Sweet deal

The merger that followed the sweet privatisation deal that saw government lease more than 100 000ha of forests between Port Elizabeth and Cape Town for a mere R17,5-million is the subject of an ongoing Competition Tribunal hearing.

An independent sawmiller in the Eastern Cape, AC Witcher (ACW), has asked the Competition Tribunal to review the approved merger between Mountain to Ocean Forestry (MTO) and two sawmills, Boskor Saameule and Boskor Ripplant.

ACW is claiming that the Competition Commission erred when it approved the merger in March last year as the deal had serious anti-competitive consequences that threatened the existence of independent sawmills in the region, which is disputed by MTO.

In early 2005 the Department of Public Enterprises and the Department of Water Affairs and Forestry signed a 70-year lease agreement with MTO to manage 117 519ha of forests between Port Elizabeth and Cape Town.

The 70-year lease agreement cost MTO R17,5-million, a fee that ACW claims was a steal.

If there is validity to the claims by ACW, it wouldn’t be the first time that state assets have been privatised to the detriment of competition and the consumer. Mittal Steel and Telkom are two examples.

ACW chief operating officer Shaun Westcott says the vehicles that were included with the plantations alone were worth more than R17,5-million and says that the two sawmills that were included in the deal could be valued at close to R300-million.

Westcott said that MTO owned between 62% and 72% of the planted area in the Eastern, Southern and Western Cape.

He said it was difficult to speculate how much the plantations of timber were worth but the figure could easily be more than R1-billion.

“I don’t think you could put up a small shopping centre for that money, but they got more 100 000ha for less than R18-million,” says Westcott.

The deal was part of government’s plan to exit the forestry industry and was seen as a BEE deal that would diversify the sector.

Cape Timber Resources (CTR) was a special purpose vehicle set up to purchase 75% of MTO from the South African Forestry Company (Safcol), a parastatal that housed the state’s forestry assets.

The shareholders of CTR were Cape Sawmills (CS) headed by Dave Reeves, the managing director of MTO, and Wild Peach Investment Holdings headed by Lulamile Xate, the chairperson of MTO.

Westcott says MTO’s acquisition of the two Boskor sawmills has allowed it to gain a stronger presence in the downstream milling market, which has resulted in less timber supplies for independent sawmills.

“The merger places MTO in such a strong position and the commercial incentives to self deal are so overwhelming that is difficult to conceive how any processor reliant on MTO for the supply of logs could compete or survive economically,” says Westcott’s founding affidavit.

However, MTO has accused ACW of being a “jilted suitor” because it was a rival bidder for the Boskor mills and accused ACW of delaying its review application unreasonably.

MTO claims the review application is an “appeal masquerading as a review” and claims that ACW is attempting to introduce new evidence that was not before the commission when the merger was approved.

Westcott argues that the MTO mills in George and Wemmershoek, the CTR mill in Longmore the CS mill in Stellenbosch together have about 69% of the estimated volume intake in the Eastern, Southern and Western Cape regions.

But MTO in its answering affidavit disputes this fact, saying that the commission had come to the conclusion that the merged entity would only have 30,4% market share of the Eastern, Southern and Western Cape regions.

“The commission drew attention to the fact that the merged entity would be required to sell about half of Boskor’s current output to Swartland for the next eight years,” says MTO’s responding affidavit. “This would reduce the merged entity’s market share from 30,4% to 26,2%.”

Westcott says that ACW has already started to experience a noticeable decrease in volumes it receives from MTO.

He says this is a serious threat to independent millers such as ACW and there could be very negative consequences for the nearby communities if these sawmills are forced out of business.

According to Westcott, the communities of Lottering, Storms River and Coldstream are 100% dependent on the ACW mill for employment.

In approving the merger in 2007, the Competition Commission found that the independent sawmills could source the timber they required from KwaZulu-Natal and Mpumalanga if there were shortages in the Eastern, Southern and Western Cape.

However, Westcott claims in his affidavit that this is incorrect and that sawmills had a 275km radius to transport logs to the mill before it becomes unprofitable.

When the merger was first before the Competition Commission for approval, ACW provided the commission with a report from timber industry experts Crickmay & Associates, which it had commissioned.

The report said sawmillers are generally constrained with regard to their primary raw material input by transportation costs and that most timber would have to be transported about 120km, with some supplementary timber from within a 240km radius.

MTO argue that the commission did in fact consider the Eastern, Southern and Western Cape regions as a separate market and still found that the merger would not result in anti-competitive outcomes.

The Department of Public Enterprises, the Department of Water Affairs and Forestry and Safcol had not responded to the M&G‘s questions at the time of going to print.

Lloyd Gedye

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