Public interest concerns limit merger approval

This decision is interesting because the tribunal imposed conditions on the merging parties despite finding that the transaction would not result in substantial prevention or lessening in competition.

Conditions were imposed solely because of a finding that the merger would have a negative impact on a particular industrial sector - energy supply.

When considering a merger notification, a decision-maker must follow prescribed steps in order to come to an outcome. (These are set out in s12A of the Competition Act.) The primary necessary question is whether a merger will result in a substantial prevention or lessening of competition. However, a decision-maker is also required to ask a second question: Is the merger justified on substantial public interest grounds? The Competition Act gives specific public interest grounds which inform this decision. One of these is "the impact the merger will have on a particular industrial sector or region."

Anticompetitive effects

This is the factor which swayed the tribunal in the Rio Tinto Decision. The concern in the transaction related to overlap in the supply of dense medium separation (DMS) magnetite iron ore. It is used for the washing of coal. An acquirer-controlled and a target-controlled entity were active in its production and sale. The commission found these to be the only South African firms that could supply DMS magnetite to local coal mines.

As mentioned, a competitive analysis revealed that the transaction would not result in anticompetitive effects in respect of DMS, since the acquirer-controlled and the target-controlled entity did not compete for customers before the merger.

However, concern was raised that the transaction would result in locally-produced DMS iron ore being diverted overseas, to the detriment of local supply. DMS iron ore plays a crucial role in the production of high-quality coal. A shortage of DMS iron ore would ultimately negatively affect Eskom's coal-related energy production, and compromise its ability to meet South Africa's electricity needs. The tribunal found that a "post-merger incentive to self-supply" would result in short supply to domestic customers, which would in turn affect electricity supply in South Africa.

In order to remedy a concern, the parties inserted conditions which (amongst others):

• Ensured that there would be sufficient DMS iron ore made available to South African firms to satisfy annual demand; and
  
• Provided for monitoring of the fulfilment of the conditions.

In this case, the tribunal chose to restrict a merger, based on only public interest grounds in the Competition Act.

It is worth remembering that the potential anti-competitive effects of a transaction are not the only things that should be considered when parties merge. The deal should also be evaluated more broadly, and considered in terms of its wider societal impacts.