Why Did AkzoNobel’s Acquisition of Kansai Paint’s African Business Fail?

Recently, the South African Competition Tribunal issued an order prohibiting the merger of shares of global paint company AkzoNobel and Kansai Paint Africa Paints after reviewing a request for review.

According to the Competition Commission of South Africa, as the largest and second largest local manufacturers of decorative paints, if the two companies merge, it may significantly reduce competition in the local decorative paints manufacturing and supply market, adversely affecting other market participants.

It is reported that the relevant legislation for merger control of South African enterprises is mainly the Competition Act No. 89 of 1998 (the "Competition Act"). The law enforcement agencies for merger control in South Africa include the Competition Commission, the Competition Tribunal and the Competition Appeal Court. Among them, the South African Competition Commission is a statutory body established by the South African government in accordance with the Competition Act No. 89 of 1998. It has the power to investigate, control and evaluate restrictive business practices, abuse of dominant position and mergers to achieve fairness and efficiency in the South African economy.

In June 2022, AkzoNobel reached an agreement with Kansai Paint to acquire Kansai Paint’s paint and coatings business in Africa to further enhance AkzoNobel’s influence in the African market. The acquisition agreement is scheduled to close in 2023, subject to regulatory approvals.

Kansai Paint's business in Africa involves 12 countries, with comprehensive revenue of approximately 280 million euros. The deal includes a presence in Kansai’s brand Plascon, which has a history in South Africa of more than 100 years. Plascon and AkzoNobel's brand Dulux are the oldest decorative paint brands in Africa. The acquisition also includes automotive and protective coatings, as well as wood coatings and coil coatings.

Former AkzoNobel CEO Thierry Vanlancker said at the time: "The acquisition of Kansai Paint's African business will help us further expand our paints and coatings business in the region and lay a solid foundation for future development. Kansai Paint is as committed to innovation and sustainable development as we are, we look forward to combining the professional capabilities of both parties to bring customers a wider range of innovative products and more sustainable solutions."

Kansai Paint President Kunishi Mori previously said: "In the African business, the integration of the two parties' platforms will create synergies and expand the expansion area including North Africa. The decorative paint business is AkzoNobel's core business , so it has the ability to unlock the full potential of this part of the business, thereby helping to promote economic development in Africa. I believe that AkzoNobel is the most suitable company to take over our African business. In addition, Akzonobel will use its ample financing capacity to actively reinvest in the 'B to B business, key businesses and areas such as India and Europe' that can maximize Kansai Coatings' strengths, so as to continuously increase the value of the company.”

However, in November 2022, the Competition Commission rejected AkzoNobel's proposed merger to acquire Kansai's paints and coatings business in the region. In South Africa, it is known that AkzoNobel controls AkzoNobel Powder Coatings South Africa; AkzoNobel South Africa Limited; ICI Dulux Limited; AkzoNobel also produces Dulux brand paint products for various fields, mainly divided into decorative coatings and industrial coatings.

In South Africa alone, AkzoNobel has three manufacturing plants, two of which are in Gauteng (Alberton and Vanderbilt Park) and the largest one in KwaZulu-Natal (Umbogintwini). In addition to being sold domestically, the products produced by these factories are also exported to other countries in Africa.

On the other hand, Kansai Plascon Africa Limited and Kansai Plascon East Africa Limited are controlled by Kansai Paint and are subject to the laws of the Republic of South Africa and the laws of Mauritius. In South Africa, both companies operate through Kansai Plascon Africa Ltd., which produces decorative and industrial coatings under the Plascon brand.

It is reported that decorative coatings account for the largest share of Kansai Plascon Africa Co., Ltd.’s net sales. In total, these entities have a total of four manufacturing plants, two of which are located in Gauteng (Krugersdorp and Claywille), one in Kwa-Zulu Natal (Mobeni) and one in the Eastern Cape (Gqeberha).

Abroad, there are four manufacturing plants in Kansai. One is in Malawi, one is in Zambia and two are in Zimbabwe. The committee also noted in its report that Kansai Plascon Africa Ltd. produces colorants.

As the largest and second largest local manufacturers of decorative coatings, if the two companies merged, the Commission found that the result would be a significant reduction in competition in the decorative coatings manufacturing and supply market.

The Commission also found that both parties to the merger were close competitors in terms of price, quality and product range, and that the merger would eliminate competition between the two well-known brands, thereby reducing consumer choice.

In addition, the Commission believes that the proposed merger may give rise to substantial input foreclosure issues related to the manufacture and supply of colorants because the merging parties would have both the ability and the incentive to extinguish the rights to colorants of some of their competitors.

As a result of these findings and the lack of evidence that the specific technological, efficiency or other pro-competitive benefits of the merger would outweigh and offset the effects of preventing or reducing competition submitted by any entity, the Commission has since prohibited the transaction from proceeding.

On November 21 this year, the South African Commission once again banned the proposed merger. While they have not yet provided any justification, initial analysis suggests the deal could significantly prevent or reduce competition in the South African decorative coatings manufacturing and supply market.

It is reported that the parties to the merger have submitted a review request to the Commission Court, seeking an order to approve the merger, but they need to divest Kansai's Micatex brand (a sub-brand of the Plascon brand), and sign colorant supply commitments and other public interest-related commitments.

According reports, the South African Competition Tribunal heard testimony from factual and economic expert witnesses over 10 days, including evidence from a market test report on the proposed divestment. After considering all the evidence submitted, the proposed transaction was again prohibited. The reasons for the ruling will be announced at a later date.