Special report - Conditional approval for Distell merger - but saga continues

The birth of the South African drinks group Distell has been a long and arduous affair. The company may have been hoping for a satisfactory conclusion from today's competition hearing, but, as Arnold Kirkby finds out, there is more pain ahead as Distell battles to establish itself on the international scene.

The South African Competition Commission has recommended conditional approval for the Distell merger, following its investigation into the anti-competitive effects of the merger.

But, the saga is far from over, with the findings to again be placed before the Competition Tribunal, which will make a finding on possible divesture of several brandy and sparkling wine brands traded by the merged entity.

This follows a lengthy wrangle which saw the Competition Commission initially give Distillers Corporation and Stellenbosch Farmers' Winery a tacit go-ahead, only to see international competitors, Bulmers and the now defunct Gilbeys, bring court and Competition Board complaints against the merger over a period of more than 18 months. The Competition Appeal Court eventually determined that it constituted a merger and ordered the investigation.

The Tribunal is expected to convene in the course of the next month to hear the findings of the Commission and submissions by Distell and other interested parties on the matter.

According to Commissioner, Menzi Simelane, it was the Commission's view that the merger had removed an effective competitor in certain product markets and had, "created the architecture for anti-competitive behaviour."

No indication was given by the Commission on which brands would be affected, but it found that Distell, had to divest of some of its brandy portfolio, for which it has about 70% volume share and 75% value share on the domestic market.

It found that KWV and Distell controlled the raw material for brandy production in South Africa. It identified KWV as a potential competitor to Distell in the brandy market and accordingly recommended that Distell be precluded from distributing KWV brandy brands. It would also have to divest of unspecified brands as well.

Distell is still locked in a court battle with the now unbundled Gilbeys Group over the production, marketing and distribution licence for Martel Brandy, which has been under dispute for about the same period as the merger issue.

The Commission had no doubt that the merger had substantially prevented or lessened competition in the sparkling wine market, where Distell had a growing 75% share of that segment.

Another area where resolution was difficult to ascertain, was in the gin market, where Distell has a 68% share, but where its Gordon's Gin was also under dispute.

Diageo has apparently informed Distell that it would like to terminate the contract for Gordon's, the number two white wine spirit brand in the country and biggest Gin brand topping 50% of sales and apparently four times the size of its nearest rival.

Expert Analysis Wines & Spirits in South Africa 2001 Comprehensive market data from 1990-2001 covering all sectors of the market. Brand sales and foreign trade data also included.

This dispute is only in its infancy and could also develop into a protracted court battle similar to the Martel Brandy issue.

The Commission concluded that, notwithstanding competition concerns, any recommendation it made to this market segment would be overwritten by the outcome of the dispute.

Strong competition, however, still existed in the whisky, vodka, cane and table wine markets, while the fruit alcohol beverage (FAB) market was subject to fashion and high volatility and consequently no remedies were sought by the Commission in those segments.

Distell MD, Jan Scannell today slated some of the recommendations by the Competition Commission saying it would undermine the company's international potential.

"We welcome the fact that the Commission has recommended the approval of the merger, however the conditions they now propose are totally unrealistic.

"The main reason for the merger was to improve Distell's capabilities to compete successfully in a highly competitive global arena.

"Major breakthroughs have already been achieved and we are well on our way to becoming a leading South African force in global beverage markets. However, the Commissions current proposal will undermine our potential to grow successfully in these keenly contested markets.

"It is significant that the only intervention in the merger has come from foreign competitors. These multinationals, which in some cases dominate product categories in their local and some international markets, are likely to be strong bidders for brands which Distell may be forced to sell. This will lead to the ownership of successful South African brands moving offshore," he said.