Competition Tribunal approves forestry merger with enhanced conditions after hearing

The Competition Tribunal (“Tribunal”) has approved a forestry merger that will see Cape Forests Products (Pty) Ltd (“Cape Forests”) acquire sole control of (i) MTO Forestry (Pty) Ltd (“MTO”); and (ii) PG Bison Southern Cape (Pty) Ltd (“PGBSC”), clearing the transaction with enhanced conditions after a hearing.

The parties

Cape Forests is a newly established holding company jointly controlled by PG Bison (Pty) Ltd, a manufacturer of wood-based decorative panels in Africa, and Wild Peach Investments (Pty) Ltd.

MTO operates softwood plantations in the Southern Cape, producing pine sawlogs for internal use and for sale to third-party sawmills. It operates the MTO George sawmill in the Western Cape and the MTO Longmore sawmill in the Eastern Cape.

PGBSC similarly operates a softwood plantation in the Western Cape, producing pine sawlogs for its Thesen sawmill in the Western Cape. It supplements its demand for sawlogs by buying sawlogs from third party plantations, including from MTO.

Public interest and merger conditions

A newly ring-fenced company, MTO Community SPV (RF) (Pty) Ltd has been incorporated to hold a significant but minority interest in Cape Forests for the benefit of a community trust yet to be established. The beneficiaries of the community trust will be certain communities located within MTO Forestry’s forestry operations. This will include communities located in: (i) Tsitsikamma; (ii) Longmore; (iii) Outeniqua; (iv) Garcia; and (v) Jonkershoek.

Following a hearing and further engagement on the proposed conditions, the Tribunal imposed an enhanced set of merger conditions governing the supply of sawlogs, transparency, employment and broader public interest considerations. A summary follows below:

Minimum sawlog volume supply commitment to third party customers in the Cape region

A central feature of the imposed conditions is a minimum supply commitment of sawlogs to third party customers in the Western Cape for five years following the merger’s implementation. The merged entity will make available a minimum of 155 000 (one hundred and fifty-five thousand) cubic meters of sawlogs annually to third party customers. This has two components:

  • specified sawlog volumes being made available annually to existing customers on the same terms and conditions as their existing supply contracts. The merged entity furthermore committed that that the quality and prices of each class of sawlogs supplied to its existing contract customers will be no less favourable than the quality and prices which are applied to the merged entity’s own sawmilling operations; and
  • 80 000 (eighty thousand) cubic meters annually to third party customers by means of open market tenders in the first year after the merger’s implementation. Thereafter, this amount will increase to 90 000 (ninety thousand) cubic meters for the remaining four year period.

Open market tender system

Cape Forests will introduce a second-round bidding process as part of the open market tender system whereby all bidders will be afforded an opportunity to revise and improve their bids. The second round bidding process will be in place for the next five years from the merger implementation date.

It will also publish each previous year’s average tender price for sawlogs, disaggregated by grade and size, for the next five years following the merger implementation date, within 30 days from the conclusion of a particular year’s open market tender process.

Cape Forests also undertakes to publish on its website, or otherwise provide in writing to open tender market customers, a wood flow forecast setting out the anticipated volumes of sawlogs (disaggregated by size and grade) that are likely to be made available in the next upcoming open market tender. The forecast must be published/provided at least six months before the start of the relevant open market tender process.

Following the initial five year supply period, Cape Forests will publish a non-binding indicative five year forecast reflecting the potential projected volumes which may be made available as part of the open market tender system for the following five year period. In addition, in each year of the second five year period, it will provide indicative non-binding annual updates on its website of the sawlog volumes which are likely to be available in relation to the open market tender in each given year.

Employment

The following conditions have been imposed relating to employment:

Moratorium: Cape Forests shall not retrench any employees of MTO or PGBSC as a result of the merger for a period of 36 months from the merger implementation date.

Head Count: Cape Forests will maintain an average headcount of at least 591 employees across the Thesen Sawmill and Cape Forests’ operations for three years following the merger’s implementation.

Employment Opportunities: Cape Forests will ensure that permanent employment opportunities will be offered to 120 existing part-time employees within the MTO George Sawmill and Thesen Sawmill operations as at the implementation date as and when such opportunities arise across any of Cape Forests’ operations over the next three years from the merger implementation date.

Reskilling and Retraining: Cape Forests will ensure that all Redeployed Employees (i.e., employees who will be redeployed into the broader operations of Cape Forests following the closure of the MTO George Sawmill) are provided with sufficient reskilling and retraining for any change in roles which may be occasioned as part of the redeployment within Cape Forests’ operations. 

Other public interest-related conditions

BEE Rating: The merged entity has committed to achieving at least a Level 3 B-BBEE rating within three years from the implementation date.

Annual Employee Training Fund: The merged entity will spend a specified amount annually, for five years from the merger implementation date, for employee training and development.

Expansion of Socio-Economic Initiatives: It will expand its current socio-economic initiatives undertaken in local communities surrounding the MTO operations, to communities surrounding its PGBSC operations over a three-year period. These include programmes which are similar to the following initiatives:

  • food security, relating to the establishment of community food gardens and small-scale crop farmers;
  • education and teacher training initiatives, relating to increasing learning opportunities for ICT and digital skills to teachers, school children, unemployed youth and small business entrepreneurs; and
  • a small, medium and micro enterprises (SMME) incubator programme aimed at increasing the presence of SMME operators within forestry operations.

Publication of non-confidential merger conditions

A non-confidential version of the merger conditions must be published on the merged entity’s website within 10 days of the merger’s implementation and must remain available for 12 months. The conditions will also be circulated to all existing customers.