The Competition Commission has recently prohibited a transaction between Emerging Capital Partners Africa (ECP) and Grand Parade Investments, a private equity firm listed in the Johannesburg Stock Exchange.
The transaction would have seen ECP acquire Grand Parade’s stake in Burger King South Africa (BKSA) as well as Grand Foods Meat Plant (Pty) Ltd.
The transaction was prohibited by the commission due to the acquiring firm, ECP, not having the correct demographic makeup approved of by the state. Namely, it did not have any previously disadvantaged people in its ownership structure.
Unwarranted and arbitrary intervention by the state
The inner workings and technicalities of the deal are not the focus of this piece. What is, is the economic environment created by the deal, or, entrenched since this environment is not a new thing in the South African economic reality and should be expected.
Unwarranted and arbitrary intervention by the state in the economic actions of citizens or groups of citizens constituted in corporations of one kind or the other, is staple for us in the southern tip of Africa.
The commission itself cited how there weren't any competitive effects that could be foreseen by allowing this transaction to go through but non competitive considerations, specifically public interest considerations as per the rationale of the legislation in Section 12A(3)(e). These considerations on their own were extenuating enough that the transaction was fully prohibited. Why? Well, because the people acquiring the firm weren’t the correct demographic according to the state.
There was no substantive lessening of competition that was going to result from the merger/transaction. Acquisitions/transactions of this kind are considered mergers for purposes of the Competition Act in South Africa when they satisfy the 'control' element.
Control being present if another firm, because of the transaction, acquires control over the operations of another.
Therefore, the 'primary' focus of Competition Law, which is the promotion of a competitive market, wasn't the main reason for the transaction not being approved, but rather the promotion of a better spread of ownership to previously disadvantaged persons. ECP had a PDI ownership stake of 68% whilst ECP had a significantly lower level than that.
The precedent the Competition Commission is seeking to establish is a dangerous one to say the least. If the Competition Tribunal, which I am sure will hear the appeal of this decision by the commission, comes to the same conclusion, then transactions in South Africa will change fundamentally.
The implications for foreign direct investment
The argument will be that for any transaction large enough to meet the threshold of a merger and thus attract the attention of the commission, the individual/s buying the firm must be a member of a historically disadvantaged group. If they aren't, then chances are the transaction will be prohibited.
The fact that the historically disadvantaged persons who have a stake in Grand Parade genuinely want to sell their assets to ECP is not important to the Competition Commission.
What the parties engaging in a trade want is wholly inconsequential, what matters is that the Competition Commission approves of the demographic makeup of the entities making the transaction. Things like the preferences of the people engaging in the trade be damned.
The implications for foreign direct investment would be horrible. Since the likelihood of a foreigner being a member of a historically disadvantaged group is slight, it means, investments from companies that don't have historically disadvantaged persons will be disallowed.
An absurdity, primarily because the demographic makeup of the people trading should not matter, only the fact that the trade is desired by both parties is of relevance. This though is a consideration that must be made as per the Competition Act.
Public interest, which is the basis upon which this transaction was disallowed, is hardly ever the sole reason for the disallowing of a transaction fully. South Africa is a world leader in invoking the public interest like say the demographics of ownership in a company, job security for employees of the target firm, and many other non-economic, public interest standards which capital must fulfil prior to investing.
The decision will most likely be appealed. There is a likelihood, according to precedent, that the merger, subject to conditions, will be approved by the tribunal, as was the case in the merger between Walmart Stores Inc/Massmart Holdings Ltd. Here the public interest considerations were a major hurdle but the tribunal actually approved the transaction, with conditions that addressed the case in point, i.e., jobs.
Walmart, as the acquiring firm, for instance, had to use a certain percentage of local suppliers and guarantee job safety for a certain amount of people. This could be the case with the ECP and Grand Parade Investment deal. For the health of our economy in the future, we can only hope that the tribunal, at the very least, approves the merger subject to conditions.
In an environment wherein our economy is in dire need of capital being injected into its veins, as well as job creation, which was guaranteed by ECP as its motivations for acquiring Grand Parade's stake.
The benefit of job creation that would come as a result of ECP acquiring Grand Parade's stake in BKSA, as well as the effect that would have on the broader economy, was disregarded by authorities, all because the people who will be creating said jobs for South Africans, aren't historically disadvantaged.
Even though the historically disadvantaged people who have a stake in Grand Parade would like to sell to the HDI less ECP.
Competition law in South Africa is hailed by academics in their circles for being among the best in the world, yet this is not the case when one actually looks at the competitiveness of the South African economy.
The Competition Commission seems hellbent on making doing business in South Africa extremely difficult and costly given the amount of legal fees that must be spent on getting such deals through. We can only hope sense prevails at the tribunal as we continue our painful march down the road to serfdom.
This article was first published on BBrief on 1 September 2021.