Summary of Judgment

1. Introduction

The proceedings were large merger proceedings before the Competition Tribunal of South Africa, culminating in the issuance of a Merger Clearance Certificate.

The primary acquiring firm was Momentum Property Investments (Pty) Ltd (MPI), described as comprising the property portfolio of the Momentum Group Limited, which in turn formed part of the FirstRand Group. The primary target firm was Bonatla Property Holdings Limited (Bonatla), a listed property holding company.

The Competition Tribunal issued the merger clearance certificate on 20 August 2003, approving the merger unconditionally in terms of section 16(2)(a) of the Competition Act 89 of 1998 (as amended). The written reasons for decision were furnished thereafter and are dated 25 September 2003. The Tribunal’s reasons reflect that the Competition Commission had investigated the merger and furnished findings to which the Tribunal ultimately aligned itself.

The dispute concerned the competitive effects of a transaction under which Bonatla would dispose of a portfolio of 34 office, industrial, and retail properties to MPI (or to a nominee structure), and whether the transaction would materially affect competition in the relevant property letting markets and whether any public interest factors weighed against approval.

2. Material Facts

MPI was identified as the acquiring firm associated with the property portfolio of the Momentum Group, within the broader FirstRand Group. Bonatla was identified as the target firm, and the transaction contemplated that 34 properties owned by Bonatla and its subsidiaries would be acquired by MPI.

A central feature of the transaction was that it would result in the establishment of a listed collective investment scheme in property (the CIS Trust), regulated under the Collective Investment Schemes Control Act 45 of 2002. The CIS Trust would be listed, would be managed by a management company appointed under the CIS regulatory framework, and would have trustees initially appointed by MPI and approved by the Financial Services Board (FSB). The parties stated that the management company would make decisions in the best interests of fund members and not in coordination with the FirstRand group, while the trustees would oversee management in accordance with the CIS Act.

The Tribunal recorded that the target properties would be acquired by MPI or by the CIS Trust as MPI’s nominee, and that MPI would initially hold a majority of the participatory interests in the CIS Trust and be entitled to appoint trustees. The parties contended, however, that this structure would not result in the FirstRand group exercising unfettered control over the target properties, as the properties would be managed on behalf of participatory interest holders under the CIS regulatory scheme.

It was accepted that the only material overlap between the parties’ activities lay in the property market, and for the Tribunal’s purposes this overlap occurred between Bonatla’s properties and the Momentum property portfolio (as managed within the acquiring group). While other divisions within FirstRand (including those associated with FNB) owned properties, the Tribunal recorded that there were no geographic overlaps between those properties and the Bonatla and Momentum portfolios relevant to the assessment.

On the product dimension, the Tribunal accepted that distinct markets exist for different property types and quality categories, and focused on office space and industrial properties because those were the categories in which overlap arose. For office properties, the Tribunal referred to the SAPOA office vacancy survey classification (grades P, A, B, and C) and limited the analysis to Grade B office blocks, noting that differences in quality and finishing are reflected in distinct rental levels. The Tribunal recorded that the Commission had concluded that the different grades constitute distinct product markets.

For industrial property, the Tribunal recorded the parties’ submission that there are grade categories analogous to offices, and also a “Rode classification” differentiating prime and secondary space, but noted that the parties had not used that method to determine overlap. The Tribunal recorded the Commission’s view (shared by SAPOA, industry participants, and Investment Property Databank South Africa (Pty) Ltd) that the different sub-classifications fall within different product markets. On the approach applied in this merger, overlap was identified in Grade B office blocks and light industrial properties.

On the geographic dimension, the Tribunal accepted the approach that market participants group areas into nodes, and that these nodes compete internally with sufficiently close rentals to warrant treatment as relevant geographic markets for the merger assessment. The Tribunal recorded that both the parties and the Commission followed this approach and that it was consistent with the Commission’s prior evaluation of property markets.

Applying that node-based approach, the Tribunal recorded that the relevant overlap nodes were Midrand in the office market and, in the industrial market, nodes described as North West, North and East Gauteng, South Gauteng and M2 Strip, Pretoria Environs, and certain areas in KwaZulu-Natal.

On market shares, the Tribunal recorded that in the Midrand Grade B office node Bonatla held 15.63% and MPI held 18.32%, resulting in a combined post-merger share of 33.95%. For light industrial property in the identified areas, the combined market shares for the overlapping properties ranged from 0.6% to 11.2%. The Tribunal further recorded that the parties contended the merged entity would face competition from other property funds in those areas.

As to public interest considerations, the Tribunal recorded that the parties stated there would be no effect on employment. It noted that MPI’s properties were managed by RMB Properties and that MPI engaged no employees to manage its property portfolio, and that Bonatla had no employees.

3. Legal Issues

The central legal questions were whether the transaction was likely to result in a substantial lessening of competition in any relevant market and whether any public interest considerations weighed against approval, as assessed under the Competition Act 89 of 1998 (as amended) and the Tribunal’s merger control mandate.

The determination involved primarily the application of law to fact, including the identification of appropriate relevant product markets (including whether segmentation by property grades and categories was appropriate), the delineation of the relevant geographic markets (through industry “nodes”), and the competitive assessment of post-merger concentration and competitive constraints in those markets.

To the extent that the Tribunal evaluated whether surrounding areas imposed “competitive pressures” on the Midrand node notwithstanding a significant market share, the assessment also involved an evaluative judgment grounded in the Tribunal’s acceptance of the node framework used by market participants and the Commission.

4. Court’s Reasoning

The Tribunal proceeded from the premise that in property letting markets, market definition may require segmentation by property type and quality. In relation to office properties, it relied on the industry grading framework referenced via SAPOA and accepted the Commission’s position that different grades of office blocks constitute distinct product markets, given that differences in quality, age, and finishes are reflected in distinct rental levels. On that basis, the Tribunal confined its office analysis to Grade B office blocks, being the category in which overlap was material for this transaction.

For industrial property, the Tribunal recorded that there are also sub-classifications in the market and accepted the Commission’s view, shared by relevant industry bodies, that these sub-classifications fall into different product markets. In the merger at hand, it treated the overlap as occurring in light industrial property, consistent with the Commission’s assessment.

On geographic market definition, the Tribunal accepted the evidence-based approach that market participants use nodes grouping proximate areas that compete with each other, and that rentals within nodes are sufficiently close to justify treating nodes as relevant geographic markets for merger analysis. It also noted that both the Commission and the parties had used this approach and that it aligned with how the Commission had evaluated property markets previously.

Turning to competitive effects, the Tribunal assessed concentration and competitive constraints in the specific overlap nodes. In the Midrand Grade B office node, it acknowledged that the merged share of 33.95% was significant, but accepted the parties’ contention that Midrand is subject to competitive pressure from surrounding office nodes, specifically Centurion and Kyalami. This constituted the principal basis on which the Tribunal concluded that the merged entity would continue to face meaningful competitive discipline in that office market notwithstanding the post-merger share.

For light industrial property, the Tribunal relied on the Commission’s conclusion that combined market shares in the relevant geographic areas ranged between 0.6% and 11.2%, and found that none of these concentrations was high enough to raise competition concerns. It also accepted that the merged entity would face competition from major competitors in those areas, as reflected in the record before it.

On public interest, the Tribunal considered the parties’ employment evidence and accepted that the transaction would have no employment effect, based on the facts that MPI’s properties were externally managed (and MPI did not employ staff to manage the portfolio) and that Bonatla had no employees. It recorded that there were no other public interest considerations militating against approval.

Synthesising these assessments, the Tribunal aligned itself with the Commission’s findings and concluded that the merger would not have a material adverse effect on competition in the relevant markets and that no public interest factor justified prohibition or conditional approval.

5. Outcome and Relief

The Competition Tribunal unconditionally approved the large merger between Momentum Property Investments (Pty) Ltd and Bonatla Property Holdings Limited in terms of section 16(2)(a) of the Competition Act 89 of 1998 (as amended).

No conditions were imposed. The reasons do not record any costs order.

Cases Cited

No judicial authorities were cited in the Tribunal’s reasons for decision.

Legislation Cited

Competition Act 89 of 1998 (as amended).

Collective Investment Schemes Control Act 45 of 2002.

Rules of Court Cited

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

Held

The Tribunal held that the merger was not likely to result in a substantial lessening of competition in the relevant markets identified, namely Grade B office blocks in the Midrand node and light industrial property in the identified geographic nodes.

It further held that, despite a significant combined market share in Midrand Grade B office space, the merged entity would be constrained by competitive pressures from neighbouring office nodes. It also held that the market shares in the light industrial property overlaps were insufficient to raise concerns and that competition from other market participants would remain.

The Tribunal held that there were no public interest considerations, including employment effects, that militated against approval, and it therefore approved the merger without conditions.

LEGAL PRINCIPLES

Relevant market definition in property letting may require differentiation by property characteristics and quality, including segmentation by office grading where grade differences are reflected in different rental levels and market conditions.

Geographic market definition in property markets may appropriately be undertaken by reference to industry-recognised nodes, where areas grouped within a node compete with each other and rental levels are sufficiently close to justify treatment as a relevant geographic market for competition analysis.

A significant post-merger market share in a defined geographic area does not, on its own, determine the outcome where the evidence indicates that the area is subject to meaningful competitive constraints from adjacent or neighbouring geographic markets.

In merger control, the Tribunal assesses both competition effects and public interest considerations, and where the evidence indicates no material adverse effect on competition and no adverse public interest impact (including on employment), an unconditional approval under section 16(2)(a) may be granted.