AFGRI Operations Limited v Pride Milling Company (Pty) Limited (LM237Feb16) [2016] ZACT 67; [2016] 2 CPLR 778 (CT) (10 August 2016)

Key Facts

Issues

• The Commission evaluated vertical overlaps in the supply of cattle and sheep feed, where AFGRI uses hominy chop from Pride Milling as an input. It found hominy chop is substitutable, and Pride Milling does not supply it regularly to AFGRI or competitors. AFGRI’s 1% market share and the fragmented downstream market led to the conclusion that no input or customer foreclosure would occur post-merger.
• AFGRI’s dominance as the sole silo operator in the geographic market was considered. Pride Milling uses less than 5% of AFGRI’s storage space, making foreclosure unprofitable. The Tribunal found no incentive for AFGRI to favor Pride Milling over other customers, ensuring continued competition in grain storage services.
• The Competition Tribunal assessed whether the merger between AFGRI Operations Limited and Pride Milling Company (Pty) Ltd would substantially prevent or lessen competition in the horizontal market for hominy chop. The merged entity’s post-merger market share was found to be 17.2%, with larger competitors like Pioneer Foods (35.3%) and Premier Foods (21.7%) expected to constrain it. The Tribunal concluded no significant risk of unilateral conduct or collusion, noting the market’s homogenous product, high entry barriers, and fragmented nature, but also the lack of customer concerns and the competitive norm pricing tied to SAFEX.
• The Commission argued the two stages are divisible, with Tranche B potentially requiring separate notification if delayed. The merging parties contended it is a single transaction. The Tribunal approved the transaction with conditions, requiring submission of the final agreement and notifications if Tranche B occurs after the stipulated effective date, to ensure compliance with the Act.
• AFGRI’s retail lending to agri-businesses like Pride Milling was examined. AFGRI holds 10% market share, with Land Bank (26.9%) and other banks as significant competitors. The Commission concluded AFGRI lacks market power or incentive to foreclose competitors, as Pride Milling contributes minimally to AFGRI’s financial services business and viable alternatives exist.
• The Commission analyzed the vertical integration of Pride Milling’s white maize milling and AFGRI’s retail distribution. Pride Milling faces competition from large millers, and AFGRI’s retail market is constrained by major retailers like Spar and Shoprite. The Tribunal found no risk of input or customer foreclosure, as competitors did not raise concerns and alternative supply channels exist.

Holdings

• The Competition Tribunal approved the transaction subject to conditions, finding no substantial prevention of competition in any relevant market and no public interest issues. Conditions include submitting the final agreement and notifications for Tranche B Sale.
• The Tribunal determined that the merged entity does not have the incentive or ability to engage in input or customer foreclosure in the vertical markets, including animal feed, white maize products, retail lending, and grain storage, due to market fragmentation and existing competitive constraints.
• The Competition Tribunal concluded that the proposed transaction will not substantially prevent or lessen competition in the horizontal market for hominy chop, as the merged entity's market share (17.2%) is insufficient to engage in unilateral conduct, and market conditions make collusion unlikely.

Remedies

• The Merging Parties shall advise the Commission of the implementation of the Tranche B Sale should they implement the Tranche B Sale on or before the Tranche B Effective Date.
• The Merging Parties shall submit a copy of the Final Sale Agreement within 10 (ten) Business Days following final signature by the Merging Parties.
• The Merging Parties shall submit a notification in terms of section 13A of the Competition Act, should the Tranche B Sale be implemented after the Tranche B Effective Date.

Legal Principles

Precedent Name

• Paramount Mills (Pty) Ltd v The Competition Commission
• The Competition Commission v AFGRI Operations Limited and 16 Other Respondents

Cited Statute

Judge Name

• Imraan Valodia
• Andiswa Ndoni
• Yasmin Carrim

Passage Text

• [40] Pride Milling and AFGRI have a long history and close relationship, given that Pride Milling was historically owned by AFGRI prior to it selling Pride to its current shareholders. Accordingly, to the extent that Pride Milling has needed products and services which AFGRI supplies to agribusinesses in South Africa, Pride has typically turned to AFGRI as a supplier. The proposed transaction is, therefore, unlikely to result in any customer foreclosure concerns for competitors of AFGRI in the supply of these products and services in the market, as Pride is typically already procuring these products and services from AFGRI.
• [25] The Commission found that the market conditions are conducive for collusion by identifying the structural features of the market. The structural features identified include that hominy chop can be regarded as a homogenous product; barriers to entry appear to be high in the market; and competitors regularly interact in other geographical and products markets. At the same time the Commission noted that the large number of firms active in the market and the asymmetry in the market shares amongst competitors is not conducive for coordinated conduct.
• [44] In light of the above, we concluded that the proposed transaction is unlikely to substantially prevent or lessen competition in any relevant market. In addition, no public interest issues arise from the proposed transaction. Accordingly, we approved the proposed transaction subject to the conditions outlined in paragraph [17].