The Competition Commission (Commission) recently prohibited the proposed merger in which Italtile Limited (Italtile) sought to acquire Ceramic Industries Proprietary Limited (CIL) and Ezee Tile Adhesives Manufacturers Proprietary Limited (Ezee Tile).

The Commission identified that the target firms, CIL and Ezee Tile, were active in the upstream market for the manufacture and supply of tiles, sanitary ware, baths, and related products, whereas the acquirer, Italtile, was active in the downstream market for the retail sale of these products.

The Commission found that CIL, with high market shares, and Ezee Tile, made significant, ongoing sales to Italtile. This created the potential that the merged entity could exclusively self-supply, thereby reducing supply to Italtile’s rival firms, neatly fitting the so-called “foreclosure” theory of harm. If Italtile had sufficient competitors this concern would likely have been mitigated, but the merged entity would allegedly face little constraint should it seek to raise prices or reduce (or even refuse) to supply Italtile’s competitors.

The Commission further found that there are high barriers to entry into the upstream market.

During a merger investigation, the Commission is empowered to contact market participants, such as customers and competitors. In this case, the Commission apparently received concerns regarding the anti-competitive effects of the proposed transaction, particularly, the foreclosure that would arise.

All this, coupled with the Commission’s finding that a merger condition or structural remedy would not mitigate the adverse competition effects, in the context of a market that is a key input to the construction sector (recently riddled with competition problems), led the Commission to prohibit the merger. Italtile has already indicated its intention to tackle the Commission’s finding before the Competition Tribunal.

Written by Susan Meyer and Kitso Tlhabanelo, Cliffe Dekker Hofmeyr