Imerys and AR are currently the only two miners and suppliers of andalusite in South Africa and are both engaged in the mining and supply of fine and medium grade (0-3mm) andalusite which they on-sell to producers of refractories nationally and internationally. The primary basis for the prohibition by the Tribunal was that the proposed acquisition would result in a merger-to-monopoly in the mining, processing and sale of andalusite in South Africa. The Imerys transaction, had it been approved, would have had far-reaching consequences for producers and end-users of andalusite based refractories which were concerned that the merged entity would be in a position to increase prices and divert andalusite sales from South Africa to export markets.
In January 2015, the parties notified an intermediate transaction to the Competition Commission (Commission) in terms of which Imerys sought to acquire the entire issued share capital of AR. The Commission found that the transaction resulted in substantial competition and public interest concerns and prohibited the transaction in April 2015. The parties subsequently referred the merger to the Tribunal for consideration. The initial case before the Tribunal was one of substitution where the merging parties contended that even though the parties were the only two suppliers of andalusite, there were technical and/or economic substitutes for the product. As the hearing progressed, the merging parties conceded that in reality there were no sufficient alternatives to andalusite. However, the parties contended that post-merger, both Imerys and AR would immediately become capacity constrained, forcing them to raise andalusite prices to export parity levels and preventing the transaction from impacting their ability to exercise market power.
Notwithstanding the evidence lead by the merging parties and their economic experts, the Tribunal noted that the merging parties’ internal strategic documents spoke directly to the rationale for the transaction and appeared to corroborate the Commission’s concerns regarding the anti-competitive effects. In the Tribunal’s view, Imerys’ internal strategic documents clearly indicated that AR was an effective competitor, which had taken away significant market share from Imerys in the past year. Moreover, the strategic documents contradicted the parties’ assertions that the merged entity would immediately become capacity constrained post-merger and in direct contrast indicated that it was actually concerned about overcapacity and had tailored its strategies to mitigate this issue. Significantly, the acquisition of AR formed part of this strategy.
The Tribunal further emphasised the fact that pre-merger there was a substantial discrepancy between the prices charged by Imerys and AR, which meant that AR served as a competitive constraint on Imerys’ pricing. The transaction would therefore place the merged entity in a position where it could increase prices of andalusite at its own will and to the detriment of its customers.
The Tribunal ultimately found that the transaction constituted a merger-to-monopoly and that it resulted in anti-competitive effects in relation to price and non-price competition. According to the Tribunal, the monopoly would signify a “permanent structural change in the andalusite market”, which would continue indefinitely in circumstances where the market is characterised by high barriers to entry with no realistic possibility of new market entry. The Tribunal accordingly prohibited the transaction and found that there were no conditions capable of remedying the anti-competitive effect.
The merging parties appealed against the Tribunal’s decision, contending that the merger should have been permitted subject to conditions, which were offered by the parties. On appeal, the CAC agreed with the Tribunal’s approach and found that the Tribunal was requested to approve a transaction that would “irreversibly change the structure of the market (form duopoly to monopoly), on the basis of conditions which would protect the domestic market for five years but deprive it of price competition” in the future. In light of the fact that there were no countervailing pro-competitive gains or public interest considerations to offset the anti-competitive effects, the CAC agreed that prohibition rather than conditional approval was the only legitimate remedy in this instance.
Written by Natalie von Ey and Ammara Cachalia