Tribunal+blocks+SASOL+monopoly,+Crotty+and+others



=Why a local giant was ready to swallow SA's oil industry=

Business Report, Johannesburg,** **February 24, 2006

 * By Ann Crotty**

Johannesburg - At about page five of the competition tribunal's 180 pages of reasons the proposed merger between Sasol Oil and Engen has been prohibited, one begins to wonder Why.

Why did the merging parties believe they would be allowed to create an entity that so comprehensively dominates the local oil industry? Why was it necessary for the tribunal to write 180 pages defending its position?

The transaction would have created an entity that controlled 82 percent of refined fuel supplies and 40 percent of the retail network in the important inland region around Gauteng. Nationwide it would also be dominant, with control over 50 percent of fuel supplies and 33 percent of the retail network.

These are figures that scream "anti-competitive" in most markets, which is why a transaction such as this would probably never have been presented to any other competition authority in the world.

Or if it had been presented, it would have been with enormously compelling arguments relating to improved efficiencies or public interest considerations. The Uhambo deal offers nothing remotely compelling on either of these scores.

Of course, it might be that if the decision is appealed, at some stage during the appeal the reason will emerge - although to date, after extensive public discussion, it has not been made apparent. It may be that Sasol, which from birth has lived off a diet of "state steroids" according to one witness at the tribunal's hearing, could not contemplate life in a deregulated competitive market.

Indeed, the proposed merger with Engen made enormous commercial sense for Sasol. It presented an opportunity to recreate the sort of protected environment it had become accustomed to over the past 50 years or so. In fact, given that Sasol, rather than the government, was likely to be calling the shots in this new oil industry environment, things might be even better for Sasol than they had been.

This prospect might have been sufficiently compelling for Sasol to believe it was worth presenting a transaction that, according to the tribunal, is "likely to lead to a substantial lessening of competition in both the upstream and downstream markets".

For Engen, which has the largest retail market share, it meant avoiding a market share battle with an aggressive, independent Sasol.

There seemed to be nothing to lose.

And given that the competition commission initially conditionally approved the deal, although it described it as anti-competitive, it looked as though there was everything to gain - until the other oil companies (OOCs) - Caltex, Shell, BP and Total - emerged as interveners in the tribunal's hearings.

The considerable financial muscle and insider information available to the OOCs, which were determined to prevent Sasol-Engen from dominating a post-regulation cartel, ensured a lengthy and fascinating hearing before the tribunal.

Although benefiting from the OOCs' resources, the tribunal was quick to point out that they were "as little interested in robust competition as Sasol".

Sasol's merger proposal represented an attempt to anticipate the environment in which the pump price of petrol was not regulated and oil companies could compete on price for market share.

With a view to this new environment, Sasol terminated the main supply agreement with the OOCs from 2003.

In terms of the agreement, which had been a feature of the industry since the fifties, the OOCs were obliged to take inland supplies of refined petrol from Sasol, and Sasol was precluded from having anything more than the odd Blue Pump presence in the marketplace.

The agreement had significant implications for the provision of pipeline capacity from the OOCs' coastal refineries to the inland region. To the extent that there is insufficient pipeline capacity available to the OOCs now and for the foreseeable future, they depend on Sasol for supplies of refined product inland.

In the old regulatory environment, the imbalances of Sasol and the OOCs created a sort of balanced co-dependency. That was threatened by the proposed transaction.

In essence, what Sasol was trying to achieve through its merger with Engen was an enhancement of the comfortable unbalanced position it enjoyed in a regulated environment.

An essential part of that position was its ability to secure the basic fuel price, which is equivalent to an import-parity price, for all of its refined fuel product. This system has enabled Sasol to generate superprofits from both its location in the all-important inland market, and its technology in the form of its cheap coal inputs.

The tribunal is obviously impressed by Sasol, which has benefited from "vast historical subsidies" that underpinned previous industrial policies.

It describes Sasol as a "highly competitive domestic producer of fuels and chemicals". But adds "it appears that little of the competitive advantage Sasol Synfuels ... enjoys, inures to the benefit of South African consumers."

It notes that the component supply agreement between Sasol and Uhambo, in terms of which Sasol undertook to exclusively supply Uhambo with feedstock for its refineries for 10 years, would continue to ensure that Sasol and not Uhambo or the consumer would benefit from Sasol's competitive advantage.

"It is our finding that a principal objective of the transaction is to ensure that Sasol's multiple sources of competitive advantage - technological and locational - are withheld from South African consumers," said the tribunal.

In terms of the component supply agreement, Sasol would continue to receive an import-parity price for whatever product it supplied to Uhambo. And to the extent that Uhambo was able to realistically threaten the OOCs with foreclosure of supply in the inland market, it would also be able to secure a price that was approximately equivalent to import-parity from them. The benefit would be passed on to Sasol.

In the deregulated environment proposed by the government, the ability to secure an import-parity price was likely to be undermined by willingness of the oil companies to start using the pump price of petrol as a means of boosting their share of a competitive market.

It is apparent throughout the tribunal's 180-page document that it suspects the OOCs would be happy with a cartel arrangement that minimised the sort of competitive actions that might benefit the consumer. However, the vigour with which the OOCs intervened reflects their opposition to the prospect of a cartel that was dominated by Sasol.

In the absence of the merger, Sasol, which is the dominant producer of refined product in the inland region, will have to develop its own retail network, and the OOCs and Engen will have to develop the capacity to bring more product inland from their coastal refineries.

Or they will all have to develop a new working arrangement together.

And the 180 pages of reasons? This may just be a message to all concerned: "Enough already." Surely every single issue has been adequately dealt with by the tribunal and does not need to be revisited. Of course, you never know.


 * From: http://www.busrep.co.za/index.php?fSectionId=561&fArticleId=3128891**



=Tribunal pulls plug on oil deal=

Business Report, Johannesburg,February 24, 2006

 * By Ann Crotty**

Johannesburg - The competition tribunal has prohibited the proposed R33 billion merger between Sasol Oil and Engen, which would have created an entity that controlled 82 percent of the supply of refined fuel products and 40 percent of the important inland retail market in Gauteng and the surrounding region.

The merged entity, which was to be called Uhambo, would have dominated the national market with control of more than 50 percent of the supply of refined product and about 33 percent of the retail network.

In a 180-page document covering the reasons for its decision, the tribunal said: "We find that the merger is likely to lead to a substantial lessening of competition in both the upstream [the supply of refined fuel products] and downstream [petrol station] markets."

It made extensive reference to the threat of foreclosure by the merged entity. Given its dominance over the inland supply of refined product, Uhambo could withhold the supplies needed by the retail arms of the other oil companies such as Caltex, Shell, BP and Total.

Because of the capacity restrictions on bringing refined product from their coastal refineries, these other oil companies (OOCs) would be vulnerable to such a threat.

All OOCs opposed the merger.

The tribunal said the merger would result in the recartelisation of the local oil industry under the leadership of Uhambo and would ensure that consumers enjoyed no benefit from the proposed deregulation of the industry.

The merger would ensure that the price of petrol, diesel and other white fuel products would be kept excessively high in order to generate superprofits for Uhambo and the other members of the oil cartel.

"Sasol's decision [in 1998] to terminate the main supply agreement, the cartel agreement that dominated fuel markets for so long, has led inevitably to an outbreak of competition in the oil markets, circumscribed, of course, by continuing regulation of the pump price of petrol.

Government is, however, committed to deregulating this vital market as well and so, all things being equal, the competition that has broken out upstream will extend to the downstream as well," the tribunal said.

Sasol's intention was to put this "competition genie" back in the bottle by ensuring that Uhambo dominated the industry and dictated terms to the other oil companies. "For Engen, the merger is an opportunity to defend its retail margins and extend its retail market share," the tribunal said.

Tribunal chairman David Lewis, who authored the 180-page document, held out the hope that in the absence of the merger, Sasol would use its considerable profit advantage from its synfuel operations and its location to organically grow its retail network. By competitively offering wholesale discounts, Sasol had achieved commendable progress in recent years.

In a deregulated environment, a lone Sasol could grow by cutting the petrol price to consumers. "In short, Sasol on its own is a maverick, alone and hungry, and, as Engen would have it, a 'big, bad' wolf, fighting the pack for its share of the spoils," Lewis said.


 * From: http://www.busrep.co.za/index.php?fSectionId=552&fArticleId=3128829**



=Victory for consumers, say fuel rivals=

Business Report, Johannesburg,February 24, 2006

 * By Ingrid Salgado**

Cape Town - While Sasol Oil, Engen and their empowerment partners yesterday mulled over how best to respond to the fact that the competition authorities had prohibited their much-vaunted merger, their rivals in the fuel industry quietly celebrated what they variously described as a victory for consumers and competition.

A tersely worded statement from the shareholders of Uhambo said the parties were "naturally disappointed" with the ruling and were considering alternatives. A further statement would be forthcoming.

But the local units of oil multinationals BP, Chevron, Shell and Total welcomed what Chevron South Africa chairman James Seutloadi termed a "thorough ruling" that had examined in great detail all issues relating to the proposed merger.

Asked whether Sasol and Engen were likely to challenge the competition tribunal's findings, an analyst from a major local securities house, who asked not to be named, said: "This is a pretty emphatic ruling so I'm not sure it's in their best interests to drag it out further."

News of the prohibited merger sent Sasol shares 3.3 percent lower to R217.60 on the JSE in intraday trade, but the counter retraced some of its losses by the close.

Analysts said the slump was a knee-jerk reaction to news of the prohibition.

"I don't think anyone would have built in upside into the share price ahead of clearance by competition authorities," said Henk Groenewald, an investment analyst at Coronation Fund Managers. "To me it's not a big negative because nothing changes."

Philip Jordan, the chief executive of Total South Africa, said the tribunal's decision confirmed that South Africa had a "robust process for dealing with merger activities", and was a good signal for the international investment community.

Total's primary concern had been that the dominant supply position of the merged entity would give it power to foreclose, or withhold supplies to inland retailers.

Rams Ramashia, the chairman of BP Southern Africa, said BP had been concerned that the merger would have created a "petroleum giant" and affected the government's attempts to liberalise the industry.

"Hopefully, the tribunal process will have highlighted the significant infrastructural deficiencies in the South African petroleum sector. If these issues could be remedied, this would pave the way for increased competition, which can only benefit consumers," he said.

Seutloadi said the decision would not immediately impact on consumer fuel prices given the current regulated environment, but it was good news for competition.

Shell South Africa chairman Benny Mokaba said the merger, even if it had been approved with conditions, would have created a dominant company that would have been contrary to the government's energy policy, which sought an end to regulation in the long term.

Sasol closed 2.7 percent lower at R219, while the Top40 index was 0.2 percent lower. The shares traded markedly higher than a week ago when news of a possible windfall tax on synthetic fuel wiped R12 billion off its market capitalisation in one day.


 * From: http://www.busrep.co.za/index.php?fSectionId=552&fArticleId=3128873**]]



Business Day, Johannesburg, 24 February 2006
=Tribunal savages Sasol as it blocks Engen deal=


 * Carli Lourens, Trade and Industry Editor**

SASOL’s attempt to become SA’s largest fuel retailer foundered yesterday when the Competition Tribunal blocked its proposed merger with Engen, calling it an attempt to re-establish an oil industry cartel.

The competition authority described Sasol, which has been engaged in yet another clash with government after a windfall tax was mooted last week, as “a maverick, a lone and hungry ... wolf”. Sasol, which was considering “all options” yesterday, was widely expected to appeal the outright prohibition, although analysts said Engen might not want to be dragged further along this rocky road.

The tribunal said in its decision that the merger between the country’s largest fuel maker and the largest retailer to form Uhambo Oil would significantly reduce competition, and this could have negative consequences for the domestic economy.

The tribunal said the new cartel would “destroy the promise (of lower fuel prices through enhanced competition) contained in further planned deregulation of the fuel market”.

Uhambo’s dominant position could have enabled it to influence fuel prices in a deregulated environment in SA’s economic heartland, competitor oil companies argued earlier.

Uhambo, which would own half of all fuel production capacity in the country and a third of the retail market, would have the South African consumer as its “natural prey”, it said.

Sasol had wanted the deal to catapult it into the fuel retail sector as the largest player ahead of deregulation. Its alternative to expand in the retail market is through the continued roll-out of service stations — a much slower process.

The prohibition saw Sasol’s share dip 2,7% yesterday. An analyst said that the market had not come to grips with the complex merger, which Sasol had attempted at least twice before.

An unnamed analyst said the deal was strategically important as it would have secured a future market for Sasol’s output when other companies no longer needed to buy fuel from it.

“It would have placed Sasol in an unbelievably strong position,” he said, but for now it was “business as usual”.

The case is only the sixth to be prohibited outright in the history of the tribunal.

The decision follows a dramatic and marathon hearing, which led to the suspension of a chief director in the minerals and energy department in October, and a reversal of position by the Competition Commission from approving the deal subject to conditions to refusing it outright.

Oil companies Shell, British Petroleum, Caltex and Total, which opposed the deal, welcomed the decision by the tribunal, which also took a swipe at them. It said the oil companies were “as little interested in robust competition as Sasol”.

The tribunal said its view was the oil industry had been cartelised for many years under the legislated Main Supply Agreement, which forced other companies to buy fuel from Sasol, which was the only producer inland.

The cartel would eliminate the competition already ushered in by the termination of the Main Supply Agreement, and it would destroy the promise contained in further planned deregulation, it said. Engen’s motivation for the merger was widely seen as a desire to defend its market position, which would be under threat if Sasol pursued a different strategy to enter the retail market.


 * From: http://www.businessday.co.za/articles/frontpage.aspx?ID=BD4A160117**



Business Day, Johannesburg, 24 February 2006
=A gutsy decision=


 * Editorial**

IT TAKES balls to do what the Competition Tribunal did yesterday. It said a simple no to a very large merger in a major strategic industry.

It said no to SA’s largest industrial group, Sasol, as well to one of SA’s largest foreign investors, Petronas, the majority shareholder in Engen. And it said no to the proposed Sasol Oil-Engen merger despite the fact that at least some in government favoured the deal.

Though the tribunal has sometimes attached conditions to its approvals of the many mergers that it has looked at in its six-year history, this is only the sixth time it has gone the route of outright prohibition. That it has done so is testimony, again, to the tribunal’s absolute independence. And the judgment sends a clear signal to corporate SA that mergers that raise serious competition concerns will not be allowed to slip through, however hard the parties might argue that the need to create national champions or bring about black empowerment outweighs the negative economic effects.

Competition authorities can’t always intervene to stop dominant firms throwing their weight around or halt anticompetitive practices that are entrenched in the market. But they can halt mergers that will give the merging parties the kind of market power that will enable them to undermine rivals and keep prices higher than they should be.

That, essentially, is what the tribunal did here. The Sasol-Engen case, with more than a million pages of evidence and three weeks of public hearings, was the most complex merger, in one of the most complex industries, that has come before the Competition Tribunal. Its lucid, carefully argued, 200-page judgment shows the tribunal at its monopoly-busting best.

It found that the merged entity, Uhambo, would have enjoyed a near monopoly of refinery capacity in SA’s inland market and would be the largest retail player in that market. The core concern was that the merged entity, which would bring together the inland Natref and coastal Enref refineries, would control refining capacity in SA’s economic heartland. That would give it the ability to “foreclose”, cutting off inland fuel supplies to the other oil companies if they refused to pay the price demanded.

But the tribunal was sceptical, too, of the other oil companies, all of which intervened to oppose the merger. Though the merger would make them vulnerable to having their supply cut off by the merged entity, the tribunal predicted their response might well be to go along with the formation of a new cartel arrangement, led by Uhambo, in which they would all collude to maintain prices as long as everyone got the supplies they required.

This is an industry with a history of government-sanctioned collusion. For decades the oil companies divided up the market and its refining capacity among themselves, in terms of an agreement that expired only in 2003. That opened the way to greater competition that could have brought down fuel prices — although government regulates the retail petrol pump price, other fuel prices are not regulated.

But although there has been more competition in the past couple of years, the tribunal found the proposed Sasol-Engen merger could have stopped the process in its tracks. On its own, Sasol would have had surplus output in the inland market and would have been forced to price competitively to sell its product. With Engen, it would not have had to do that because of Engen’s large retail network.

So the best chance of promoting greater competition in the fuel market, the tribunal reckoned, was to stop the merger. Its decision comes in a context in which government has committed to lowering the costs of doing business. Fuel is one of the key costs. The Uhambo decision may not help curb fuel costs now, but it helps open the way to a more competitive market in future.


 * From: http://www.businessday.co.za/articles/opinion.aspx?ID=BD4A159953**

3388 words, 5 articles