COMPETITION TRIBUNAL OF SOUTH AFRICA

                                Case No.: 74/LM/Sep06

In the matter between:

KWV LTD                                                                                        Acquiring Firm

and

NMK SCHULZ FINE WINE AND SPIRITS (PTY) LTD                       Target Firm                                               
_______________________________________________________________

Panel			:	N Manoim (Presiding Member), Y Carrim (Tribunal 
Member), and U Bhoola (Tribunal Member) 

Heard on		:	13 September 2006
Order Issued on	:	13 September 2006
Reasons Issued on	:	14 September 2006   

REASONS FOR DECISION

Approval

[1]	The Competition Tribunal issued a Merger Clearance Certificate on 13 September 2006 approving without conditions the proposed merger between KWV Ltd (“KWV”) and NMK Schulz Fine Wine and Spirits (Pty) Ltd (“NMK”). 

The parties and the merger transaction

[2]	KWV will acquire 51% of the entire ordinary issued share capital of NMK together with 51% of all the claims on loan account which NMK Global may have against NMK. KWV is a JSE listed company and is not controlled (either directly or indirectly) by any of its shareholders. KWV does control a number of firms. NMK is a South African firm controlled by NMK Global, which in turn wholly owns two (2) subsidiaries, viz., Tuscanbeam Trading (Pty) Ltd and Schultz Wagner (Pty) Ltd. 

[3]	Pursuant to the entering into the sale of shares agreement, the ordinary shareholding in NMK will be as follows: KWV (51%) and Newco (also known as NMK Global) (49%). It is recorded that the individual shareholders in NMK Global have combined their indirect interest in NMK through means of Newco. Post-acquisition, KWV will exercise control over NMK by virtue of its 51% shareholding in NMK.

Rationale for the transaction

[4]	KWV wants to broaden the distribution base of the alcoholic beverages it manufactures.

[5]	NMK submitted that the proposed deal would allow for a substantial re-investment to provide for the destined future growth and expansion which would improve NMK’s position as a competitive distributor of alcoholic beverages. NMK asserted that it would benefit from KWV’s international presence in sourcing new international brands for distribution by NMK in South Africa. 

The relevant market

[6]	KWV manufactures, distributes, markets and sells a number of brands of alcoholic beverages, viz., wines; and spirits. KWV also distributes (but does not produce) the Groenland wine brand for and on behalf of its manufacturer. There are as mentioned above other KWV subsidiaries whose activities are not too significant for purposes of analysing this transaction. Our focus here will be only those subsidiaries that are involved in the manufacturing, distribution, marketing and sale of alcoholic beverages. 

[7]	NMK distributes, sells, markets and administers (for and on behalf of
 	various manufacturers either as an agent or as a distributor) a variety of brands of alcoholic beverages, viz., wines; spirits; and beer. The merging parties submit that NMK does not produce any of the above alcoholic beverages, and also that NMK does not distribute brandy at all. NMK provides the aforegoing services to “on-consumption” customers (e.g., to hotels, bars, and the like, where alcoholic beverages are purchased by end consumers and consumed on the premises) and to “off consumption” customers (e.g., largest retail stores, where end consumers purchase such beverages for consumption outside of the premises on which they were bought). 

[8]	There is a difference of opinion with regard to the relevant product market between the Commission and the merging parties. From a geographical point of view, both the Commission and the merging parties submit that both the merging parties and their competitors operate nationally and thus rendering the geographic market to be national. We need not consider these differences as in our view it appears unlikely that the proposed transaction may lead to anticompetitive concerns. That is, no matter how the market is defined. 

Competition analysis

[9]	A number of factors support our conclusion below which is that the
 	proposed merger ought to be unconditionally approved. 

[10]	Firstly, there will be virtually no substantial accretion of market shares pursuant to the implementation of the proposed transaction. With regards to market shares the Commission’s investigation revealed that KWV has a 5% market share for the distribution of alcoholic beverages whilst NMK has 1%. If this figures are indeed correct, this would result in the merged entity having a 6% combined market share post-acquisition. The merging parties further submit that as KWV distributes only one brand of wine which is not its own, therefore one can only assume that its market shares as an independent distributor is so small as to be de minimis.
 
[11]	Secondly, the distribution services market appears to be competitive and fragmented and comprises of a substantial number of competitors. Apart from the merging parties, there are other distributors, viz., Douglas Green Bellingham; NUCED; E Snell; Meridian; Smollan Liqour Division; and Parnod Ricard. With regards to the upstream market for the production of alcoholic beverages, the Commission’s investigation revealed that KWV has a 5% market share. The Commission further indicated that KWV is not considered as a big player in the upstream market because it did not even future on the top five list of manufacturers. 

[12]	According to the Commission, NMK does not distribute alcohol beverages for and/or on behalf of KWV, but currently distributes these products for Western Wines (Pty) (Ltd) and Wine Cape Liquors (Pty) Ltd. The Commission indicate that other manufacturers (including KWV) who are competitors of the merging parties distribute their own products. We are advised that NMK has just entered into a distribution agreement with KWV in terms of which it will distribute the latter company’s products. we are convinced that KWV may not be able to foreclose other manufacturers of alcoholic beverages from utilising NMK as a distributor given that most of these manufacturers conduct their own distribution. We further agree with the Commission’s view which is that should KWV attempts to foreclose the current manufacturers that use NMK as a distributor, those manufacturers may conduct their own distribution or they may contract other distributors available. 

[13]	Lastly, barriers to entry into the market appear to be low. Insofar as the distribution of alcoholic beverages, the merging parties submit that any potential distributor is required to obtain a wholesaler liquor licence prior to being able to commence such business, and that such licence is not difficult to obtain – usually it takes between six months and a year. 

Public Interest

[14]	The merging parties submitted that proposed transaction would not have an impact on any public interest aspects. In addition, the merging parties anticipate no job losses post merger, but foresee a potential increase in employment to cope with the distribution of the additional volumes of KWV’s alcoholic beverages.   Although the Food and Allied Workers Union (Fawu) wrote a letter to the Commission subsequent to its recommendation in which it sought the imposition of a moratorium on retrenchments for a period of 48 months subsequent to the merger, it failed to lay a basis for why such a condition should be imposed.

Conclusion

[15]	We are satisfied that the proposed transaction is unlikely to result in a substantial lessening or prevention of competition in the relevant markets. There are no public interest grounds that justify prohibiting or imposing any conditions on the merger. We accordingly approve the proposed transaction unconditionally.

______________
N Manoim 

Y Carrim and U Bhoola concurring.

Tribunal Researcher: T Masithulela

For the merging parties	:	N Lopes (Edward Nathan Corporate Law
Advisers) 

For the Commission		:	M Mohlala assisted by G Mudzanani (Mergers 
and Acquisitions) and A Kalla (Legal Services)