The copper merger prohibition by the Competition Commission in mid-February was the fifth merger prohibition by the Commission since December 2011.
Chris Charter, Director in the Competition practice at Cliffe Dekker Hofmeyr says that it appears the target (Gauteng-based Maskal Tubes) was a manufacturer of copper products, while the acquirer (Copalcor, also based in Gauteng) was a customer of Maskal Tubes. Both Maskal and Copalcor supply to original equipment manufacturers in turn. Accordingly the merger has both a horizontal component (the parties compete in the downstream market to supply solid copper extrusions and extruded copper busbar) and a vertical dimension (Copalcor supplies Maskal with inputs to make the supply).
“The Commission’s finding was that the concentration in the downstream distribution market (where the merged entity would be the largest firm) was made worse by the fact that the vertical integration would raise barriers to entry (access to copper inputs are limited) so that Maskal might refuse to supply existing and new competitors in the downstream market,” he says.
Charter says that it is perhaps telling that of the recent spate of prohibitions, most have been vertical mergers. This may seem curious since most large jurisdictions consider vertical mergers to be procompetitive. However, the structure of the South African economy often lends itself to oligopolies, particularly in capital intensive industrial product markets. Such market structures often exacerbate foreclosure concerns as entry at both levels of the market may be difficult. One might add that intermediate industrial products is a professed focus area for the Commission, which suggests that there is some residual concern around the competitiveness of the market structure.
“It’s hard to say whether apparent increase of blocked mergers indicate a trend or developing agenda to be more strict on mergers. Certainly, the recent prohibitions have raised some eyebrows. According to the Commission’s annual report for 2010/2011, it only prohibited two intermediate mergers the previous financial year. Since December 2011, its already prohibited five mergers.”
Charter says in his opinion the Commission takes mergers on a case-by-case basis.
“Despite the current culture of administrative review of Commission decisions, “unionification” of the merger process by organised labour and a growing political aversion to consolidation of big business, I’d be surprised if that translated into a conservative agenda at the Commission – given that merging parties have an automatic right of appeal there is no sense in the Commission choosing to prohibit when a merger is “touch and go”, as this will almost certainly result in an appeal.
“Although third parties (who may be unhappy with an approval but are not afforded a right of appeal) are increasingly making use of review proceedings, establishing legal standing for review ought to be more difficult than an appeal by the merging parties. Since both prospects (appeal and review) are equally unpleasant for the Commission, I can’t see that it would choose appeal (of a prohibition) over review (of an approval),” he adds.