You are here:
SAFLII >>
Databases >>
South Africa: Competition Tribunal >>
2005 >>
[2005] ZACT 42
[Database Search]
[Name Search]
[Recent Decisions]
[Noteup]
[Help]
Clover Fonterra Ingredients (Pty) Ltd and Clover SA (Pty) Ltd / New Zealand Milk Products SA (Pty) Ltd (92/LM/Nov04) [2005] ZACT 42 (21 June 2005)
.RTF of original document
COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case no: 92/LM/Nov04
In The Large Merger Between:
Clover Fonterra Ingredients (Pty) Ltd
Acquiring Firm
And
Clover SA (Pty) Ltd and
New Zealand Milk Products SA (Pty) Ltd
Target Firms
Reasons for Decision [NON CONFIDENTIAL]
APPROVAL
1.
On 13 May 2005 the Competition Tribunal issued a Merger Clearance Certificate conditionally approving the merger between Clover Fonterra
Ingredients (Pty) Ltd, Clover SA (Pty) Ltd and New Zealand Milk Products SA (Pty) Ltd.
THE TRANSACTION
2.
The parties to this merger are Clover SA (Pty) Ltd (“Clover”) and New Zealand Milk Products SA (Pty) Ltd (“NZMPSA”).
Clover is a wholly owned subsidiary of Clover Industries Limited, a public company. NZMPSA is a wholly owned subsidiary of Fonterra International Limited ("Fonterra International"), and will be referred to as either NZMPSA or Fonterra henceforth.
3.
Clover and Fonterra have agreed to form a joint venture company, Clover Fonterra Ingredients (Pty) Ltd (“CFI”), in respect
of Clover’s and Fonterra’s dairy ingredients businesses. Clover and Fonterra will own 51% and 49% of the issued shares
in CFI respectively. However, according to the parties, they will have joint control of CFI by virtue of the provisions of a shareholders'
agreement to be concluded between Clover and Fonterra in relation to CFI.
4.
The joint venture is aimed at marketing, selling and distributing these dairy ingredients in bulk, i.e. as commodity products, in
the countries of sub-Saharan Africa. It is intended that CFI will market, sell and distribute these commodity products to customers
that prepare food for direct on-sale to the consuming public ("food service customers") and customers who use products
supplied to them for processing to create new products for distribution and/or purchase products packed in bulk whether for resale
to third parties or not ("ingredients customers"). It is thus not the intention of the joint venture partners to use CFI to sell to retail customers. Retail sales will remain the prerogative
of the partners individually, and to the extent these activities overlap they remain competitors of one another. We deal with the
consequences of this more fully below.
5.
The transaction between the parties is contained in a number of agreements, the Master Agreement being the core of the consensus between
the parties. The Master Agreement seems to have gone through a number of iterations before the parties reached finality. Whilst the joint venture is generally in relation to the bulk/commodity segment of their respective ingredients businesses, excluding
retail, the agreement seems to be a compromise of different strategic objectives with some products being included, some not, some
customers being included and some not.
6.
The evaluation of this merger has been an equally iterative process, somewhat convoluted and at times difficult, with information
being furnished in piece-meal fashion by the parties.
HISTORY OF THE PROCEEDINGS
7.
On 31 January 2005, the Commission filed its first recommendation (“the Commission’s Report”) with the Tribunal
in which it recommended that the transaction be approved unconditionally.
8.
At a pre-hearing held on 14 February 2005 the Tribunal requested further documentation from the parties relating to the transaction.
9.
At a subsequent telephonic pre-hearing on 15 March 2005, the Tribunal requested the parties and the Commission to make submissions
to it on the basis that the transaction constituted a full merger between Clover and Fonterra.
10.
On 4 April 2005 and after receipt of the additional documentation the Commission filed a supplementary submission (“Supplementary
submission”) with the Tribunal, consisting of an evaluation of the newly submitted documentation. In the Supplementary submission
the Commission revised its analysis of the market shares and competitive landscape for skimmed milk powder but persisted with its
recommendation that the transaction be approved unconditionally.
11.
A hearing of the matter was held on 7th and 8th April 2005. The following witnesses were examined:
1.
Karin Purchase – Aspen Nutritionals (procurement manager);
2.
Adam Prinsloo – Nestle South Africa
3.
Malcolm Tweed – New Zealand Milk Products SA (general manager)
4.
Manie Roode – Clover SA (executive director)
5.
Mike van den Berg – Milk Producers Organisation (director)
6.
Pieter Uys – Clover SA (general manager: Ingredients and Exports)
12.
In the course of the hearing further documentation was referred to by the parties, which documentation was later furnished to the
Tribunal.
13.
Subsequent to the hearing and after receipt of the further documentation, the Commission was asked to confirm certain information
on market shares and prices. The Commission filed its second supplementary submission (“2nd Supplementary submission”) on 11th May 2005.
14.
As a consequence of the submissions of the parties, the documentation provided, the evidence led at the hearing and the reports by
the Commission this merger has been approved conditionally. The reasons follow.
BACKGROUND TO THE DAIRY INGREDIENTS INDUSTRY
15.
The merging firms are both involved in the processing and manufacturing of dairy, beverage and other related food products and the
marketing, distribution and sale of such dairy, beverage and other related food products.
16.
The dairy industry is broadly divided into the raw milk (fresh milk) segment and the dairy products or ingredients segment. Dairy
products or ingredients, which consist of products such as cheese, butter, UHT milk and milk powders, are sold both in the retail
and non-retail channels. The non-retail channels involve the sale of such products in bulk as commodities to food service customers and ingredients customers.
17.
Clover’s ingredients division supplies sprayed and roller-dried dairy ingredients and vegetable fats and blends to various customers
including infant formulae manufacturers, bakeries, ice cream and dessert manufacturers. The dairy ingredients products consist of
-
♣
Skimmed milk powder
♣
Full cream/ whole milk powder
♣
Buttermilk powder
♣
Whey powder
♣
Natural cheese for use in the manufacture of processed cheese
♣
Non-dairy creamers and whiteners
♣
Butter
18.
The business of Fonterra International follows the cow-to-customer value chain, from milk collection, through manufacturing and logistics
and ultimately to the marketing of ingredients to the international food industry under the New Zealand Milk Products brand. According
to the parties, New Zealand produces more milk than it consumes, and therefore a major part of the Fonterra group’s business
involves selling manufactured dairy products around the world. Its activities can be divided into three segments namely Ingredients, New Zealand Milk and Fonterra Enterprises.
19.
The four main dairy ingredients sold by the New Zealand Milk Products brand are milk proteins, milk powders, cheese ingredients and
cream products.
20.
NZMPSA conducts the Fonterra group’s business in relation to ingredients in South Africa. The products that NZMPSA sells in
South Africa are -
♣
Milk and whey proteins
♣
Milk powders
♣
Cream products
♣
Cheese and cheese ingredients
♣
Portion controlled (<20ml) UHT milk
♣
Refined and edible lactose
21.
While the Fonterra group is considered to be one of the largest milk-producing companies in the world, NZMPSA does not import raw
milk into South Africa nor does it have a retail (branded) aspect of its ingredients business in South Africa. Clover SA on the other
hand has between 30 - 35% of the raw milk market in South Africa and has approximately 32% of the ingredients business, both in the commodity and retail segments. Clover also exports ingredients and UHT milk to other parts of Africa and EU. Fonterra International also exports milk and dairy products to other parts of the world including Africa.
NATURE OF THE JOINT VENTURE
22.
The joint venture is designed by the parties along very discrete aspects of their ingredients businesses and assumes a hybrid or “mongrel
character” with some products included, some excluded, with some customers included, some not.
23.
The products to be sold by CFI ("the defined products') will be (subject to certain contractual exclusions):
23.1.
Certain bulk-packaged commodity products (with or without value-added components which do not result in the packaging being altered) to be sold to food service customers and ingredients customers, and comprising:
23.1.1.
Milk powders (whole milk, skimmed, butter milk),
23.1.2.
Whey powder,
23.1.3.
Butter,
23.1.4.
Anhydrous milk fat,
23.1.5.
Edible and refined lactose,
23.1.6.
Natural cheese for use in the manufacture of processed cheese,
23.1.7.
Whey protein concentrates,
23.1.8.
Casein,
23.1.9.
Caseinate,
23.1.10.
Bulk-formulated powdered products e.g. filled milk, whey/milk mixtures, coffee creamers;
sold to food service customers and ingredients customers.
23.2.
Commodities where the value-added component takes the form of altered packaging into consumer or catering packs, sold to ingredients
customers.
23.3.
As special inclusions, sliced processed cheese, portion-control (<20ml) UHT milk, and frozen diced and shredded mozzarella cheese
which is supplied to [confidential information] and [confidential information].
24.
The following are specifically excluded from the activity of CFI:
24.1.
Fonterra’s filled milk, whole milk and infant formula contracts with Promasidor;
24.2.
Fonterra’s customers which purchase the defined products on a multinational purchasing contract basis i.e. from Fonterra's head
office;
24.3.
Clover inventory management transactions which result in ownership of the product ultimately reverting to Clover;
24.4.
Clover’s contract with Nestle for manufacturing of skimmed milk powder; and
24.5.
Ingredients used internally by the Clover group (Clover SA, Danone Clover, Clover Danone Beverages).
25.
The parties do not intend to exchange technology or know-how and any expenditure on research and development of new products can only
be incurred with the approval of the boards of directors of the parent companies. The joint venture company will determine its own prices through a process of adding a percentage on prices that are set independently
by the parent companies. Despite its independent pricing structure the joint venture company is seen as a marketing and distribution agent of the two parent
companies rather than a principal.
26.
As stated above, CFI will be jointly controlled by the parties with Clover having 51% and NZMPSA 49%.
RATIONALE FOR THE TRANSACTION
27.
The stated commercial rationale for the proposed transaction is that the establishment of the joint venture will lead to more effective
supply of the defined products in the rest of sub-Saharan Africa. According to the parties the dairy ingredients business is characterised
by a pattern of surpluses and shortages. This is because the ingredients business is dependent on the supply of raw milk, which is
cyclical and seasonal. This makes it difficult for Clover to supply defined products such as skimmed milk powder on a sustained basis.
The joint venture will be able to source its supplies from either Clover SA or Fonterra, which will enable Clover to supply the defined
products to customers in sub-Saharan Africa on a sustained basis. Fonterra, in turn, will establish a sustained presence in the region
and have access to Clover’s major customers to which CFI can supply Fonterra’s specialised products.
28.
In summary, the joint venture in the ingredients business has been agreed upon by the parties in order to –
28.1.
expand the range of products offered to customers of both these businesses;
28.2.
satisfy customers' requirements for ingredients on a consistent basis in a market which has cyclical features of surpluses and shortages;
and
28.3.
export to sub-Saharan Africa from a stable supply base.
