Panel:
N Manoim (Presiding Member), Y Carrim (Tribunal Member) and U Bhoola (Tribunal Member)
Date of hearing:
24 - 25 July 2006
Order issued on:
15 August 2006
Reasons issued on:
14 September 2006
Reasons for Decision
APPROVAL
[1]
On 15 August 2006, the Competition Tribunal approved without conditions the merger between Mainstreet 333 (Pty) Ltd and Kumba Resources
Limited. The reasons for approving the transaction follow.
THE TRANSACTION
[2]
In terms of the transaction which has been dubbed “Project Pangolin,” the acquiring firm is Mainstreet 333 (Pty) Ltd or
“BEE Holdco” which is directly controlled by a newly formed entity, Eyesizwe SPV. According to the parties, Eyesizwe
SPV’s shareholding will be held by Anglo American (11%), an Employee Trust (10%), PWC (4%) and BHP (9%). Anglo American’s
shareholding and BHP’s shareholding will entitle them to one (1) director each on the Eyesizwe SPV’s board. The remaining
66% in Eyesizwe SPV will be held by Eyesizwe Mining (66%), a black empowerment company with interests in the coal industry. The coal mining activities of Eyesizwe Mining are currently conducted through a subsidiary, Eyesizwe coal, in which Anglo American
has an 11% shareholding interest and BHP Billiton enjoys a 9% shareholding interest.effect, post merger the shareholding of Eyesizwe SPV will mirror the current shareholding of Eyesizwe Coal. Their current shareholding entitles them to one (1) director each on Eyesizwe coal’s board. The pre-merger shareholding of Eyesizwe
Group is depicted below:
[3]
The target firm Kumba Resources Limited (“Kumba”) is a publicly traded South African company that was formed in 2001 pursuant
to the unbundling of Iscor Limited’s (now Mittal Steel South Africa) mining division. Kumba’s Iron ore activities are
conducted through Sishen Iron Ore, its coal activities through Kumba Coal, its base metals business through Kumba Base Metals and
its heavy minerals business through Ticor. Anglo American controls Kumba and nominates five (5) out of the fifteen (15) directors
that sit on Kumba’s board.
[4]
The current shareholding of Kumba is graphically illustrated below:
[5]
Project Pangolin involves a number of complicated steps, which need not be to reproduced here as ultimately these transactions lead
to the transformation of Kumba into two companies: Kumba Iron Ore Limited and Exxaro Resources Limited.
[6]
It is intended that Kumba’s coal, heavy minerals and base metals operations and assets will be combined with the coal operations
and assets of Eyesizwe Coal within a newly created company, Exxaro. Exxaro will be controlled by BEE Holdco which will own approximately
55% of the company. According to the parties, Anglo American will initially own approximately 17% of the shares of Exxaro and it
is proposed that Anglo American will have one representative on Exxaro’s board.
[7]
Kumba’s iron ore assets which are currently housed in Sishen Iron Ore Company (“SIOC”) will be sold to a wholly
owned subsidiary of Kumba, to be called Kumba Iron Ore. Kumba Iron Ore will hold 74% of SIOC, while Exxaro will retain a 20% stake
in SIOC. An Employee Share Option Plan and a Community SPV will hold 3% each post merger. Ultimately though, Anglo American will
continue to exercise control over SIOC through its 66% shareholding in Kumba Iron Ore. Anglo American will also have an indirect
economic interest in SIOC through Exxaro, through its 20% stake.
[8]
The merging parties provided the following post merger diagram which illustrates the relevant ownership structures after the Pangolin
transaction:
*The shaded boxes are relevant to the co-ordinated effects discussion later
THE RATIONALE FOR THE TRANSACTION
[9]
Anglo American is the key driver behind this deal. The reason for that is the controversy generated by Anglo’s original bid
for control over Kumba Resources in 2002. When we wrote our decision approving that merger, we noted the battle for control over
those assets between Anglo and the IDC. The battle was over whether a historically privileged mining house should be permitted to take control over another class of mineral
asset. Anglo, no doubt sensitive to this criticism, had entered into an understanding with government at the time, in which inter
alia it undertook to ensure its holding in Kumba remained below 50%, and to ensure the company remained listed.
[10]
Anglo had always indicated that its main interest in Kumba was its iron ore holdings and not its other mining assets. Project Pangolin
resolves all these difficulties for Anglo. The creation of a significant Black owned and controlled resource company, valued at approximately
R 24 billion, which has the assets and balance sheet to make it attractive to list on the JSE, resolves the problem of the undertakings
made to government. Splitting the iron ore business off, allows Anglo to retain a significant stake, approximately 66%, in the part of the Kumba business
in which it is most interested. By giving the newly created Exxaro a 20% stake in the iron ore asset company SIOC, it bulks up the
latter’s’ BEE profile, towards compliance with the goals of the mining charter. (Note that Anglo claims that together
with interests held by employees and the local community, SIOC’s empowerment credentials will already be Charter compliant)
[11]
Exxaro is therefore a very ambitious project, and crucial to its early success is the fact that Anglo, and to a lesser extent BHP
Billiton via Ingwe, remain invested in it. Anglo is responsible for a large financial commitment to the success of the venture that
is disproportionate to its equity interest. For this reason it seeks not only equity in the venture, but board representation at
operating company and shareholder level. This desire, which as we will see later, becomes a source of controversy with the Commission,
is driven, says Anglo, by a need to protect its investment and its reputation, which requires the new venture to succeed. Anglo also
maintains that its partners in the venture want it on board to give the group credibility in the market in its formative years. Not
least in making these suggestions, Anglo claims, is its erstwhile foe in the Kumba scrap, the IDC, who it seems, has kissed and made
up with Anglo, and supports its role in the present structure.
THE COMMISSION’S RECOMMENDATION
[12]
As will be discussed later, the Commission was of the view that the implementation of the merger would, as a result of coordination,
have the effect of substantially lessening or preventing competition in the affected markets. In an effort to address their concerns,
the Commission recommended the imposition of conditions which essentially sought to prohibit Anglo American from having representatives
on the boards of either Exxaro or Eyesizwe SPV.
[13]
In light of the fact that the merging parties were unwilling to accept these conditions, it became necessary to conduct a formal hearing.
THE HEARING
[14]
A pre-hearing was held on the 21st June 2006. The main hearing was held on the 24th and 25th July 2006. The Competition Commission did not call any witnesses. The merging parties, however led the following witnesses:
i.
Dr Robert Stillman, an economist from CRA International; and
ii.
Mr Phillip Michael Baum, the chairman and chief executive officer of the Ferrous Metals and Industries Division of Anglo American.
[15]
Mr Reint Dykema from Solidarity Union and Mr Jeffrey Magida from NUM also made submissions. These will be dealt with later under the section on “public interest.”
COMPETITION ANALYSIS
The Parties’ activities and the Relevant market
[16]
BEE Holdco and Eyesizwe SPV are special purpose vehicles and have not previously engaged in any commercial activities. Eyesizwe Mining
and Eyesizwe Coal are active in the exploration and extraction of coal. Kumba is active in the exploration and extraction of coal,
iron ore, base metals and industrial minerals. Kumba’s controlling shareholder, Anglo American interests in gold, platinum, diamonds, coal, base metals, industrial minerals, ferrous metals and industry and forest products. Project Pangolin therefore results in a horizontal product overlap in the market for the exploration and extraction of coal.
[17]
Coal is an internationally traded commodity. According to the CRA economic report filed by the merging parties (hereinafter referred
to as the “CRA report”), 27% of the coal produced in South Africa is exported and very little is imported. The rest is
consumed domestically. We therefore agree with the Commission that the relevant geographic market is national. This is consistent
with our previous findings in this market.
The Exploration and Extraction of Coal
[18]
Coal is a differentiated product that is categorised according to the degree of transformation of the original plant material to carbon.
The ranks of coal from lowest to highest are lignite, sub-bituminous, bituminous and anthracite. Lower rank coals (lignite and sub-bituminous
coals) are typically softer and are characterised by high moisture levels and low carbon content. Higher rank coals (bituminous and
anthracite) contain less moisture, more carbon and have a higher calorific value.
.RTF of original document