The Competition Commission has prohibited Corruseal Group's proposed acquisition of Neopak, saying the merger is likely to result in a substantial prevention and lessening of competition.
Neopak and Corruseal are both active in the recycled paper value chain.
Corruseal's South African activities include the collection and recycling of waste paper; the manufacture and supply of recycled containerboard paper; and the manufacture of corrugated sheets and box packaging products using recycled containerboard paper as an input.
Neopak is a manufacturer and supplier of recycled containerboard paper. It is only active in the upstream market for the manufacture and supply of recycled containerboard paper and does not have its own downstream operations.
Neopak supplies recycled containerboard paper to third parties that are vertically integrated, such as Corruseal, and smaller firms that are not vertically integrated.
The commission found that Neopak is considered an important independent non-integrated supplier of recycled containerboard paper to firms that manufacture packaging products. The merger would thus result in the loss of Neopak as a non-integrated firm.
The commission expects the merger to result in the merged entity having high market shares irrespective of whether production capacity, production volumes or domestic sales volumes are used to measure its size.
The commission found that the merged entity will have the ability to act unilaterally by, for example, raising the prices of recycled containerboard, refusing to supply competitors of Corruseal who also rely on Neopak for recycled containerboard, or supplying downstream competitors on poor terms.
The increase in concentration brought about by the merger is of particular concern given that it would further increase concentration in an already highly concentrated upstream market (at the paper manufacturing level), where there is a history of cartel investigations, it states.
The commission further found that barriers to entry into the upstream market are high. There has been no significant production capacity installed in the upstream market for at least the last five years.
Moreover, the commission found that supply of recycled containerboard paper from the upstream market to the downstream market is tight.
This lack of capacity means that vertically integrated companies such as Corruseal prioritise supplying their own downstream market activities with inputs as opposed to supplying external customers.
Furthermore, the commission found that imports of recycled containerboard paper are not a viable alternative for downstream market participants owing to the prohibitive price of imports. The current global supply chain constraints add to costs and uncertainty.
The commission also found that, in the event of being denied inputs by the merged entity post-merger, it is likely that some players in the downstream market would likely exit the market, as a result reducing competition and discouraging entry in that market.
Consequently, it found that the merger is likely to result in a substantial prevention and lessening of competition in the upstream and downstream markets.
It also found that neither the efficiencies raised, nor the remedies offered by the merging parties, countervail the anti-competitive effects of the merger.
The commission also found that the merger cannot otherwise be justified on public interest grounds.