Kwazulu-Natal Business News

Send  Share  RSS  Twitter  14 Jun 2012

VENTURES: Seed Merger - Conditions and Implications


Recent Kwazulu-Natal Business News

The Competition Appeal Court (CAC) this week approved the transitional merger between Pioneer, a US based international developer and supplier of plant genetics and Pannar, a family firm based in Kwa-Zulu Natal, subject to several conditions.

The merger parties had appealed against the complete ruling out of the proposed merger by the Commission in 2010, and again by the Tribunal at the end of 2011.

The CAC's conditions of approval include several offered by the merger parties before, such as a cap on price increases for Pannar maize hybrids and open pollinated maize varieties for three years, and that subsistence farmers will not suffer a price increase for three years and thereafter increases capped at CPI for five years.

In addition the parties had to establish an International Research and Technology Hub in SA to improve expertise in crops important to SA, and food security in Africa reinforced by the condition that they will be involved to spreading know-how among developing farmers to increase productivity and well being.

The merged entity would also be obliged to make available the Africa genetic maize material to public institutions for research and development, and to potential competitors identified by the CAC for breeding programs for use in SA.

Competition Authorities Against the Merger

"The CAC's conditions to the agreement show that the public interest factors in merger cases are being used more frequently to promote the purposes of the Competition Act especially to foster effective competitiveness of smaller firms and businesses through investment in research, education, skills and training, and of course to maintain local industry and expertise.

The much contested Kansai/Freeworld merger, the Walmart and Massmart take-over and now this matter - involve conditions that aim to do just that with the proven experience of the merger parties in their particular industry,” Petra Krusche, Director in the Competition and Regulatory practice at Cliffe Dekker Hofmeyr explains.

Krusche sums up the ruling by saying that from a competition and public interest perspective, the fundamental objection by the competition authorities against the merger was rooted in the prospect that the number of significant competitors in the market for hybrid maize seed development and supply would be reduced from three to two.

Pannar and Pioneer, each with a market share between 15%-30% of the local hybrid maize seed market wished to merge, leaving only a merged Pannar/Pioneer and the dominant third player, Monsanto, "the source of almost all germplasm licensed to smaller independent seed companies in SA".

Central to Merger Analysis - Pannar Expertise

The so-called 3-2 mergers are considered to be problematic due to the known competition problems associated with highly concentrated markets, such as increased risk of coordinated conduct and collusion leading to higher prices and less choice. The Tribunal noted that this was "a risk well known to the merging parties when the transaction was contemplated."

In their decision, the CAC said that this theory is usually necessary, but not when the failure of one of the competitors is likely and although uncertain. In that case eventually the market will only be served by two competitors in any event. Better then would be to ensure that positive aspects of the merger "are preserved and exploited in the public interest"

Central to the analysis of the merger was Pannar's expertise in breeding and supplying of a hybrid maize seed, especially suitable for African farming conditions. Hybrid maize seed is used by all SA commercial farmers and subsistence farmers are increasingly turning to hybrids to increase their yield. Some 95% of maize grown here is derived from hybrid seeds. Pannar's germplasm has been described as unique from an SA perspective, resistant to African diseases and pests, with the essential late maturity for the longer growing season and can produce more than one cob. The Tribunal had found that Pannar's germplasm is "sufficiently diverse and extensive", and thus valuable and attractive, and the CAC described it as a "valuable local asset".

Pannar's Germplasm - Unique to the Merger

But the Tribunal and the CAC diverged on what to do with Pannar's assets given its not so favourable future.

The Tribunal described the Pannar asset as an ideal springboard for a "timely and sufficient" potentially new entry into the market. It said that the value in Pannar's unique germplasm would remain attractive to investors, even though other maize varieties with earlier maturity and sufficient yield are becoming more widely-used by local farmers, which allow them to manage much of the risk of agriculture due to natural elements through shorter harvest cycles, and double-cropping. Pannar was found to be well placed to ride out competitive pressures for a few years yet while waiting for a suitable match other than Pioneer, of which it put two forward as examples of what was possible.

Krusche says that in the ruling, the CAC disagreed and found that there was no indication that other firms were interested or capable of making more of the Pannar assets and that the evidence, according to CAC, "cannot justify the denial of the preservation and exploitation of Pannar's germplasm by way of the proposed merger".

Debate About suitable Merger Candidates

The CAC was critical that the Tribunal did not recognise that the firms identified as possible suitable bidders for Pannar, were, according to the CAC, mismatched by good quality of attributes of their products and own strategy, and thus unlikely merger candidates. The CAC warned that merger analysis must remain focused on competition, not on the competitors and speculative arrangements with new entrants. The refusal of a merger in these circumstances would have involved an interference with the affairs of private firms not in the public interest.

The CAC indicated that Pioneer's capabilities were likely the best fit for Pannar and by the conditional approval of the merger, placed the parties in the position to do what they had had set out to do two years ago. They had said that Pannar's inability to compete effectively in the market and increasing reliance on large competitor Monsanto for genetic plant material at a price higher than that paid by Pioneer, would be solved by the merger with Pioneer.

Krusche concludes that Pannar felt the deal would further its objective to enter into a transaction that would offer, according to Pannar, " continuity and growth for the brand, the business and (its) employees, complementary germplasm, strong advanced breeding technology capabilities and biotech trait development and access".

Pioneer's aspirations with the merger included more investment in Africa, also to improve the food supply on this continent. The conditions to the merger approval integrate the parties intentions to support local food supply and transfer genuine skills and know-how to the developing farmers.

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