It’s a battle of David and Goliath proportions. On the one side are small-scale furniture-makers Eshu Seevnarayan and Roy Pritchard, representing a hastily thrown-together coalition of ”poor nephews” calling itself the Independent Furniture Manufacturers’ Association.
On the other side are what Seevnarayan and Pritchard believe are the ”big bad uncles” of the furniture business. They comprise Steinhoff, the German-South African furniture-maker that dominates the South African market; Claas Daun, the German industrialist with major investments in the South African furniture industry; and FirstRand Bank, ”the furniture bank”, which now has significant shareholding in two large furniture retail groups, Profurn and Relyant.
At issue is a bid to merge two of the biggest furniture retailers: Profurn, of which FirstRand now controls 78%, and the JD Group, to which the bank also has lending exposure.
In terms of an agreement, Daun would then relieve FirstRand of most its stake, comprising 25% of the merged entity. The two groups control some of the best-known retail brands in South Africa. Profurn includes Morkels, Barnetts and the Hi-Fi Corporation, while JD includes Joshua Doore, Bradlows and Russels.
The Competition Commission has already given its unconditional recommendation for the deal to go ahead. The commission also allowed JD effectively to take over indirect management of Profurn — a direct competitor — ahead of a final ruling by the Competition Tribunal.
Justifying its decision, the commission cites claims that the furniture retail market is ”over-traded” and that Profurn would go to the wall without the merger, with the resultant loss of thousands of jobs. The JD takeover is regarded as a rescue operation.
The independent manufacturers think otherwise and have taken their case to the Competition Tribunal (which can overturn the commission recommendation) where the case is due to start on Monday.
The independents, who rely on Profurn for much of their business, believe the company has cleaned up its act and can trade its way out of debt — if the banks will let it. Seevnarayan says Profurn directors have privately confirmed their faith in the company’s viability.
The independents suggest that it is the JD Group that is now in the doldrums and wants to grab Profurn’s much-improved R2-billion debt book and R600-million bad-debt provision to put a gloss on its own annual results, whose release is nearly three months overdue.
In a witness statement prepared for the tribunal hearing, Seevnarayan argues that the merger will result in significant rationalisation, with store closures and job losses and a loss of competition, particularly at the lower end of the market.
This argument may well be taken seriously. Two years ago the tribunal rejected a proposed merger between JD and Ellerines for precisely these reasons.
But the real challenge for the tribunal to consider is what is termed the ”vertical integration” issues raised by the deal. The independents argue that the parties promoting the deal have interests or links that will allow them to dominate the furniture industry across the supply chain, from the supply of raw materials and components to manufacture and retail.
They point to the close relationship between the JD Group and Steinhoff, which they argue will be extended should the Profurn merger go ahead.
In his witness statement, Pritchard, the MD of Oak Tree Products, claimed his annual business with JD had dropped from R8-million in 1998 to zero a couple of years later.
”The witness will state that he was informed by all the merchandisers that they had received an instruction from the top (i.e. the directors) that they were to achieve certain targets with the Steinhoff Group and that the easiest way to do this was to substitute the bread-and-butter lines, variations of which were being made by Steinhoff.”
According to the statement Pritchard will tell the tribunal that he was advised that Steinhoff has the right of first refusal to match the price of any product offered to JD by a rival manufacturer.
Pritchard even claims the JD Group provided samples of his own product lines for Steinhoff to copy. Seevnarayan tells a similar story of being shut out by JD in favour of Steinhoff.
Both argue that they will lose their Profurn business which, in Seevnarayan’s case, amounts to 50% of his turnover, if the merger goes ahead.
The independents argue that Daun and Steinhoff (of which Daun is a director) already control 90% of the production of foam products (for mattresses and padding) and that Steinhoff has a controlling interest in Bisonboard, the country’s dominant manufacturer of chipboard — a major input material for furniture. Steinhoff also has major interests in sawmills and furniture-timber forests.
”The witness will testify that he fears for the future of the industry as a result of the dominance of a group consisting of the JD Group, the Steinhoff Group, Claas Daun and Relyant retail and if this merger proceeds would include Profurn,” reads Pritchard’s statement.
JD Group director corporate services Jan Bezuidenhout said Seevnarayan and Pritchard ”have their own agenda”. He said their allegations would be tested and dealt with at the tribunal. He declined to respond further before the hearing.
Paul Schouten, who represents Daun in South Africa, emphasised he was not privy to the details of the deal but said their was no guarantee Steinhoff would remain a preferred supplier.
He said companies within the Daun group were run independently and werer expected to match price, quality and efficiency with competitors.
Steinhoff MD Marcus Jooste could not be reached for comment.