Brief Summary

Competition Law — Merger Approval — Merger between Clicks Organisation (Pty) Ltd and Purchase Milton and Associates (Pty) Ltd and others — The Competition Tribunal approved the merger, allowing Clicks to acquire control over the target firms, which operate retail pharmacy outlets — Legal issue concerned the potential impact on competition in the retail pharmaceutical market — Tribunal concluded that Clicks, as a new entrant, would not pose a competitive threat and thus approved the merger, citing no significant competition concerns.

Comprehensive Summary

Summary of Judgment

1. Introduction

The matter concerned large merger proceedings before the Competition Tribunal of South Africa in terms of the Competition Act 89 of 1998. The Tribunal was required to determine whether the proposed acquisition should be approved, prohibited, or approved subject to conditions, applying the statutory test for merger control.

The acquiring firm was The Clicks Organisation (Pty) Ltd (“TCO”), a subsidiary of New Clicks Limited, which controlled the broader Clicks Group. The target firms were Purchase Milton & Associates (Pty) Ltd, Milton & Associates (Pty) Ltd, J&G Purchase (Pty) Ltd, and Leon Katz (Pty) Ltd, which together controlled a network of pharmacy outlets operating under Link and Linkmax brands, as well as certain non-branded pharmacy stores.

On 4 August 2003, the Tribunal issued a Merger Clearance Certificate in terms of section 16(2)(a) approving the merger. The document provided the Tribunal’s reasons for decision, dated 9 September 2003, explaining why the merger was approved unconditionally notwithstanding concerns arising from the evolving regulatory environment governing pharmacy ownership, licensing, and pricing.

The general subject-matter of the dispute was whether the transaction—occurring at a time of regulatory change permitting corporate ownership of pharmacies—would substantially lessen or prevent competition, particularly in the retail pharmaceutical (dispensary) market, and how uncertainty around licensing and pricing regulation should be treated in the competition assessment.

2. Material Facts

TCO formed part of the Clicks Group, which operated various retail businesses and owned 248 stores and 13 franchises. TCO also held a 56% interest in the Link Investment Trust (LIT) and acted as franchisor of Link and LinkMax branded stores, both operating as retail pharmacy outlets. The Tribunal treated these facts as part of the context for assessing the acquiring group’s footprint and potential influence in pharmacy retailing.

The target firms controlled a pharmacy network comprising 50 Link branded stores, 27 Linkmax stores, and 3 non-branded stores, totalling 80 PMA stores, while the overall number of Link franchisees (including independents) was stated to be about 320. Control structures were described in the reasons, including the direct control of PM&A by Trevor John Milton and joint control of J&GP by Graham Erlank Purchase and John Ingles Purchase.

The transaction structure was straightforward: one agreement per target firm, under which TCO would acquire all shares in each target firm and thereby acquire control over their businesses. The rationale advanced was that the acquisition aligned with TCO’s long-term strategy to enter the pharmaceutical market, facilitated by legislative changes enabling non-pharmacist corporate ownership of pharmacies subject to pharmacist supervision/management and the issuance of relevant licences by the Department of Health.

A central, largely undisputed contextual fact was that, historically, South African pharmacy outlets had operated in a “mom and pop” format because legislation had prevented non-pharmacists from owning pharmacies. The reasons recorded that the merger coincided with a regulatory shift intended to broaden access and affordability of prescription drugs, but that the practical operation of the new regulatory regime—particularly licensing and pricing—remained uncertain at the time of adjudication.

Where the Tribunal expressly noted a dispute, it concerned the degree of control over Link franchisees. The parties disputed that Clicks controlled the LIT franchisees, characterising the relationship as a loose association of independently run franchises to which Clicks provided consulting and merchandising assistance. The Tribunal nevertheless proceeded on an expressly stated “worst-case scenario” assumption for purposes of analysis, namely that Link branded stores would form part of the post-merger control group, potentially resulting in ownership of approximately 320 Link outlets.

3. Legal Issues

The central legal question was whether the merger was likely to result in a substantial lessening or prevention of competition, particularly in the retail pharmaceutical (dispensary) market, in circumstances where TCO was not yet active in dispensing scheduled medicines but was described as the most likely potential entrant once regulatory barriers fell.

The dispute required the Tribunal to address issues of market definition (product and geographic), the application of competition law principles to a prospective and partially uncertain regulatory setting, and the appropriate treatment of potential competition. It also required an evaluative assessment of how likely future licensing and pricing rules could affect entry barriers and competitive constraints.

Although certain aspects involved factual characterisation (such as how pharmacies compete locally and the significance of chronic versus acute medication), the core task was the application of legal and economic principles—including potential competition and entry barriers—to the established and assumed facts, culminating in a forward-looking value judgment about competitive effects under uncertainty.

4. Court’s Reasoning

The Tribunal accepted that a typical pharmacy supplies two broad categories of products, namely dispensary (pharmaceutical) products and front shop (general consumer) products. While the Competition Commission had defined front shop product markets narrowly across multiple consumer goods categories where the parties overlapped, the Tribunal indicated that it was not concerned with competition in those front shop markets, referring to the presence of numerous alternative retailers (including grocery chains and other large retailers) selling similar products.

The Tribunal’s principal focus was the retail pharmaceutical (dispensary) market. The Commission initially did not evaluate that market, reasoning that there was no overlap because TCO was not yet licensed to dispense scheduled drugs. The Tribunal, however, required further submissions, emphasising that the competitive assessment could not ignore that TCO was a uniquely positioned potential entrant whose anticipated entry may already have constrained incumbents. The Tribunal reasoned that, for merger analysis, potential competition principles can justify treating a firm as a relevant competitive constraint even in the absence of present product overlap, particularly where the firm’s entry is imminent once regulatory barriers are lifted.

In that context, the Tribunal reasoned that TCO’s entry through acquisition eliminated it as an independent potential threat. The Tribunal characterised this as significant because entry by acquisition, unlike entry through rollout of new outlets, might not add additional capacity in the same way, and thus could remove a constraining influence without necessarily increasing the number of competitors. The Tribunal considered this consistent with the logic of potential competition illustrated (in its reasons) by the approach in Federal Trade Commission v The Proctor and Gamble Company 386 U.S. 588, 18 L.Ed. 2d 303 (1967), where the removal of a firm “at the edge” of a market was recognised as potentially influential on market conduct and entry conditions.

The Tribunal then addressed the difficulty of predicting post-merger market structure because the regulatory environment was in flux. It was uncertain how many pharmacy licences TCO would obtain, and how many other entrants would be licensed. While the Tribunal noted it had previously imposed a postponed divestiture remedy in a context of regulatory change, it indicated that such an approach had not proven effective and would provide limited comfort in the present case because the timing and content of regulatory certainty were unclear.

Proceeding on the stated “worst-case scenario” assumption that the Link branded stores would be part of the post-merger controlled group, the Tribunal considered that concentration could be high, especially in urban metropolitan areas. However, it concluded that it lacked sufficient information to assess the extent of potential entry into the scheduled drug market because this depended materially on the licensing regime administered by the Department of Health.

The Tribunal identified barriers to entry, particularly the prospect that licences would be granted based on the “need” for another pharmacy in a given area. It distinguished between legitimate safety-based regulation of pharmaceutical distribution (which it accepted as necessary) and licensing criteria that import competition-related considerations such as “need”, which it regarded as potentially raising entry barriers and protecting incumbents—especially a “first mover” corporate entrant such as TCO—from subsequent rivalry. The Tribunal expressed concern that administrative restriction of entry could undermine the disciplining role of potential entry that is ordinarily central to competitive constraint in contestable markets.

The Tribunal also considered submissions regarding a single exit pricing regime in which manufacturers’ list prices would determine consumer prices and pharmacists would earn through a dispensing fee. It noted uncertainty about how such a pricing system would operate in practice, including whether price regulation would set a maximum price and whether pharmacies could compete on dispensing fees. Even assuming a relatively competition-friendly form of price regulation, the Tribunal reasoned that competitive space could be severely compromised if entry were additionally restricted through a “need”-based licensing criterion.

Notwithstanding these concerns, the Tribunal recognised plausible pro-competitive aspects of the merger and of corporate chain entry into pharmacy retailing, including potential innovation and efficiency gains, stronger purchasing power against manufacturers, and a footprint potentially conducive to investment in underserved areas. It also noted that certain constraints might arise from other market features, such as the influence of medical aid schemes steering consumers (especially for chronic medication) towards more competitive pricing.

Ultimately, the Tribunal reached a balancing conclusion. It regarded the potentially negative aspects as substantially governed by regulatory uncertainty rather than by clear, merger-specific evidence of anticompetitive foreclosure or price effects that could be decisively established on the record. Given the potential pro-competitive gains and the absence of a sufficient basis to find a likely substantial lessening of competition, the Tribunal approved the merger unconditionally, while urging competition advocacy engagement with the Department of Health and cautioning that the market required careful monitoring.

5. Outcome and Relief

The Competition Tribunal approved the merger unconditionally and issued a Merger Clearance Certificate in terms of section 16(2)(a) of the Competition Act 89 of 1998.

No behavioural or structural conditions were imposed. The reasons nevertheless recorded a caution that the sector required careful monitoring, and urged the Competition Commission to engage with the Department of Health using its advocacy role to promote regulatory approaches consistent with competition principles, particularly ease of entry.

The reasons for decision did not record any costs order.

Cases Cited

Clicks Pharmaceutical Wholesale (Pty) Ltd and New United Pharmaceutical Distributors (Pty) Ltd (Competition Tribunal, Case No. 69/LM/Dec02).

Nasionale Pers Limited and Educational Investment Corporation Limited (Competition Tribunal, Case No. 45/LM/Apr00).

Federal Trade Commission v The Proctor and Gamble Company 386 U.S. 588, 18 L.Ed. 2d 303 (1967).

Legislation Cited

Competition Act 89 of 1998, section 16(2)(a).

Pharmacy Act (section 22A).

Government Notice No. R553, Government Gazette 24770, 25 April 2003 (including Regulation 7).

Rules of Court Cited

No rules of court were cited in the reasons.

Held

The Tribunal held that, although the merger raised significant analytical concerns in the retail pharmaceutical (dispensary) market—notably the removal of TCO as a strong potential entrant and the risk that a “need”-based licensing regime could increase barriers to entry—the competitive effects assessment was heavily conditioned by uncertain and evolving regulation. Taking account of potential pro-competitive benefits associated with chain entry and efficiencies, and lacking a sufficient basis to conclude that the merger would likely substantially lessen competition, the Tribunal approved the transaction without conditions, while emphasising the importance of regulatory approaches that do not inhibit entry and noting the need for careful monitoring of the market.

LEGAL PRINCIPLES

The decision applied the principle that potential competition may be relevant in merger control even where there is no present product overlap, particularly where a firm is a uniquely positioned and likely entrant once regulatory barriers are removed. In such circumstances, merger analysis may treat the removal of a significant potential entrant as competitively meaningful, including by imputing the competitive constraint that the potential entrant would otherwise exert on incumbents.

The reasons reflected the principle that merger analysis must consider barriers to entry and their likely evolution, including those arising from regulatory licensing criteria. While safety-based regulation of pharmaceutical distribution was accepted as legitimate, the Tribunal identified that licensing rules incorporating competition-relevant criteria such as “need” can function as a barrier to entry that protects incumbents and reduces the disciplining role of potential rivalry.

The Tribunal further applied the idea, drawn from contestable market reasoning, that where entry is administratively restricted, less weight can be placed on the prospect of potential entry as a constraint on market power. It also indicated that price regulation (such as single exit pricing) does not necessarily eliminate competition concerns, particularly where residual competitive parameters (such as entry or dispensing fees) may be constrained by regulatory design.

Finally, the decision illustrated an evaluative approach to merger control under regulatory uncertainty, balancing plausible pro-competitive efficiencies and innovation against speculative but potentially significant anticompetitive risks that depend on how regulatory frameworks are implemented, and emphasising the role of competition advocacy where sector regulation materially shapes competitive outcomes.

Clicks Organisation (Pty) Ltd and Purchase Milton and Associates (Pty) Ltd / Milton & Associates (Pty) Limited / J&G Purchase (Pty) Limited / Leon Katz (Pty) Limited (24/LM/May03) [2003] ZACT 46 (9 September 2003)