Crest Chemicals (Pty) Ltd v CH Chemicals (Pty) Ltd (131/LM/Dec08) [2009] ZACT 30 (12 May 2009)
- Citation
- [2009] ZACT 30
- Status
- Judgment
- Jurisdiction
- South Africa
- Court
- Competition Tribunal
- Panel
- D Lewis, N Manoim, Y Carrim
- Case number
- 131/LM/Dec08
More details
- Court
- Competition Tribunal
- Panel
- D Lewis, N Manoim, Y Carrim
- Case number
- 131/LM/Dec08
On this page
Professional case brief
Research organized from the available case record
01
Holding and result
The Tribunal found that the relevant market for analysis is the chemical distribution market, not the chemical products market, as neither party is involved in manufacturing. The merging parties are general third-party distributors and compete with several other distributors. The Tribunal determined that the merged entity would not have a dominant position, and viable alternative distributors exist to constrain its market power. Concerns raised about exclusive agreements and price increases were investigated and found to be attributable to external factors such as exchange rates and input costs, not the merger. Vertical concerns were dismissed due to the lack of market power and the continued purchasing from outside the group by Chemserve subsidiaries. The Tribunal concluded that the merger is unlikely to substantially lessen or prevent competition and that there are no public interest concerns.
Court disposition
Merger approved without conditions.
Orders
- The merger between Crest Chemicals (Pty) Ltd and CH Chemicals (Pty) Ltd is approved.
- No conditions are imposed on the approval of the merger.
02
Material facts
Parties
Crest Chemicals (Pty) Ltd
Applicant Counsel: Webber Wentzel BowensCH Chemicals (Pty) Ltd
Respondent Counsel: Webber Wentzel Bowens03
Procedural history
Posture
Merger Application / Tribunal Approval and Reasons
04
Questions and positions
Legal issues
- 01
Whether the proposed merger between Crest Chemicals and CH Chemicals is likely to substantially lessen or prevent competition in the relevant market.
- 02
Whether there are any public interest concerns arising from the merger.
- 03
Whether the merger raises horizontal or vertical competition concerns.
Party arguments
- Applicant
- Crest Chemicals argued that the acquisition of CH Chemicals' business would expand its product range and improve efficiency in storage and distribution. The transaction was motivated by the retirement of CH Chemicals' owner, who viewed Crest Chemicals as a stable exit partner. The merging parties submitted that any price increases in certain products were due to external factors such as exchange rate fluctuations and input costs, not the merger itself. They maintained that there are sufficient alternative sources and competitors in the market to prevent anti-competitive effects.
- Respondent
- Protea Chemicals and Sancryl raised concerns about the concentration of exclusive distribution agreements and price increases in certain products, particularly surfactants. The Commission investigated these concerns and found that alternative import sources exist and that price increases were influenced by external factors. The Commission also found no evidence of foreclosure in vertical relationships, as Chemserve subsidiaries continued to purchase from outside their group, indicating no incentive for self-dealing.
05
Court’s reasoning
Legal principles
- 01
Competition Act, No. 89 of 1998
A merger will not be prohibited unless it is likely to substantially lessen or prevent competition in the relevant market.
- 02
Tribunal reasoning, para 4
Market definition in merger analysis should focus on the distribution market where the parties are active, not the product manufacturing market.
- 03
Tribunal reasoning, para 9
Foreclosure concerns in vertical mergers require evidence of market power and lack of viable alternatives in upstream or downstream markets.
06
Ratio, limits and disposition
Ratio decidendi
The Tribunal found that the relevant market for analysis is the chemical distribution market, not the chemical products market, as neither party is involved in manufacturing. The merging parties are general third-party distributors and compete with several other distributors. The Tribunal determined that the merged entity would not have a dominant position, and viable alternative distributors exist to constrain its market power. Concerns raised about exclusive agreements and price increases were investigated and found to be attributable to external factors such as exchange rates and input costs, not the merger. Vertical concerns were dismissed due to the lack of market power and the continued purchasing from outside the group by Chemserve subsidiaries. The Tribunal concluded that the merger is unlikely to substantially lessen or prevent competition and that there are no public interest concerns.
Obiter and limits
- The Tribunal noted that barriers to entry in chemical distribution may exist due to requirements for specialised equipment and access to dockside facilities, but these do not alter the competitive assessment in this case.
- The Commission's initial market analysis was exhaustive but ultimately the relevant market is more appropriately considered as the distribution market, not the product market.
- Price fluctuations in chemical products are often influenced by external factors such as exchange rates and input costs, not solely by merger activity.
Court disposition
Merger approved without conditions.
- The merger between Crest Chemicals (Pty) Ltd and CH Chemicals (Pty) Ltd is approved.
- No conditions are imposed on the approval of the merger.
Source and reliance status
Competition Tribunal
This page organises the available record for research. Confirm quotations, current status, and subsequent treatment against the official source before relying on the case.
Judgment reading view
Judgment text
The complete available source text.
Competition Tribunal
Judgment
COMPETITION TRIBUNAL OF
SOUTH AFRICA
Case No: 131/LM/Dec08
In the matter between:
Crest Chemicals (Pty) Ltd Acquiring Firms
and
CH Chemicals (Pty) Ltd Target Firm
Panel : D Lewis (Presiding Member), N Manoim (Tribunal
Member) and Y Carrim (Tribunal Member)
Heard on : 6 May 2009
Order issued on : 6 May 2009
Reasons issued on : 12 May 2009
Reasons for Decision
Introduction
On 6 May 2009 the Tribunal approved the merger between the abovementioned parties. The reasons follow below:
The transaction and rationale
The proposed transaction is by Crest Chemicals (Pty) Ltd (âCrest Chemicalsâ), of the entire chemicals business of CH Chemicals
(Pty) Ltd (âCH Chemicalsâ) as a going concern.1 Crest Chemicals is jointly controlled by Chemical Services Limited (âChemserveâ) and Brenntag Holdings. CH Chemicals is a wholly owned subsidiary of CHC Group SA (Proprietary) Limited, which in turn is jointly controlled by CHC Holdings (Proprietary) Limited and the Danela Trust. Both merging parties operate in the chemical distribution business.
Crest Chemicals views CH Chemicalsâ product offering as complimentary to its own business, which will enable it to expand its range of products currently supplied to its existing and potential customers. Crest Chemicals also considers this as an opportunity to enhance efficient utilisation of storage and distribution facilities. For CH Chemicals, the rationale is that the owner wishes to retire, and considers Crest Chemicals a stable partner in the exit of his shareholding in CH Chemicals.
Relevant Market
[4] The Commission did an exhaustive analysis in which it found a horizontal overlap in a range of chemical products distributed by the merging parties based on supply side substitutability.2 However, in the view of the Tribunal, what is important in defining the relevant market in this proposed transaction is that we are dealing with a distribution market in which the merging parties are active, and not a chemical products market as the merging parties are not involved in the manufacturing of chemical products. In the circumstances, the competitive assessment should consider other rivals and potential rivals in the distribution business. This is not to say that there are necessarily low barriers to entry in the market for distributing all chemical products. In many instances specialised equipment is required when handling and distributing
chemical products and, as we learnt in this transaction, access to dockside facilities for importation. However, the relevant market is more appropriately considered to be a distribution market.
[5] The Commission correctly averred that the chemical distribution business encompasses 4 segments, namely; the indent traders, the niche market distributors, the manufacturer-traders and the general third party distributers, and that the merging parties fall within the segment of third party general distributors. The merging parties thus directly compete with general third party distributors such as among others; Protea Chemicals, CJ Petrow, Servochem, Corda, and SIM. In addition potential competitors include other companies with experience in logistics and transport.
Effect on Competition
Horizontal analysis
[6] The Commission in its assessment did not consider all the potential competitors in the distribution market. However, the Tribunal found that there are no major competitive issues arising as the merging parties do not have a large or dominant position in the relevant market, and that there are a number of viable alternative distributors that can effectively constrain the merged entity.
[7] Even when adopting the Commissionâs approach to analyse each overlapping chemical product distributed, it was found that the market shares of the merging parties pre and post merger were insignificant.3 In respect to the biocides, coalescing solvents and nitrocellulose markets, Protea Chemicals raised concerns citing the concentration of exclusive agreements under one distributor, making the merged entity the only route into South Africa for those products. In addition, Sancryl, a Durban customer for surfactants products, raised concerns that its prices for some of the surfactants it purchases from Crest had significantly increased for approximately 30% on its NP15 product, since Crest acquired Bergen. However, the Commission during its investigations interviewed other customers of these products who did not raise any concerns due to availability of several alternative import sources of the said products. It was also pointed out in the hearing that the price escalation referred to was significantly influenced by exchange rate movements and by increases in the prices of key inputs.
[8] With regards to the NP15 product, the Commission found that this is not a bulk product, which enables it to be imported in various ways and also that there are many other alternative sources for this product. At the hearing the merging parties submitted that any price rise in the surfactants product can not solely be attributable to the Crest-Bergen merger since there are other factors which usually contribute to price fluctuations such as the price of input products such as oil, and since the product is fully imported, the rand exchange rate fluctuations could also be a contributing factor.
Vertical Analysis
[9] The proposed merger also has a vertical dimension in that certain subsidiaries of Chemserve purchase some products from CH Chemicals.4 The Commission found that there are no foreclosure concerns due to the presence of other viable alternative companies in the upstream
and downstream markets. In addition it found that none of the companies in the Chemserve group have market power in the relevant
market, and thus any foreclosure strategies would not be profitable. The Commission also found that Chemserve is already in a position to self deal but the fact that it purchases outside its sister companies shows that it is unlikely to have the incentive or intention to self deal.
Conclusion
[10] Based on the above, the Tribunal finds that the proposed merger is unlikely to substantially lessen or prevent competition in the relevant market. There are no public interest concerns.
_______ 12 May 2009
D Lewis Date
N Manoim and Y Carrim concurring.
Tribunal Researcher: L Xaba
For the merging parties: Webber Wentzel Bowens
For the Commission: Grashum Mutizwa and Kate Morris
1 CH Chemicals is not selling at the holding level, but only disposing of its chemical distribution business.
2 Initially there were some 50 individual products, and ultimately for the purpose of analyzing the horizontal relationship, the Commission zoned on 9 horizontal markets for the chemical products distributed by the merging parties.
3 In the chlorinates product, the Commission found that the merging parties have relatively high combined market shares (approximately 49%), however, that there are a number of viable alternative suppliers.
4 See pgs. 52 â 54 of the Commissionâs recommendation for a Table showing the products sourced from CH Chemicals by the various Chemserve subsidiaries during the last three years.
4
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