Case No: 35/LM/Apr07
In the matter between:
Steinhoff Africa Holdings (Pty) Ltd
Acquiring Firm
And
BCM Holdings Limited (Pty) Ltd,
International Wire Converters (Pty) Ltd, and
Buffalo Freight Systems (Pty) Ltd
Target Firm
Panel
:
D Lewis (Presiding
Member), N Manoim (Tribunal Member), L
Reyburn (Tribunal Member)
Heard on
:
1 August 2007
Order issued on:
1 August 2007
Reasons Issued:
9 November 2007
Reasons for Decision
Approval
[1]
On 1 August 2007, the Tribunal approved with conditions the merger between Steinhoff Africa Holdings Limited (Pty) Ltd andBCM Holdings Limited, International Wire Converters, Buffalo Freight Systems (Pty) Ltd. The reasons for approving the transaction
follow.
The parties
[2]
The primary acquiring firm is Steinhoff Africa Holdings (Pty) Ltd (“Steinhoff”), a company incorporated in terms of the
company laws the Republic of South Africa. Steinhoff is a wholly owned subsidiary of Steinhoff Investment Holdings Limited which
is in turn, a wholly owned subsidiary of Steinhoff International Holdings Limited (“Steinhoff International”), being
a public company listed on the JSE Securities Exchange. The shareholders of Steinhoff International who hold at least 5% are RMB
Asset Management and funds administered by them (with a 12.7% shareholding), BS Beteiligungs und Verwaltungs GmBH (with a 9.3% shareholding), Fidelity International Limited (US, LU, UK, and CA) (with an 8.75% shareholding), Investec Asset Management
(with a 7.75% shareholding), and Stanlib Limited (with a 5% shareholding).
[3]
The primary target firms are BCM Holdings (Pty) Ltd (“BCM”), International Wire Converters (Pty) Ltd (“IWC”),
and Buffalo Freight Systems (Pty) Ltd (“Buffalo Freight”). The target firms are controlled by Geros GmbH, a company incorporated
in Austria, which is also controlled by Daun et Cie, a company incorporated in Germany which is in turn controlled by Claas Daun.
Description of the transaction
[4]
In terms of the structure of this transaction, Steinhoff intends to acquire all the shares in and claims on loan account against BCM,
IWC, and Buffalo Freight.
Rationale for the transaction
[5]
In its submissions to the Tribunal, the primary acquiring group stated that the transaction compliments and diversifies the raw material
offering by them and gives them international exposure as these raw materials are exported overseas. However, the internal documents
of the Steinhoff show that its primary motivation for concluding this transaction is the entry into the South African springs market
by Legett & Platt, a world player.
The parties’ activities
[6]
The primary acquiring group is a manufacturer and distributor of furniture and household goods, as well as a manufacturer and distributor
of those raw materials which are used primarily in the manufacture of household goods. It is involved in forestry, sawmilling, production
of processed timber products, furniture manufacturing, bedding manufacturing, wooden kitchenware, and manufacturing of foam and textile. Furthermore, the acquiring group is involved in freight and passenger transport, warehousing, logistics services, motor retail and car rental.
[7]
The primary target firms are involved in manufacturing and distribution of bedding components that are used in the bedding industry.
BCM manufactures and distributes inner mattress springs, plastic legs, corner guards and z-springs. IWC manufactures and distributes
bedding and sitting wire. Buffalo Freight engages in freight forwarding and clearing services.
Relevant product market
[8]
The proposed transaction results in both horizontal overlap and vertical integration.
Horizontal product market
[9]
The only horizontal overlap resulting from this transaction is with regards to the freight forwarding market. The parties submitted that the freight-forwarding services they conduct involves arranging the international freighting of goods
bought by their clients whether by sea, air or road freight, the clearing of the goods through customs and the payment of customs
duty, VAT, and freight costs on behalf of clients. It also includes arranging the delivery of the goods to the clients’ premises.
Vertical product market
[10]
The proposed transaction results in vertical integration in that Steinhoff purchases raw materials from BCM and from IWC to use in
the manufacturing of bedding and furniture.
Upstream markets
[11]
The Commission identified the relevant upstream markets in this transaction as the upstream market for the production of bedding components,
and the upstream market for z-springs.
Market for production of Bedding components
[12]
The parties stated that there is a market for bedding components though they provided market shares per component. After finalising
its investigations, the Commission concluded that, in this transaction, the market for bedding components can be further classified
under two submarkets since bedding manufacturers can purchase various components from different producers. The first one is the market
for bedding and sitting wire, and inner mattress springs. The second one is the market for plastic bed legs and corner guards. There are no competition concerns in
the latter market as there many suppliers and barriers to entry are very low. The first market will be analysed below.
Market for manufacture of Z-Springs
[13]
The target firms manufacture both the wire needed to produce z-springs and the actual z-springs. Z-springs are used in the manufacture
of lounge furniture.
Downstream markets
[14]
There are two downstream markets identified by the Commission in this transaction.
Bed manufacturing
[15]
The first downstream market identified with respect to the bed manufacturing segment is the market for inner mattress spring units
which can be supplied on a large scale to the national furniture retailers. There are three types of mattresses namely quilted foam
mattress, non-quilted form mattress and the inner-spring mattress. For our purposes, the relevant market relates to the springs mattress.
The firms competing in this market are predominantly Steinhoff, Lylax, Restonic, Simmonds, Rand bedding, Contour beddingEMPS bedding and Viva bedding.
Manufacture of lounge suites
[16]
The second downstream market identified is the market for the manufacture of lounge suite furniture. These lounge suites are manufactured
for the national chains and makes use of z-springs.
Relevant geographic market
[17]
It was not contended by any of the parties in these proceedings that the relevant geographic market for the implicated product markets
is at least national. We will therefore, analyse the impact of this transaction in the Republic of South Africa.
Competition analysis
Horizontal Analysis
[18]
There are no competition concerns that arise in the market for freight forwarding services since the merging parties’ combined
market shares are expected to be less than 1%. In addition, the South African Association of Freight Forwarders (”SAAFF”)
submitted that there are more than 600 large, medium and small players who compete effectively in this market. SAAFF further stated that the freight forwarding market is highly competitive as there are low barriers to entry.
[19]
After the merger was referred to the Tribunal, the parties were requested to provide further information to the Tribunal. The Tribunal
was concerned that post merger Steinhoff would control a large portfolio of raw materials used in manufacturing bedding and, post
merger, this would give Steinhoff the power to require manufacturers of beds to buy a bundled products or to bundle inputs in predatory
manner to exclude rivals. After receiving Steinhoff’s further submissions, the Commission sent them to Steinhoff’s competitors
and customers for comment. None of them indicated any concerns, and one firm which had previously advised the Commission that it
had concerns about the merger, now indicated that its concerns had been addressed by the additional information.
[20]
Steinhoff’s further submissions show that there is no horizontal overlap in the inputs that Steinhoff and the target firms supply
to the bed manufacturing industry. The target firms, as noted earlier, manufacture bed springs, an input that Steinhoff does not
manufacture. Industry practice in the bedding industry recognises three segments; entry level, mass market and middle level and the upper market
beds. Springs are not used as an input into entry level beds as manufacturers prefer to use foam to keep costs down. Since at present
the entry level is the portion of the market where Steinhoff supplies 62.9% of value of the inputs, the addition of the springs will
not enhance its share of the inputs that go into beds for this segment. At the other levels, where springs are used Steinhoff’s
share of the inputs decreases, varying between 22% - 28%, pre merger. Although at these levels springs comprise, depending on the
level, between 20% – 28 % of the input costs, this is not sufficiently large a command of the inputs to warrant concern yet.
Moreover, the target firms the target firms are not dominant suppliers of springs to the bedding industry, commanding only 28% of
the market for this input. Thus even in these other segments it is unlikely to have a sufficient command to exercise portfolio power.
[21]
In addition post merger, Steinhoff will face competition from Legett & Platt, a world player in the provision of springs.
.RTF of original document