SOUTH AFRICA – The Competition Commission of South Africa has prohibited the proposed acquisition of Neopak Limited by Corruseal Group, citing the merger is likely to result in a substantial prevention and lessening of competition.

Late last year in December, Ethos Private Equity through its Ethos Fund VI, agreed to offload its 100% stake in South Africa based paper and packaging business, Neopak Holdings, for an undisclosed sum to Corruseal Group.

The company was first purchased by the Ethos Fund VI in 2015 from Nampak, when it was known as Nampak Corrugated.

According to the commission, both Neopak and Corruseal are both active in the recycled paper value chain.

In particular, the supply chain of Corruseal is integrated with its South African operations comprising of collection and recycling of wastepaper; manufacture and supply of recycled containerboard paper for the upstream market; and the manufacture of corrugated sheets/box packaging products using recycled containerboard paper as an input targeting the downstream market.

Meanwhile, Neopak is a manufacturer and supplier of recycled containerboard paper but 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.

Merger not justified on public interest grounds

The Commission found that Neopak is considered an important independent supplier of recycled containerboard paper to firms that manufacture packaging products, thus the merger would thus result in the loss of the Neopak as a non-integrated firm.

The investigation further showed that the merger will result in the creation of an entity having high market shares irrespective of whether production capacity, production volumes or domestic sales volumes are used to measure their size.

“The Commission found that Neopak is considered an important independent supplier of recycled containerboard paper to firms that manufacture packaging products. The merger would thus result in the loss of the Neopak as a non-integrated firm,” the Commission said.

Meanwhile, the new entity is presumed will have high market shares irrespective of whether production capacity, production volumes or domestic sales volumes are used to measure their size.

This brought to the fore the concern that the merged entity will have the ability to act unilaterally for example by 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.

In addition, 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,” the Commission added.

In addition, the barriers to entry into the upstream market are high and there have 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 (i.e., companies that don’t have an integrated value chain),” noted the regulating body.

Further weighing the available options, the Commission found that imports of recycled containerboard paper is not a viable alternative for downstream market participants due to the prohibitive price of imports.

The current global supply chain constraints add to costs and uncertainty and 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, the Commission 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

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