Tiger Brands Ltd / Ashton Canning Company (Pty) Ltd / Newco and Langeberg Foods International Ashton Canning Company (Pty) Ltd (46/LM/May05) [2005] ZACT 82 (23 November 2005)

We approved this transaction, which concerns the merger between two fruit canning businesses, Langeberg Foods International and Ashton Canning Company (Pty) Ltd on 30 September 2005, subject to conditions that relate to employment and appears at the end of this decision. The reasons for our decision are set out below.

In consideration for this, Tiger Brands will acquire two- thirds of the shares in Newco. Ashton Canning will acquire the remaining one- third, as well as certain minority protections or veto rights, which confer upon it the right to materially influence the policy of Newco. Tiger Brands and Ashton Canning will therefore jointly control Newco after the merger.

Tiger Brands is a branded food and healthcare group that is involved in the production of fast moving consumer goods and healthcare products. Whilst no single shareholder controls Tiger Brands it controls 20 subsidiaries of which, for our purposes, Tiger Food Brands Limited (“TFB”) is the most important. TFB in turn wholly owns Langeberg Foods International (“LFI”), the canning business involved in this transaction.

Ashton Canning, like LFI, is involved in the production of canned deciduous fruit and fruit puree for the local and export market. Both merging parties are also involved in the production of canned baked beans and tomato paste. However, since their market shares are less than 1% we will ignore it for purposes of this transaction.

According to the merging parties the deciduous fruit canning industry is an industry in dire straights due to the strengthening of the rand, which has made their products less price competitive in foreign markets. Since 80% of their product is exported, and only 20% is sold locally, they need to consolidate in order to lower their production costs and hence to enable them compete profitably on the international market. 85% of the canned fruit is exported and 15 % is sold locally while 75% of the puree is exported and 25% sold locally. They claim that in doing so they are following international trends set by international retailers and other food service businesses.

Canned fruit is produced in five different can sizes and consists of canned apricots, peaches, pears, guava, apples and fruit cocktail which are produced in a variance of styles (halves, slices, quarters and dices) and packing mediums (sugar syrup, natural fruit juices and artificial sweeteners). Puree concentrates are mainly produced in large containers for reprocessing by manufacturers of fruit juices, dairy products and jams.

There are four deciduous fruit canners in South Africa. They are Ashton Canning situated in Ashton, Cirio Del Monte in Tulbagh, RFF Foods in Drakenstein and LFI in Ashton. The canners purchase fruit from farmers in the vicinity of their respective plants, typically supplied in terms of a contract between the canner and the individual farmer.

LFI owns the KOO and Naturlite brands, which are sold locally. Its international brands are Gold Reef and Silver Leaf. Unlike its competitors Ashton Canning, produces canned fruit on behalf of third parties and does not own any of its own brands. It produces primarily for M&L Distributors (Pty) Ltd, which owns the following three local brands:

The remaining deciduous fruit canners in the market that own canned fruit brands are Del Monte, trading under the Del Monte and Layco labels and Rhodes, which owns the Rhodes, Tartan and Hazeldene brands. Both Rhodes and Del Monte also produce canned fruit for the private labels of the three local retail chains.

Fruit puree is produced for reprocessing by manufacturers of fruit juice, dairy products and jams. The canners produce puree by pulping the fresh fruit, concentrating it through evaporation and filling it into bags in steeldrums. It is sold unbranded and there is no substitute available for fruit puree.

A number of competitors, in addition to the merging parties, compete in this product market namely RFF, Del Monte, Boland Pulp and Breede Valley River Processors (“Breede Valley”). Breede Valley entered into this market fairly recently, in 2004, and has since then captured 5% of the market.

It was common cause between the Commission and the merging parties that these products form discrete product markets and have no competitively significant substitutes. Thus though fresh fruit may be functionally substitutable for canned fruit it is not considered a relevant substitute for the purposes of defining the market because of its high rate of perishability.

According to the merging parties 85% of their canned deciduous fruit product and 75% of their puree are exported to countries in Asia, the EU, the Middle East, the Far East and Canada and they, accordingly, compete with companies located throughout the world. They also claim that the local market is constrained by the threat of actual and potential imports particularly within the current and now sustained strong rand environment, and that imports effectively compete with locally produced products.

The Commission accepted that the players, all of whom are based in the Western Cape, compete in both national and international markets within each product market. However, it found that import penetration into South Africa was limited in the canned fruit market and non-existent in the puree market and, therefore, defined the geographic market as a national domestic market for both products. We were told during the hearing that imports represent 1% of total consumer packed canned fruit. See page 20 of the transcript dated 13 September 2005. As the concentration levels differ materially depending on whether one defines the market as a domestic national market or an international market it is necessary for us to decide this issue.

“ The mere presence of imports does not necessarily indicate conclusively that a market is international. Some writers and indeed other competition authorities take the approach that a market may be a national one punctuated with sporadic sources of supplies for overseas. This however would not necessarily warrant delineation as an international market.” See Trident Steel (Pty) Ltd v Dorbyl Limited 89/LM/Oct00 at paragraph 27.

In deciding whether a market should be defined as national or international the Office of Fair Trading in the United Kingdom, suggests, in a research paper on market definition, that the following factors should be taken into account: See Office of Fair Trading Research Paper on Market definition in UK competition policy, by National Economic Research Associates (NERA), February 1992.

The research paper also notes that in considering these factors one should also keep in mind that the international market carries a higher uncertainty factor than expectations concerning domestic affairs and this uncertainty justifies the use of a stronger burden of proof before accepting that the relevant market is international. As these are useful indicators to apply to the facts of this case we consider some of them below.

The merging parties have provided us with the international and domestic price data for each commodity for the period 2001 to 2005. During this period the exchange rate of the rand, particularly against the dollar has proved to be extraordinarily volatile. These data can be found on page 188 of the record. See summary attached as Annexure B to this decision. This document is not attached as it contains confidential information. In 2001 the average exchange rate for the year was R8.06 to the dollar depreciating to R10.85 in 2002. Thereafter the value of the rand against the dollar appreciated sharply to R9.46 in 2003, R6.62 in 2004 and R6.00 for the first half of 2005. Perusal of the price data for LFI and Ashton show that the relationship between international and domestic prices was significantly altered by these changes in the exchange rate. See page 761 and 762 of the record The international and local prices did not move in tandem, the local prices increased while the international prices were decreasing. And when the local prices reached a point where it was higher than the international prices we find Del Monte re-entering the local market.

As the rand depreciated during the period 2001 to 2002 LFI was able to charge higher prices, in rand, in the international market than in the domestic market. This provides evidence that the pass- through of the exchange rate in Rand was reasonably complete and that LFI was operating as a price taker on international markets. After 2002, as the rand appreciated, the relationship between domestic and international prices altered with LFI’s domestic prices now in excess of international prices. Ashton increased its local prices above its international prices much later, in 2005, when the exchange rate was R6 to the dollar. This might be because LFI’s KOO brand is the leading brand locally and much stronger than those canned by Ashton. It is clear that LFI and Ashton are able to segment the international from the domestic market as rand prices domestically fails to be affected by the strong appreciation of the rand. Domestic consumers were insulated from these exchange rate changes suggesting that the two markets could be differentially serviced by canners. The data therefore support the hypothesis that there is a domestic for those canned fruits sold nationally that is separate from either an international market or a series of foreign markets such as Japan, EU and North America.

In order to define a market as international it is suggested in the NERA Research Paper, referred to earlier, that significant levels of import penetration, at least 15% of domestic sales, should be required before one can regard import competition as capable of exerting decisive influence on price levels.

In this case neither the canned deciduous fruit market, claiming imports of 1%, nor the fruit puree market, having none, have recorded any imports worth considering. There is little probability that imports will constitute a large part of our domestic market for a sustainable period given the competitive advantage of local firms not just in location, but also in terms of quality.

We are not convinced by this argument since imports are negligible even with the current strong rand. In fact, there is no indication in the evidence that parties are concerned about the threat of imports due to the strengthening rand. It is mostly in relation to exports that this issue is raised by the merging parties. See record page 802. The key to this might be found with the South African consumer. According to Dr D.P. Keetch of Goldhamer Consulting, “consumers [in South Africa] have become wary of buying “cheap” products because they are considered to be of an inferior quality to the well-known brands.” See the report by Dr Keetch: The South African Canned Fruit and Vegetable Industry, page 524 of the record.

Furthermore this conclusion is strengthened by reference to the internal documents of the parties. Part of the rationale for the merger is to achieve a better-balanced firm in the various international markets. See page 179 of the record. If there were only a single international market there would be no such concern. Of note as well is that the parties have different brands locally to those in the offshore markets. This again is inconsistent with the notion of a single international market.

In light of the above we find that the relevant geographic market for both product markets can be divided into an international market, which itself is composed of a series of offshore national markets, but this is not an issue that we have to decide, and a domestic national market. For competition purposes we will only consider the effect of competition in the domestic national geographic market.

LFI                                          25%
Ashton Canning                     25%
RFF                                          10%
Del Monte                                   25%
Boland Pulp                                 10%
Breede Valley Fruit Processors   5%
TOTAL                               100%

In terms of the oft quoted United States merger guidelines, utilising the Herfindahl Hirschman Index (HHI), a post merger market of 1800 points is considered highly concentrated, but that on its own is not decisive if the change in concentration between the pre and post merger market figures is less than 50 points; where in such a market the change is more than 100 points, it is presumed the merger will create or enhance market power. See US Dept of Justice and Federal Trade Commission Horizontal Merger Guidelines as revised in 1997, paragraph 1.5.1 The HHI in the deciduous fruit canning market is set out in the table below:

As set out above it is clear that in the deciduous fruit and puree markets a relatively concentrated market pre-merger with respective HHI’s of 3578 and 2100, became even more concentrated post merger with HHI’s of 5168 and 3350 respectively. The change in concentration was 1590 in the deciduous fruit market and 1250 in the puree market.

Of course just as is in the US merger guidelines our approach to merger evaluation is not to rest having found significant concentration, as there may be other factors that prevail in a market that may detract from the prima facie conclusion of the creation or enhancement of market power that the concentration calculations suggest.

As we have discussed in the previous section the primary point of departure between the merging parties and the Commission is over the extent of the geographical market with the former contending for an international market, while the latter opts for a national market. On the other issues they are ad idem and this is because of the Commission’s surprising conclusion that notwithstanding the fact that it finds this to be a national market where post merger there is “from a structural perspective” a substantial lessening of competition, the merger does not give rise to competition concerns. See Commission’s Heads of Argument paragraph 15 read with 22.

The Commission derives its comfort from two factors that it identifies in the relevant product markets. The first is that it considers that retail chains are able to exercise countervailing power over the merging firms. Secondly, the Commission considers the existence of surplus capacity at the plants of the other non-merging canning firms, as a factor that will allow them to discipline any attempt at market power by the merged entity. Although neither of these two aspects was foremost in the minds of the merging parties in their filings, they have, in their heads of argument, endorsed this aspect of the Commission’s analysis.

According to the parties, low regulatory barriers, presently 5%, exist and imports can and do effectively compete with locally produced products. They also stress that imports are capable of escalating dramatically at any point in time. See parties Heads of Argument, par 18. After discussions with large retailers such as Shoprite Checkers and Pick ‘n Pay, the Commission confirmed that retailers are able to and do import canned deciduous fruit products, particularly from Greece and China. It accordingly found that imports place enough of a constraint on the merging parties from behaving anti-competitively.

Given the strength of the rand, which has had such a debilitating effect on local producers in the export market, one would expect import competition to be at its most competitive level now. However the evidence of Mr Martalas is that presently imports constitute approximately 1% of the local market. See record page 20. Martalas does suggest that once firms have got a foot in the door their market share can “ multiply very quickly in a short period of time.” Competitors mentioned seem to be Chinese firms who can apples. Beyond this, Martalas was rather vague as to who and how effective they were, despite saying they were monitoring them. He did acknowledge that it was easier for them to get into the food service market than the retail market as the former was less brand sensitive.( record 18-19) This is hardly indicative of an actual or potential level of import threat. As stated earlier the OFT considers a figure of at least 15% of sales as an indication that exports are a factor in a domestic market. See footnote 6 supra.

There are several reasons why our market may not be attractive to importers. In the first place our market is considered small and notably even a locally placed producer in the form of Del Monte did not choose to sell domestically until approximately 3 years ago. See transcript dated 14 September 2005, page 200. Secondly, given the competitive advantage that local producers enjoy as a result of their location, product quality and strong loyalty towards some of the brands, importers would need to be substantially cheaper to be able to compete. Finally, importers would either have to develop a brand or can for a local existing brand (such as one of those owned by a local firm) or a house brand for a chain. Again we have no evidence that this has happened with any significance pre-merger and it seems even less likely post merger, given the enhanced market position of the merged firm and its ability to command more than one brand.

Nor is entry from a local firm likely either. According to the Commission’s enquiries there had been no new entrant into the market since Del Monte in 2002. The parties have not led any evidence to suggest that local entry into this product market is likely. Nor could they have done so credibly given the gloomy outlook for the industry which they so frequently express not only during the course of this hearing but also in their public statements and through their industry associations. Faced with the market power of key suppliers, and having to negotiate competitive arrangements with farmers, the prospects for a new domestic entrant are daunting and unattractive. It also seems that bar entry from a competitor willing to break the existing business model of the present incumbents, the new entrant would have to ensure that the better part of its revenues came from exports,; this given present exchange rates, coupled with the difficulty of getting access to offshore markets is unlikely to herald entry.

Our present canning industry was born out of the era of price and marketing controls institutionalised by the control boards. Up until 1996 the price at which canning companies procured their fruit from farmers was set by the Deciduous Fruit Control Board, as was the price at which they exported their canned product. See record page 495. In 1997 the control board was abolished in terms of government policy to introduce market forces into the agricultural industry. For more background information on the Co-ops, see The Competition Commission v Patensie Sitrus Beherend Ltd, Tribunal Case No: 37/CR/Jun01 and South African Raisins (Pty) Ltd and Johannes Slabber v SAD Holdings Ltd and SAD Vine Fruit (Pty) Ltd, Tribunal Case No: 04/IR/Oct1999 Whether this was achieved in this industry is open to some doubt. The Deciduous Fruit Control Board was replaced by a voluntary association, the Deciduous Fruit Canners Association of South Africa, which appears to replicate in function much of what the old Board did.

In recognition of the specific needs of the deciduous fruit canners in the Western Cape, the Deciduous Fruit Canners Association of South Africa was established under the umbrella of the SA Fruit & Vegetable Canners’ Association, its largest members being Ashton Canning, RFF Foods and Tiger Brands. See page 502 -503 of the Record.

The associations do not fix prices. Instead what has replaced the Board’s role in fixing the price of fruit at which farmers sell to the canners is a price formula which each of the merging parties has for its respective suppliers. Briefly, the canning firm agrees to pay farmers according to a pre-determined formula based on the average selling price that the canner relies on its sales in the export markets. Although Ashton and Tiger do not apply the same formula, indeed Ashton’s seems more favourable to the farmers, neither has changed its formula in the past ten years. See evidence of Martalas to this effect Record page 26. Nor according to Martalas do many farmers go from one canner to another looking for a better formula; it is he said quite a stable relationship. Record page 27.

According to the testimony of Mr Wehan Victor the chief executive of the farmers association, the Canning Fruit Growers Association, farmers bargain annually with their canning firm customers. Yet even this appearance of the working of a competitive market is not what it seems on closer scrutiny. Mr Victor admitted that pricing formulas had not changed in 10 years.

Indeed the meetings between the farmer representatives and their canning firm customer serve more of an auditing function to ensure that the average price to which the formula is to be applied has been applied fairly. Noteworthy is that these meetings are not between individual farmers, but their industry representatives in respect of that canning firm. Farmers would appear to be price takers in the sense of the formula that is applied although the average purchase price to which the formula is applied is a function of international market forces in an aggregate number of offshore markets in which the particular firm is exposed.

Since the exposure of each of the merging firms to international markets varied, we heard evidence that despite the fact that the formula applied by LFI was less beneficial to farmers, their farmers on occasion reaped a better return than their Ashton counterparts because LFI had realised better prices in the overseas markets. (This again is evidence of the lack of a uniform international price and hence that markets for these products are national in character.)

We requested at the pre-hearing, and subsequently received copies of recent minutes of the industry associations namely the South African Fruit & Vegetable Canners’ Association (Pty) Ltd and the Deciduous Fruit Canning Forum. Whilst a fuller consideration of the purport of these documents is not warranted the following features emerge. Meetings between the competing firms in the industry are frequent and issues of strategic importance appear to be discussed openly on a collegial basis. Most canners share their expectations of pricing, costs, views on innovation etc.

Whilst this may be more characteristic of agricultural product markets the extent to which information and strategy is discussed between competitors is again hardly suggestive of a culture of vigorous competition between firms. Rather it appears that the firms see themselves as a national collective, competing with other international players and hence dissipating their possible national rivalry in favour of a common flag rallying effort against foreign firms. The only firm to buck this trend has been Del Monte a less than enthusiastic member of the club although it appears despite this to recognise the self–interest in industry wide collaboration. See transcript of 14 September on page 208 and record page 734 which refer to Del Monte’s attendance at meetings of the Deciduous Canning Fruit Forum.

We would hasten to add that this is not to suggest that the canning firms are engaged in activity that is unlawful. Rather what we seek to emphasise is that the cultural milieu of the co-operative has not been eliminated from the industry and it would be hard to regard this as a market characterised by strong inter-firm domestic rivalry. The merger between the two strongest firms in the market can only serve to cement this culture further. The concern expressed in the board minutes of Ashton that they would hope that if the merger were not to go ahead that this might lead to an end to ‘friendly competition’ between the firms, epitomises this culture.

This factor is primarily intended to account for the fact that in innovation markets a first mover may have very high market shares but that should not be suggestive of the fact that they will always be able to dominate the market once new entrants have caught up. This does not apply here as the goods are mainly commodities and there is little indication that Tiger and Ashton’s positions of strength in the market are the result of new innovations. On the contrary a reading of the minutes of the trade associations shows how slowly our industry has been to innovate; the long discussions over new packaging being one example of an idea discussed by all competitors and yet to happen. Tiger as the leading firm has not invested much and seems to have delayed any investment decision until the industry had further consolidated. Thus the lack of competition in the local market has seen a stultified market not characterised by either innovation or, apart from Ashton recently, much investment.

According to the evidence of Martalas most of the domestic sales of canned deciduous fruit are to the retail market where most of the sales are through the large retail chains, Pick n Pay, Shoprite Checkers, Spar or through the wholesalers such as Metro and Massmart. A smaller portion goes to what is termed the food service market, where the customers are firms who are largely commercial caterers, such as Caterplus.

Insofar as the Commission spoke to retail customers they were of the view that if the merged firm raised its prices they would be able to find other substitutes including imports. On the face of it these are comforting reassurances and seem to have given solace to the Commission. Yet on closer inspection these are rote answers to a series of rote questions, without any further evidence, analysis or even anecdote as to why this countervailing power, if it exists, should be exercised. We have in previous decisions expressed our reservations about considering retail chains, despite their enormous bargaining power over suppliers of fast moving consumer goods, as a font of countervailing power keeping down prices for consumers. Rather, what the chains do is to extract discounts and rebates from suppliers based on the list prices, so that the chains can be competitive relative to one another in respect of a product; but as suppressors of absolute prices i.e. keeping the list price down, there is scant evidence that this is so nor any reason why they would want to do so, since the retailer is not the ultimate consumer, but an intermediary between the consumer and producer; it wants to retain its overall competitiveness relative to its rivals over a product, but has less interest in ensuring that the product, just one of the many it sells, is low in absolute terms.

Nor has the Commission taken into account the fact that the merged firm will be managed and two-thirds owned by one of the largest suppliers of food to the retail chains. Tiger states in its 2004 annual report that it gained the top three places, and five out of the top ten, in the food sector, in a recent comprehensive survey of brands in South Africa conducted by Markinor. In addition Koo emerged as the fifth most admired South African brand overall. See record page 209. This firm is thus no skinny weakling falling over in the face of the playground bully in the form of the retail chains; rather the chains have an interest in stocking the portfolio of goods that Tiger Brands can put on its shelves. This is not mere speculation. An inadvertent addition to the record seems to confirm that this is so. The Commission sought from Massmart answers to their various questions as they had other retailers and received the customary answer, in Massmart’scase in particularly terse and non-committal language. Interestingly however in sending its answer to the Commission, Massmart, presumably unintentionally, enclosed some internal correspondence that explains why the Commission received the type of answer that it did. The author, one Graham Rebello who is the Forum Chairman of Massmart Foods & Liquor Forum warns in an email written to subordinates who would be supplying the answer to the Commission that: See page 476 of the record.

This email suggests that not only are claims of the vast powers of the chains to be treated with some caution when the supplier is a firm as powerful as Tiger Brands or one of its subsidiaries, but also the reliability of the views of chains who have no interest in prejudicing their commercial relationships with powerful suppliers over the price of a can of peaches.

The merging parties at the outset of our hearing confirmed that they did not intend to rely on the failing firm defence. See record pages 5-6. Despite this, a good deal of evidence on this point has been led by the parties although in relation to the public interest as the merging parties contend that absent the merger there would be potentially disastrous effects on employment and the economy of the Ashton region where the merging firms and the farmers who supply them carry on their business. Although the parties seek not to rely on the failing firm defence we will still consider this aspect.

Ashton Canning’s bankers have expressed concern over the sustainability of the business going forward. Ashton Canning forecasts a bank overdraft of approximately R50 million for 2004/2005 and it anticipates that it will require additional borrowings of approximately R100 million. It furthermore projects a substantial net deficit in respect of the 2005 and 2006 financial periods and should the current economic climate prevail, i.e. the strong rand against the US dollar, Ashton Canning anticipates that its bankers’ reluctance to extend its overdraft facilities may well necessitate the closure of Ashton Canning. This is particularly so when regard is had to the fact that a rand/dollar exchange rate of approximately R7.25 to R7.50 is required in order for it to achieve break-even point. With the current exchange rate ranging from approximately R6.30 – R6.50 to the US dollar, it will, accordingly, continue to record losses in respect of its business operations.

Tiger too claims its LFI business is troubled. Since 2003 LFI has experienced a loss varying from R4 million to R60 million with interest and will, based on projections into the future, continue to do so until 2009. Should these projections be correct, LFI, we heard, would be compelled to rationalise its business to its most profitable core, which means it might ultimately have to close its business. See Tiger’s Heads par 5.2 on page 7.

Yet despite the gloomy picture painted by the figures it does not appear that either firm is about to exit the market. We say this for two reasons. The initiative for the merger came not from Ashton, supposedly the firm most likely to fail, but from Tiger. It appears from the minutes that Ashton was not the only firm with whom it considered a merger - all were given consideration and Ashton was considered the most suitable. Once Tiger had made the approach Ashton whilst an interested party bargained hard. It first resisted an outright sale of the business and demanded a share in the equity of the merged firm, which eventually after much horse-trading was settled on the present ? - ? formula. Significantly the Ashton minutes show that it considered as an alternative making an offer to buy Langeberg from Tiger. This is hardly the behaviour of the management of a firm about to fail.

This is perhaps the reason the parties wisely chose not to rely on the failing firm defence. It must be pointed out that both in our law and in the comparative case law, a failing firm defence will only succeed if the merging parties can demonstrate that there is another buyer whose acquisition of the target would raise less competition concerns. See Iscor Ltd and Saldanha Steel (Pty) Ltd, Tribunal Case No: 67/LM/Dec01. In this case as Tiger was the initial suitor we have no evidence that Ashton either had sought a less objectionable buyer or indeed wanted to sell.

It should be noted that Ashton cried wolf previously in December 2003 in a document it disseminated to interested parties at the time saying that the “company was in real danger of being forced to close its factory unless there is a steep weakening of the rand to the level of R7,50 to R8,00 to the USD. The domestic market for canned fruit is very small and it is thus not a viable alternative to switch sales to it.” See page 127 of the record.

“Notwithstanding the strengthening of the Rand over the past few years, it can be argued that the long term agricultural economics favour South Africa, especially against its EU and USA competitors. Given the inherent quality advantage, South Africa could become a world leader in canned peaches”. See page 176 of record.

At present Ashton is Tiger’s most effective competitor in the canned deciduous fruit products market. Although we have two other firms in the market neither is as effective a competitor as Ashton. Rhodes is the smallest of the four incumbents, has the least spare capacity, and judging from the evidence of Mr Bruce Henderson from Rhodes, does not see this market as a priority as the firm is also involved in.markets for other canned products; baked beans, vegetables and jams. LFI, in its Board briefing paper, also mentions as one of the reasons why it had targeted Ashton Canning that Rhodes is “an unwilling and in any event smaller player”. See record on page 179. [Confidentiality was claimed with regard to this document]

Del Monte, whilst owned by an international food firm, is the least likely of the four to remain committed to this market. Mr Henderson of Rhodes, in his oral testimony, described it as being “inconsistent”. See transcript dated 13 September 2005, page 185. This is a reference to the fact that the firm has experienced shareholder problems in the past and has only recently started trading in the domestic market, having previously been an exporter. Martalas also had a negative view of Del Monte when explaining why it was not considered a favorable merger partner:

“ I think there have been a lot of complications there in that group over the last few years. The company effectively went into liquidation in Europe and. It was bought out by another arm of Del Monte in the United States. So there has been a lot in internal turmoil.” See transcript dated 13 September 2005, page 14.

Del Monte has, it must be acknowledged, grabbed a good share of the market in that short time although this appears to be because it saw the domestic market as a balance to its offshore exposure since the rand strengthened and has it seems been an aggressive price competitor, the maverick of the local market. When questioned by the Commission it did not appear that Del Monte had designs on much further expansion in the local market. See transcript of 14 September 2005 on page 217.

Ashton by contrast is a stable and effective competitor despite its present problems. In the first place it has been in the industry for many years; it was established in 1949, and through all the cycles such an industry is want to experience, has proved to be a resilient competitor. As a family owned business it is run by a stable and experienced management, has access to customers in a good spread of offshore markets, indeed it is the envy of Tiger in this respect, and a good reputation for product quality. It boasts an established client base in Europe, Far East, Middle East, Canada and other markets. It states that some of its relationships with its customers have lasted for more than 30 years. See Ashton memorandum on the effect of strong Rand, record page 126. In addition, the firm has a strong network of suppliers and has recently invested in new plant in its cannery. According to Mr Du Plessis it has the best plant in the country at the moment with a production capacity of approximately 44 600 tons of fruit. See Competition Commission’s recommendation on page 8.

The Commission places great reliance on the fact that if the merging parties were to raise prices there is sufficient capacity in the rest of the ‘industry’ (for which read only Del Monte which has available access capacity of 15000t during the peak season since RFF has none available) for those firms to increase production and discipline the price rises instituted by the merger firm. This theory was based on a questionnaire to all the incumbents during the course of the Commission’s investigation. See page 424 and 451 of record. But this theory has two flaws.

Firstly, capacity in this type of industry is dependant on both the size of crops on the one hand and the ability to sell product in offshore markets. The question was not whether there is spare capacity in general but whether there is spare capacity during the relevant period namely the canning season which lasts for six months of the year. During the season it appears that there was little spare capacity and although after the season there is, that is of no significance because it cannot be used to increase production in this market where products perish if not canned immediately. Secondly, and more significantly, neither of the two firms to whom this theory must apply, if it is to have any credence, showed any enthusiasm about expanding production for sale to the domestic market. Indeed, as Mr Hofmeyer from Del Monte so frankly acknowledged, they were worried that this would de-stabilize pricing in the domestic market. See transcript of 14 September 2005, page 218.

Although Mr Martalas in his oral testimony testified that the rationale for the merger was all about efficiencies and denied that there was any benefit to come from decreased competition, this is not borne out by the internal documentation of the two merged firms. See Martalas on this point record page 17.

“It is a pre-requisite that the cost basis is competitive against both local and international competitors. This implies an ever-increasing focus on costs. The core of the business is commoditised and the quality advantage of SA product only receives a 5 – 10% premium…..The industry can rationalise further to a maximum of three or even two manufacturers. Due to higher throughputs, decreased competition and lower management costs the profitability of the industry will thus increase.” (Our emphasis)

The same issue is also foreshadowed in the documents presented to the Ashton board where among the reasons given in favour of the merger are those that are described as “ Elimination of competition in export markets” According to this document this would amount to R2-R3 per carton. See record page 182 , Ashton document headed Discussion points: Co-operation with Tiger Brands, item A.1.

Du Plessis in his oral evidence says much the same thing when he alludes to the fact that the firms have some common customers who have “got very sharp and they play us off against one another” Record page 82. Du Plessis says that this would contribute between 25 and 33% of the benefits. Record page 68

This then explains why the merged firms would be concerned about eliminating competition between two of the South African producers despite the fact that South Africa as a whole is only accountable for about 8% of sales internationally. Competition between Southern hemisphere firms is fiercer because demand is seasonal although pricing is still a function of overall non-seasonal supply and demand that includes northern hemisphere producers. But what remains clear and the parties are perfectly frank about this, is that part of the motivation for the merger is to eliminate competition between themselves in relation to their international customers and they believe this could gain them an amount of [ ] Confidential information in savings if this price competition is eliminated. See page 179 of the record. Document claimed confidential.

The parties’ documents are silent on any strategies in the South African market, which is not surprising given the low percentage of their business it represents. Nevertheless if the parties are able post merger on their own version to eliminate some price competition in international markets and so sustain higher prices albeit of a low order, it is highly probable that they could implement a larger price increase in the domestic market where they will account for 68% of the market post merger.

It needs to be stressed that the firms do not compete in the local market in the same way. Tiger primarily sells its own branded product KOO, while Ashton owns no brands of its own, but cans for others; either third parties, such as M&L or for supermarkets’ own labels or exclusive labels. For instance the Ashton cans for a brand known as Farmgirl, which is a label produced exclusively for Pick n Pay.

It is not clear how the merged firm intends dealing with brands other than KOO in the domestic market going forward. They have indicated that they would be happy to continue canning for third parties post merger although there is nothing in the documentary record to indicate that this has been given any consideration. The fact is that even though Ashton does not own its own brands this does not appear to be a factor that would constrain a price rise by the merged firm to the third parties, who provided they benefit from it would have no interest in constraining it. With the merged firm’s percentage of the local market it is likely that it could implement a small, but significant price increase without fearing that this would be unprofitable. The two other firms in the market might well have an interest in following them up. Certainly the evidence of Mr Hofmeyer from Del Monte suggests that price stability in the local market is a matter of concern to them. Rhodes seems to lack the inclination to expand much further in the local market given that canning is not its core business.

Furthermore from the pricing data we have received, Tiger and Ashton already price at a premium to the other two firms, and certainly Tiger prices at a substantial premium to Ashton which indicates that even pre-merger the firms’ are price makers. The comparisons between Tiger and Ashton come from material furnished by the merging parties themselves as constituting list prices. The Commission obtained the prices from Rhodes and Del Monte although in argument the merging parties suggest that the prices may not be comparable as they may not include transport costs or provide for discounts. This may be so, but despite this, the price differentials between Tiger and Del Monte are vast.

Disturbingly in the shareholders agreement, which we only received after the hearing, special provision is made in the list of prescribed matters that both sets of shareholders have to agree to, for any decision that relates to a decrease in volume of the fruit acquired by the company. Whilst one does not want to read too much into such a provision, it does indicate that the parties seriously contemplated that possibility, for it to find its way in as a special protection.

Thus far we have not looked at the other market implicated by the merger, the food puree market. Although many of the same issues apply to this market, as to the canned deciduous fruit products, there are some differences, which lead us to the conclusion that in this market the merger will not lead to a substantial lessening of competition.

The food puree market is a derivative market of the deciduous fruit market. Fruit not suitable for canning is utilised in the lower value puree market. In this market the merged firm will still have a very high share of a highly concentrated market as our earlier HHI figures show. However the concentration is less accentuated than in the canned deciduous fruit products market. Furthermore there are more players in this market and entry seems to be easier. According to the merging parties the capital requirements to establish a fruit puree plant are approximately R20 million. This is considerably lower than the cost of a plant to enter the deciduous fruit market. See parties merger fillings record pages 91 –92. The time taken to enter this market is also less according to the merging parties, twelve months as opposed to eighteen to thirty months. Record page 92.

This submission on the ease of entry has been confirmed by the recent and successful entry of Breede Valley, who in a short space of time had acquired 5% of the market. Interestingly Breede did not consider that it could attain the same success entering the canned fruit market. See testimony of Mr Oelof Janse van Rensburg, transcript dated 13 September, page 105 and 112 Entry is easier in this market because access to quality fruit is not an important factor in competitive success as in the canned deciduous fruit products market. Note that plant that is used in this market is not capable of being used in the canned deciduous fruit products market. Thus competition in this market is unlikely to be impaired post merger, notwithstanding the high levels of post merger concentration, due to low barriers to entry confirmed by the recent and successful entry of Breede Valley.

A number of witnesses expressed the concern that the merger would lead to the merged firm having buyer power in respect of the farmers who supply fruit to the industry. Most of the concern emanated from competitors understandably worried that the merged entity could extract better terms than they could. Farmers themselves were not consulted by the Commission and for this reason we approached Mr Victor who as chief executive for the farmers association is someone familiar with farmers interests. He did not express great concern in this respect. See page 141 of the transcript dated 13 September 2005.

What is most probable post merger is that farmers producing for Ashton will end up either supplying fruit on the more exacting formula that Tiger gives to its suppliers, or a completely new arrangement will be negotiated with all of them. The latter is the view expressed by Martalas, who, whilst not giving any detail as to what this may be, expressed the view that inefficiencies would need to be removed from the system. See transcript of 13 September 2005, page 27. It is probable that the merged firm will be able to squeeze farmers further and that this may see the exit of some producers. Although Martalas says that he intends to revisit the issue of farmer compensation he denies that they will be squeezed further. Record page 28

However there is insufficient evidence to suggest that this will lead to buyer power over farmers. We do know from the evidence that farmers can switch production out of canned deciduous fruit products to other fruit or even other products. The opportunity cost of such switching has not been modeled so we cannot meaningfully assess this. What we can surmise is that if the merging parties squeeze the producers too hard, they will exit, and the merged firm will lose its source of supply. Given that the quality of our fruit is the greatest competitive advantage that our producers have, this would be an ill- advised strategy so we do not consider that an anti-competitive squeeze is all that likely. See copy of an extract from the article by David Kaplan and Raphael Kaplinsky: Trade and Industrial Policy on an Uneven Playing Field: The Case of the Deciduous Fruit Canning Industry in South Africa, on page 590 of the record. Accordingly although we find that the merger will lead to the merged firm enhancing its bargaining power with farmers we find that will fall short of a form of buyer power that is anti-competitive.

The merger will lead to a highly concentrated market in the deciduous canned fruit product market where market power may be created or enhanced. Whilst high concentration levels are not dispositive of whether a merger will lead to a substantial lessening of competition, the other factors that we have considered seem to confirm, rather than detract from that conclusion; new entry into the market is unlikely in the foreseeable future, the market itself has not been characterised by great rivalry and is likely post merger to see a continuation and solidifying of the collusive tendencies already manifest; even absent collusion the merged firm will be able to wield market power unilaterally; the merger will also see the removal of an effective competitor probably the firm best placed to challenge Tiger in the local market; countervailing power and excess capacity are not credible threats to the merged firm’ s market power.

Whether or not the merger is likely to result in any technological, efficiency or other pro-competitive gain which will be greater than, and offset, the effects of any prevention or lessening of competition, that may result or is likely to result from the merger, and would not likely be obtained if the merger is prevented.

Whilst not specifically invoking an efficiency defence, because their case has been hinged on a finding that the market is international, the merging parties have nevertheless alleged that the merger will lead to certain efficiencies, and we must consider whether they can resurrect the merger given our conclusion that the merger will lead to a substantial lessening of competition in the canned deciduous fruit products market.

The most detailed documentation for the efficiency claims comes from a document prepared by the Tiger board for its deliberations on whether to conclude the merger. In this document efficiencies in the amount of [ ] Confidential information. are alleged and should it be achieved, would result in a reduction in their breakeven point from [ ] to below [ ], i.e. it would remain viable if there was a 12% decline in the relative exchange ratio. See confidential document on page 179. Figures in brackets claimed confidential.

We went through these items with Martalas in his oral testimony and what emerged was that a good part of the efficiencies claimed are as a result of the shorter production period. According to the parties the continuous processing of fruit type would enable the high season period to be shortened by approximately 3 – 4 weeks.

Canner	% Market share	HHI Pre-merger	HHI post-merger
LFI	53	2809	4624
Ashton Canning	15	225
RFF	20	400	400
Del Monte	12	144	144
Total	100	3578	5168

South Africa: Competition Tribunal

Tiger Brands Ltd / Ashton Canning Company (Pty) Ltd / Newco and Langeberg Foods International Ashton Canning Company (Pty) Ltd (46/LM/May05) [2005] ZACT 82 (23 November 2005)