The Competition Tribunal has conditionally approved the merger between South Africa’s largest ostrich processing companies, Klein Karoo International (Pty) Ltd (“KKI”) and Mosstrich (Pty) Ltd (“Mosstrich”). The approval of the transaction is, however, subject to several conditions.
 
KKI and Mosstrich supply ostrich slaughter and ostrich feather-related services to ostrich farmers, as well as tannery services for ostrich skins. The markets for the supply of ostrich feathers, meat and skins are largely export orientated.
 
The conditions imposed by the Tribunal relate to ensuring the availability in South Africa of: ostrich feathers to producers of various feather-related products; ostrich meat such as ostrich steak, fillet and trimmings to wholesalers and retailers of ostrich meat products; and access to the merging parties’ abattoirs and tanneries in South Africa.
 
The merging parties currently have abattoir facilities in Oudtshoorn, Mossel Bay, De Aar and Graaff-Reinet and tannery facilities in Mossel Bay and Oudtshoorn.
 
The imposed conditions include: 
 

 
The merged entity will, after the proposed transaction, be obliged to offer at least 40% of its slaughter line ostrich feathers on tender in each financial year.
 
The tender process will be managed by independent auditors on behalf of the merged entity and such auditors will be required to annually submit a certificate to the Commission confirming compliance with this condition.
 
The continuation of the current tender system for ostrich feathers and the further obligation to offer 40% of the merging parties’ slaughter line ostrich feathers on tender will ensure that the status quo, as before the merger, remains. Third parties such as Lewitton Industrial CC, Rancho Las Plumas and the Opsa Group buy ostrich feathers locally that are used for downstream production / value added purposes.
 
This tender condition will remain in place indefinitely.
 
In addition third parties, such as ostrich farmers who bring their ostriches to the merging parties for slaughter, must be allowed to retain their feathers (if they so wish) on terms that are fair, reasonable and non-discriminatory.
  

 
The merged entity will have to comply with certain annual volume conditions in relation to their supply of ostrich meat in South Africa for local consumption. This means that it must make a certain percentage of its ostrich steaks and fillets, as well as ostrich trimmings, available for sale in South Africa in each financial year. The percentages relating to the volume condition will remain confidential.
 
This condition will also remain in place indefinitely.
 
Currently, various wholesalers, retailers, restaurants and caterers purchase ostrich meat in the local market.
 

 

The merged entity, for as long as it has excess capacity, will have to offer access to its abattoirs and tanneries to any party requiring access on terms that are fair, reasonable and non-discriminatory in respect of pricing, quality and timeliness.

 

If it declines to provide any party with access, it must provide detailed and specific written reasons within seven days of receiving the request.

 

 

The merging parties agreed that the current agreements between Mosstrich and two of its customers, Buffelskom Boerdery and Ostriland, will be amended to remain in place indefinitely, subject to a 24-month notice period in which either party may cancel the agreement.

The percentage annual inflationary increase of tanning/slaughtering fees will not exceed tannery/abattoir cost inflation and shall be subject to expert determination.

Buffelskom and Ostriland will not be restricted from competing with the merged entity for the duration of the agreement, during the notice period or thereafter i.e. Buffelskom will not be restricted from constructing its own tannery at any time (if it so wishes) and Ostriland will not be restricted from constructing an ostrich abattoir (if it so wishes) nor will it be restricted from processing, marketing or selling ostrich meat.  

 

 
The merged entity will not retrench any employees as a result of the merger for a period of three years from the date that the merger is implemented.

 
Background – Commission prohibited the intermediate merger
 
On 20 December 2018, the Commission prohibited this intermediate merger, arguing that it would create a near monopoly in the ostrich industry and lead to a significant lessening of competition in the market for ostrich meat and feathers. It did not, however, identify any competition concerns relating to ostrich leather as ostrich leather was found to be substitutable with other exotic skins.
 
The Commission also claimed that the transaction would enable the merged entity to control the entire value chain and eliminate competition. The Commission was concerned that the merger would essentially effect a permanent structural change to the ostrich industry, which posed significant competition concerns.
 
Although the merging parties proposed remedies, the Commission was of the view that these remedies were inadequate to address its concerns.
 
Merging parties challenged the Commission's decision in the Tribunal
 
On 22 January 2019, KKI and Mosstrich filed an application in the Tribunal, challenging the Competition Commission’s decision to prohibit the merger.
 
In the Tribunal hearing, which took place from 1-8 July 2019, they argued that the merger is necessary to stabalise the ostrich industry which is suffering significant decline due to different factors which contribute to farmers being unable to realise sufficient returns on their ostriches. These factors include, among others, droughts and the recurrence of Avian Influenza resulting in export bans on raw meat in an export driven market.
 
During the Tribunal hearing, the merging parties tendered enhanced competition conditions.
 
After hearing evidence in the matter, the Tribunal decided to approve the merger subject to conditions.
 
A non-confidential version of the conditions will be made available on the Tribunal’s website at: www.comptrib.co.za
 
The Tribunal’s reasons for its decision will also be issued in due course.