|Our good friends at CONCURRENCES will be hosting the third instalment of their global antitrust conference next Thursday, September 23rd:|
The 2021 edition of Concurrences annual “Global Antitrust Hot Topics” conference will be held online, with a series of 3 webinars from Tuesday, September 21st to Thursday, September 23rd.
The third and last webinar will take place on Thursday 23 September from 3:30pm CEST / 9:30am EDT with a panel focusing on key issues for in-house counsel in global antitrust, merger enforcement and emerging regimes.
The conference will then close with a virtual reception where speakers and participants will be able to exchange their thoughts on this 9th edition.
Speakers will include:
Head of Competition Law
Vice President Mergers & Acquisitions
FREE REGISTRATION (CONFERENCE)
Following the 3rd panel, Concurrences is inviting you to the closing reception of this conference. It will allow you to exchange views with the participants and speakers involved in the different webinars of this edition.
This reception will take place via the platform Remo. During this virtual event, you will be able to speak or chat with other attendees and navigate from table to table on a virtual hotel floor.
This virtual panel will also be the opportunity for you to interact with the speakers during the live Q&A session at the end of the panel discussion.
The COMESA Competition Commission (“CCC”) is stepping up to the plate in 2021, and nobody can deny it. The days of ignoring the CCC’s jurisdiction over M&A deals, joint ventures, and even anti-competitive agreements in the Common Market for Eastern and Southern Africa are decidedly over, as the antitrust enforcer has significantly increased its presence and visibility in the legal and business communities over the past 6 months.
In its latest bid to be considered by the antitrust community to rank among the leading African competition-law agencies, the CCC has issued its first-ever failure-to-notify fine on mobile-phone infrastructure providers Helios Towers Limited (“Helios Towers”), Madagascar Towers S.A (“Madagascar Towers”) and Malawi Towers Limited (“Malawi Towers”) for failure to notify the transaction within the prescribed 30-day time period under Article 24(1) of the COMESA Competition Regulations of 2004. Helios Towers is a UK-based telecommunications company, listed on the LSE and a constituent of the FTSE 250 stock index; it operates in the Democratic Republic of Congo within the COMESA region.
As we previously reported in 2017 (here and here), to AAT’s knowledge the only other reported transaction that came close to being fined for a failure to be notified by the merging parties was the paints deal between Akzo Nobel and Sadolin / Crown Paints: “In that transaction, the parties boldly proclaimed that the CCC simply did not have any statutory jurisdiction at all,” says attorney Andreas Stargard, an expert in African competition law. Indeed, four years ago, Akzo’s spokespeople flatly claimed that their deal fell “outside the CCC’s purview,” as “[w]e do not have a merger going on; we are a fully independent plant, so COMESA does not come into the picture at all.”
The COMESA’s CID observed that the Parties should have filed their merger notification on 22nd April 2021 in accordance with Article 24 (1) of the Regulations, but breached it.
Interestingly, as to the comparatively low amount of the fine, the CCC took into account significant mitigating aspects pursuant to Article 26(6), including these five considerations:
- The breach was unintentional;
- The delay in filing did not yield any “discernible advantage” to the Parties;
- The breach did not result in any loss or harm in the market;
- The Parties cooperated with the Commission from the time they were engaged leading to the merger being notified on 2nd July 2021 following their initial engagement; and
- The Parties have no record of contravention with the Regulations.
Therefore, the CCC merely imposed a 0.05% fine (instead of the statutory maximum under Art. 24(5) of 10% of the parties’ turnover in the preceding calendar year in the common market). AfricanAntitrust.com confirmed this 0.05% figure with a CCC executive, clarifying that this percentage amounted to a fine of U.S. $102,101. Mr. Stargard noted his understanding that the CCC’s positioning of this fine at the extremely low end of the permissible spectrum denotes not only the parties’ significant cooperation and other mitigating factors, outlined above, but also represents a nod by the Commission to the fact that this is the first-ever enforcement action of its kind, and therefore “should not set a precedent in both substance and amount.”
The Parties may appeal the decision (available to AAT readers here) to the full Board of Commissioners in accordance with Article 15(1)(d) of the Regulations as read together with Rule 24 (e) of the COMESA Competition Rules of 2004.
The Commission’s Registrar, Ms. Meti Disasa, stated that “the fine was the first of a kind for breach of the Regulations. The Commission therefore wishes to remind Undertakings in the Common Market to be cautious of the prescribed timeline for notifying mergers in under Article 24 (1) of the Regulations.” Ms. Disasa warned undertakings operating in the Common Market “to comply with all other parts of the Regulations especially with respect to anti-competitive conduct as the Commission shall henceforth not take lightly any breaches of the regional competition law,” according to the CCC’s press release, also noting that “the decision to fine has no impact on the Commission’s assessment of any competitive effects of the merger, which is still ongoing.”
By Charl van der Merwe
The South African Competition Commission (SACC) made headlines with its first prohibition of an intermediate merger that was based solely on public-interest grounds.
Emerging Capital Partners (ECP), a private equity firm founded in the US, was to acquire all Burger King assets from South African Grand Parade Investments, a South African majority black owned entity.
The SACC, while finding that the proposed transaction will have no actual impact on competition, prohibited the transaction on the basis that the transaction will have a substantial negative effect on “the promotion of greater spread of ownership, in particular to increase the levels of ownership by historically disadvantaged persons” (HDPs).
The SACC found that the merger would lead to a 68% reduction in the shareholding of HDPs in the target entity.
As John Oxenham, director at Primerio points out, “public interest” considerations have long been a feature of competition law in South Africa, particularly in relation to merger control. In this regard, mergers, which may otherwise be deemed problematic, could be ‘justified’ on public interest grounds. Public interest, while initially limited to employment, was first informally expanded through notable mergers such as Walmart/Massmart (2011) and AB Inbev/SAB (2016) where public interest conditions were imposed related to empowerment and ownership, through agreement by the merging parties.
The Competition Amendment Act, which largely became effective in 2019, formally expanded the recognised public-interest factors contain in Section 12A(3) of the Competition Act to include the “promotion of a greater spread of ownership, in particular to increase the levels of ownership by historically disadvantaged persons and workers in firms in the market”. Further, the public-interest element was elevated to a separate and self-standing assessment, which must be assessed as an integral part of the merger assessment.
While the Competition Act, as amended, has made provision for mergers to be assessed and prohibited on pure public interest grounds since July 2019, the Burger King merger is the first merger to be prohibited on this basis.
SACC Commissioner, Tembinkosi Bonakele noted that the SACC had no choice but to recommend that the merger be prohibited as, clearly, the merger would result in a reduction of HDP ownership from 68% to 0%, which the SACC believes is substantial. This concern was raised with the merging parties, who were unable to address the concern in a suitable manner.
Regarding the broader impacts of the decision on investment and merger control in South Africa, Bonakele noted that the SACC is merely a statutory agency obliged to impose the law as it currently stands and, according to the Bonakele, there is no uncertainty regarding the transformation objectives which had been introduced to the Competition Act. The SACC is clear on its mandate in terms of the Competition Act, as amended, and will continue to implement such mandate.
The legal basis for the decision is clear, however, as is the case with any new legislation, implementation thereof less so. At the time of the enactment of the amendments to the Competition Act, it was well recognised that the practical implementation of these provisions will be critical and that it may lead to significant unintended consequences – including adverse effects on consumer welfare and even broader public interest. Primerio director, Michael-James Currie points out that, ironically, HDP-owned target firms might be negatively prejudiced by this criterion, as the pool of potential buyers is limited (and hence the value) if non-black owned firms are not able to successful acquire the target’s business.
It is not clear, at this stage, what the assessment in the Burger King merger entailed, what evidence was put forward by the parties and what the relevant counterfactual may have been. It is also not clear whether the transaction presented pro-competitive elements which outweigh the adverse effect on public interest – similar to what is required in terms of public interest where a merger may have an adverse impact on competition. The SACC confirmed, however, that the transaction was ultimately prohibited after ECP failed to adhere to requests to proffer conditions relating to shareholding and empowerment.
The SACC has the power to assess and prohibit intermediate mergers. Accordingly, the SACC’s prohibition can only be challenged by way of a request for consideration, to be filed by the merging parties, to the South African Competition Tribunal. The SACC opined, however, that unless the acquiring firm is prepared to make concession to remedy the public interest concerns, the decision is unlikely to be overturned.
Grand Parade has been vocal in its dissatisfaction of the prohibition. The matter will be highly contested, and it is not uncommon for transactions to be approved on a request for consideration to the Tribunal. Furthermore, any decision by the Tribunal is likely to be taken on appeal to the Competition Appeal Court and likely also the Constitutional Court.
The Burger King decision, regardless of its eventual outcome, will leave a lasting precedent and shape merger control proceedings in South Africa going forward.
By Gina Lodolo and Estelle Naude
South Africans have been left with dropped jaws at the news that Mr Price Group has entered into an agreement to acquire the local Yuppiechef, known for their quirky, luxury kitchenware.
The owners of Yuppiechef are certainly pleased with their agreement with Mr Price Group to have 100% of their issued share capital acquired in cash for around R470 million and stated that “the timing is right for Yuppiechef to move forward with its growth ambitions with a partner who has a shared vision and the resources to help achieve this. I am excited about our future as a part of the Mr Price Group. They are a business which prides themselves on innovation and growth and we are strategically aligned in our plans. We share similar cultures and values which will make this an easy fit for both parties.”
According to Mr Price Group, the acquisition will provide the opportunity for Mr Price Group to expand their market share by reaching a high-end customer base in the kitchen appliance department, as well as expand their product variety from that which is already part of the Mr Price Group offering. Yuppiechef has a larger online presence than Mr Price Group, as such, Mr Price Group will reap competitive benefits from the online presence of Yuppiechef, which will enable them to become a more effective competitor with the likes of inter alia, Takealot.
According to the voluntary announcement from Mr Price Group regarding the acquisition of Yuppiechef, “the targeted effective date is subject to the fulfilment of both regulatory and commercial suspensive conditions which includes competition authority approval.” As such, it is important to note that section 13(3) of the Competition Act 89 of 1998 (“Act”) states that “the parties to an intermediate or large merger may not implement that merger until it has been approved, with or without conditions, by the Competition Commission.” Thereafter, according to section 12A(2) of the Competition Amendment Act 18 of 2018 (“Amendment Act”), a proposed merger must be evaluated on both competition and public interest grounds.
Accordingly, although South Africans are excited about the success story of the local Yuppiechef start-up, it is important to note that the proposed acquisition is still subject to scrutiny from the competition authorities before implementation of the merger can take effect.
Further, Yuppiechef is not the only home-grown retail store that Mr Price Group has sunk it’s teeth into as they seem untouched by the COVID-19 pandemic in their acquisition of Power Fashion, which was approved by the Competition Tribunal in March 2021. The acquisition of Power Fashion, with 170 retail stores, places Mr Price Group in an even stronger competitive position against the likes of Pep and JAM Clothing. According to the South African Primerio team, this acquisition places Mr Price Group in a strategic position to compete more vehemently with the lower end market, while Mr Price Group’s proposed acquisition of Yuppiechef places Mr Price Group in a position to access the higher end market. It seems that Mr Price Group intends to diversify its market share to such an extent that they are able to access the entire market, being both the lower end and the higher end consumer through the acquisition of Power Fashion and proposed acquisition of Yuppiechef respectively. The large scope of retail outlets provided by Power Fashion allows Mr Price Group to expand their physical store offering, while the online retail side will soon be catered for by the acquisition of YuppieChef.
According to Moneyweb the Mr Price Group’s JSE listing is “around 64% up on a year ago when South Africa went into its first Covid-19 lockdown”. Accordingly, Mr Price Group’s diversification and broader acquisition of market share may be one of the reasons that Mr Price Group finds itself at a stock high, unfettered by effects of the COVID-19 pandemic.
BREAKING NEWS: The COMESA Competition Commission (“CCC”) issued new guidance today in relation to its application of previously ambiguous and potentially self-contradictory merger-notification rules under the supra-national COMESA regime. As Andreas Stargard, a competition practitioner with Primerio notes:
“This new Practice Note issued by Dr. Mwemba is an extremely welcome step in clarifying when to notify M&A deals to the COMESA authorities. Specifically, it clears up the confusion as to the meaning of the term ‘to operate’ within the Common Market.
Prior conflicts between the 3 operative documents (the ‘Rules’, ‘Guidelines’, and the ‘Regulations’) had become untenable for practitioners to continue without clear guidance from the CCC, which we have now received. I applaud the Commission for taking this important step in the right direction, aligning its merger procedure with the principles of established best-practice jurisdictions such as the European Union.”
The full text of the new Guidance is as follows:
PRACTICE NOTE ON THE COMMISSION’S APPLICATION OF THE TERM “OPERATE” UNDER THE COMESA COMPETITION REGULATIONS AND THE “APPLICATION OF RULE 4 OF THE RULES ON THE DETERMINATION OF MERGER NOTIFICATION THRESHOLDS AND METHOD OF CALCULATION”
February 11, 2021
CCC – MER – Practice Note 1 of 2021
The COMESA Competition Commission (the “Commission”), having received several queries from merging parties and their legal representatives in relation to the application of certain merger control rules, hereby issues this practice note on its application of the term “operate” under the COMESA Competition Regulations, 2004 (the “Regulations”) and the COMESA Competition Rules, 2004 (the “Rules”) and its approach to the application of Rule 4 of the Rules on the Determination of Merger Notification Thresholds and Method of Calculation (the “Rules on the Determination of Merger Notification Thresholds”).
- Application of the Term “Operate”
Article 23 of the Regulations establishes the jurisdiction of the Commission to assess cross-border mergers where the term “operate” is central to the application of Article 23 of the Regulations which, inter alia, applies where “…both the acquiring firm and target firm or either the acquiring firm or target firm operate in two or more Member States…”.
The Regulations have not defined the term operate. However, paragraph 3.9 of the COMESA Merger Assessment Guidelines of 2014 (the “Merger Guidelines”) states that an undertaking is considered to operate in a Member State for purposes of Article 23 (3)(a) of the Regulations if its operations in that Member State are substantial enough that a merger can contribute to an appreciable effect on trade between Member States and restrict competition in COMESA. Further, the Merger Guidelines state that “…an undertaking operates in a Member State if its annual turnover or value of assets in that Member State exceeds US$ 5 million…”.
It should be noted that at the time the Merger Guidelines became applicable, the prescribed merger notification thresholds envisaged under Article 23(3)(b) of the Regulation, were set at US$ 0. This effectively meant that all merger transactions satisfying the regional dimension requirement of Article 23 (3)(a) of the Regulations were required to be notified to the Commission, irrespective of the magnitude of the merging parties’ operations in the Common Market. In line with the Regulations’ objectives, the Commission sought to only capture those mergers likely to affect trade between Member States and restrict competition in the Common Market. As a result, the Merger Guidelines attached a quantitative definition to the term ‘operate’, as meaning the turnover or value of asset in a Member State to be at least US$ 5 million.
All stakeholders are hereby informed that following the enactment of the Rules on the Determination of Merger Notification Thresholds, the definition of ‘operate’ under paragraph 3.9 of the Merger Guidelines in no longer applicable as the Rules take precedence over the Guidelines. In view of this, paragraph 3.9 of the Guidelines has been rendered ineffective with the coming into force of Rule 4 of the Rules on the Determination of Merger Notification Thresholds. Therefore, for purposes of merger notification in line with Article 23 of the Regulations, all stakeholders should be referring to Rule 4 of the Rules on the Determination of Merger Notification Thresholds which stipulates that:
“Any merger where both the acquiring firm and target firm, or either the acquiring or the target firm, operate in two or more Member States, shall be notifiable if:
- the combined annual turnover or combined value of assets, whichever is higher in the Common Market of all parties to a merger equals to or exceeds US$50 million; and
- the annual turnover or value of assets, whichever is higher, in the Common Market of each of at least two of the parties to a merger equals or exceeds US$10 million, unless each of the parties to a merger achieves at least two-thirds of its aggregate turnover or assets in the Common Market within one and the same Member State.”
2. Application of Rule 4 of the Rules on the Determination of Merger Notification Thresholds
Rule 4 applies to merger transactions that satisfy both the “Regional Dimension” and “Notification Thresholds” requirements under Article 23 of the Regulations. Rule 4 is cumulative and must be satisfied entirely before a merger is notified to the Commission. Rule 4 is therefore applied as follows:
Firstly, Regional Dimension must be satisfied. This is contained in the chapeau of Rule 4 which requires the merging parties to operate in at least two COMESA Member States. Further, it gives three alternative scenarios under which merging parties can operate in Member States namely:
- Both the acquiring firm and target firm can operate in at least two Member States;
- The acquiring firm can operate in at least two Member States, while the target firm can operate only in one Member State; or
- The target firm can operate in at least two Member States, while the acquiring firm can operate only in one Member State.
Regional Dimension will therefore be met once any of the three scenarios is satisfied and if they are, the next step is to confirm whether Rule 4(a) is satisfied. Rule 4(a) must be satisfied by confirming that either the combined annual turnover or combined annual assets in the Common Market of all the parties to the merger equals to at least US$ 50 million. The option to use combined annual turnover or combined annual asset shall depend on the higher amount of the two total values.
Assuming the Regional Dimension and Rule 4(a) is satisfied, the next step is to confirm whether the merging parties satisfy Rule 4(b). To satisfy Rule 4(b), it should be demonstrated that the annual turnover or annual asset, whichever is higher, of each of at least two of the parties in the Common Market is at least US$ 10 million. Whether to use annual turnover or annual asset depends on the higher of the two. It should also depend on the measure (turnover or asset) used in Rule 4(a).
As an illustration, assume annual combined turnover is higher than annual combined asset under Rule 4(a). This shall mean annual combined turnover will be adopted under Rule 4(a). Therefore, proceeding to Rule 4(b) shall mean confirming whether the annual turnover of each of at least two of the parties in the Common Market is at least US$ 10 million.
The final step in applying Rule 4 is to confirm if the 2/3 exemption rule holds. Given that Rule 4 must be applied in its entirety, the 2/3 exemption rule must also be read in conjunction with the preceding limbs in establishing the thresholds i.e. Rule 4(a) and Rule 4(b). For both the collective and individual thresholds requirements under Rule 4(a) and 4(b), it is the higher value of the turnover derived or asset value held which must be considered. In this regard, the 2/3 rule is meant to apply once the higher value has been established. It would be contrary to the principles and spirit of the 2/3 rule to rely on a different financial criterion to exempt a notification than the criterion used to establish a notification requirement under first two limbs of Rule 4.
The COMESA Competition Commission has announced that it is accepting applications for the position of Director of the CCC until the end of October. Says Andreas Stargard, an antitrust practitioner with Primerio Ltd.:
“The post is currently held by Dr. George Lipimile, the agency’s first and, therefore by definition, most influential chief. Dr. Lipimile has certainly steered the comparatively young Commission into the right direction during its formative years, notably overseeing a complete makeover of the merger-notification procedure early on in the process, after much criticism of the initial system.
We are curious to see who will replace him in March 2021, as Dr. Lipimile’s term expires at the end of February. Will it be a true competition-law expert, or will it be a politically-motivated appointment made by the COMESA Secretariat, pushing for someone who is more of a trade lawyer or, worse, economic protectionist. What the CCC needs now to continue gaining international recognition and respect (from its peer agencies, as well as from commercial parties!) is a qualified antitrust attorney who understands the law & economics aspect of competition practice, and who will apply these principles neutrally throughout the COMESA region!”
Back in 2015, we quoted Mr. Stargard as follows, suggesting a path forward for the agency:
“If the CCC steps up its enforcement game in the non-transactional arena, it could become a true force to reckon with in the West. I can envision a scenario where the CCC becomes capable of launching its own cartel matters and oversees a full-on leniency regime, not having to rely on the ‘follow-on enforcement’ experience from other agencies abroad. The CCC has great potential, but it must ensure that it fulfills it by showing principled deliberation and full transparency in all of its actions — otherwise it risks continued doubt from outsiders.”
It remains to be seen who the Director’s replacement will be and which of these topics will dominate her or his agenda, if any. The Director’s term is for 5 years, offering a salary of between $70,000 and $83,000. Details on the opening can be found here. Only Member State nationals can apply. Interestingly, COMESA member states’ antitrust enforcers likewise posted the announcement on their individual web sites:
The COMESA Competition Commission (“CCC”) hosted a live webinar today on the impact of COVID-19 on merger regulation and enforcement within the common market in the COMESA region. The seminar was aptly sub-titled “Challenges and Way Forward,” and the CCC representatives, in particular Dr. Willard Mwemba, did indeed lay out the problems faced by them and the measures proposed and taken to alleviate them.
COVID-related business and national competition agency closures have led to “significant delays in information gathering” from NCAs, third parties, and merger parties themselves.
CCC has relaxed the hard-copy filing requirements for merger notifications.
The concept of non-competition factors (i.e., the public-interest element) was also raised, as there is a “growing debate on whether the pandemic may necessitate changes in [the] substantive assessment of mergers, e.g., towards more lenient consideration of failing firms.”
That said, the CCC emphasized that its adjustment to enforcement actions should not be construed as any weakening of competition principles taking place. The harmonization and coordination among the COMESA member countries’ agencies and the CCC remain a critical element of the operation of the single market.
By Ruth Mosoti, Esq. (Primerio Ltd. Kenya practice head)
On 4th May 2020, the Kenyan Competition Tribunal made its first decision after considering the application for review of the Airtel-Telkom merger where they contested 7 out of 8 the conditions imposed. The competition Act allows the tribunal to look at the merits of the Competition Authority’s (CAK) decision therefore and has power to confirm, modify or reverse any order issued either partially or wholly. In this particular decision the Tribunal did exercise all these powers. The decision of the Tribunal was guided by whether CAK’s decision promoted or protected effective competition in the telecommunications sector, enhanced the welfare of the Kenyan people and prevented unfair and misleading conduct throughout Kenya among other things.
First, the Tribunal confirmed the condition set in relation to employment. This public interest consideration varies on a case by case basis hence the difference in its application. In some mergers CAK has limited the retention of employees to 12 months and in others it is limited to 3 years. In this particular case, it was limited to 2 years. The tribunal agreed that due to the specialized nature of the industry and the presence of only two players in that market post-merger, then the condition imposed in regard to employment was justified.
Secondly, the 2 conditions in relation to spectrum licensing and management were varied in their entirety primarily because it was found that CAK had no basis to interfere with licensing conditions imposed by the Communications Authority. It was their view that the Communications Authority was the competent authority to govern the licensing terms and, in the event, that there are any competition concerns then, these two regulators would consult. The imposition of these two conditions were deemed to be unnecessary. It was emphasized that competition law is there to protect competition and not competitors.
Thirdly, the condition on restricting entering into any sale agreement was modified to bring clarity. As imposed by CAK any form of sale was prohibited which was found to be blanket, therefore unreasonable. The Tribunal clarified that the merged entity would be able to enter into sale agreements in the ordinary course of business however the merged undertaking cannot be sold for a period of 5 years. In addition to this, the condition of audit in case the merged undertaking became a failing firm was done away with because CAK failed to justify why it applied the “failing firm doctrine” post-merger. In any event should this happen, the Tribunal reasoned that this would require approval from CAK therefore an unnecessary condition at this point.
The conditions in relation to contracts managed by Telkom on behalf of the government were retained however the tribunal clarified that this was not to interfere with the freedom of contract between the Kenyan government and the merged entity. While it is unconceivable how the government would agree to preferential terms while entering into these contracts without offending the law (this would be to my understanding that you pay for a government service/product depending on who you are which would be outright discriminatory)
Lastly, imposing a requirement for annual reports to CAK with no time limit was not justified. The appellants asked for 2 years and the Tribunal obliged. This was based on the fact that most of the conditions imposed on the merged entity after the review would lapse after 2 years therefore the tribunal deemed two years to be a justifiable time frame to comply with the 8th condition.
The Tribunal’s take on the procedural issues raised by the appellants is quite interesting. On the issue as to what constituted a “fair administrative process”, it was of the opinion that CAK had accorded the appellants adequate notice and opportunity to respond. To contextualize this, the appellants received a notice of a proposed decision and had a meeting on 25th October 2019, the Appellants contested these conditions and on the same date after the meeting, CAK sent amended conditions. The appellants advocates asked for time to consult their clients on the amended conditions. The CAK however went ahead to issue a notice of determination on 31st October 2019 which was 6 days later. CAK’s position on this was that the board having sat, the decision issued on 31st October 2019 was final. This being the case, the only avenue available to the Appellants was to challenge it before the tribunal. The position by the tribunal that the Appellants had been given adequate time to challenge procedural fairness bearing in mind that the 30 days were to lapse on 24th November 2019 is baffling at best.
In conclusion, this decision being the first of has accorded practitioners an insight as to how CAK arrive at its decisions as well as the considerations of the tribunal in case of appeals. We now look forward to its determination of the other appeals in relation to RTPs before it.
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:
- 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;
- A moratorium on merger related retrenchments for a period of 5 years;
- An undertaking to maintain the aggregate levels of employment for 5 years; and
- An undertaking to create 500 direct new employment opportunities and 2500 indirect employment opportunities over the next five years.
- An undertaking to invest a cumulative amount of R5.5 billion (USD180 million) in production capacity over the next five years.
- Promote procurement from local suppliers and producers;
- Maintain all sales and distribution agreements currently in place for a period of two years;
- 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.
As reported by AAT here last month, the PepsiCo / Pioneer Foods mega deal has caused the parties to agree to a number of conditions imposed by the South African Competition Commission, despite there being no material overlap between the parties which give rise to any legitimate competition concerns.
Now, COMESA has joined the field, with its Competition Commission likewise reviewing the transaction’s effect on the common market under its jurisdiction, pursuant to Notice 39/2019. The Competition and Tariff Commission of Zimbabwe will likely provide its confidential input as to the transaction to the CCC. According to local news outlets, the proposed U.S. $1.7 billion takeover by American conglomerate giant Pepsi has sent Zimbabwean and other local and regional competitors “into panic mode.”
In the specific context of the Zimbabwean non-alcoholic beverage market, local beverage producer Varun Beverages sells Pepsi’s brands and already enjoys significant tax benefits from its “special economic zone” status. The local competitors’ concern is that, if Varun also obtains the full rights to distribute all of Pioneer’s FMCG products, it will put smaller rivals at a disadvantage.
Taken together with other regional taxation incentives (in Zambia, Varun had temporarily been granted a deferment of value-added tax and excise duty for five years, which was however reversed upon a finding of likely illegality), the impact may indeed affect the competitiveness of Varun’s rivals. However, it remains to be seen whether the Pepsi/Pioneer deal itself has any material adverse competitive effects overall, as this is the transaction under review after all, comments legal practitioner Andreas Stargard. “Besides, merger reviews pursuant to established antitrust law concern themselves not with the welfare of competitors, but with the maintenance of overall competition in the total relevant market. Just because some rival is hurt does not make the deal anti-competitive per se,” says Stargard. Moreover, there are major competitors still to reckon with, such as Delta brands, which has historically dominated the Zimbabwean market, and only recently lost market share to Varun, which has budgeted US$150 million in investments over the next five years. “These investments and the increased rivalry between a potentially strengthened Varun and the existing market leader Delta may actually be considered pro-competitive indicators by the competition regulators, such as the CCC and the Zim authorities,” concludes Stargard.