Alex Constantinou

Historically, the South African maize seed market has been dominated by three major players, namely the two multinationals Pioneer Hi-Bred International Inc. (“Pioneer”) and Monsanto South Africa (Pty) Ltd (“Monsanto”); and the local South African company Pannar Seed (Pty) Ltd (“Pannar”). Whereas Pioneer, Pannar and Monsanto are involved in the breeding, production and distribution of hybrid maize seed in South Africa, Monsanto is currently the only active provider of “biotech traits” in the market.

In 2010, Pioneer made an offer to acquire Pannar, and subsequently applied to the Competition Commission (“Commission”) for approval. The Commission recommended that this merger be prohibited, and on 14 October 2011, the Competition Tribunal of South Africa (“Tribunal”) issued an order which upheld the Commission’s decision; and for good reason. The Commission and subsequently, the Tribunal, came to the conclusion that this merger was likely to lead to a substantial prevention or lessening of competition (“SLC”). The risk of allowing it was simply too high in terms of:

i) reducing rivalry (from 3 to 2 market players);

ii) raising barriers to entry for potential new players;

iii) reducing countervailing power for farmers (especially smallholdings);

iv) increasing the potential for coordination or the risk of unilateral conduct (market power to raise prices);

v) tenuous evidence provided by the merging parties of dynamic efficiency gains that were likely to arise from this specific transaction; and

vi) incorrectly applying the failing firm doctrine to suggest that Pannar would not survive in the absence of this transaction.

It is our view that the Commission and Tribunal were correct in that the merger between Pioneer and Pannar does indeed give rise to either unilateral or coordination risks. This is chiefly because of the significant increase in concentration and barriers to entry arising from this merger. Specifically, we are concerned that the merger will lead to a durable duopoly in the market, and that this may create room for prices of various products to be increased artificially (through enhanced market power or coordination among rivals); and has the capability to “lock-out” future competitors from gaining access to the breeding level of the market.

After the Tribunal prohibited the merger, this matter was taken on appeal to the Competition Appeal Court (“CAC”). On 28 May 2012 the CAC reversed the decision by allowing the merger to proceed with conditions provided by the merging parties.   It also issued an unprecedented cost order against the Commission.

The CAC’s decision was largely based on the argument that Pannar is in decline and simply must partner with Pioneer in order to survive. This we find hard to digest. The available evidence suggests that Pannar occupies a unique position in the South African market and other international companies were queuing-up to purchase or partner with them. Moreover, even if the firm was in decline (i.e. not failing as such), this does not make for a valid competition argument in favour of the merger – only a real and immediate risk of failure is an acceptable argument.

The CAC also accepted the view of the merging parties that the merger will give rise to efficiencies through “innovation competition”. In our view, such efficiencies are hardly merger specific (as they can also be achieved through a licence agreement rather than a merger, or a less anti-competitive merger with another player); and the CAC ruling ignores the possibility that the merger might also stifle “innovation competition” at the biotech traits level of the market.

Despite the CAC finding that the merger does not result in an SLC, it still determined that it was necessary to impose conditions to address competition concerns. This in itself is an admission that an SLC exists. In analysing the proposed remedies, we find they are weak, apply to a very limited range of products and for a very short period of time, and will do little to break down the barriers to entry in the market place created by the merger. In just three years the merged entity will not be bound by any of the price cap conditions imposed by the CAC. While the merger fundamentally changes the competitive nature of the market, the conditions imposed do not provide a sufficient remedy to completely eliminate the impact of this fundamental change – which is what, for example, European Commission (“EU”) guidance, regarding acceptable remedies, requires of a sufficient merger remedy.

For all of these reasons and more, the Commission filed leave to appeal the CAC order to the Supreme Court of Appeals (“SCA”). This application was rejected outright by the SCA.

The merger between Pioneer and Pannar can now proceed unencumbered. But this case has raised numerous serious concerns that will linger well beyond the transaction itself. First and foremost, the merger itself is likely to shake-up the domestic seed market in a way that is likely to only undermine competition, introducing new public interest risks in an already sensitive industry. These risks will need to be closely monitored. 

Furthermore, the precedent that this decision sets as regards cost orders against the Commission, and the acceptability of fig-leaf conditions on mergers that carry a high anti-competitive risk. In such a situation where there is a higher likelihood of merger prohibitions being reversed on appeal, the more willing the Commission and Tribunal are likely to accept such insufficient conditions, in order to avoid embarrassing and potentially costly overturns of their decisions. It is no exaggeration therefore to say that this precedent may threaten the efficacy of the system of merger control as a whole.

Given the impact which this decision may have on the way in which Competition law is applied in South Africa, the Commission should be encouraged to take this ruling to the Constitutional Court.