COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case No: 30/LM/Jun03
In the large merger between:
Ethos Private Equity Fund IV
and
The Tsebo Outsourcing Group (Pty) Ltd
Decision and Reasons [NonConfidential]
INTRODUCTION
1. Ethos Private Equity Fund IV (“Ethos”) is a private equity firm which
invests in companies, in exchange for which it acquires equity therein,
entitling it to a participatory management role. The Tsebo Outsourcing
Group (“Tsebo”) is one such firm, involved in hospitality and facilities
management through its subsidiaries. Ethos is increasing its shareholding
in Tsebo from [< 50% ] to [ > 50%] 1.
JURISDICTION
2. Earlier this year the shareholders of Tsebo resolved to enter into a
transaction in terms of which Ethos would increase its shareholding in
Tsebo by purchasing a further [less than 5%] of the equity of Tsebo,
bringing its shareholding from [< 50% ] to [ > 50%].
3. Although Ethos had received legal advice that it was not required to notify
the transaction as a merger it decided to seek an advisory opinion on the
issue from the Commission on the 26 March 2003.
1 The actual shareholdings have been claimed as confidential information. However Ethos’ shareholding
has moved from an amount slightly below 50% to an amount slightly above it.
1
4. In its letter Ethos set out its reasons for arguing why the transaction did
not constitute a merger. We will consider these in detail later.
5. The Commission did not accept this argument and in an advisory opinion
dated 23 April 2003, informed the parties that it considered the transaction
notifiable. The parties then notified the transaction on the 11 June 2003,
but emphasized that they were making the filing under protest in order to
comply with the Commission’s advisory opinion. On receipt of the
notification the Commission accepted that it had jurisdiction.
6. On 15 August 2003 Ethos appealed the Commission’s decision to accept
jurisdiction, a procedure available to it in terms of Rule 33 (3) of the
Competition Commission’s rules, read with Rule 31(1)(c) of the Tribunal
rules. Although the appeal was brought late the Commission has no
objection and we condone the late filing. 2
7. On 20 August 2003 a second hearing was held. The hearing dealt with
arguments on the legal point as well as on the merits of the merger itself.
On the same day, the Competition Tribunal notified the parties that
whatever was decided on the jurisdiction point, the merger would be
cleared and so to avoid delaying the parties’ business operations, they
were told that they could implement the transaction.
Legal requirements for establishing jurisdiction
8. A transaction is only notifiable if it constitutes a merger. The definition of
a merger is to be found in section 12(1) of the Act, which states as follows:
“ (a) For the purposes of this Act, a merger occurs when one or more
firms directly or indirectly acquire or establish direct or indirect
control over the whole or part of the business of another firm.
b) A merger contemplated in paragraph (a) may be achieved
in any manner, including through –
b) A merger contemplated in paragraph (a) may be achieved
in any manner, including through –
2A first hearing had been held on 13 August 2003 where the parties raised the jurisdiction question as a
point in limine. The Tribunal advised the parties that the approach they had adopted in raising the
jurisdiction question as an in limine point was not appropriate. The question of change of control in any
transaction is a complex one and there was insufficient factual evidence placed before the Tribunal for it to
evaluate whether in fact control had changed by virtue of this transaction and therefore whether it did or
did not have jurisdiction in pursuance of the triggering of the notification requirements under the Act. The
parties were given the option to either proceed with a conventional merger hearing into the merits,
alternatively to pursue the legal argument on the control issue in a separate application. The parties
elected to file the appropriate separate application within a few days.
2
(i) purchase or lease of the shares, an interest or assets of the
other firm in question; or
(ii) amalgamation or other combination with the other firm in
question.”
9. Section 12(2) then sets out when a person controls a firm:
“A person controls a firm if that person—
i.beneficially owns more than one half
of the issued share capital of the
firm;
ii.is entitled to vote a majority of the
votes that may be cast at a general
meeting of the firm, or has the ability
to control the voting of a majority of
those votes, either directly or
through a controlled entity of that
person;
(c ) is able to appoint or to veto the appointment of a majority
of the
directors of the firm;
(d) is a holding company, and the firm is a subsidiary of that
company as contemplated in section 1(3)(a) of the Companies
Act, 1973 (Act No. 61 of 1973);
(e) in the case of a firm that is a trust, has the ability to control
the majority of the votes of the trustees, to appoint the majority
of the trustees or to appoint or change the majority of the
beneficiaries of the trust;
(f) in the case of a close corporation, owns the majority of
members’ interest or controls directly or has the right to control
the majority of members’ votes in the close corporation; or
(g) has the ability to materially influence the policy of the firm in a
manner comparable to a person who, in ordinary commercial
practice, can exercise an element of control referred to in
3
paragraphs (a) to (f).
Factual issues relating to jurisdiction
10. In February 2000, the shareholders of Tsebo had notified the Commission
that they had acquired joint control of the Fedics Group (Pty) Ltd (“Fedics”)
as a going concern (then known as “Newco”, later to become Tsebo). At
that stage, they had contended that the acquiring parties, which included
Ethos and its fellow shareholders Nozala Investments and Siphumelele
Investments, would acquire joint control over Tsebo as any material
decision in the company required the assent of 67% of the vote of the
shareholders and that this could only be achieved if Ethos and at least one
of Nozala Investments or Siphumelele Investments voted in favour of the
resolution. In addition, no single shareholder had the ability to appoint or
veto the appointment of the majority of the directors.
11. At the time of this first notification no single shareholder owned more than
half of the issued share capital of the firm. The shareholdings in the firm
were held as follows:
[ diagram confidential ]
12. The shareholders could also appoint directors according to the following
formula:
Ethos IV 4
Nozala 2
Siphumelele 2
Management 2
Independent, nonexecutive 2
Total 12
13. In terms of the present notification before us the shareholdings will alter as
follows:
[ diagram confidential ]
14. The shareholders’ respective rights to appoint directors remain
4
unchanged.3 However Ethos now owns more than half of the issued share
capital of the firm.
15. Ethos argues that the only consequence of the transaction is that its equity
in Tsebo has been marginally increased. Its ability to control the firm
remains unchanged despite the fact that it will now own more than 50% of
the firm. This is because in terms of its shareholder’s agreement, the
acquisition of the additional shares is rendered essentially neutral all
decisions of consequence require the assent of 67% of the shareholders.
Since Ethos has still not acquired sufficient equity to control the firm on its
own (i.e. above twothirds) the situation is no different to what it was prior
to the present transaction. The firm was jointly controlled prior to the
transaction and it will still be so subsequently. Hence Ethos argues there
has been no acquisition of control as required by the Act, in order for the
transaction to constitute a merger.
16. The Commission accepts the parties’ version on the facts and agrees
largely with its legal conclusion that effectively the transaction has not
changed much in so far as the shareholder’s agreement is concerned. 4
However the Commission’s view was that when interpreting legislation,
one must consider whether the legislation will be effective . The
Commission therefore, advanced a policy argument that the forms of
control set out in section 12(2) constitute ‘bright lines’ for all to know both
firms and the Commission. When firms cross a bright line they must notify,
notwithstanding shareholder arrangements inter se. This gives certainty to
all. The Commission argued that it relies on notification by the parties in
order to investigate matters. The Commission is concerned that if in a
order to investigate matters. The Commission is concerned that if in a
situation such as this, a firm is not obliged to notify a merger when its
shareholding exceeds fifty per cent by virtue of a private agreement
between shareholders in which it has diluted its voting powers, then it will
become extremely difficult for it to monitor compliance with the Act. In
consequence, the Commission would have difficulty in exercising its
regulatory function.
17. The Commission therefore urged us to adopt a conservative yet
uniform approach that protected legal certainty and public policy, by
requiring the parties to conform to the Act’s requirements, rather
3 In terms of the shareholder’s agreement, a shareholder’s right to appoint additional directors is only
triggered if it acquires an additional 10 per cent of the shares. See clause 5.11 of the shareholders
agreement.
4 There was some disagreement about the relationship between the shareholders agreement and section 220
of the Companies Act which provides for shareholder removal of a director, but not much turned on this as
even if we accept the Commission’s interpretation Ethos does not seem to have acquired control over the
appointment of the Tsebo board.
5
than contorting the Act to fit in with the creative ways which parties
devise to structure their transactions. 5
ANALYSIS OF CONTROL QUESTION
18. Prior to the present transaction Tsebo was, it is common cause, the
subject of joint control by Ethos and one of either Nozala Investments or
Siphumelele Investments. 6
19. Ethos has now acquired an additional [less than 5%] of Tsebo. That an
existing shareholder of a firm purchases more shares in it, is in of itself of
no significance. What is significant for the Commission, is that the
acquisition means that Ethos crosses the 50% plus threshold referred to in
section 12(2)(a).
20. Ethos is essentially arguing that there can only be one form of control at
any time. That is, we either have joint control or sole control. A company
cannot be regarded as ‘solely’ controlling another if effectively it still
requires the assent of its other shareholders for any meaningful decision.
Ethos argues that if it is required to notify the Commission of the
transaction simply because it has crossed the 50% boundary,
notwithstanding that its control has not increased concomitantly with its
equity, it would have the effect of making the same merger notifiable
twice. Recall that in 2000 the merger was notified and approved as one of
joint control.
21. There are two problems with this approach of Ethos In the first place it
assumes that control is what has been termed by the Competition Appeal
Court a ‘unitary concept’. 7 In other words, there can only be one
controller in a company at any given time. On Ethos’s approach, what one
is required to do in merger control is to identify who that controller is –
whether sole or joint and then determine whether a given acquisition will
alter that scenario. Yet this is not how the Act reads, nor how it has been
alter that scenario. Yet this is not how the Act reads, nor how it has been
interpreted by the Competition Appeal Court in the Distillers case, where
the Court suggests that the Act provides for the possibility of a plurality of
5 The Commission maintained that setting the bar at 51% would not excessively increase
the number of notifications and therefore burden business interests because in the
majority of such cases, there will almost always be a change of control in any event.
6 This is because with its [< 50% ] shareholding Ethos required a further approximately [ figure
confidential] of the votes to attain the 67% majority required by the shareholders agreement; votes it could
only secure from Siphumelele of Nozala. However without Ethos even if all the others voted together they
could not obtain the necessary 67%.
7 See Distillers Corporation (SA) Ltd / SFW Group Ltd and Bulmer (SA) (Pty) Ltd / Seagram Africa (Pty) Ltd
08/CAC/May01
6
controllers.
22. In Distillers the Court rejected an argument that there was only one type of
control and that is ultimate control. The court held that such an
interpretation is not mandated by the express words of section 12(1).
23. The court went on to state that:
“The wording of section 12(2), clearly contemplates a situation where
more than one party simultaneously exercises control over a company.
This situation can be illustrated with the following example:
A beneficially owns more than half of the issued share capital of the
firm. He concludes an agreement with B in order that the latter may
run the business. B agrees provided that he obtains control over the
appointments to the board of directors as well as of senior staff and
marketing policy. In such a situation A would control the firm as
defined in terms of section 12(2) (a) and B would exercise control as
defined in term of section 12(2)(g). In short, while A would have
ultimate control, B would have control of a sufficient kind to bring
him within the ambit of control as defined in section 12.” 8
24. If more than one firm can simultaneously control another firm, it follows
that more than one may acquire control and hence the concomitant
obligation to notify.
25. We have also in the past decided, consistent with the practice in other
jurisdictions, that a change from joint control to sole control triggers a
notification9.
26. In Iscor we explained the justification for this by quoting this extract from
ICI/Tioxide a case where the European Commission had to evaluate the
distinction between joint and sole control:
"...because decisive influence exercised solely is substantially
different to decisive influence exercised jointly, since the latter has
to take into account the potentially different interests of the other
to take into account the potentially different interests of the other
party or parties concerned.. By changing the quality of decisive
influence exercised by ICI on Tioxide, the transaction will bring
about a durable change of the structure of the concerned
parties."12
8 See page 25 of the decision.
9 See Iscor Limited and Saldanha Steel (Pty) Ltd 67/LM/Dec01
7
27. If we combine the approaches taken in the decisions of Distillers and
ICI/Tioxide we come to the following conclusions.
28. Firstly, that a sole controller is a different controller to a joint controller. In
other words joint controllers are considered a different species of
controller to one of their constituent elements controlling on its own. We
are, for this purpose, blind to the identity of the individual members of the
joint control pool and we see a change between two notionally different
controllers.
29. Secondly, that if more than one controller can exist simultaneously by
virtue of section 12(2), then it may be possible to say that a firm can at the
same time be subject to joint control and sole control. That is because the
Competition Appeal Court has recognised that section 12(2) instances
different forms of control and that for this reason different firms may
exercise control over a target firm by virtue of these different instances at
the same time.
30. This is the situation that we have in the present case. We have two
controllers a joint controller that includes Ethos and a sole controller that
is Ethos alone. When Ethos crossed the threshold and acquired 50% plus
of the equity it is deemed in terms of 12(2)(a), to control the firm on its
own, because it beneficially owns more than one half of the issued share
capital. It ability to control Tsebo on its own in terms of 12(2(a) is not
negated by the fact that simultaneously there was another entity in control
at the same time, namely the joint shareholders who could command the
67% vote and who are deemed to control the firm by virtue of other sub
sections of 12(2). 10
31. It matters not for this purpose, that Ethos has effectively eroded the voting
benefits normally associated with 50% plus beneficial ownership. If that
benefits normally associated with 50% plus beneficial ownership. If that
were so, every acquirer of 50% which sought to evade notification could
argue that there has been no change of control because of some
contrived set of circumstances in which it contracted away its voting rights
to a collective that had previously existed.
32. Merger policy is not confined to an assessment of control via the legal
form. The Act recognises that control is not confined to exercise through
the same legal form and that a firm can be controlled by another’s
economic or commercial leverage over it. Because of this, the legislature
recognised the possibility of the separation of the economic and ‘political ‘
10 It would seem that 12(2) (b), (c), and (g) would all fit the bill.
8
benefits of ownership and so provided for each in section 12(2) through
subsection 12(2)(a) and (d) (ownership) and 12(2)(b) and (c) (voting
rights). But it also had to go beyond recognising even these two traditional
company law forms of control and provide for control over other entities
12(2)(e) trusts and 12(2)(f) close corporations. It went further still,
recognising that even these instances may be deficient in capturing all
notions of control and so provided a catch all in 12(2)(g). Notwithstanding
subsection (g), the Court has held that the list is nonexhaustive
recognising that control is too elastic a notion to confine to a closed list. In
so doing it held that the legislature had instanced separate notions of
control. As the Court observed in Distillers, there is nothing in the
language of section 12(2) to suggest that its specified instances operate
exclusively at any one time. Indeed given the range of possibilities section
12(2) canvasses, it is likely that more than one controller subsists at any
given time in any complex commercial structure.
33. Of course even if this is the correct interpretation of the language, we must
still enquire into whether there is any absurdity in the notion that a firm
may have more than one controller at any one time. Commercial reality
suggests not. Control in companies that are not wholly owned is rarely a
case of an absolute dictatorship. Competition law needs to recognise that
companies can be run on either republican or monarchical lines. In a
monarchy the identity of the ruler is simple. In a republic where power is
mediated through sets of possibly complex relationships, the location of
sovereignty is more elusive. Yet premerger notification systems by
necessity are obsessed with the notion of control. They must find putative
necessity are obsessed with the notion of control. They must find putative
emperors in republics even if they are not garbed in purple robes. For this
reason, some artificiality in rules that say when acquisitions of control
occur is unavoidable. Happily those instances are rare – they will usually
occur in cases such as the present one where a majority owner contracts
out of its right to be a majority voter.
34. Section 12(2)(a), the one that implicates Ethos in the present notification,
may look harsh when applied to the present facts. But if the supermajority
had been set higher say 75 %, and if Ethos had moved from a lower
threshold say from 2O% to 74%, can we say that the change in
ownership was without significance? For that scenario, the triggering of an
obligation to notify when the bright line of a majority beneficial ownership
is crossed makes sense. The fact that there may be cases such as the
present one, where the journey across the bright line is so brief, does not
negate the rationality of the policy.
35. As the Commission has argued, other jurisdictions adopt bright lines not
9
because they are perfect in each case, but because by and large they are
consistent with commercial reality and, most importantly, they help create
certainty for both regulator and regulated.
36. Does this mean that Ethos might have to notify again if it crosses some
other threshold in section 12(2) that it presently does not enjoy now? For
instance, if it was able to control or veto the appointment of the majority of
the directors of the firm, a power that, as we have seen, it does not
presently enjoy.
37. The answer to that question is no. A change of control is a onceoff affair.
Even if a firm has notified sole control at a time when that control is
attenuated in some respects by other shareholders and it later acquires an
unfettered right, provided that sole control has been notified and that this
formed the basis of the decision, no subsequent notification is required.
38. It could be said that this approach is quixotic and leads to the notification
of changes of control that are illusory. That in reality business at Tsebo
continues in the same way at 50% plus as it did at 50% minus.
39. That may be so, but that is the product of the private arrangements of
these shareholders who have chosen to regulate their relationships in a
particular way, not a deficiency in the Commission’s approach to the Act.
40. The alternative, on the parties’ version, would require the Commission to
enquire into each and every change in shareholder relations, some of
which may be, if one’s experience of shareholders agreements we see on
a daily basis are anything to go by, extremely opaque.
41. In the present case, the shareholders agreement provides for a twothirds
majority vote on a specified number of issues. On the parties’ approach, if
the shareholders were to amend that arrangement tomorrow and remove
some items from the list, it would on each occasion trigger a difficulty of
some items from the list, it would on each occasion trigger a difficulty of
whether sole control was achieved, a question that might be as difficult to
answer for the parties as it is for the Commission. It is for this reason that
the Act has adopted the blunt approach of recognising instances of
control; not just in a legalistic sense, but also as a concept that
acknowledges economic and commercial reality as well.
42. For this reason, section 12(2) instances certain “bright lines” of when
control will be assumed. When firms cross that line, as Ethos has, they
must notify, albeit that they have not traveled very far in crossing it.
10
43. This does not mean that section12 (2) sets out only bright lines. The
parties correctly observe that section 12(2)(g) is anything but ‘bright’.
44. But that subsection, as we stated earlier, serves as a default provision. It
is only likely to concern a potential controller if it does not fall into any of
12(2) ‘s prior categories. So who would fall into such a situation? Typically
this would be the shareholder of a widely held public company, where no
shareholder had an interest in the company above 50%, and that
shareholder might, because not all shareholders in public companies vote
their shares, command the majority of votes at a general meeting of the
company, notwithstanding that its share of the company’s total voting
rights is well below half. 11
45. Granted a section 12(2)(g) enquiry may be a complex one, when that
becomes the only basis for deciding where there has been a change of
control, but that does not mean that in every other case where the
legislature has determined bright lines, we should ignore that indication
and revert to elaborate legal and factual enquiries into the shareholders’
private arrangements before concluding that there has been a change in
control.
46. Ethos’s purchase of additional shares in Tsebo means that it now
beneficially owns more than half of the issued share capital of Tsebo.
Ethos is therefore considered to have sole control of Tsebo by virtue of
section 12(2)(a) of the Act. As the previous notification of control in
respect of Tsebo related to joint control by Ethos and others, the question
of its sole control of Tsebo has not previously been considered. The fact
that Tsebo also continues to be subject to the joint control of its
shareholders in terms of section 12(2) does not detract from its obligation
shareholders in terms of section 12(2) does not detract from its obligation
to notify. The Tribunal accordingly has jurisdiction to consider the
transaction as a merger in terms of the Act.
47. There is one further issue that we should comment on lest this decision be
interpreted as heralding in an era of bureaucratic unreality. What if the
current Ethos/Tsebo merger had not previously been notified, but was
notified now with the present constellation of shareholders and
shareholders agreement? How would the merger assessment be done if
the company has at the same time two possible controllers? The answer it
11 See for instance the recent case of Anglo American Holdings Limited and Kumba Resources Limited
46/LM/Jun02, where the shareholder notified a merger at a level considerably below 50% on the grounds
that its holding and minority representation at board level would give it material influence. See also the
decision by the European Commission in the case on Anglo Americans’ attempt to merge with Lonrho
( Case IV /M .754) where the Commission regarded Anglo’s stake of 24.47%% as one giving them the
possibility to exercise decisive influence.
11
seems is determined by the manner in which the transaction is notified.
There seems to be no reason why, as part of the same notification, that
the competition consequences of two simultaneously existing controllers
cannot be explored. Thus to pursue the present example, the parties
would indicate that for the purpose of section 12(2)(a) of the Act, Ethos is
to be regarded as a single controller of Tsebo, but that de facto, the firm is
jointly controlled by Ethos and at least one other shareholder and that it is
also to be regarded as jointly controlled by them for the other purposes of
section 12(2).
FINDING ON JURISDICTION
We therefore find that this transaction is notifiable and hence we have jurisdiction
to consider this merger. We go on to consider whether this merger will
substantially lessen or prevent competition in any market.
ANALYSIS OF MERITS
The Parties
48. The acquiring firm is the Ethos Private Equity Fund IV (“Ethos IV”), a
subsidiary of Ethos Private Equity Limited, ultimately controlled by Ethos
Holdings Limited. 12
49. In essence, Ethos IV is a private equity fund manager that provides
investment capital to companies requiring it. It is a fund incorporating both
local and international investors. Institutional investors invest capital into
the respective partnerships in order to participate in private equity
investments through Ethos. Ethos invests primarily in companies where it
can be involved in management. It participates through acquiring a seat
on the company’s board. Ethos IV has investments in various portfolio
companies, of which the target firm is one.
50. Ethos Private Equity operates several other funds. One of its other funds
has an interest in a firm known as Muscatel Investments (Pty) Ltd, also
known as Pleasure Foods (Pty) Ltd). Accordingly, the only other Ethos
known as Pleasure Foods (Pty) Ltd). Accordingly, the only other Ethos
subsidiary relevant to this transaction is Pleasure Foods, which controls
Wimpy, Whistle Stop and Market Caf é. Pleasure Foods has 538 outlets
countrywide. Other brands include Juicy Lucy and the Milky Lane.
51. The target firm is Tsebo Outsourcing Group (Pty) Ltd (“Tsebo”). Its
12 No investment decisions are made at the Ethos Holdings level and the Ethos Private Equity funds are run
independently of this.
12
shareholding premerger is set out above in the discussion on jurisdiction.
52. Tsebo’s subsidiaries include:
• Fedics (Pty) Ltd
• BJ s Franchising (Pty) Ltd
• Drake and Scull Facilities Management (SA) (Pty) Ltd
• Air Caterers Johannesburg (Pty) Ltd
53. Tsebo has two operating divisions:
i. Firstly, Facilities Management Services Division 13, through this
division Tsebo and its international partner manages outsourcing of
noncore activities such as building maintenance, cleaning, mail
services, etc.
ii. Secondly, Food Services (branded as Fedics), providing an
outsourced catering service to corporations, educational and
healthcare institutions. Its only subsidiary relevant to this
transaction is BJ’s which is a chain of quick service restaurants
located along the major highways of RSA.
Rationale for the Transaction
54. Ethos is acquiring additional shares in Tsebo in terms of a restructuring.
The Relevant Product Market
55. The overlap occurs insofar as BJ’s (Tsebo) and Wimpy, Whistle Stop and
Market Caf é (Pleasure Foods) are all fast food outlets that are also linked
to major fuel stations. 14 The national market shares for all the fast food
outlets of the merging parties irrespective of location are low. The parties’
combined post merger market share nationally is [ less than 10%]. Even at
this level the parties maintained that their market share is overstated
because independent operators in the market have been excluded.
Competitors in the broader market for fast foods (not necessarily highway
outlets only) include Nando’s, KFC, McDonald’s, Spur, Steers, Maxi, to
name just a few.
13 Through Drake & Scull, its joint venture with an international company.
14 Wimpy, Whistle Stop and BJ’s do however also provide services as standalone entities, that is,
entities that are not linked to fuel stations but exist on their own as retail fast food stores.
13
Market Shares in the National Quick Service Food Market
Source:
Parties’
Competitiveness
Report
56. However, it
is possible
to have as
a sub
market a fast food market based on the kind of food served at the various
outlets. The Commission did not go into whether consumers regard as
substitutable takeout or home delivery stores. Nor whether chained or
nonchained stores are regarded as substitutable. They also followed the
European Commission approach of confining quick service format outlets
to one product market, regardless of the type of meals that are served.
The Commission therefore defined the market as the fast food chain store
market.
57. We do not rule out the possibility that, in a uniquely South African market,
one could delineate each food chain brand into separate product market
niches according to the type of food that they sell; the stay or go nature
thereof or even on the basis of price. However, for the purposes of this
merger and the minimal impact on competition in the market, we do not
find such stratification necessary. The other delineation is that fast food
outlets attached to service stations constitute a different product market
but form part of a national geographic market as we approached the
furniture market delineation in cases such as JD/ Ellerines and JD/
Profurn.15 This market on the other hand may not be a separate relevant
product market but may be delineated geographically as we discuss
below.
Geographic Market
58. The parties and the Commission took the view that because the various
15 JD Group Limited and Ellerine Holdings Limited –78/LM/Jul01; JD Group Limited and Profurn Limited
60/LM/Aug02
Competitor Market Share
KFC [ ]%
McDonalds [ ]%
Spur [ ]%
Steers [ ]%
Nando’s [ ]%
Chicken Licken [ ]%
Maxi [ ]%
Buster [ ]%
Wimpy [ ]%
Whistle Stop [ ]%
BJ’s [ ]%
14
fast food outlets are organized into chains with prices set nationally, the
relevant geographic market is national.
59. However, as we stated earlier when discussing the relevant product
market, there is a possibility that the market could be more narrowly
defined to include only those fast food outlets attached to the highway
service stations on national routes between city destinations. The Tribunal
therefore requested the Commission and the parties to consider an
alternate, possibly separate, relevant market, which incorporates only the
service station outlets of the Whistle Stop, Wimpy and BJ chains located
on national highways. Our concern was that when one undertakes long
haul trips, there is not a great deal of choice between the different fast
food outlets at the highway service stations, elsewhere referred to as
comprising “transient routes”. 16
60. However, the possibility of such an alternate market existing would require
considerably more information. We make no finding on the precise extent
of the product or geographic market since, as the further analysis will
show, there is no prospect of a substantial lessening or prevention of
competition on any market definition.
Impact on competition
61. The parties’ response was that from a demand perspective, there is a vast
array of potential substitutes that would compete with such highway
outlets. Amongst such competitors are competing garage food outlets
such as convenience stores (located enroute as well as the fuel station’s
own branded convenience stores located on their forecourt); independent
roadside caf és and restaurants; retail outlets such as Woolworths; stay
over options such as B&B’s and hotels. The parties therefore sought to
persuade us that the highway outlet market should also include such “en
persuade us that the highway outlet market should also include such “en
route” outlets as well as those food outlets proximate to the merging
parties’ outlets.
62. However, as we discuss below, since the barriers to entry in this market
are low, we need not address this question directly. Our analysis below
with respect to competitors in the market is also subject to this
qualification.
63. The parties further provided a breakdown of the number of outlets of the
16 The possibility of an alternate market definition is lent credence by a recent remark by the Steers’ COO
for franchising in referring to the Steers takeover of Pleasure Foods. He reported that the Wimpy and
Whistle Stop brands “ply market niches (breakfasts/brunch and “transient routes”). “ Hedderwick and the
Hungry Inch “. Finance Week Article 3 September 2003
15
merging parties that are located at petrol stations alongside national
highway routes. Of the three fast food brands, only the Whistle Stop Caf é
had the majority of its outlets located alongside national highways. The
reason for this is that the Whistle Stop brand was established in
conjunction with the Shell fuel company. The parties assured us that
there is no agreement that would prohibit other franchise operations from
establishing themselves at Shell garages. The other two, BJ’s and Wimpy,
primarily have outlets located on nonhighway routes. Revenue derived
from their highway outlets are as follows:
Wimpy 17%
Whistle Stop Caf é 90%
BJ’s 40%
The best information the parties could provide on market shares in respect
of outlets attached to retail petroleum stations was as follows:
Firm Outlets on
highways (no.)
Other outlets
(no.)
Total outlets
BJ’s 36% (10) 64% (18) 28
Whistle Stop 92% (33) 8% (3) 36
Wimpy 8% (31) 92% (335) 366
Total 430
Source: Additional Submission by Merging Parties
Barriers to Entry
64. Although the market information is inadequate to properly evaluate the
extent of concentration in the retail outlet market, the parties did provide
persuasive evidence concerning the ease of entry. On the supply side,
given the many other brands of fast food outlets in the market in general,
there are a number of potential entrants into the transient route market
described above. The number of differently branded competitors that
appear on the forecourts of the different petrol stations is an indication of
this. Besides the outlets of the merging parties, Shell, Engen and Caltex
have relationships with other outlets such as KFC, Vet Koek, Nandos and
Steers, to name a few. There are furthermore no restrictions on entry,
such as exclusive supply arrangements between any fast food franchise
such as exclusive supply arrangements between any fast food franchise
outlet and a particular petroleum company. The evidence indicated that
the petroleum companies seek to encourage the presence of a number of
fast food brands on their forecourts since there is a demand for this variety
of choice from consumers. It is therefore quite plausible that such variety
16
of competing fast food brands at any one petrol station may serve as a
preferred destination stop for consumers on longhaul journeys, making
such petrol stations more competitive. Therefore, insofar as it is in their
interests to have competitive outlets, the choices of the petroleum
companies determines the structure of the market.
We conclude that this merger will not lead to a substantial lessening of
competition. There are no public interest concerns that would alter this
conclusion. The merger is therefore approved unconditionally.
_____________ 3 October 2003
N. Manoim Date
Concurring: D.Lewis, T. Orleyn
For the merging parties: Adv. A. Gotz, instructed by Webber Wentzel
Bowens Attorneys
For the Commission: K. Ramathula, M. Worsely, Competition
Commission
17