11 September 2012 by Cliffe Dekker Hofmeyr

Making a mountain out of a minepit

In January this year, the Competition Commission prohibited the proposed sale of SamQuarz, one of South Africa's largest silica producers, to Thaba Chueu Mining.  The Commission concluded that the merger would lead to foreclosure effects as it would enable Thaba Chueu, a subsidiary of Silicon Smelters which operates ferrosilicon and silicon metal producing plants in Polokwane and Witbank, to control a critical input, silica, to its downstream competitors in the markets for the production of ferrosilicon and silicon carbide. 

Following the Commission's prohibition, the merging parties applied to the Tribunal to have the merger reconsidered on the grounds that the Commission erred in fact and in law and failed to undertake a complete analysis of the likely effects of the transaction on competition.  Prior to the commencement of the reconsideration hearing before the Tribunal and to address the Commission's concerns around foreclosure (without conceding that such concerns exist) the merging parties concluded long-term supply agreements with Silicon Smelter's downstream competitors in the markets for ferrosilicon and silicon carbide, namely Silicon Technology and Sublime Technologies.  Following the conclusion of these long-term supply agreements both Silicon Technology and Sublime Technologies' withdrew as interveners to the proceedings pending before the Tribunal.  The basis for their withdrawal was that their supply concerns regarding the merger were addressed by the provisions of the long-term supply agreements and as such their intervention in the merger reconsideration proceedings before the Tribunal had become unnecessary. 

The conclusion of the long-term supply agreements provide a significant, lasting and clear remedy to the foreclosure concerns.  The agreements negate the ability of the merged entity to foreclose and absent ability, there can be no foreclosure.  Despite the conclusion of the supply agreements and the withdrawals by the interveners, the Commission refused to entertain the merging parties' requests and Tribunal panel's directive for the Commission to consider and withdraw its continued opposition to the merger.  Instead, the Commission maintained its opposition of the merger on the basis that the long-term supply agreements did not go "far enough" in addressing the foreclosure concerns and that its concerns around the structure of the market and the increased likelihood for co-ordination in the ferrosilicon market still remained.  One of the difficulties that confronted the merging parties leading up to the hearing and throughout the hearing was the Commission's continued reliance on foreclosure as a key theory of harm, despite this being addressed through supply arrangements and absent factual evidence which supported their theory of harm.  The Tribunal seemed equally as perplexed as the merging parties, repeatedly prompting the Commission for an explanation as to why the supply agreements did not address the Commission's foreclosure concerns. 

The Commission's view that supply agreements do not go "far enough" in addressing foreclosure concerns is curious given that the supply agreements addressed all concerns around foreclosure by providing customers' guaranteed access to their silica requirements at agreed prices and upon agreed terms and conditions.  In fact, the customers were placed in a more favourable commercial position as a result of the merger than they would be in absent the proposed merger.         

The merger was ultimately conditionally approved by the Tribunal in July.  The approval was subject to the conditions that the merging parties honour the terms of the supply agreements and provide similar commitments to any new entrant in the markets for the production of ferrosilicon and silicon carbide.  The Tribunal's reasons for its favourable decision have yet to be published.

The Commission's prohibition of the sale of SamQuarz to Thaba Chueu was one of a spate of prohibitions of vertical mergers by the Commission.  During the period December 2011 to date, the Commission prohibited six mergers, of which four have been vertical mergers.  This certainly is pause for thought given that most large jurisdictions consider vertical mergers to be pro-competitive.  In the U.S., vertical mergers have as far back as the 1980's generally been considered to be competitively insignificant.  A view which the European Commission later also recognised, with one of the main messages in its Guidelines on the assessment of Non-Horizontal Mergers being that vertical mergers are for a number of reasons less likely to give rise to competition concerns than horizontal mergers.  One such reason is that vertical mergers typically provide scope for efficiencies owing to the integration of complementary activities and/or products.  Efficiencies include that the merger may reduce transaction costs, allow for better coordination in terms of product design, facilitate organisation of the production process and encourage investments in production factors along the value chain.

The timing of the increase in the number of prohibitions by the Commission interestingly coincides with the vacancy in the head of mergers and acquisitions' position at the Commission (the position has been vacant since the end of last year, with a number of members of the Commission rotating through the position as acting head of mergers and acquisitions since then).  This has given rise to speculation amongst competition practitioners as to whether the internal leadership changes at the Commission may have attributed to the prohibitions.   While we await the appointment of a permanent head of mergers and acquisitions at the Commission, it remains to be seen whether the recent merger prohibitions by the Commission will deter firms from merging in the future.  Certainly, notifying a merger to the competition authorities is on its own a costly and time consuming exercise.  Coupling this with a potential reconsideration application is a possible risk which merging parties may be forced to account for going forward.   

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