Johnnic Holdings Limited and Fabcos Investment Holding Company Limited (01/LM/Jan05) [2005] ZACT 13 (18 March 2005)

80 Reportability

Competition Law

Brief Summary

Competition Law — Merger Approval — Johnnic Holdings Limited acquiring additional shares in Fabcos Investment Holding Company Limited — Merger clearance certificate issued by the Competition Tribunal approving the merger without conditions — The merger results in Johnnic Holdings obtaining joint control over Fabcos Investment Holding Company — No significant change in market structure or competition in the gaming industry — Merger unlikely to prevent or lessen competition substantially.

Comprehensive Summary

Summary of Judgment

1. Introduction

These proceedings concerned the approval of a large merger by the Competition Tribunal of South Africa under case number 01/LM/Jan05. The Tribunal issued a Merger Clearance Certificate on 23 February 2005, approving the transaction without conditions, and subsequently furnished written reasons for decision dated 18 March 2005.

The primary acquiring firm was Johnnic Holdings Limited (“Johnnic Holdings”), a public company listed on the JSE. The primary target firm was Fabcos Investment Holding Company Limited (“FIH”), in which Johnnic Holdings already held a minority interest pre-merger.

The dispute concerned the competitive and public-interest implications of Johnnic Holdings acquiring an increased shareholding in FIH such that it would obtain joint control. The Tribunal’s reasons focused on the parties’ limited overlap in casino and gaming, the geographic scope of any overlap, and whether the merger would be likely to prevent or lessen competition substantially.

2. Material Facts

Johnnic Holdings was described as an investment holding company with interests in several sectors, including the casino and gaming sector. For purposes of the merger analysis, the Tribunal concentrated on Johnnic’s gaming interest, which was conducted through a subsidiary, Durban Add-Ventures (Pty) Ltd. Durban Add-Ventures held a 40% share in the Suncoast Casino & Entertainment World complex in Durban, which operated as a 40/60 joint venture with Tsogo Sun Holdings (Pty) Ltd (holding the remaining 60%).

FIH was formed to steer the commercial affairs of the Fabcos Trust and to hold ownership stakes in corporate entities for the benefit of its members. At the time of the transaction, Fabvest Investment Holdings Ltd (“Fabvest”) controlled FIH, holding 75%, while Johnnic Holdings held 25%.

The proposed transaction entailed Johnnic Holdings acquiring a further 25% of the issued share capital of FIH from Fabvest, thereby increasing Johnnic’s interest from 25% to 50%. The effect of this acquisition was to confer joint control over FIH on Johnnic Holdings (together with Fabvest/Fabcos interests). The Tribunal recorded an express qualification that the notified transaction was limited to the acquisition of joint control, and that a future move to cross the “bright line” into sole control would require notification to the competition authorities if and when it occurred.

A further material fact for the Tribunal’s assessment was the restructuring of FIH’s portfolio contemporaneous with the merger. The parties indicated that, pursuant to Johnnic’s acquisition, FIH would transfer all interests in its portfolio firms (save for its 38% shareholding in Tsogo Investment Holding Co. (Pty) Ltd (“TIH”)) to Fabvest. As a result, post-merger FIH’s only interest would be a 38% stake in TIH. TIH, in turn, held 51% of Tsogo Sun (with SAB Miller holding 49%), and Tsogo Sun Gaming held five casino licences in different geographic areas.

On the Tribunal’s account, the only product overlap between Johnnic Holdings and FIH related to their respective interests in the gaming industry, specifically the provision of casino services. The Tribunal further noted that KwaZulu-Natal (Durban) appeared to be the only region in which both parties had an interest in casino operations, through their indirect interests connected to the Suncoast complex.

Market share data placed before the Tribunal reflected, at a national level, estimated market shares in casino gaming of Sun International (40%), Tsogo Sun (25%), Global Resorts (15%), Gold Reef (10%), and Others (10%). In KwaZulu-Natal, the estimates reflected Tsogo Sun (55%), Sun International (30%), Gold Reef (10%), and Others (5%).

3. Legal Issues

The central legal question was whether the proposed acquisition of an additional 25% in FIH by Johnnic Holdings, resulting in joint control, was likely to prevent or lessen competition substantially in any relevant market.

This inquiry required the Tribunal to determine matters of application of law to fact, including identification of the relevant product market, the relevant geographic market, and an evaluation of competitive effects in light of market structure and entry conditions as reflected in the evidence and submissions before it. In addition, the Tribunal was required to consider whether any public interest concerns arose that would militate against approval.

4. Court’s Reasoning

The Tribunal approached the competitive assessment by first isolating the area of overlap between the merging parties. On the facts before it, the Tribunal considered it “clear” that the only product overlap was in the gaming industry, and in particular the casino segment. The Tribunal did not expand the analysis into other sectors in which Johnnic Holdings had interests, because those were not the source of overlap relevant to the transaction as presented.

The Tribunal then considered the geographic dimension of any overlap. It accepted that KwaZulu-Natal (Durban) was the only region where both parties had an interest in casino operations, specifically through their involvement (directly and indirectly) in the Suncoast Casino & Entertainment World development. The Commission’s position, as recorded, was that the geographic overlap lay in the KwaZulu-Natal area, and the Tribunal’s reasoning proceeded on that basis.

In evaluating competitive effects, the Tribunal recorded the parties’ contention that Johnnic Holdings was not a significant “player” in any region within the gaming industry, and that the only affected area (KwaZulu-Natal) involved indirect, non-controlling equity investments in gaming entities. The Tribunal also recorded the Commission’s contention that the proposed transaction would not result in any change in the current market structure.

A further consideration in the Tribunal’s reasoning was the regulatory environment governing entry into casino gaming. The Tribunal accepted that entry into the gaming industry was regulated through the National Gambling Act 33 of 1996, which provided for the granting of a maximum of 40 licences across the nine provinces. It noted the parties’ submission that there were 30 operating casinos and 10 outstanding licences at the time. Against this background, the Tribunal accepted the contention that the proposed transaction did not increase barriers to entry because the regulatory requirements existed irrespective of the merger.

The Tribunal also recorded the parties’ position that both Johnnic and FIH had limited interests in gaming, and that the merger would enable Johnnic, described as a relatively new player, to increase its presence in the sector, which was characterised in the submissions as pro-competitive. On the totality of the parties’ and the Commission’s submissions, the Tribunal stated that it was satisfied that the transaction was unlikely to prevent or lessen competition substantially.

Finally, the Tribunal considered public interest implications and concluded that the merger raised no public interest concerns that would militate against approval. On that basis, the merger was approved unconditionally.

5. Outcome and Relief

The Competition Tribunal approved the merger without conditions, as reflected in the Merger Clearance Certificate issued on 23 February 2005, and confirmed in its written reasons dated 18 March 2005.

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

Cases Cited

No cases were cited in the reasons for decision.

Legislation Cited

National Gambling Act 33 of 1996.

Rules of Court Cited

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

Held

The Tribunal held that the merger, which resulted in Johnnic Holdings acquiring joint control over FIH, was unlikely to prevent or lessen competition substantially in the relevant market, given that the only overlap concerned casino gaming and the transaction would not materially alter the existing market structure.

The Tribunal further held that regulated entry under the National Gambling Act 33 of 1996 did not become more restrictive as a result of the merger, and that no public interest considerations arose that justified opposition to the transaction. The merger was therefore approved unconditionally.

LEGAL PRINCIPLES

The decision applied the principle that merger assessment turns on identifying the relevant product and geographic markets in which the parties overlap, and then evaluating whether the transaction is likely to prevent or lessen competition substantially within those markets on the basis of the structure and dynamics described in the record and submissions.

The Tribunal also applied the principle that regulatory barriers to entry (here, licensing under the National Gambling Act 33 of 1996) are assessed in context, and where such barriers exist independently of the transaction, the merger does not necessarily aggravate them merely by changing shareholding or control arrangements, particularly where the transaction does not materially change the market structure as presented.

A further applied principle was that merger approval requires consideration of public interest implications, and where the Tribunal finds that no public-interest concerns arise on the evidence and submissions, this supports approval without conditions.