COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case No: 32/LM/May02
In the large merger between:
Firstrand Bank Limited
and
Profurn Limited
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Reasons
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Approval
1. Further to the recommendation of the Competition Commission in
terms of section 14A(1)(b), we approved the merger between
Firstrand Bank Limited (Firstrand) and Profurn Limited (Profurn) on
29 May 2002.
The Transaction
2. The acquiring firm is Firstrand, a whollyowned subsidiary of
Firstrand Bank Holdings Limited. Profurn is the target firm.
3. This transaction was precipitated by a notice to Profurn from a
consortium of bankers that have been providing finance to Profurn to
reduce its overdraft facilitites. Profurn was not in a position to do this
out of its normal operating cash flow and faced the real prospect that
if the banks refused to allow it to operate at the current level of
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borrowing, it will be unable to meet its obligations to creditors and
would be forced to stop trading. After considering all options
available to it, the management of Profurn opted to raise an amount of
R600 million to recapitalise the business by way of a rights offer to
shareholders. Firstrand, the largest creditor of the consortium of
banks, agreed to underwrite the rights offer and has bound itself to
acquire the shares in circumstances where the shareholders of Profurn
do not follow their rights 1.
4. According to the parties, even though it is Firstrand’s stated
preference that Profurn’s shareholders follow their rights, this is
unlikely to happen because of negative market sentiments towards
credit granting retailers and Firstrand would probably acquire the bulk
of these shares (and therefore control of Profurn) in terms of its
underwriting commitments 2. Where, for example, none of the Profurn
shareholders follow their rights, Firstrand will own 79% of the issued
share capital of Profurn. It is this likelihood that the rights issue may
result in a change of control in Profurn, with Firstrand becoming the
majority shareholder, that the parties have decided to notify the
transaction as a merger in terms of section 12 of the Act.
5. The parties claim that Firstrand, whose core business is in the
financial sector, has no desire to control a furniture retail business and
intends disposing of any interests acquired in Profurn as a result of
this transaction as soon as market conditions allow. It is argued that it
would not have been possible for Profurn to issue a rights offer that
was not underwritten and Firstrand, already exposed to Profurn, was
the only potential underwriter for a rights offer of the magnitude
required to recapitalise the business.
Impact on Competition
required to recapitalise the business.
Impact on Competition
6. There is no overlap between the businesses of the parties. Firstrand
trades in the financial sector providing a variety of banking services
such as retail, merchant, and corporate banking; shortterm insurance,
instalment finance etc. Profurn, on the other hand, is in the broad
1 Firstrand will receive an underwriting fee of R15 million, 2,5% of the required capital.
2 Firstrand currently has no shareholding in Profurn.
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furniture retail business. It owns a number of branded stores focusing
on a different income groups. Products sold in these stores include
furniture, electric appliances, cellphones, home sound systems,
televisions etc. Profurn trades mainly in South Africa but has stores in
other African countries as well 3. Because of the absence of
product/service overlaps, this transaction is unlikely to lead to
competiton problems in any market.
7. However, we were advised by the parties that Firstrand is in the
process of negotiating another underwriting agreement with Relyant
Retail Limited (Relyant), a competitor of Profurn in the broad
furniture retail market. These negotiations arose because the
management of Relyant decided to undertake a major capital
restructuring of the business. To achieve this it was decided that the
business must raise an additional capital of over R791,5 million. The
capital was to be raised by way of rights offer which would be
underwritten by a consortium of four banks, including Firstrand,
which were the principal debt providers to Relyant. It is envisaged
that subsequent to the restructuring, and depending on the exact
uptake of the rights issue, the banks collectively will hold 49.9% of
the issued share capital in Relyant. Firstrand on its own may hold 24%
of the shares in Relyant, making it the biggest shareholder amongst
the banks. POCO Holding GmbH, a strategic retail investor from
Germany, brought in to facilitate the restructuring process, will have
the biggest stake with a shareholding of at least 35%. 4
8. We were concerned about the potential effect of this transaction on
competition in the broad furniture retail market. Profurn and Relyant
are two of three biggest competitors in this market 5 and the possibility
are two of three biggest competitors in this market 5 and the possibility
that the majority shareholder in the one company could also become
the second biggest shareholder in the other is obviously disconcerting
for a competition authority. We therefore requested the parties for
more information on the Relyant transaction. According to Firstrand,
the terms of the underwriting agreement between itself and Relyant
have not yet been finalized. We were informed that if Firstrand does
3 Profurn’s component of turnover from outside South Africa currently stands at approximately 38%.
4 POCO was introduced to Relyant by FNB Corporate, a division of Firstrand.
5 According to the parties’ estimates, the three biggest shareholders in this market are the JD Group (16%),
Profurn (12%) and Relyant (9%).
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acquire the shareholding in Relyant it would be by default; they have
no intention of holding equity in Relyant. Firstrand sees this
transaction as a rescue operation and has agreed to convert a large
portion of their debt funding into equity only to help recapitalise
Relyant, to which it is already exposed. To support this claim, it is
claimed that the banks, who will have rights to appoint directors in
proportion to their shareholding, have no intention of doing so at this
stage and may consider doing so only where this becomes necessary
to protect their investment.
9. Firstrand claims that even though it may appoint board members, it
will never have control of Relyant. It states that it has made it clear to
POCO, which is likely to be the largest shareholder, that they do not
intend holding equity in the furniture retail market and will be
disposing of their equity holdings over the next five years.
10.To allay our concerns, Firstrand volunteered an undertaking to “notify
the Competition Commission, should there be a change of control as
contemplated by the Competition Act, as a result of the
recapitalisation of Relyant”. Firstrand also informed us that in any
event, Relyant’s advisors, INVESTEC, have advised them that it was
their intention to submit the Relyant transaction for consideration by
the competition authorities upon finalisation.
11.The merger between Firstrand and Profurn raises no competition
concerns since there is no overlap between the products/services of
the merging parties. With regard to the transaction being negotiated
between Firstrand and Relyant, assuming Firstrand still controls
Profurn pursuant to this merger and the Relyant transaction leads to a
change of control, a product/services overlap will result and the
transaction may require very close competition scrutiny. In light of the
transaction may require very close competition scrutiny. In light of the
commitments referred to in paragraph 10 above, and the fact that the
transaction has not been finalized (and there is no guarantee that the
transaction will occur at all), it is prudent that any impact the
transaction may have on competition be evaluated at the time of
notification when all the terms of the agreement are known.
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Public Interest issues
12.It is not envisaged that any job losses will result directly from the
merger. According to the parties, Profurn has retrenched about 800
employees because of the current financial situation of the company.
The decision to embark on this retrenchment process was taken last
year and has no connection to the merger. The parties claim this
process has in fact been completed.
13.No other public interest issues arise from this transaction.
Conclusion
14.The Tribunal endorses the Commission’s finding that this transaction
is not likely to substantially lessen or prevent competition in the
market and accordingly approves the transaction without conditions.
_____________ 04 June 2002
N.M. Manoim Date
Concurring: D.H. Lewis, U. Bhoola
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