AAT, mergers, public-interest, Uncategorized

PepsiCo/Pioneer merger: Minister Patel approves the Deal

In one of the few megamergers of the 2019/2020 season, the South African Competition Tribunal approved, subject to a wide range of public interest related conditions, PepsiCo’s acquisition of South Africa’s largest FMCG producers, Pioneer Foods.

In predictable fashion, this was not the type of transaction which would escape the attention of Minister Patel (who oversees the portfolio of the competition agencies). Despite not being a transaction which raises any competition concerns (i.e. there being no substantive overlap in product portfolios) and no material public interest concerns, the merger was an acquisition by a major international producer, PepsiCo and Minister Patel has openly expressed his intention to involve himself in acquisitions by foreign firms in an effort to extract a “socio-economic” tax from the merging parties. This was first seen in the Massmart/Walmart deal in 2012 but more recently in the AB-InBev/SAB and SAB/Coca-Cola mergers.

Competition lawyer, Michael-James Currie points out that a noteworthy difference between the legislative environment in terms of which the PepsiCo/Pioneer merger was assessed are the amendments to South Africa’s Competition Act. Under the new merger regime, public interest standards have been elevated, as a test, so as to be on par with the traditional competition analysis. Furthermore, the public interest grounds which the competition authorities are mandated to take into account have been expanded and now specifically include ownership levels among historically disadvantaged persons (commonly referred to as BBBEE policies in South Africa – Broad-Based Black Economic Empowerment).

The Competition Tribunal’s reasons are noteworthy. In a transaction of this magnitude, the Tribunal did not provide any reasons or findings as to the assessment of the merger. There was no analysis as to the relevant markets nor an assessment of the negative effects that the merger may have on the public interest factors.

The Tribunal’s reasons jump straight to the conditions ostensibly on the basis that the merging parties, the Competition Commission and Minister Patel had “agreed” to the conditions and, therefore, there was no reason to assess the transaction and the Tribunal could go ahead and rubber stamp the terms of the agreement.

Based on the majority of the conditions imposed, it is safe to assume that the transaction raised no material competition or public interest concerns. Notwithstanding that the transaction raised no adverse effects, the conditions imposed on the merger include:

  1. The creation of a BBBEE Workers Trust which will receive at least R1.6 billion (USD 10.6 million) in equity and the appointment of a non-executive director to the PepsiCo board together with voting rights of 12.9% in lieu of the equity for a period of 5 years;
  2. Employment:
    1. A moratorium on merger related retrenchments for a period of 5 years;
    2. An undertaking to maintain the aggregate levels of employment for 5 years; and
    3. An undertaking to create 500 direct new employment opportunities and 2500 indirect employment opportunities over the next five years.
  3. An undertaking to invest a cumulative amount of R5.5 billion (USD180 million) in production capacity over the next five years.
  4. Promote procurement from local suppliers and producers;
  5. Maintain all sales and distribution agreements currently in place for a period of two years;
  6. Contribute at least R600 million (USD60 million) to the creation of a development fund to be used for education, small medium enterprise development and agriculture programs.

Despite the substantial conditions imposed on the merger, Minister Patel surely finds himself in a catch twenty two. On the one hands, Minister Patel is a socialist at heart and has very much focused his efforts on utilising the Competition Act and authorities to promote industrial policy action and advance socio-economic objectives. Now, both as Minister of Trade and Industry and in light of President Cyril Ramaphosa’s drive to attract foreign direct investment, Minister Patel needs to tread a far more intricate line than ay previously the case (under President Jacob Zuma’s reign).

On the one hand, large foreign mergers present Minister Patel with a golden opportunity to extract non-merger specific public interest commitments – which merging parties often acquiesce to in order to preclude protracted litigation. On the other, Minister Patel needs to ensure that South Africa’s message to the rest of the world is that we would welcome foreign investment with open arms.

John Oxenham says that while it is perhaps regrettable that the Competition Tribunal did not grapple fully with the extent to which these types of conditions would have been objectively justifiable in terms of the new merger control regime or whether they amount to an overreach. While the Tribunal typically does not dedicate substantial resources to evaluating mergers when there is no dispute between the parties – and understandably so – the Tribunal should be mindful of rubber-stamping approvals of this nature. The message that this decision sends to foreign firms seeking to invest in South Africa is certainly not a warm and inviting message. The lack of analysis and objective justification for the conditions sends a strong message to merging parties that the most important aspect for purposes of obtaining merger approval is to engage and reach settlement terms with Minister Patel.

When the executive becomes the gatekeeper to merger control approvals (or competition law enforcement more generally), this very rapidly blurs the distinction of the separation of powers.

Standard

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s