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Afgri Operations Ltd and Daybreak Farms (Pty) Ltd (113/LM/Nov05) [2006] ZACT 41 (18 May 2006)
.RTF of original document
COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case no: 113/LM/Nov05
In The Large Merger Between:
Afgri Operations Ltd
Acquiring Firm
And
Daybreak Farms (Pty) Ltd
Target Firm
Reasons for Decision [NON CONFIDENTIAL]
Approval
1.
On 22 March 2006 the Competition Tribunal issued a Merger Clearance Certificate approving the transaction between Afgri Operations
Ltd and Daybreak Farms (Pty) Ltd. The reasons for this decision follow.
The Transaction
The Parties to the transaction
2.
The acquiring firm is Afgri Operations (Pty) Ltd (“Afgri”), a wholly owned subsidiary of Afgri Limited. Afgri has four main operating divisions, namely Afgri Products, Afgri Requisites, Afgri Financial and Logistics Services and Afgri
Commercial and Producer Services.
3.
The target firm is Daybreak Farms (Pty) Ltd (“Daybreak”), which is jointly controlled by JG Kruger and IG Taylor. Daybreak
has interests in the following firms: Daybreak Properties Springs (Pty) Ltd, Die Plaas Olifantsfontein 196 CC, Partnership Die Plaas
Olifantsfontein, Daybreak Superior Marketing (Pty) Ltd, Superior Foods (Pty) Ltd, Telsek Investments 1001 (Pty) Ltd, Telsek Investments
1013(Pty) Ltd, Midway Chix (Pty) Ltd, Partnership Midway Chix and Waltmerwe Park (Pty) Ltd.
The Structure of the transaction
4.
In terms of the proposed transaction, Afgri is acquiring from JG Kruger and IG Taylor their entire interests in Daybreak including:
4.1.
100% of the share capital of and shareholders’ claims against the following firms: Daybreak, Daybreak Properties Springs (Pty)
Ltd, and Telsek Investments 1001 (Pty) Ltd;
4.2.
50% of the share capital of and the shareholders’ claims against the following firms: Daybreak Superior Marketing (Pty) Ltd,
Die Plaas Olifantsfontein196 CC, Superior Foods (Pty) Ltd and Telsek Investments 1013(Pty) Ltd; as well as
4.3.
65% of the entire issued shares in the share capital of and shareholders’ claims against Waltmerwe Park (Pty) Ltd.
The Rationale for the transaction
5.
Afgri wishes to participate in the broiler market as it contributes 40% of the total market for protein for human consumption and
consumes over 50% of animal feed produced by the formal animal feed industry. According to the parties, “it is Afgri’s strategic imperative to participate in this industry to ensure growth for its animal feed business.” From the perspective of the shareholders of Daybreak, since JG Kruger wishes to exit the business, the transaction offers IG Taylor
an opportunity to realise his investment in the group and to obtain a partner to grow the business.
The Merging parties’ activities
6.
According to the parties, Afgri supplies farmers with various agricultural input commodities and services. Through its operating divisions, Afgri is involved in financial services products, trading of agricultural commodities, handling
and storage facilities, manufacture and distribution of animal feeds, operating retail outlets, marketing of farming equipment and
the sale and distribution of care crop products.
7.
Daybreak is a fully integrated broiler producer, which produces, processes and distributes poultry and poultry products. Through its
subsidiaries, Daybreak is also involved in marketing, property, rearing and growing of live chickens, production of a day old broiler
chicks and retail.
8.
Afgri and Daybreak are in a vertical relationship due to the fact that Afgri, through its Products division is involved in the manufacturing
and supply of poultry feed, and Daybreak is a consumer of poultry feed. The transaction will therefore result in the vertical integration
of a poultry feed business with broiler production; a phenomenon, which the Commission submits, is not uncommon.
The Relevant Market
Upstream market
9.
Poultry feed can be divided into broiler starter, grower, finisher and layer ration. The poultry, which are fed can further be grouped
into three subcategories namely, layers, broiler breeders and broilers. According to the Commission, each type of chicken is given a specific ration, containing nutrients necessary for that particular
type of chicken. The relevant upstream product market can therefore be defined broadly as that for the production of poultry feed
with sub markets for layers, broiler breeders and broilers feed.
10.
Afgri’s customers are located in the inland region, which includes Mpumalanga, Gauteng and the Free State. According to the parties, Afgri’s mills supply customers in the province it is situated in as well as to customers outside
that province but still close to the mill. Without concluding on the geographic market we will follow the Commission’s analysis
of both a regional and inland market.
11.
The Commission provided the following table sourced from the Animal Feed Manufacturers Association (AFMA), which reflects the market
shares for its members. The shares are based on sales in 2004/2005 in the inland region.
| Producer |
% Market share |
|
| Layers |
Broiler Breeders |
Broilers |
| Meadow |
20 |
41 |
24 |
| Afgri |
19 |
11 |
24 |
| Epol |
24 |
36 |
33 |
| Senwes |
3 |
8 |
9 |
| Alzu |
7 |
- |
1 |
| Kanhym |
11 |
- |
- |
| Others |
17 |
5 |
8 |
Source: Animal Feed Manufacturers Association Chairman’s Report 2004/2005
12.
In the broader market for poultry feed in the inland, the Commission provided the following table sourced from information provided
by the merging parties:
13.
For the regional market, the Commission calculated the shares based on the parties’ total sales per province and AFMA’s
total sales per province. In the Free State, Afgri accounts for 37% of the market, in Gauteng, 26% and in Mpumalanga, 7%.
Downstream market
14.
We will accept for these purposes the Commission’s definition of the relevant downstream market as the production and processing
of poultry products in South Africa. The parties provided the following market shares based on the number of birds slaughtered per
week nationally:
| Producer |
% Market share |
| Daybreak |
4 |
| Country Bird |
8 |
| Rainbow |
36 |
| Astral |
27 |
| Tydstroom |
5 |
| Chubby Chick |
4 |
| Rocklands |
4 |
| Argy |
2 |
| Others |
10 |
Source: South African Poultry Association
Impact on competition
15.
We are of the view that post merger, foreclosure is not likely due to a number of reasons. Firstly, there are several competitors
in both the upstream and downstream markets, from whom customers could source product. In the broad market for poultry feed, Afgri
faces strong competition from players such as Meadow and Epol. In the downstream market, Daybreak is a relatively small player and
faces very strong competition from Astral and Rainbow who are both vertically integrated.
16.
According to the parties, in 2004, Daybreak accounted for approximately 19% of Afgri’s total sales of poultry feed. Afgri is
therefore not likely to exclude other poultry feed customers in order to benefit from broiler production.
[CONFIDENTIAL INFORMATION]
Collusion is not likely as information relating to Daybreak’s competitors’ prices and volumes of supply is to a large
extent already available and easily determined
17.
Furthermore, the customers and industry participants the Commission contacted during its investigations, had no concerns with the
merger. Firstly, customers indicated that the poultry feed market is very competitive with several competitors. According to AFMA,
some of the vertically integrated broiler producers even source from competing feed manufacturers. Secondly some of Afgri’s
customers informed the Commission that choice of feed manufacturer is determined by inter alia price, quality and service and that
switching between suppliers is easy and common with no cost. One customer informed the Commission that his company switches every
month from one supplier to others.
18.
Based on the above, we agree with the Commission that the transaction is unlikely to substantially prevent or lessen competition in
the markets in which the parties compete.
Conclusion
19.
According to the parties, the transaction will not have any adverse effects on employment and there are no other significant public
interest issues, which arise. We accordingly approve the transaction for the above reasons.
18 May 2006
