You are here:
SAFLII >>
Databases >>
South Africa: Competition Tribunal >>
2005 >>
[2005] ZACT 3
[Database Search]
[Name Search]
[Recent Decisions]
[Noteup]
[Help]
Plaaskem (Pty) Ltd and UAP Agrochemicals KZN (Pty) Ltd / UAP Crop Care (Pty) Ltd (78/LM/Oct04) [2005] ZACT 3 (13 January 2005)
.RTF of original document
COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case no: 78/LM/Oct04
In The Large Merger Between:
Plaaskem (Pty) Ltd
Acquiring Firm
And
UAP Agrochemicals KZN (Pty) Ltd
UAP Crop Care (Pty) Ltd
Target Firms
Reasons for Decision
Approval
1.
On 9 December 2004 the Competition Tribunal issued a Merger Clearance Certificate approving the transaction between Plaaskem (Pty) Ltd and UAP Agrochemicals KZN (Pty) Ltd and UAP Crop Care (Pty) LtdThe reasons for this decision follow.
The Parties
2.
The primary acquiring firm is Plaaskem (Pty) Ltd (“Plaaskem”). Plaaskem is controlled by Chemical Services Ltd (“Chemserve”), which is ultimately controlled by AECI Ltd (“AECI”), a public company listed on the JSE Securities Exchange South Africa. No one shareholder directly or indirectly controls AECI. Plaaskem
directly or indirectly controls the following firms: Plaaskem Italia s.r.l, Fertiplant (Pty) Ltd, Plaaskem Intellectual Property
and Nalesco 88 (Pty) Ltd.
3.
The primary target firm is UAP Agrochemicals KZN (Pty) Ltd (“UAP KZN”) and UAP Crop Care (Pty) Ltd(“UAP Cape”). UAP KZN is a wholly owned subsidiary of Lager Commodity Trading (Pty) Ltd (“Lager”).Lager is a subsidiary of ConAgra Foods Inc.At the time of notification, UAP Cape was 80% owned by Lager and 20% owned by AstraZeneca Pharmaceuticals (Pty) Ltd. However, at the
hearing, the Tribunal was informed that AstraZeneca had already sold its stake in UAP Cape to Plaaskem. Neither UAP KZN nor UAP Cape
has control over any firms, nor do they have any subsidiaries.
The Transaction
4.
Plaaskem is acquiring UAP’s Cape and KwaZulu-Natal businesses, UAP Cape and UAP KZN, respectively. The sale includes the operating
assets and liabilities of said businesses. In terms of the Sale of Business Agreement, the acquisition by Plaaskem of the UAP KZN
business is conditional upon Plaaskem’s acquisition of UAP Cape and visa versa. The acquisition therefore constitutes one indivisible
transaction.
Rationale for the Transaction
5.
According to Plaaskem the agricultural industry in South Africa is dynamic, overtraded and therefore extremely competitive, and these factors are forcing
both distribution networks and manufacturers to integrate both vertically and horizontally.The integration of UAP’s existing distribution infrastructures will result in, inter alia and operating efficiencies and provide Plaaskem with a more efficient and effective route to market its products.From UAP’s perspective, ConAgra, its parent company, has made the strategic decision to withdraw from all non-core food-processing
activities and as such, to exit the agricultural chemicals business.
The Parties’ Activities
6.
Plaaskem manufactures and supplies agricultural products to the local and export markets. Plaaskem’s activities are broadly
divided into the following product divisions: agricultural chemicals (or “agrochemicals”), foundry chemicals, animal
health products, industrial products, water treatment and mining chemicals. However, the division relevant to the assessment of the
proposed transaction is agrochemicals division.
7.
In its agrochemicals division, Plaaskem manufactures and supplies plant protection products, plant nutrition products and adjuvants.
According to the partiesplant protection products are designed to protect crops from various forms of damage or disease caused by insects, weeds or fungi.
Plant protection products include insecticides, fungicides and herbicides. Plant nutrition products impact a grower’s yield
and comprise foliar products and soil fertilizers (fertigation products). Adjuvants are surfactant (surface-active substance) chemicals
that are added to a tank mix to adjust the water quality in order to improve or prolong the performance of the agrochemical. are added mainly to plant protection solutions.
8.
UAP KZN and UAP Cape distribute a complete line of agrochemicals, including plant protection chemicals, plant nutrition chemicals
and adjuvants, from a range of manufacturers including Plaaskem. None of Plaaskem’s other divisions use the target firms as
distributors.
The Relevant Market
9.
The transaction has a vertical effect in that it involves a manufacturer and supplier of agrochemicals, acquiring a distributor of
agrochemicals. The transaction must therefore be analysedat two levels of the supply chain viz. the manufacturing level (upstream) and the distribution level (downstream).
10.
It is important, at this point, to understand the supply chain in the South African agrochemical industry. Manufacturers of agrochemicals
develop and formulate agricultural products. The manufacturers then supply these chemicals to the agrochemical distributors. Manufacturers typically supply more than one distributor.
Similarly, distributors tend to source and stock a rangeof agrochemical products from a number of research-based and generic companies. Distributors employ agents who serve the farmer directly. Agents make recommendations to the farmers regarding which products and
services they should utilize, in order to develop a comprehensive spray programme.Usuallyfarmers are offered a “complete solution” of various agrochemical products,from a number of agrochemical manufacturers.
11.
The Commission refrained from defining the relevant upstream market.However, we accept the parties’ submission that the relevant markets for the purpose of assessing the vertical aspects of the
transaction are:
- the manufacture and supply of herbicides;
- the manufacture and supply of fungicides;
- the manufacture and supply of insecticides;
- the manufacture and supply of plant nutrition products; and
- the manufacture and supply of adjuvants.
12.
Both the Commission and the parties define the relevant downstream market as the market for the distribution of agrochemicals. While
the parties submit that the downstream markets are regional, the Commission did not conclude on the relevant downstream geographic
market.
Evaluating the merger
13.
Although generally, vertical mergers raise fewer competition concerns and generate larger pro-competitive gains than their horizontal
counterparts,vertical mergers may impact negatively on competition. In analyzing the effect on competition from vertical integration, effects in
two markets usually have to be considered—the market in which the integrating firm already competes i.e. the upstream market
and the market into which it is vertically integrating i.e. the downstream market. As with all vertical transactions, market shares
in the upstream and downstream markets do not increase as a direct result of the transaction. In the Schumann Sasol and Price’s Daelite the Tribunal statedthat instead the question to be asked is “…whether the transaction allows the parties or one of the parties to prevent
competition in the relevant market(s) thus maintaining or extending the anti-competitive structure of both or one of the markets.”
14.
To this end, it is necessary to examine the likelihood of the merged entity raising its rivals’ costs by means of input or customer
foreclosure. This approach is confirmed by our previous decisions.
Customer foreclosure
15.
According to the parties, customer foreclosure is not likely because a very small portion of both UAP KZN and UAP Cape’s turnovers
is derived from distributing Plaaskem’s products. Post-merger UAP will continue to distribute the products of other manufacturers.
There are a number of distributors in the agricultural chemicals industry. Many of Plaaskem’s competitors have their own distribution
networks and/or alternative routes to market. The Commission’s investigation revealed that there were other distributors who
not only had the capacity but the incentive to serve any supplier that would be cut off from UAP’s distribution.
16.
Plaaskem supplies a range of agricultural chemicals to various distributors and neither target firm is a significant customer of Plaaskem.
According to the parties’ competitiveness report, a relatively small percentage of Plaaskem’s total sales were supplied
through UAP during the past year. In the Cape region, the remainder of Plaaskem’s sales is conducted through two other distributors,
Wenkem and Terason, and it is expected that these distributors will continue to distribute for Plaaskem in future. Plaaskem’s
sales account for approximately 1% of both Wenkem and Terason’s businesses and the parties submit that even if the merged entity
were to cancel these distribution contracts, this would not cause them (Wenkem and Terason) to exit the market.
17.
Similarly in the KZN region, Plaaskem’s remaining sales are conducted through another distributor, Farmers Agricare. These sales
also constitute an insignificant part of Farmers Agricare and will not cause it to exit the market should the merged entity self-deal
in KZN. The Commission’s investigation confirmed the parties’ contention that Plaaskem represented a small percentage of the other
distributors’ total annual revenue in the downstream market. Furthermore, since UAP does not have a national distribution network,
the merged entity would have to use other distributors in the regions where UAP is not located.
18.
The Commission’s investigation revealed that farmers and agents regularly attend symposiums and presentations by independent
consultants, co-operatives, chemical companies, research councils and industry trusts. At these occasions, new product developments
(patented and generic) are discussed. Thus the farmer and agent are familiar with continuous developments at manufacturing level.
19.
