Summary of Judgment

1. Introduction

The proceedings concerned the approval of a large merger before the Competition Tribunal of South Africa. The merger was between Old Mutual Bank Limited (described in the reasons as the acquiring firm, operating through the Old Mutual Group’s banking structure) and the Permanent Division of Nedcor Bank Limited (referred to as the target business, being a division of Nedcor Bank Limited, itself a subsidiary within the Nedcor group).

The Tribunal approved the merger without conditions on 7 March 2002, and subsequently furnished written reasons dated 10 April 2002. The reasons recorded the Competition Commission’s investigation and recommendation that the merger be approved without conditions, and then explained the Tribunal’s agreement with that recommendation.

The general subject-matter of the dispute was whether the transaction was likely to result in a substantial lessening or prevention of competition in any relevant market for retail banking services, and whether any public interest considerations, particularly employment effects, warranted prohibition or conditions.

2. Material Facts

Old Mutual Holdings Bank Limited (“OMBH”) was described as a bank holding company with no interests other than its shares in Old Mutual Bank Limited (“OMBL”), which was a wholly owned subsidiary of OMBH. Old Mutual (SA) Limited (“OMSA”) owned 100% of the issued share capital in OMBH and was itself a wholly owned subsidiary of Old Mutual plc.

Nedcor Bank Limited was a wholly owned subsidiary of Nedcor Limited. The reasons recorded that OMSA owned 15% of the shares in Nedcor Limited, and that a wholly owned subsidiary of OMSA (OMLACSA) held 36% of the shares in Nedcor Limited. On that basis, the reasons stated that OMSA controlled Nedcor Limited, and therefore indirectly controlled Nedcor Bank. The Tribunal observed that it therefore appeared that OMSA controlled both the acquiring and target firms.

The transaction arose after Nedcor Bank decided to rationalise its Permanent Division due to perceived stagnancy. Instead of closing the business entirely, Nedcor Bank and the Old Mutual Group entered into a joint venture arrangement. Through the transaction, 45 branches of the Permanent Division were to be injected into OMBL.

Post-merger, it was intended that Nedcor and OMBH would each own 50% of OMBL. The mechanism recorded was that Nedcor Bank would acquire from OMSA 50% of the entire issued share capital of OMBH, with the remaining 50% retained by OMSA. Since OMBH would continue to own and control OMBL, this would result in joint ownership and control of OMBL by Nedcor Bank and OMSA. The reasons also recorded provisions allowing either party to become a majority shareholder by acquiring one share from the other, although the parties characterised the arrangement as essentially a 50/50 structure.

Branding and business rationale were also recorded. The Permanent Bank brand was intended to run in parallel with the Old Mutual brand during integration, after which the Old Mutual brand would be used exclusively. Nedcor Bank viewed the merger as a revenue-growth initiative rather than a cost-cutting exercise.

In defining the relevant market, the Tribunal recorded that both firms participated in the broader market for financial services, and identified the relevant product market as the market for personal retail banking services, subdivided into cash/cheque and transmission accounts, deposits, overdraft facilities, mortgages, and credit cards. The overlaps relied upon were in retail deposit taking, the provision of mortgages, and asset-backed loans. The Tribunal recorded that the services were provided throughout South Africa through various channels, and that there was no evidence of local or regional competition, leading to the finding that the relevant geographic market was national.

The Tribunal recorded market shares in the relevant sub-markets. In retail deposit taking, Nedcor’s estimated market share (including Perm) was 17.9%, while OMBL’s was 0.03%. In mortgage bonds, Nedcor’s estimated market share (including Perm) was 17.7%, while OMBL’s was 0.07%.

A limited factual dispute was recorded regarding asset-backed loans. The merging parties stated that it was not possible to compute market shares because the product was not identified for DI return purposes, and asserted that OMBL’s market share would be 0% (i.e., it did not participate). The Competition Commission, however, stated it had evidence that OMBL did participate and estimated its market share at approximately 0.017%, based on lending figures over December 2001/January 2002 compared to total loans in South Africa over that period.

On public interest, the Tribunal recorded that Perm employed 1085 individuals in South Africa, with 588 employed in the sold business and 497 in branches not forming part of the sold business. It was stated that all employees of the sold business would continue to be employed by OMBL, while those employed in the other branches would lose their jobs. The parties contended that these job losses were not directly attributable to the merger but to an efficiency drive by Nedcor Bank, and asserted that absent the transaction all 1085 employees would lose their jobs due to closure.

The Tribunal further recorded that there would be job losses at OMBL as well, with the parties estimating that a maximum of 200 employees would be retrenched as a result of the merger, split between senior managerial and clerical staff. The unions representing employees, IBSA and SASBO, indicated they had no objection to the merger, and the merging parties undertook to explore alternatives to compulsory retrenchments through measures such as redeployment, retraining, and voluntary early retirement, in consultation with the unions. The unions were recorded as being satisfied that the Labour Relations Act provided sufficient protection for their members.

3. Legal Issues

The central legal question was whether the merger was likely to lead to a substantial lessening or prevention of competition in any relevant market, assessed through the Tribunal’s identification of the relevant product and geographic markets and the competitive effects within the relevant sub-markets where overlap existed.

A further legal question was whether there were substantial public interest issues arising from the transaction that warranted either the prohibition of the merger or the imposition of conditions, with the employment effects being the primary public interest consideration addressed.

The dispute therefore primarily concerned the application of competition-law standards to the economic facts (market definition, market shares, concentration and competitive constraints), together with an evaluative assessment of public interest considerations as recorded in the reasons.

4. Court’s Reasoning

On market definition, the Tribunal accepted that although both firms operated broadly in financial services, the relevant market for competitive assessment was personal retail banking services, with further attention to the specific sub-markets where there was overlap, namely retail deposit taking, mortgages, and asset-backed loans. The Tribunal also accepted a national geographic market, reasoning that the services were provided throughout South Africa and that there was no evidence of competition occurring at a local or regional level for purposes of the analysis presented.

On competitive effects, the Tribunal aligned itself with the Competition Commission’s assessment that the merger was unlikely to create competition problems given the small market share of OMBL and the correspondingly insignificant increase in concentration levels attributable to the transaction. The market-share evidence recorded in the reasons demonstrated that, in the overlapping sub-markets of retail deposit taking and mortgage bonds, OMBL’s pre-merger presence was minimal relative to Nedcor’s position.

Regarding asset-backed loans, the Tribunal noted the parties’ inability (as they presented it) to compute shares and their assertion that OMBL was not active in that segment, but also recorded the Commission’s contrary evidence suggesting OMBL did participate at a very small scale. The Tribunal accepted the Commission’s view that, regardless of the precise market share attributed to OMBL in asset-backed loans, a merger involving a competitor with a market share as low as that attributed to OMBL was highly unlikely to result in a substantial lessening or prevention of competition.

The Tribunal added an additional competitive constraint consideration beyond market shares and concentration. It emphasised that the parties faced very strong competition in the broad retail banking services market, identifying ABSA Bank, Standard Bank and First National Bank as the biggest players. The Tribunal reasoned that the presence of such strong competitors across the identified sub-markets precluded the possibility that the merged entity would be able to behave anti-competitively.

On public interest, the Tribunal recorded job-loss implications and the parties’ characterisation of certain employment losses as arising from an efficiency drive rather than being directly caused by the merger. The Tribunal also took into account that the unions had no objection to the merger and that there were undertakings to consult and explore alternatives to compulsory retrenchments, with reliance placed on the protection afforded by the Labour Relations Act. In the circumstances described, the Tribunal concluded that there were no substantial public interest issues warranting prohibition or conditions.

5. Outcome and Relief

The Tribunal held that the merger between Old Mutual Bank Limited and the Permanent Division of Nedcor Bank Limited was not likely to lead to a substantial lessening or prevention of competition. It further held that, taking account of the circumstances, there were no substantial public interest issues that warranted either prohibition or the imposition of conditions.

The merger was accordingly approved without conditions. The reasons did not record any order as to costs.

Cases Cited

No cases were cited in the Tribunal’s reasons.

Legislation Cited

Labour Relations Act (as referred to in the reasons; full statutory citation not provided in the text).

Rules of Court Cited

No rules of court were cited in the Tribunal’s reasons.

Held

The Competition Tribunal approved, without conditions, the large merger involving the injection of 45 branches of Nedcor Bank’s Permanent Division into Old Mutual Bank Limited, concluding that the transaction was unlikely to substantially lessen or prevent competition in the national market for personal retail banking services (including the overlapping sub-markets of retail deposit taking, mortgages, and asset-backed loans). The Tribunal further found that no substantial public interest issues, including those related to employment, warranted prohibition or conditional approval.

LEGAL PRINCIPLES

The Tribunal applied the principle that merger analysis requires identification of an appropriate relevant product market and relevant geographic market, followed by an assessment of whether the transaction is likely to result in a substantial lessening or prevention of competition within the markets affected by the merger.

In evaluating competitive effects, the Tribunal relied on standard competition assessment considerations reflected in the reasons, including the merging parties’ market shares, the change in concentration attributable to the transaction, and the presence of competitive constraints from strong existing competitors in the relevant market.

The Tribunal further applied the principle that merger control entails consideration of public interest factors, including effects on employment, and that where the circumstances and stakeholder positions (including organised labour’s stance and consultation undertakings) do not indicate substantial public interest harm warranting intervention, approval without conditions may be appropriate on the facts presented.