remains the same. As a result, the Commission contended that the distribution of each and every chemical constitutes a separate market on its own. The parties submitted that this is not an appropriate delineation of the market, but provided the Commission with market share figures with respect to the distribution of specific chemical product categories.

Evaluating the merger

Market shares for distribution of chemical products

20.     
The parties’ overlapping product categories are found in the supply of industrial chemicals,
food and nutriceutical chemicals, plastics, performance chemicals and pigments. Below is a table which reflects the market shares of the parties together with those of their competitors.

Industrial chemicals

Product Company Market share (Percent)
Dyhard 100 S (Degussa)/ Dicyandiamide Chemiphos 5
First Chemicals 16
BASF South Africa 25
Air products 40
Other 14
Total 100



Hydroquinone (Clariant)/ 1.4 Benzenediol

 Chemiphos 10
First Chemicals 1
CJ Petrow 30
Protea Chemicals 40
Other 29
Total 100

Food and neutriceutical

Potassium Sorbate

Nutrinova

 Chemiphos 7
Crest Chemicals 11
CJ Petrow 50
Protea Chemicals 25
Savannah Fine Chemicals 7
Total 100

Plastics

Terluran GP (BASF)

Acrylonitrile-butadiene-styrene polymer, (ABS) injection moulding grade

 Chemiphos 3
Plastamid 4
Protea Chemicals 17
Affirm Marketing 44
Bayer 2
Rawmac 17
Plastomark/Dow 10
CHC Polymers 2
Other 1
Total 100
Ultraform (BASF)

Polyoxymethylene (POM), injection moulding grade

 Chemiphos <1
Plastamid 1
Affirm Marketing 10
Plastomark 9
Rawmac 25
Protea Polymers 8
Advanced Polymers 25
Other 21
Total 100

Ultramid (BASF)

Polyamide 66 (PA66), injection moulding grade, containing impact modifier

 Chemiphos 2
Plastamid 3
Chemimpo 3
Rawmac 15
CHC Polymers 5
Cast and Walker<