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[2023] ZACT 1
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FLM Proprietary Limited v Everfresh Market Ballito (Pty) Ltd and Others (LM126Oct22) [2023] ZACT 1 (5 January 2023)
COMPETITION
TRIBUNAL OF SOUTH AFRICA
Case
No: LM126Oct22
In
the matter between:
FLM
Proprietary Limited
Primary
Acquiring Firm
and
Everfresh
Market Ballito (Pty) Ltd, Everfresh Market Hillcrest (Pty) Ltd and
Riverbend
Trade and Invest 11 (Pty) Ltd
Primary
Target Firms
Panel: Andreas
Wessels (Presiding Member)
Mondo
Mazwai (Tribunal Member)
Imraan
Valodia (Tribunal Member)
Heard
on: 21
December 2022
Order
issued on: 22
December 2022
Reasons
issued on: 05
January 2023
REASONS
FOR DECISION
Conditional
approval
[1]
On 22 December 2022, the Competition Tribunal (“Tribunal”)
conditionally approved the large merger
in terms of which FLM SA
Proprietary Limited (“FLM SA”), intends to acquire 51% of
the entire shareholding in respect
of Everfresh Market Ballito (Pty)
Ltd, Everfresh Market Hillcrest (Pty) Ltd and Riverbend Trade and
Invest 11 (Pty) Ltd (collectively
“the Target Firms”).
[2]
The reasons for the conditional approval follow.
Parties
to the proposed transaction and their activities
Primary
acquiring firm
[3]
FLM SA is 100% owned by Food Lovers Holdings Proprietary Limited
(“FLH”) which is subject to negative
control by Actis
Berry Limited (“Actis”). FLM SA does not control or own
any other firm.
[4]
FLH is the holding company and franchisor in respect of Food Lover’s
Market. It comprises corporate
retail stores, meat processing
facilities, distribution centres, an import and export business and a
food production business.
[5]
Food Lover’s Market is a supermarket chain compromising
franchised and corporate- owned grocery stores
which retail a wide
range of fast-moving consumer goods (“FMCG”). The FMCG
products include fresh produce, dry groceries,
butchery, perishable,
beverages, personal care, household groceries, baked goods and
confectionary. However, groceries (including
fresh produce) and
butchery products typically constitute the largest categories in many
Food Lover’s Market stores.
Primary
target firms
[6]
The primary target firms are (i) Everfresh Market Ballito Proprietary
Limited, t/a Food Lover's Market Ballito
(“Food Lover’s
Market Ballito”); (ii) Riverbend Trade and Invest 11
Proprietary Limited, t/a Food Lover's Market
Arbour Crossing (“Food
Lover’s Market Arbour Crossing”); and (iii) Everfresh
Market Hillcrest Proprietary Limited,
t/a Food Lover's Market The
Crescent (“Food Lover’s Market Crescent”).
[7]
Each of Food Lover’s Market Ballito, Food Lover’s Market
Arbour Crossing and Food Lover’s
Market Crescent are
wholly-owned subsidiaries of Everfresh Market Ballito Proprietary
Limited (“Everfresh Ballito”);
Riverbend Trade and Invest
11 Proprietary Limited (“Riverbend”) and Everfresh Market
Hillcrest Proprietary Limited
("Everfresh Hillcrest”),
respectively. [….] is a majority shareholder of each of
Everfresh Ballito ([….]
%), Riverbend ( [….] %) and
Everfresh Hillcrest ( [….] %).
[8]
The Target Firms do not own or control any other firms.
[9]
The Target Firms conduct franchised stores under the Acquiring
Group’s Food Lover’s Market chain
of corporate and
franchised stores. The Target Firms operate in the grocery retail
market in the KwaZulu-Natal province, more specifically
in the
greater Durban region.
Proposed
transaction and rationale
[10]
In terms of the Sale of Business Agreement, FLM SA will have sole
control over the Target Firms.
[11]
Post-merger, FLM SA and each of the sellers will enter into Joint
Venture Agreements in respect of the sellers' erstwhile
stores in the
following joint venture partner ratio: FLM SA: 51%, and the seller in
each case: 49%.
[12]
The merging parties submitted that the proposed merger is an
important step towards FLM SA expanding its presence in
the greater
Durban region and growing the Food Lover’s Market brand. A
number of prospective sites in the greater Durban
region have been
identified and it is the intention of FLM SA to apply its resources
towards developing the brand's presence in
the region, with improved
performance of the Target Firms providing a springboard.
Relevant
markets and impact on competition
[13]
The Competition Commission (“Commission”) considered the
activities of the merging parties and found that
the proposed
transaction results in a horizontal overlap in the market for the
retail of groceries as both the Acquiring Group
and the Target Firms
provide retail grocery products.
[14]
The Commission considered the competition effects of the proposed
transaction on the broad market for the retail of grocery
products
within a 5km radius, noting that there is no accretion to the Food
Lover’s brand as a result of the transaction.
[15]
The Commission found that the nearest retail store of the Acquiring
Firm to the target retail stores is 4.7km away from
one of the Target
Firms i.e., Food Lover’s Market La Lucia situated in La Lucia
Mall, Umhlanga. The distance between the
Food Lover’s Market
corporate-owned stores and the Target Firms’ stores in all
other instances exceed 15km.
[16]
The Commission also considered market concentration in relation to
the potential geographic overlap, basing its market
share
calculations on third party submissions in relation to revenues for
the 2021 financial year The Commission found that the
merged entity
will have an estimated market share of less than 10% within a 5km
radius of the Target Firms in Umhlanga.
[17]
Furthermore, the Commission was of the view that the proposed
transaction is unlikely to change the structure of the
market as the
Target Firms will continue to operate as Food Lover’s Market
stores under corporate ownership. Consequently,
the proposed
transaction will only change the ownership from franchisee to
corporate owned stores.
[18]
The Commission furthermore found that the proposed transaction raises
a vertical overlap as FLM SA supplies the Target
Firms with fresh
produce and ambient and perishable groceries. The Commission found
that the Target Firms also procure fresh produce
from other suppliers
in the market.
[19]
The Commission was concerned about the likely implications on the
existing Target Firms’ SME and/or HDP suppliers
in the event
that they cease to source products from them post-merger. However,
the merging parties agreed that the Target Firms
will continue to
procure fresh produce and ambient and perishable groceries from the
other suppliers.
[20]
The Commission also sought to determine the post-merger position
regarding the Target Firms’ existing suppliers
as the Target
Firms will, post-merger, form part of the Acquiring Group’s
Seed Change Programme (“SCD Programme”)
which seeks to
identify and develop small and medium-sized suppliers and provide
them with a platform in retail stores. The merging
parties submitted
that the SCD Programme will not have an impact on existing suppliers
as the SCD Programme is intended to identify
and support non-listed
suppliers. Pre-merger, the Target Firms do not source from the SCD
Programme beneficiaries, but post-merger
the SCD Programme
beneficiaries will be able to have their products sold in the Target
Firms but not to the exclusion of existing
suppliers.
[21]
In light of the above, we concur with the Commission that the
proposed transaction is unlikely to substantially prevent
or lessen
competition in any relevant market.
Public
interest
Employment
[22]
The Target Firms are being acquired as going concern enterprises and
therefore the employees will be transferred in terms
of
section 197
of the
Labour Relations Act 1995
as amended. Further, the merging
parties submitted that the merger will not result in any
retrenchments.
[23]
The Commission contacted the respective employee representatives and
only received a response from the Acquiring Group’s
employee
representative, who confirmed receipt of the non-confidential merger
report. No employment concerns were raised.
[24]
The Commission noted that the Acquiring Group undertook [….]
retrenchments in Food Lovers Holdings and FLM SA
combined in the past
12 months. The Acquiring Group retrenched drivers and butchery
employees. However, none of the retrenchments
took place in
KwaZulu-Natal. The Commission further noted that no retrenchments
took place in the Target Firms. The Commission
was of the view that
these retrenchments are unlikely to be related to the proposed
transaction as the retrenchments took place
because of restructuring
that was influenced by factors such as less production in the
butchery due to the centralization of production
to the butchery
factories, and poor volume of sales in relation to staff cost.
Effect
on greater spread of ownership
[25]
Neither the Acquiring Group nor the Target Firms have any HDP or
worker ownership.
[26]
The Commission was of the view that the proposed transaction does not
promote a greater spread of ownership, particularly
in relation to
HDPs and/or workers in terms of
section 12A(3)(e)
of the Act. The
Commission therefore requested the merging parties to provide
remedies to alleviate this concern.
DTIC
submissions
[27]
The DTIC raised concerns and requested the Commission to engage with
the merging parties with a view to recommend that
the Acquiring Group
will make firm commitments in terms of value and timeframes with
respect to new investments in franchise and/or
corporate owned
stores, upstream facilities and distribution stores in the region;
and furthermore that the expansion of new franchise
stores should
support HDP and/ or small and medium-sized businesses (“SME”)
as new entrants into the sector.
Tendered
remedies
[28]
The Commission invited the merger parties to make commitments in the
form of conditions which would address the above
concerns. After
further engagements, the merging parties agreed to certain
conditions.
[29]
We approved the proposed transaction subject to the following public
interest-related conditions as tendered by the merging
parties:
29.1. FLM SA shall
ensure that 3 (three) of the [….] stores it will open in the
KZN region in the next five (5) years
will have a significant HDP
component – either by virtue of being wholly-owned and operated
by HDP franchisees or will be
co-owned by FLM SA as to 51% and an HDP
Joint Venture partner as to 49%.
29.2. In order to
give effect to the realisation of the objective set out in the
conditions, FLM SA shall implement the following
initiatives:
29.2.1. FLM SA has
identified […] corporate stores it intends to develop. FLM SA
has also outlined [….] suitable
areas for franchising
opportunities. This is a total of [….] stores in the KZN
region in the next five (5) years.
29.2.2. Of the [….]
corporately owned stores, FLM SA shall ensure that one store is owned
and operated through a joint
venture arrangement with an HDP Joint
Venture partner who shall likely come from the ranks of FLM SA's KZN
employee base; this
being recorded that such employee will be an HDP.
The Joint Venture partner ratio will be 51% in respect of FLM SA and
49% in respect
of the HDP Joint Venture partner, with FLM SA funding
of no less than R [….] ) this being the start-up costs
required to
open this store. For the sake of clarity, in terms of the
corporate owned store, although FLM SA will fund the CAPEX required
to
open the Joint Venture store, the rights that arise from the Joint
Venture partner's participation in the Joint Venture are those
of an
equal partner (i.e.: the operating partner in the Joint Venture
Agreement is the person that runs the business for their
own and for
the collective benefit). The 49% interest is a substantive interest
which takes into account the fact that the HDP
shareholder will also
be an owner-manager of the business. The HDP individual will have
influence over the management and operations
of the business in a
manner aligned with the substantive and strategic nature of the HDP
individual's interest in the business.
29.2.3. The [….]
franchised stores identified, FLM SA shall ensure that two stores
shall be owned and operated by an
HDP franchisee, with the CAPEX
investment being borne by the HDP franchisee and provided that the
HDP franchisee meets FLM SA's
franchisee qualifying criteria, namely,
(i) access to at least 50% of the CAPEX investment in freely
available cash; (ii) the ability
to raise the remaining 50% through
funding; and (iii) experience in the grocery retail industry, in
particular, in the retail of
fresh and perishable products.
29.2.4. To the
extent that FLM SA will open additional franchised stores in the KZN
region in the next five (5) years, it
will endeavour to ensure that
the ownership structure contributes to the main objective set out in
the conditions.
[30]
The merging parties furthermore tendered the following conditions
related to supplier development:
30.1 FLM SA
shall ensure that the Target Stores will continue to procure from
existing small to medium and/or HDP suppliers
for a period of 5
(five) years from the implementation date provided that all suppliers
meet FLH's minimum listing requirements,
namely:
30.1.1. the farm on
which the fresh produce is grown, must have a Food Safety Management
System in place that has been assessed
against Local G.A.P (good
agricultural practice) intermediate level;
30.1.2. the pack
house in which the fresh produce is packaged must be in possession of
a Certificate of Acceptability issued
by the responsible Local
Authority and have a Food Safety Management System in place that has
been assessed against Local G.A.P
intermediate level (Local G.A.P is
a capacity building program developed by Global G.A.P, a farm
certification scheme owner. Global
G.A.P has written a number of farm
certification standards based on Good Agricultural Practice);
30.1.3. the
packaging and labelling of any pre-packed fresh produce conforms to
all legislative requirements, including but
not limited to the
Agricultural Produce Standards Act 119 of 1990 and all Regulations
promulgated thereunder; and
30.1.4. the quality
of the fresh produce accords with the specifications set by FLH's
buyers.
[31]
We are satisfied that the abovementioned imposed conditions address
any public interest concerns resulting from the proposed
transaction.
Conclusion
[32]
In light of the above, we conclude that the proposed transaction is
unlikely to substantially prevent or lessen competition
in any
relevant market. In addition, the imposed conditions address any
public interest issues that may arise from the proposed
transaction.
Accordingly, we approve the proposed transaction subject to the
conditions attached hereto as
Annexure “A”
.
Date:
05 January 2023
Mr
Andreas Wessels
Ms
Mondo Mazwai and Prof. Imraan Valodia concurring
Case
Manager: Theodora
Michaletos
For
the Merging Parties: Chris
Charter of Cliffe Dekker Hofmeyr Inc
For
the Commission: Tamara
Paremoer
and Nonhlanhla Msiza