Acquiring firm
[11]
Nampak and its subsidiaries manufacture a wide variety of products which include the following:
Drums
[12]
Nampak manufactures a wide range of blow moulded plastic drums. The drums come in a variety of shapes, neck formats, closure options
and temper evident features. Sizes range from 1 litre to 250 litres.
Injection moulded plastic industrial containers
[13]
Nampak manufactures thin wall injection moulded containers. These are small containers varying in sizes from 125grams to 1 kilogram.
They are used mainly for the packaging of food in retail industry such as ice cream, yogurt and margarine. The products can be of
any design or shape required, and customers can select their preference in respect of graphics, finishes and seals.
[14]
Nampak also manufactures polypropylene buckets, containers, dishes, basins and reusable household containers. These containers are
available from 250ml to 25 litres.
General line cans
[15]
General line cans include two-piece, built up and down cans, in a variety of shapes. The general line cans are used in the following
sectors: food, automotives, cosmetics, pharmaceuticals, paints and household sectors. They can be manufactured from either plastic
or metal.
Metal closures
Twist off/ press twist
[16]
These are the caps used to close cans and are generally used for glass jammed and processed food products. The products are offered
in a wide range of sizes and have temper evident features.
Roll on Piler Proof (‘ROPP’)
[17]
These include a range of aluminium ROPP closures for edible oils, wine, spirits and non-alcoholic beverages. The products are offered
in a wide range of sizes with a broad selection of printing and finishing options. These are the caps used to close the bottles
Paint containers
[18]
Nampak products manufactures metal paint containers in sizes of 1 litre, 5 litres and 20 litres. These containers can be used for
all types of paints, including water based and acrylic based paints.
The primary target firm
[19]
Burcap is involved in manufacturing the following products:
Injection moulded plastic industrial containers
[20]
Burcap manufactures thick walled containers made of plastic. Thick wall containers are generally larger containers, where the size
of the container requires a thicker wall for strength. These containers are used in food, chemicals and paint industries. They are
available in sizes ranging from 100ml to 25 litres.
Paint containers
[21]
Burcap manufactures plastic paint containers for water based paints in sizes of 1 litre, 5 litre and 20 litres. Burcap supplies its plastic paint containers to some of the smaller paint manufacturers Chemspec, Prominent, and Promac, amongst others, Transcript pp 42-43. but does not supply some of the largest paint manufacturers, namely, Plascon, Dulux and Medal. Commission’s further recommendations p9.
Relevant markets
[22]
The markets implicated by this merger are difficult to define with complete precision; there are large numbers of containers of different
shapes and sizes; secondly, customers range from producers of food products to producers of industrial products such as paints, and
accordingly have different propensities to substitute. Whilst many manufacturers are capable of producing a range of containers,
for technical reasons not all produce the complete range, and it would appear that most specialise in a particular range and further
specialise in making either plastic or metal containers. Notwithstanding this array of detail, it appears that there are at least
two broad segments that we can sensibly work with for purposes of analyzing the merger – containers for the food industry,
typically injection moulded plastic containers, and containers for industrial products like paint, which can be either metal or plastic.
[23]
With this as a basis for analysis, it means that an overlap occurs between the two merging firms in the market for containers for the food market and containers in the industrial market.
[24]
With regard to the industrial containers market, the Commission had argued that the merging parties produce complementary products as one firm (Nampak) only produces metal containers, and the other (Burcap), only produces plastic containers. Metal containers are manufactured from tinplate and plastic paint containers are manufactured from polypropylene.
[25]
The Commission’s reasoning is based on the fact that the majority of industrial containers are sold to paint manufacturers.
Hence the container choices of these customers are the primary driver as to whether plastic or metal can be considered complements
or substitutes. Customer evidence is that water based paints (also called acrylic paints) can be stored in either plastic or metal
containers. However, paint manufacturers prefer to store water based paints in plastic containers because the seams and welds on
metal containers are vulnerable if the paint has a high water content. Plastic also does not scratch easily and has a greater after
market use. Water based paints can only be stored in metal based containers if the containers are coated with a lacquer. Lacquered
containers are more expensive than conventional metal based containers.
[26]
On the other hand, solvent based paints (also called enamel paints) can only be stored in metal containers. At present, they cannot be stored in plastic containers because plastic is susceptible to attack by solvents.
Plascon indicated that it puts certain solvent based products, like thinners, in plastic containers, but that it does not store solvent based paints in plastic paint. In order to store the solvents in plastic containers a process of fluorination is
done on high density polyethylene containers so that there is a barrier to stop migration of that solvent over a period of time. Currently fluorination is only done by Fluoripac
in Pelindaba. Fluorination is an expensive process. (Transcript p32 and p49).
For this reason the Commission came to the conclusion that the two products should be regarded as complements not substitutes.
[27]
In this respect we have parted ways with the Commission and have come to the conclusion that the two technologies can be regarded
as substitutes and hence are capable of disciplining one another’s prices. On the evidence of the Commission’s market
enquiries, it is evident that at present, for some customers, plastic and metal containers are at least partial substitutes for one
another.
[28]
But in the near future, plastic containers will become complete substitutes for metal as new plastic technologies have been developed, presently in use in overseas markets, which will allow plastic containers to store solvent based paints, without deterioration. Yet even with the products serving as partial substitutes, as they do presently, there is evidence of a growing trend towards greater substitutability, from both customers and Nampak. Customers have advised the Commission that because plastic containers are between 15 – 20 % cheaper than their metal counterparts, where they can, they have begun substituting plastic for metal. They also inform the Commission that when one product is in short supply they substitute with the other. See for instance Earthcote, which stated that it has changed from using only tin a few years ago to tin and plastic with a saving for them of 25 -30% ( record 453) Similarly, Sabre Paints says that plastic is generally cheaper, but when plastic is in short supply it makes use of metal.(Record 475)
[29]
The reason for the fluctuation in prices and supply of these container products is the cost of their respective key inputs – in the case of metal containers, steel prices which manufacturers receive from Mittal, the sole supplier in the domestic market – in the case of plastic containers, polypropylene, an input again dependant on a sole supplier, Sasol. Since these input prices are not interdependent, the gap between the prices in metal and plastic is not constant. Nevertheless customers suggest that plastic has remained the cheaper
product and that the gap with metal, on most versions, fluctuates at around 20%.
[30]
As a result, and where they can, firms are moving away from metal paint containers to plastic paint containers. Mr Mathontsi, the divisional managing director of one of Nampak’s subsidiaries (Nampak Tubes and Tubs),admitted to this trend in his evidence:
“MR MATHONSI: …During a number of years the market has gradually moved its water based paint from metal containers into
plastic containers. Amongst the major players in the paint market our analysis has indicated that Plascon has lagged behind in that
migration from metal to plastic containers specifically for water based paints…”
Transcript p8.
Thus Nampak saw the need to defend its industrial container business, where it is the largest manufacturer of metal containers, by expanding into plastic industrial containers where it has no presence, except for its 50% interest in Burcap. The response of Nampak to this trend in substitution was threefold. The first was to use the opportunity to purchase the remaining interest in Burcap. This would give Nampak a 100% interest in a business that presently supplies, as we noted earlier, some of the plastic container needs of the paint manufacturing industry. However Burcap does not enjoy the custom of the larger players in the paint market, and most notably, it gets no business from Plascon who source all their plastic containers from another firm, Pailpac (Pty) Ltd (‘Pailpac’). The reason for this is that Pailpac manufactures a container that meets Plascon’s requirements, but Burcap presently does not have the technology to do so. Thus the second response of Nampak is to invest money in a plant to manufacture a container that will meet the Plascon’s requirements for plastic containers for water based paint. The third response is to invest in one of the new plastic container technologies, called PET, which entails the development of a plastic
container that can be used to store solvent based paints.
[31]
This is evidence of a dynamic market responding to changes in technology and customer needs – plastic and metal containers
can no longer be considered as functionally distinct products.
[32]
We can thus conclude that the relevant market comprises an overlap between the two firms in the market for injection moulded plastic
containers for the food industry, and secondly, metal and plastic containers for the storage of liquids (solvent or water based)
for industrial use.
Competition analysis
[33]
There are no competition concerns arising from the market for injection moulded plastic containers for the food industry and in this respect we are in full agreement with the submissions of the Commission and the merging parties. Whilst the food industry requires a wide range of containers, the market is nevertheless characterised by low barriers to entry, a large number of players and high degree of supply side substitution. The merged entity will have a post merger market share of 19%. Presently, Nampak Tubes and Tubs has 9,5% and Burcap has 9,5%.
Record p52.
Apart from the merged firm there will also be at least three other companies each having a market share of approximately 14%, which will continue to compete with the merged entity. These are Pailpac with 14.1%, Polyoak (Pty) Ltd with 14.1%, and Huhtamaki (Pty) Ltd with 14.1%. In addition, there have been six new entrants into the market within the past 5 years. Commission’s further recommendation p13-14.
[34]
The issues become more complex when considering the industrial containers market. Since Nampak already has 50% of the company, the
merger only makes a difference if it changes the incentives of Burcap post merger. Certainly post merger, Nampak, now a 100% owner,
unconstrained by its erstwhile partners, could use Burcap to protect a Nampak dominant position in metal containers or the soon to
be established plastic substitutes for the metal.The remaining competitors in the metal container market are Rheem (with a market share of about 38%), Grief (with a market share of less than 2%) or Canpac (with a market share of less than 2%) Nampak would be able to prevent customers arbitraging between the two products, as they are presently, by raising the prices of plastic
containers so that they are priced closer to their metal counterparts and thus protect its dominant position in metal containers.
[35]
Nampak, unsurprisingly, argued that it would have no such incentive, although, it did not convincingly explain why. At best it argued
that customers in the face of a price rise could look to other suppliers. Firms mentioned were Pailpac (with a market share of 41%)
and Markon Plastics (with a market share of 7%) and Consol Plastics (which has a market share of 2%). Pailpac has recently gained
much market share and supplies some of the big paint manufacturers like Plascon and Dulux. The problem with this argument is that
at present there are few other suppliers. Not only must a supplier be capable of providing the volumes and service levels required
by a major customer, but it must also have the technology to make a container that meets customer’s standards.
[36]
It is clear from the testimony of Mr Gwilliams of Plascon, and the internal documents of Nampak which we have had access to, that those customers moving from metal to plastic, still want the latter product to meet more exacting standards. At present Plascon only sources plastic containers from Pailpac and does not procure from Burcap, because it considers that only the Pailpac product is suitable for its needs. Some smaller paint manufacturers are satisfied with the Burcap offering and use it for that purpose. However, Plascon is the most
valuable customer in this sector and is particularly valuable to Nampak. Plascon purchases from Nampak are three times the size of its next largest customer, in the industrial sector, Chemspec, six times
larger than those of Dulux, and twice the size of its largest customer in the food sector.See record page 31 These presently represent sale of metal containers. It is not difficult to see how crucial the loss of some or all of this business
to plastic containers would be for Nampak. Plascon, as we noted earlier does not use Burcap as a supplier for its plastic containers, because it considers that it cannot manufacture a container that meets its quality requirements. Presently, only Pailpac does and
hence it supplies all Plascon’s plastic container needs. Nampak for this reason took a decision to upgrade the Burcap Durban plant to meet this need. Although Nampak claims to have no guarantee that the investment will win it the Plascon plastic business, it would seem a fairly safe bet that it will. What bearing does the merger have on this investment? It seems as if the investment decision was taken once it was certain that the option would be exercised, and therefore, Nampak was at large to decide in which of the groups plants, post merger, to place this production. The evidence of Mr Mathonsi was that production would commence at the Burpac plant in Durban, for logistical reasons, but would thereafter continue in Gauteng at a Nampak plant. See evidence of Mathonsi transcript page 22. However, if the merger had not gone ahead, and the status quo resumed, it is probable that Burcap would have considered winning the Plascon investment account as a viable strategy, while Mathontsi has made it clear that it intended entering this market regardless of whether the approval for this merger was granted. Although Nampak
never states this explicitly it is probable that it intended this to be entry independent of Burpac and not through an investment
in Burpac. With separate entry Nampak enjoys 100% of the returns not 50%. Since investment in this plant is de novo there was every incentive
to do this at an existing Nampak plant like the one in Gauteng as synergies with the Burpac plant don’t seem a consideration. Thus in relation to investment in existing plastic technology to serve current needs, the merger removes the potential of separate entry for the Plascon water based plastic containers from both Burcap and Nampak and ensures that there is only a single entrant to take on Pailpac.
[37]
But as we noted earlier, new technology is available to ensure that there is a viable plastic substitute for solvents. Nampak has
on its own pursued this opportunity and has acquired the exclusive rights to technology to manufacture what are referred to as polyethylene
terephthalate (PET) containers from an overseas firm. It would appear that this container, if successfully developed, could become
the leading edge technology for this type of product. Nampak is optimistic about the prospects of the new (PET) technology because
of its success in foreign markets. See evidence of Mathonsi transcript p15-16. To the best of anyone’s knowledge no-one else in the domestic market has access to this technology. But once again it seems
clear, that absent the merger, Burcap would have been an obvious entrant into the PET market and the merger again eliminates the
potential for this conflict of interest between the two firms.
[38]
Without the merger a major conflict of interest would have arisen between Burcap and Nampak. Nampak had the choice of making the new investments we have discussed, either in Burcap or independently of Burcap. Similarly, Burcap might well have viewed these projects as corporate opportunities to protect its plastics business. It is thus clear that a conflict of interest would mean that incentives between the two firms were not aligned. Burcap’s management shareholders would be competing for the same corporate opportunities that Nampaks’ board have identified
to protect its metal container business. The merger by giving Nampak full ownership of Burcap resolves this conflict.
[39]
Instead of competing for market opportunities with its half-parent, as it in all likelihood would have done, the now wholly owned Burcap will form part of a specialisation strategy in which Nampak can direct which plants do what. By eliminating Burcap as an independent entity able to make its own investment decisions, Nampak has reduced potential future competition from a firm well-placed to expand in the plastic segment of the container market. Given that only two serious players remain in the plastic segment of the market for the customers who have these needs, the merger leads to a market structure in which post merger there are two, instead of potentially three, viable competitors. Since plastic seems to be where the industrial containers market is going in the future, the elimination of even potential competition in this segment has greater implications than might seem at present. Thus, this is a market where in the language of section 12(2)(e) of the Act we must be aware of
“the dynamic characteristics of the market, including growth, innovation, and product differentiation.”
[40]
The parties are of the view that even if there are not many players in the plastic segment of the market presently, barriers to entry are low. In this respect Mr Gwilliam of Plascon has done them a great favour. He outlined how successfully Pailpac, a firm owned by two enterprising brothers, has recently entered the market and proved highly successful. If they can do it so can someone else, the argument goes. However, Pailpac does not hold any intellectual property rights over its technology and this is the reason Nampak is investing in
new plant to meet this standard without the need for a licence. What this means is that Pailpac’s competitive advantage will soon be reduced as it is highly likely that Plascon will move at least some of its plastic container business to Nampak so that it is not dependent
on one supplier. See evidence of Gwilliam on p36-37 and p42 of the transcript. For this reason Pailpac is in future likely to be a less vital competitor than it is presently. Since Burcap has never manufactured metal containers, the merger does not reduce the number of metal based competitors to Nampak. However, because metal containers are more expensive and are losing market share
to plastic containers, firms manufacturing metal containers are unlikely to be a source of strong competitive pressure to the merging firm. To the extent that Nampak is able to raise the price of
plastic containers, closer to those of metal, these firms benefit as higher plastic container prices may slow down migration from plastic to metal.
[41]
We must then consider whether the merged firm will be constrained by the possibility of new entry. Superficially, barriers to entry
to plastic container manufacturing appear to be low, as the success of Pailpac illustrates. Note however, this only applies to entry
to manufacturing plastic containers for water based paints, their traditional use. The market must however be analysed dynamically.
The market is moving towards greater use of plastic containers for both water and solvent based paints, and the firm that can provide
both, is going to be able to reduce the opportunities for arbitrage between the two products, a characteristic of the market at present,
and gain considerable pricing power. Since the new technology to put solvent based paints into plastic cans is dependent on access
to viable patents, a barrier to entry to manufacture this product does exist. At present the only firm which enjoys access to this
new technology is Nampak, via its exclusive licence to PET technology from PCC. In contrast, Pailpac not only does not have such a licence, but also is vulnerable to losing its present competitive advantage over
its non solvent plastic containers as they are not subject to a patent and can be readily copied by a rival. We were advised that other (PET) patents exist, but have not been licensed to anyone for exploitation in the South African market. The Commission and Nampak submitted that there are other patent holders worldwide which can grant licenses to other manufacturers
of paint containers to manufacture PET containers. The only example provided is that of Brittpac which at one time approached Nampak
with a proposal for Nampak to manufacture its PET containers. (Record pp554-557). Nampak, given its size and financial strength relative to its rivals, has the ability to acquire further PET licences in order to
prevent them falling into the hands of rivals or even if its does not succeed in acquiring them, by getting into a competitive auction
for them, can raise the costs of the rivals who do acquire them. By acquiring control over Burcap, Nampak also gains control over
another plastic container patent - the Bocan which Burcap enjoys as a result of an exclusive licence with a Danish company.
[42]
For this reason Nampak has undertaken, as a condition for the approval of the merger, not to acquire any further exclusive licence agreements for PET paint containers within South Africa for a period of three years after the approval of this merger. See clause 1.1 of the condition As Nampak has not yet developed the PET patent from PCC, a protection has been introduced in the condition in case the licence agreement is cancelled. See clause 1.3
[43]
The condition states that:<
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