REPUBLIC OF SOUTH AFRICA
Case No.: 105/LM/Dec04
In the large merger between:
Business Venture Investments 790 (Pty) Ltd Primary Acquiring Firm
and
Afrox Healthcare Limited Primary Target Firm
Reasons for Decision
Conditional Approval
1. The Competition Tribunal issued a Merger Clearance Certificate on 02 March 2005
approving with conditions the proposed merger between Business Venture Investments
No. 790 (Pty) Ltd (“Bidco”) and Afrox Healthcare Limited (“Ahealth”).
2. Our order reads as follows:
The merger is approved in terms of section 16(2)(b) of the Act subject to the following
conditions:
A. ELIMINATION OF CROSS HOLDINGS
1. Regarding the interest of Mvelaphanda Capital (Pty) Ltd and Management of
Mvelaphanda Capital (Pty) Ltd (collectively referred to as “Mvelaphanda”) in Tshwane
Private Hospitals (Pty) Ltd (“Tshwane Private Hospitals”):
1.1 Mvelaphanda must dispose of its entire shareholding in Tshwane Private
Hospitals within three months from date of this order or such longer period
as the competition authorities may take to approve the merger notified to it
regarding that disposal.
1.2 All directors of Mvelaphanda on the boards of Curamed Holdings Limited
and Tshwane Private Hospitals must resign from the latter two boards,
within one month of the date of this order.
1.3 Dr Jackie Mphafudi, who is a director on the board of MediClinic and also a
director of Mvelaphanda, must resign from the board of MediClinic within
one month of the date of this order.
2. Regarding the Industrial Development Corporation’s (“ IDC”) interest in the Clinix
Healthcare Group Limited (“ Clinix”), provided the IDC acquires a shareholding
in Bidco:
2.1 The IDC must dispose of its entire direct or indirect shareholding in Clinix
within six months from the date on which it acquires shares in Bidco.
2.2 Any employee of the IDC, who is a director on the board of Clinix, must
resign within one week of the date on which the IDC concludes the
agreements necessary to give effect to the divestiture contemplated in 2.1.
B. RESTRICTIONS ON SALES OF EQUITY
1. For a period of 3 years from the date of this order –
1.1. If any shareholder in Bidco or the Company sells equity in Bidco or the
Company to MediClinic or to Netcare then that sale must be notified to the
Competition Commission as a large merger;
1.2. If RMB acquires additional equity in the Company, directly or indirectly, so that
its total effective equity in the Company is in excess of 25%, then the
transaction, which raises the equity above that level (“additional equity
transaction”), must be notified to the Competition Commission as a large
merger.
1.3. Provided that the condition in paragraph B 1.2 –
1.3.1 Only applies for so long as First Rand Limited or any company
controlled by it, holds in excess of 45% of the equity in Discovery
Health Limited;
2
1.3.2 Does not apply if RMB disposes of the equity that gave rise to
the additional equity transaction within 3 months of the date that
it was acquired, and provided further that it gives notice to the
Commission at the time it acquires the additional equity and at
the time when it disposes of it.
2. For the purpose of this order –
2.1 “the C ompany” means Ahealth Limited or any company into which the
present business of Ahealth may be transferred;
2.2 “Bidco” means Business Venture Investments No. 790 (Pty) Limited;
2.3 “equity” depending on the context, means the issued share capital of the
Company or Bidco, or an indirect interest in the share capital of the Company;
2.4 “Netcare” means Network Healthcare Holdings Limited or any company
controlled by it;
2.5 “Medi Clinic ” means MediClinic Corporation Limited or any company
controlled by it;
2.6 “RMB” means RMB Private Equity (Pty) Ltd, RMB Ventures (Pty) Ltd
and FirstRand Bank Limited (acting through its Rand Merchant Bank
Division) and or First Rand Limited, and includes any other company
controlled by them.
C. A Merger Clearance Certificate be issued in terms of Competition Tribunal rule 35(5)
(a).
3. The reasons for conditionally approving the merger are set out below.
The Transaction
4. In terms of this transaction, all of the shares in Ahealth are to be acquired by Bidco,
a shelf company created for purposes of the acquisition of Ahealth. In terms of the new
transaction, the shareholding of the buying entity, Bidco, is as follows:
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Business Venture Investments No. 813 (Pty) Ltd (“BEECo”) (comprising
Brimstone and Mvelaphanda in equal shares) shall hold a 50.2% interest in
Bidco;
African Oxygen Limited (“AOL”) as to 20.1%;
Rand Merchant Bank Equity (Pty) Ltd (“RMB”) as to 10.1%;
Old Mutual Life Assurance Company (South Africa) (“OMLACSA”) as to 10.1%;
Industrial Development Corporation South Africa Ltd (“IDC”) as to 4.5%; and
Ahealth Management (“Management”) as to 5%.
5. The structure of the proposed transaction envisages that BEECo, AOL, RMB, and
OMLACSA will jointly control Bidco. 1 Upon conclusion of the transaction the structure
and shareholding of Bidco and Ahealth postmerger will be as follows:
1 The merging parties’ legal representative, Adv. Subel SC expressed it thus:
“What is being proposed in the structure is that BEECo, AOL, RMB, OMLACSA will jointly
control Bidco. There is reference in the documents to the fact that the joint control will
also be exercised by the IDC. That may or may not, depending on their role, and it also
depends on the minority protections, because they may not meet the 10% threshold.
But at the very least BEECo, AOL, RMB and OMLACSA will jointly control Bidco .”
Page 5 of the transcript of 10 February 2005.
Mvelaphanda (50%) Brimstone (50%)
IDC (4.5%)BEECo (50.2%)
Management (5%)OMLACSA (10.1%)
AOL (20.1%) RMB (10.1%)
Bidco (100%)
4
6. As will be explained below, we are as yet not certain whether the IDC has already
taken up its 4.5% equity stake in Bidco. In addition, it is noteworthy that the merging
parties anticipate that “Doctors and BEE Groupings” will be introduced into the Bidco
shareholding structure at some point in the future. 2
The Merging Parties
The primary acquiring firms
7. The primary acquiring firm is Bidco, a newly formed private company created solely
for purposes of this acquisition. As noted Bidco is controlled by BEECo (an
empowerment company which is in turn controlled by Mvelaphanda Strategic
Investments (Pty) Ltd (“Mvelaphanda”) and Brimstone Investment Corporation Limited
(“Brimstone”)), AOL, RMB and OMLACSA. As already noted, there was, at the time of
writing, no clarification as to the IDC’s role, that is, as to whether it had taken up an
equity share in the company and signed the shareholders’ agreement. We have,
however, imposed a condition on the IDC which is, in turn, conditional upon the IDC
having actually taken up an equity stake in the target company. For the purposes of
this analysis then we treat the IDC as one of the primary acquiring firms.
8. Mvelaphandais a wholly owned subsidiary of Mvelaphanda Holdings (Pty) Ltd
(“Mvelaphanda Holdings”). Mvelaphanda Holdings is a leading blackowned investment
holding company established in 1998. Mvelaphanda Holdings has major investments in
a diverse range of sectors. 3 However, only Mvelaphanda’s subsidiaries involved in the
healthcare industry are relevant for purposes of this analysis.
9. In the healthcare industry, Mvelaphanda holds, through Mvelaphanda Capital (Pty)
Ltd, an interest of 32% in Tshwane Private Hospital (Pty) Ltd (“ Tshwane Private
Hospital”). Tshwane Private Hospital is controlled by MediClinic (which holds 51% of
Hospital”). Tshwane Private Hospital is controlled by MediClinic (which holds 51% of
the shares therein). Tshwane Private Hospital in turn holds 63% of the shares in
2 See the merging parties’ letter (para. 4, page 2) addressed to the Commission erroneously dated 9 April
2005, but emailed to the Tribunal on 24 January 2005.
3 See Page 79 of the merger filing – “An organogram (Exhibit 4) showing Mvelaphanda Holdings’
interests in diverse industries.
Ahealth
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Curamed Holdings Limited (“ Curamed”), which owns 6 hospitals in Pretoria. These
interests have led the Commission to recommend the imposition of a condition on the
approval of the transaction. This recommendation has been accepted by the Tribunal
and the merging parties.
10. Brimstone a BEE investment holding company. It too has investments in a wide
range of sectors. Its only interest in healthcare is its 26.04% interest in the Scientific
Group (Pty) Ltd (“the Scientific Group”). The Scientific Group is a company that
distributes medical and pharmaceutical equipment.
11. RMB is a subsidiary of FirstRand Limited (“FirstRand”). FirstRand is a large group
of companies in the financial services sector. Of principal relevance here is its
controlling interest in Discovery Holdings Limited (“Discovery Holdings”). FirstRand
holds approximately 65,6% of the issued shares in Discovery Holdings. Discovery
Holdings is a specialist insurance company that finances and manages healthcare and
other related risks. Discovery Holdings itself operates 4 main businesses, viz.
Discovery Health, a South African medical aid scheme administrator; Discovery Life
(South African life insurance products); Destiny Health (US based healthcare
products); and PruHealth, which is UK based healthcare products. The vertical issues
implicit in the FirstRand group’s involvement in a large hospital grouping and a large
healthcarefocused financial institutions accounts for a further condition imposed on
this transaction.
12. The FirstRand group, through its various subsidiaries, also holds:
100% of Momentum Holdings.
A 40% interest in Magna Medical Holdings (Pty) Limited, which in turn
holds approximately 5% of the shares in Alliance Pharmaceuticals Limited
holds approximately 5% of the shares in Alliance Pharmaceuticals Limited
(“Alliance”), which markets and distributes cosmetics, toiletries, and
pharmaceutical products.
A 70% interest in Surgitech (Pty) Limited, a company that imports and
distributes disposable medical devices.
A 30% interest in Eternity Private Health (Pty) Limited, a medical aid
administrator.
An effective 76% interest in Medicor PBM (Pty) Limited, which provides
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pharmaceutical benefit management services. 4
13. OMLACSA a wholly owned subsidiary of Old Mutual South Africa Limited (“OMSA”)
and is a registered longterm insurer. OMLACSA is primarily involved in all classes of
life assurance and retirement funding in South Africa. It has minority shareholdings,
and no board representation, in Netcare (1.591%), MediClinic (0.148%), FirstRand
(2.373%), and AOL (4.947%). OMLACSA also controls:
Old Mutual Healthcare (Pty) Limited (“OMHC”) which provides administration
services, risk management services which include pharmacy benefit
management, hospital benefit management, oncology management, etc). It
further provides a health management program;
Old Mutual Health Insurance Limited (“OMHL”) which provides shortterm
health insurance products under two policies, viz. Accident and Health; and
Miscellaneous;
Managedchoice (Pty) Ltd, a pharmaceutical management company 5;
14. The IDC a stateowned national development finance institution (“DFI”) mandated
to promote, through its financing activities, economic growth, industrial development
and economic empowerment. It provides loan and equity financing to a vast array of
sectors including healthcare. Of relevance are its:
28.5% interest in Carecross Health (Pty) Limited which offers, through a
national network of Carecross Health service providers, the delivery of primary
healthcare to medical schemes, employer groups, managed healthcare
companies and the state.
effective 30.1% in Clinix Healthcare Group Limited (“ Clinix”) which owns a
number of hospitals, viz. Clinix Selby Park Hospital, Lesedi Private Hospital,
Clinix Private Hospital Sebokeng, Clinix Private Hospital Soweto, and Clinix
Private Hospital Vosloorus. 6 We were informed that the IDC in fact controls
Private Hospital Vosloorus. 6 We were informed that the IDC in fact controls
Clinix by virtue of it being entitled to appoint four (4) of the fourteen (14)
directors, which include the Chairman who has a second and casting vote. This
4 In this regard, refer to pages 6 and 7 of the transcript of 10 February 2005.
5 The parties pointed out that this company was in the process of being wound up, and would result in its
business being incorporated into OMHc. Page 59 of the merger filing.
6 See page 10 of the Commission’s recommendations, and transcript of 10 February 2005 (page 9).
7
horizontal relationship underlies a further condition recommended by the
Commission and imposed by the Tribunal.
49.9% interest in Biomox Pharmaceuticals (Pty) Ltd – this is a pharmaceutical
firm currently doing research and development of new products, specialising in
mineral, vitamin and amino acid combinations.
15. As indicated above, AOL Ahealth, and holds approximately 69% of the issued
share capital of Ahealth with the balance of the shares held by a wide variety of
minority shareholders. AOL is primarily involved in the industrial gas business. Its
controlling shareholder is, BOC Group plc, British multinational supplier of industrial
gases.
The primary target firm
16. The primary target firm is Ahealth, public company listed on the JSE Securities
Exchange. Ahealth is controlled by AOL, which holds approximately 69% of the issued
share capital of Ahealth. The remaining shares in Ahealth are held by a wide variety of
minority shareholders. Ahealth is principally active in the private healthcare market.
Rationale for the transaction
17. From the perspective of BEECo and its owners, Mvelaphanda and Brimstone, the
transaction represents a rare opportunity to acquire a significant stake in a business
such as Ahealth – it is large, well placed in its sector, financially stable and well
managed. It also represents the first significant incursion by BEE investors in the
healthcare sector and is one of the largest BEE transactions ever. Accordingly, we are
informed, when AOL and Ahealth issued a joint cautionary statement in July 2003 to
the effect that AOL was in the process of considering its strategic options with regard to
its shareholding in Ahealth, Bidco expressed interest in the acquisition thereof. In fact
it appears that Bidco was formed in order to acquire an interest in Ahealth. However,
it appears that Bidco was formed in order to acquire an interest in Ahealth. However,
the company that was formed at that time differed in one significant respect from the
Bidco that is before us today – it was owned as to 25% by MediClinic, a key
competitor of Ahealth. The contemporary relevance of this is elaborated below.
8
18. RMB, OMLACSA and the IDC, who are the funders and, together with the BEE
consortium, the joint controlling shareholder, aver that the opportunity to
facilitate a landmark BEE transaction in the South African healthcare sector is
the key driver of their participation in the transaction. 7 For reasons elaborated
below it was necessary to complement their debt funding with equity stakes in
Bidco.
19. AOL, the controlling shareholder of Ahealth, wished to extricate itself from the
healthcare sector and to focus on its core industrial gas business. It appears that AOL
is the only BOC Group subsidiary anywhere in the world that is involved in the
healthcare sector. Although the factors initially motivating the entry of its South African
subsidiary into this sector appear almost accidental, it nevertheless proceeded to build
a highly successful business in healthcare. It now wishes to realise its investment and
focus on its core gas business.
20. AOL initially intended to extricate itself completely. However when it became clear
that the MediClinic shareholding in, and funding of, the initial Bidco structure would not
pass muster with the competition authorities, it nevertheless decided to proceed with
the transaction even though this entailed it retaining a minority joint controlling stake in
the newly constituted Bidco. This is the transaction that is before us today. Although
AOL is committed to retaining its shareholding in Bidco for at least 2 (two) years, it has
made no secret of its desire to exit this investment at the earliest opportunity.
Background to the transaction
21. While, on the face of it, this transaction is relatively uncontroversial from a
competition perspective, there are, as already indicated, selected horizontal and
vertical concerns.
vertical concerns.
22. As our description of the interests held by Mvelaphanda and the IDC in the
healthcare sector suggest, there are several horizontal implications that command the
attention of the competition authorities. However these are relatively easily cured by
the imposition of several conditions and these, as we shall elaborate below, are
7 Note that for all RMB and OMLACSA’s stated commitment to BEE they make no secret of the fact that
the BEE risk is effectively assumed by the stateowned IDC.
9
contained in Part A of our order. As will be elaborated below, the merging parties did
not oppose the conditions recommended by the Commission.
23. There are also several troubling vertical concerns that arise in consequence of the
FirstRand group’s involvement in the Discovery Health group. These, too, are cured by
conditions imposed in Paragraphs 1.2 and 1.3 of Part B of our order.
24. However, in paragraph 1.1 of Part B of our order we impose several unusual
restrictions on the future disposal of equity in Bidco and Ahealth. The underlying
reasons for these conditions can only be understood in the context of an understanding
of the history of this transaction.
25. In June 2003, AOL put its 69% shareholding in AHL up for sale. MediClinic
expressed an early interest and, initially, thought to go it alone. However, the
evidence is that MediClinic then decided to seek a BEE partner in order to
overcome anticipated complications at the competition evaluation stage.
Several empowerment partners were mooted. MediClinic eventually decided to
draw Mvelaphanda and Brimstone into the transaction and so Bidco was
formed.8
26. Note that Network Healthcare Holdings Limited (“Netcare”), which, together
with Ahealth and Mediclinic, is the third major participant in the private hospital
services, also expressed interest in Ahealth and approached the merchant
bankers. However Netcare was told that bids from other large hospital groups
would not be entertained because of the problems that this would inevitably
present on the competition evaluation of the transaction. 9 The relevance of this
is outlined below.
27. Nevertheless, despite the refusal to admit Netcare to the bidding process, its
rival, MediClinic, and a BEE consortium comprising Brimstone and
rival, MediClinic, and a BEE consortium comprising Brimstone and
8 See Mr Swiegers’ testimony, pages 5 & 14 of the transcript of 22 July 2004.
9 See Mr Sacks’ testimony, pages 23 of the transcript of 11 February 2005. See also page 8 of the
affidavit of Dr Jack Shevel deposed to in the MediClinic proceedings; as well as page 149 of volume 3 in
the MediClinic proceedings (That is, Annexure B – Letter to the Commission from WWB dated 25
February 2004).
10
Mvelaphanda successfully bid for AOL’s stake in AHL. 10 MediClinic and its
BEE partners formed a company known as “Bidco” for purposes of the
acquisition. Bidco was held as to 25% by MediClinic and 75% by Brimstone and
Mvelaphanda, and the funding of the latter was secured through a MediClinic/
Remgro guarantee to ABSA. 11 In addition, MediClinic intended to acquire
selected Ahealth hospitals representing some 2500 beds post the deal and
entered into an agreement (the “Disposal and Cooperation Agreement’) to this
effect with its Bidco partners. Throughout these proceedings the intended sale
of hospital beds to MediClinic was referred to as the “T2 transaction”. The
merging parties insisted that this second acquisition would be notified to the
competition authorities at a later stage and, so, only limited disclosure of T2 was
made to the Commission.
28. Note that there were other credible participants in the bid process. A select
group of potential buyers were approached in June 2003 and invited to
participate in the sale process. This list comprised three financial institutions,
namely Brait Private Equity, Ethos Private Equity and Platinum Equity as well as
Bidvest and Fresenius. 12 However the MediClinic consortium was prepared to
offer a significant premium. This, of course, should not be surprising. Medi
Clinic was effectively prepared to offer what could accurately be described as a
market power premium, that is, a premium for the influence over a major
competitor that would accrue as a result of its participation in the Bidco
consortium and, possibly more important, for the Afrox hospitals that were to be
acquired in terms of T2.
29. Bidco’s bid was successful. Note that AOL’s advisers expressed some doubt
29. Bidco’s bid was successful. Note that AOL’s advisers expressed some doubt
10 In terms of the previous merger filing, BEE Consortium shareholding comprised of Brimstone (as to
40%); Mvelaphanda (as to 40%); and a consortium of “Doctors and BEE Groupings” (as to 20%). BEE
Consortium was to be jointly controlled by Brimstone and Mvelaphanda.
11 Remgro is the controlling shareholder of MediClinic.
12 According to the documentation submitted to us during the MediClinic proceedings, it seemed that
Bidvest declined the invitation to participate whereas Fresenius and Platinum Equity declined to
participate further in the process due to internal strategic reasons. During Phase I of the bidding process,
three indicative bids were received from Brait, Ethos and MediClinic. During Phase II of the sale
process, Ethos and Brait were considered to be “preferred bidders”, but discussions with MediClinic
were underway with a view, it appears, to clarifying MediClinic’s strategy regarding competition
authorities constraints.
11
about the ability of this transaction to survive competition scrutiny. But it seems
that the premium offered by the MediClinic consortium prevailed over good
sense and it was accepted. However, AOL insisted on a strict separation of this
transaction from the subsequent sale of hospitals, and it insisted that all of the
‘competition risk’ would be borne by MediClinic, that is, should T2 not surmount
the competition hurdle, the validity of T1 would be unaffected. In short, AOL
would get its premium and MediClinic would be left to deal with prospective
competition opposition to T2. 13
30. Bidco then proposed a scheme of arrangement between Ahealth and its
shareholders in terms of which Bidco would become the owner of the entire issued
share capital of Ahealth. Ahealth’s shares were to be delisted from the JSE. We will,
for convenience, refer to the initial transaction which involved MediClinic as the “Medi
Clinic transaction”.
31. The MediClinic transaction was filed with the Commission on 5 December 2003. In
terms of the MediClinic transaction, AOL would sell, by way of a scheme of
arrangement in terms of section 311 of the Companies Act (61 of 1973), its
shareholding in Ahealth to the Bidco consortium comprising Mvelaphanda, Brimstone
and MediClinic.
32. Between December 2003 and 16 April 2004, the Commission conducted an
investigation into the proposed MediClinic merger. It concluded that it should be
approved conditionally, and forwarded its written recommendations to the Competition
Tribunal on the 16 April 2004. The conditions imposed by the Commission were
essentially directed at curing the horizontal problems that Mvelaphanda’s participation
gave rise to and are broadly similar to those imposed in paragraph 1 of Part A of our
gave rise to and are broadly similar to those imposed in paragraph 1 of Part A of our
order in this transaction. The IDC was not involved in the MediClinic transaction and
13 See page 1099, Vol. 7 of Part C of the merger filing, and page 21 of Mr Swiegers’ testimony, i.e.,
transcript of 22 July 2004. This is also evident in the following passage of Mr. Unterhalter’s cross
examination of Mr Cor van Zyl of Ahealth:
“Adv Unterhalter : It also means, does it not, that insofar as there are any competition
risks that may arise in the much spoken about transaction 2, those competition risks
rest with the purchasers.
Mr Van Zyl : That’s correct. ” – see transcript dated 20 July 2004, page 82 .
12
hence the problems sought to be addressed in Para 2 of Part A of our order did not
arise in the MediClinic transaction. The FirstRand group was also not part of the Medi
Clinic transaction and hence the vertical issues that its participation portends also did
not arise.
33. The Tribunal commenced hearings in respect of the MediClinic transaction
on 14 July 2004. Prior to the hearing, Netcare, together with several other smaller
participants in this sector, 14 applied to the Tribunal to intervene in these
proceedings. Neither the merging parties nor the Commission opposed the
intervention application.
34. In the MediClinic transaction proceedings the main point of contention from the
intervenors’ perspective was, not surprisingly, the role of MediClinic. Recall that Medi
Clinic was, firstly, to have a 25% stake in Bidco, the firm that was to acquire control of
Ahealth, secondly, to guarantee the massive loan capital required to effect the
transaction, and, thirdly, to enter into a related transaction with Bidco, in terms of which
the latter had agreed to sell 2500 of Ahealth’s beds to it.
35. The MediClinic transaction hearings were adjourned in August 2004 and were
scheduled to recommence in September 2004. The August hearings did not go well for
the merging parties. To the extent that the initial filings did not already reveal Medi
Clinic’s actual role in the transaction, this was massively amplified by a comprehensive
process of discovery initiated by the intervenors and by the oral evidence submitted to
the Tribunal.
36. In short, what the process of discovery confirmed was that MediClinic’s
attempt to cast itself as a ‘passive, minority shareholder’, interested only in
facilitating the empowerment of one of its major competitors, was nothing other
than a disingenuous attempt to shield from competition scrutiny the true nature
than a disingenuous attempt to shield from competition scrutiny the true nature
of the transaction, the outcome of which would have had MediClinic thoroughly
dominating its competitor, Ahealth. Moreover a major reason for MediClinic
assuming control over Ahealth and its BEE shareholders was to give effect to an
agreement in terms of which MediClinic would have acquired approximately
14 These included firms such as the East London Doctors Company Ltd; PE Hospital Investments Ltd;
Clinix Health Group Ltd; MidMedic Holdings Ltd; and Community Healthcare Holdings Ltd.
13
onethird of Ahealth’s capacity thus changing the competitive landscape in the
private hospital market. As disturbing, is the fact that MediClinic had sought to
achieve this outcome by the most cynical manipulation of the government’s –
and the Competition Act’s – support for Black Economic Empowerment.
37. Suffice to say that MediClinic had left no stone unturned in its attempts to ensure
its effective control over Bidco and Ahealth. It identified and paid for all the advisers to
Bidco – the legal advisers, the competition advisers and the investment advisers. It
held a 25% equity stake in Bidco, accompanied by a shareholders agreement which
ensured its control over key competitive, financial and operational decisions. It
guaranteed some R3.1 billion rand worth of loan capital. And, it had already secured
an agreement from the BEE companies – nominally the ultimate controlling
shareholders of Ahealth – that would have had MediClinic acquire some 2500 beds
from Ahealth. This was ‘fronting’ on a grand scale with MediClinic, though holding a
minority equity stake, thoroughly dominating its BEE partners.
38. During the adjournment period various negotiations took place between the
merging parties. Further postponements were sought and granted. In December
2004 parties filed a revised shareholders agreement that purported to address
some of the concerns ventilated at the hearings. The revisions sought to
strengthen MediClinic’s proclaimed passivity relative to its empowerment
partners. To this end, it offered to place MediClinic’s equity stake in a trust
which would be represented on the Bidco board by an independent director.
However it resolutely clung to T2, that is, to its right to acquire 2500 hospital
beds from Ahealth once the new control structure was in place.
The Scheme of Arrangement
beds from Ahealth once the new control structure was in place.
The Scheme of Arrangement
39. A brief description of parallel proceedings in the High Court which focused on the
validity of the Scheme of Arrangement is necessary if only because the settlement of
this litigation purported to ‘settle’ simultaneously the standoff between the Netcare
organised intervenors involved in the Tribunal procedures, on the one hand, and the
various merging parties – Afrox/Ahealth, MediClinic and the empowerment parties on
the other. It resulted in the muchrevised transaction that is before us, a transaction in
which AOL effectively replaces Mediclinic.
14
40. On 14 October 2004 certain small shareholders 15 of Ahealth brought an
application to the High Court for an order declaring that the scheme of
arrangement had lapsed. In terms of the Securities Regulation Code, had this
application been successful and the scheme lapsed, the bid may have been
placed in terminal jeopardy. This litigation was ultimately settled when the
applicants agreed to withdraw their challenge to the Scheme which was then
extended by the Court.
41. We now proceed to deal with the terms of the High Court settlement. The
application to the High Court was brought by two doctors. There were also two
intervenors, both of whom appeared to be Netcare sponsored. 16 These two
intervenors launched applications to be joined as coapplicants in the High Court
on 24 th November 2004.
42. In this High Court application, there were two settlement agreements, of
which was made an order of the Court. 17 We are concerned with those aspects
of the settlement agreements that have direct reference to our proceedings, in
particular those dealing with MediClinic’s withdrawal from both T1 and T2 and
the provisions governing any future disposal of Afrox hospitals.
43. The settlement agreement provided, firstly, that Ahealth, AOL and the BEE
participants in Bidco would procure MediClinic’s withdrawal from the transaction and
that it sells its shares in Bidco. MediClinic would also have to undertake not to
participate in any restructured consortium to acquire Ahealth. Secondly, Ahealth, AOL
and the empowerment parties also agreed to procure the cancellation of the disposal
and cooperation agreement which was the agreement between MedClinic and its
empowerment parties that governed T2, the disposal of Ahealth hospitals to Medi
15 These were Dr Johannes Paulus Franciscus Dalmeyer; Wendy Couhan. There were also two
intervening applicants, Bridi (Pty) Ltd; and Stratospheric Investments CC.
16 When asked by the Tribunal whether it was common cause that Netcare paid legal costs of these two
intervenors, Mr Sacks replied as follows: “We certainly had an agreement to support the legal
costs”. – See Sacks’ testimony on page 11 of the transcript of 11 February 2005.
17 This relates to an agreement of settlement between the parties marked “X1” paragraphs 110 in terms
of the High Court Order dated 2 December 2004. – See page 10061014 contained in File 3 of the
merging parties’ subsequent filings.
15
Clinic.
44. Thirdly, the agreement provided that the new owners of Ahealth would
ensure that neither MediClinic nor Netcare would acquire any hospital from
Ahealth unless they had been given an ‘equal opportunity’ to acquire the
hospitals offered for sale. It required that any future proposed disposal be
notified in writing simultaneously to both Netcare and MediClinic both of whom
are to be afforded the same rights of access to information and/or the assets
which are subject of the proposed disposal for due diligence purposes, and both
will be entitled to submit offers in relation to the proposed acquisition or
disposal.
45. The proceedings before the High Court and the various settlements were
extensively reported in the media. We then invited the parties to appraise us of these
reported developments which clearly implicated the pending resumption of our own
hearings. This meeting took place on the 6 December 2004. We were advised that the
deal had been restructured. In essence we were advised that AOL would substitute
itself for MediClinic in the Bidco structure, that new institutional shareholders and
lenders had been introduced to the transaction, and that all agreements and
understandings pertaining to the future disposal of Afrox hospital had been cancelled
and disavowed. We were also advised that the new transaction would be filed as a
new notification.
The hearing of the present merger
46. The new transaction was filed on the 14 thDecember 2004. The hearing in respect
of the present merger was held on the 10 thand 11 thFebruary 2005. The Commission
did not call any witnesses. The merging parties called Mr James Archer, a
representative of RMB, who addressed the Tribunal on the funding model as well as on
representative of RMB, who addressed the Tribunal on the funding model as well as on
the vertical issues raised by Discovery Health’s position within the FirstRand group of
companies.
47. The Tribunal called the following witnesses:
1. Mr Rick Hogben (Chief Executive of AOL)
16
2. Dr. Jakes Gerwel (Chairman of the Brimstone, who will also be the first
Chairman of Bidco postmerger)
3. Mr Michael Flemming (Chief Executive Officer of Ahealth).
48. Further to this, the Tribunal requested that representatives from the Council
of Medical Schemes, MediClinic and Netcare be represented at the hearing. Mr
Alex van der Heever 18, Mr Gerhard Swiegers 19 and Mr Michael Sacks and Mr.
Neil Lazarus 20 appeared and testified on behalf of the Council of Medical
Schemes, MediClinic and Netcare respectively.
The Competition Analysis
49. The target firm, Ahealth, a private healthcare service provider which operates two
divisions, viz. a private hospital division and a healthcare services division.
50. The private hospital division comprises 63 private hospitals which are able to
perform a wide range of medical services and which are located throughout South
Africa.21 The healthcare services division includes Lifecare Special Health, a public
private partnership with the government, which has 21 chronic care hospitals and 2
acutecare hospitals; Direct Medicines, a pharmaceutical benefit management
company; and Afrox Occupational Healthcare, a leading provider of contracted onsite
workplace healthcare.
51. The primary acquiring firm, Bidco, has been established specifically for the
purpose of making this acquisition. It has no interests other than those acquired in this
transaction. On the face of it then, this is a classic conglomerate transaction whereby a
new entrant, Bidco has entered the private hospital market via the acquisition of an
existing player, Ahealth. We have, however, noted that certain members of the
consortium of acquiring firms have interests in the healthcare industry which raise
certain horizontal and vertical issues.
certain horizontal and vertical issues.
18 Mr van der Heever is the Special Advisor to the Registrar of the Council of Medical Schemes.
19 Mr Swiegers is the Financial Director of MediClinic.
20 Mr Sacks is Chairman of Netcare. Mr. Lazarus was an adviser to Netcare.
21 According to the parties, nine (9) out of 63 of these hospitals are associate hospitals, as well as one
hospital in Gaborone (Botswana). The Ahealth hospital portfolio includes key hospitals such as Eugene
Marais; Entabeni; Flora Clinic; St Dominics; St Georges; the Glynnwood; Vincent Palloti; Westville; and
Wilgers.
17
52. In addition, in our discussion of the background to the transaction, we have also
noted MediClinic’s manifest intention to acquire a large portion of Ahealth’s assets.
The evidence also establishes MediClinic’s palpable reluctance to relinquish the rights
to these assets that it believed that it had acquired in terms of the Disposal and Co
operation Agreement. that it was only on the 19 thOctober 2004 that MediClinic finally
agreed to walk away from T2 which, it believed, had been secured by the disposal
agreement – indeed it appears that even after MediClinic had accepted that it would
be replaced by AOL in the transaction to acquire Ahealth, it still clung on to the notion
that it would acquire the Ahealth assets that it desired, 22 although it had reduced its
demand from 2500 to 1500 beds. 23 Ultimately, the BEE parties were required to
compensate MediClinic to the tune of some R50 million for relinquishing the rights
which it believed had been secured through the disposal agreement.
53. These factors account for the imposition of certain conditions on the approval of the
transaction. The order is divided into two sets of conditions. Part A attempts to secure
the elimination of certain crossholdings, while Part B imposes certain limitations on
possible future sales of equity in the merged entity. For ease of exposition it is
convenient to structure the competition analysis as an explanation of the conditions
imposed in our order. However before turning to an explanation of the conditions
imposed, a brief comment on the relevant market is apposite.
Relevant markets
54. For the purposes of this evaluation, we are satisfied to conclude that the relevant
product market is that for the provision of private hospital services. We note however
that a more extensive analysis, were it to be required, may reveal a more complex view
that a more extensive analysis, were it to be required, may reveal a more complex view
of the product market. We simply observe that private hospitals provide services to
individual patients, to healthcare funders and to private healthcare practitioners and
each of these may, on more extensive enquiry, delineate a separate product market.
55. While the existence of three predominant national groups of private hospitals who
price nationally – AHL, Netcare and MediClinic – suggests that the geographic market
22 See page 10 of the additional documents (i.e., File 1) filed by the merging parties.
23 Refer to Mr Swiegers’ testimony, pages 3741 of the transcript of 11 February 2005.
18
is national, there are particularly complex issues involved in the delineation of
geographic markets in hospital mergers. We have little doubt that the geographic
markets in which healthcare funders and healthcare practitioners engage with the
providers of hospital services interact are national. It appears, moreover, that the
national hospital chains price nationally thus reinforcing the existence of a national
market. Equally it is clear that the market in which the private hospital services are
provided to patients is local although even this may not be the case in respect of the
provision of particular, highly specialised services. Note too that, although patients may
consume these services in geographically bounded subnational markets, because the
pricing is national – and, for most patients, determined in national negotiations between
the hospitals and the funders – pricing is not responsive to regionally particular market
conditions.
Elimination of crossholdings – provisions of Part A of the Tribunal’s order
56. A horizontal overlap exists between the activities of some of the merging parties.
Part A of our order is intended to address the competition concerns raised by these
horizontal overlaps.
57. In its assessment, the Commission found that the only activities of the acquiring
firm which could be regarded as reasonably substitutable with the activities of Ahealth
are the interest held by Mvelaphanda in Tshwane Private Hospital and the IDC’s
control of the Clinix group.
58. Mvelaphanda holds a minority interest (32%) in Tshwane Private Hospitals.
However, the Commission’s concerns arise from the identity of the 51% controlling
shareholder, MediClinic. It appears that MediClinic occupies four seats on the board
shareholder, MediClinic. It appears that MediClinic occupies four seats on the board
of Tshwane while Mvelaphanda holds two seats. Mvelaphanda also has a seat on the
board of Curamed, a Pretoriabased hospital grouping controlled by Tshwane. The
Commission is concerned that the mutual involvement in Tshwane of one of the
controlling shareholders of the postmerger AHL and MediClinic may provide a
platform for an exchange of information between the two competitors. In order to
address these concerns, the Commission recommended the divestiture of
Mvelaphanda’s interest in Tshwane Private Hospitals. It also recommends that
approval of the merger be made conditional upon Mvelaphanda representatives
19
relinquishing their seats on the boards of Tshwane, Curamed and MediClinic.
Mvelaphanda has not opposed this condition and there is no need for us to examine it
further.
59. We should however add that the background to this particular transaction and
general indications of a cooperative relationship between the major players in the
private hospital services market strongly endorse the Commission’s concerns. We
need look no further than the agreement concluded between Netcare and MediClinic
with respect to future disposals of Ahealth assets for evidence of the ease with which
the hospitals are willing to conclude agreements of dubious validity in terms of the
Competition Act. We note too the following assessment by RMB analysts of
competitive conditions in the relevant market:
“ The strategic behaviour of these groups has historically been characterised by
a conscious avoidance of price competition. Rather than attempt to
aggressively win market share through price wars and intensive advertising
campaigns, the hospital groups – via their joint membership of the Hospital
Association of South Africa (“HASA”) – have managed to standardize industry
pricing by agreeing set tariffs with the Medical Aids represented by the Board of
Healthcare Funders (“BHF”)…
The key issue will be the extent to which the dissolution of the formal, collective
price setting arrangement in favour of onetoone negotiations will increase the
likelihood of price competition amongst the primary service providers. On the
face of it, the encroachment of the Government on the private sector (via the
establishment of private wards) and the diminishing growth opportunities in the
top end of the local market could provide an incentive for one of the primary
top end of the local market could provide an incentive for one of the primary
service providers to break ranks and initiate a price war in order to increase
market share and sustain the growth performances that shareholders have
grown accustomed to. This is, in our view, unlikely. The primary service
providers have operated as a cartel over the past 3 years and have established
exceptionally healthy profit margins”. 24
24 Our emphasis. See the transcript of 10 February 2005, pages 103104 as well as pages 12271228 of
File 3 of the merging parties’ subsequent filings.
20
60. In commenting on this assessment Mr. Hogben conceded that the private hospitals
did not compete on price. He described the competitive dynamics of the market in the
following terms:
“…The basis of competition between private hospitals is about several
elements, of which price is not really one…The basis of competition between a
hospital is distinct units. It’s about its location. It’s about the quality of the
doctors that it has that work there and the quality of the doctors that work in
those hospitals is really driven in many ways by the quality of the hospital
facility and the quality of care that is given in that hospital…The question of
price as a competing factor between the hospitals is of lesser significance,
unless it becomes extreme.” 25
61. This is clearly a market that warrants the closest attention of the competition
authorities. We share the Commission’s concerns at the possibility of cooperation
between MediClinic and Ahealth and, accordingly, we have no hesitation in accepting
the Commission’s recommendation which is reflected in paragraph 1 of Part A of our
order.
62. The Commission is also concerned at the overlap between the IDC’s control of the
Clinix Group of hospitals and its share in control of Ahealth. Again it appears that the
IDC tendered to divest itself of its holdings in Clinix Holdings and there is, similarly, no
need to examine this further.
Restrictions on the sale of equity – provisions of Part B of the Tribunal’s order
63. The conditions imposed in Part B of our order derive from two distinct sets of
concerns. Those imposed in para 1.1 of Part B – ‘if any shareholder in Bidco or the
Company sells equity in Bidco or the Company to MediClinic or to Netcare then that
sale must be notified to the Competition Commission as a large merger’ – derive from
sale must be notified to the Competition Commission as a large merger’ – derive from
the particular background to this transaction. In short, we are not convinced by Medi
Clinic’s assurances regarding future designs on Ahealth’s assets. Moreover the terms
of the settlement indicate that Netcare may have similar designs. The condition
25 Refer to pages 105106 of the transcript of 10 February 2005.
21
imposed in Para 1.1 is designed to ensure that were either of these groups to attempt
to acquire interests in Ahealth itself or in its controlling shareholder, Bidco, that this
transaction would be subject to the most comprehensive form of scrutiny provided for in
the Competition Act.
64. The conditions imposed in Para 1.2 of Part B – ‘if RMB acquires additional equity in
the Company, directly or indirectly, so that its total effective equity in the Company is in
excess of 25%, then the transaction, which raises the equity above that level
(“additional equity transaction”), must be notified to the Competition Commission as a
large merger’ – derive from RMB’s interest in Discovery Holdings, a company whose
activities are vertically linked to those of the target company in this transaction.
65. We now turn to a detailed examination of each of the sets of conditions imposed in
Part B.
Para 1.1 of Part B of our order – change in control of Bidco or Ahealth
66. We have already indicated that MediClinic’s primary objective in participating in the
initial transaction was to gain control over a significant proportion of Ahealth’s assets.
This was expressed as 2500 hospital beds which were to be sold by the new owners of
Ahealth to MediClinic on conclusion of the sale. In both the Commission’s investigation
and in the Mediclinic hearings before the Tribunal, representatives of MediClinic and
its BEE partners were at pains to insist that this subsequent sale of hospital bids
represented little more than a conceptual understanding between the members of the
original Bidco consortium. In fact it is absolutely clear that they were being exceedingly
economical with the truth. MediClinic entered the transaction – T1 – with the express
intent of getting its hands on the Ahealth hospitals, this to be effected in the transaction
dubbed, T2. Contrary to the evidence presented to the Commission and to the
Tribunal, this was a done deal – the hospitals were, with the assistance of Mr. Rick
Hogben, already identified and the disposal agreement had been drawn up and signed.
And, in any event, should its BEE partners have reneged on T2, MediClinic’s control of
the merged entity’s funding and its participation on Ahealth’s board would have
enabled it to secure compliance with the disposal agreement. We have already
recorded the extreme reluctance with which MediClinic relinquished these rights.
22
67. It was precisely the prospect of MediClinic’s acquisition of the Ahealth beds that
underpinned Netcare’s aggressive intervention in the initial hearings before the
Tribunal. This is why the agreements struck as a direct consequence of the High Court
application in respect of the scheme of arrangement are careful to ensure both Medi
Clinic’s exit from T1 and its express disavowal of the continued existence of any
agreements to acquire hospital beds from the merged entity. However, while it is not
difficult to understand why Netcare should be well satisfied with this outcome, from the
perspective of those concerned to promote competition in the private hospital market,
MediClinic’s (and Afrox’s) assurances and the terms of the settlement agreement
which commits Ahealth and its owners to treating Netcare and MediClinic equally in
the event of a future disposal, provide cold comfort and this for two reasons:
68. Firstly, we are troubled that, even in the hearings in respect of this present
transaction, Mr. Hogben, AOL CEO and its future representative on the board of Bidco,
insisted on his lack of knowledge of, or participation in, T2. He insisted that he only
became aware of the existence of the disposal agreement when the papers in the
MediClinic transaction were filed with the Commission. This is directly contradicted by
Mr. Swiegers’ evidence in these hearings and the probabilities clearly favour Swiegers’
version. We note that despite the express opposition of Ahealth’s senior management,
the evidence submitted in the MediClinic hearings is that Mr. Hogben actively
participated in the selection of those of Ahealth’s hospitals that were to be sold to Medi
Clinic. Mr. Hogben insisted that he was not aware of a signed agreement. But, even if
Clinic. Mr. Hogben insisted that he was not aware of a signed agreement. But, even if
this is so and we doubt that, it is neither here nor there Mr. Hogben was certainly
aware of MediClinic’s strong designs. At best his claimed lack of knowledge of the
existence of a binding agreement may have been part of a scheme best described as
‘plausible deniability’, an express attempt to shield himself from truths that may be
23
inconvenient for him to acknowledge in a forum such as the Tribunal. 26 As elaborated
above, we understand why it was convenient for AOL to distance itself from T2. AOL,
after all, had made certain that its exit was firmly secured by the successful conclusion
of T1. But we do not accept Mr. Hogben’s denial of knowledge of, indeed complicity in,
MediClinic’s designs on the assets of Ahealth. We are accordingly not content to
accept his assurances regarding the absence of any side agreements regarding the
future disposal of Ahealth assets. We are pleased that Dr. Gerwel has added his own
disavowal of the existence of any side agreement regarding future disposals. However,
Mr. Hogben with his intimate knowledge of the market in question, will be an influential
member of the board and, it is undeniably he who, of the Ahealth management, proved
most amenable to the selloff to MediClinic. He also represents a shareholder, AOL,
explicitly anxious to exit its investment in Ahealth.
69. Secondly, we are extremely concerned at aspects of the settlement agreement,
effectively an agreement between Ahealth, MediClinic and Netcare. What it explicitly
purports to do is to manage any future disposals of Ahealth hospitals so as to ensure a
‘level playing field’ between Netcare and MediClinic. While we understand why this
provides comfort to Netcare, an agreement which effectively requires the putative
competitors to sit down and trade any future disposal of assets cannot be well received
in the ranks of those anxious to promote competition in an industry which expert
analysts already describe as a cartel and in which there has, through, this whole sorry
affair, been a massive exchange of information between the competitors. This
agreement potentially compounds the information exchange. As we have already
intimated, we believe that, in the ordinary course, such an agreement may well fall foul
of the provisions of Section 4(1)(a) of the Act.
70. We have already noted Netcare’s stated interest in acquiring Ahealth’s assets. It
26 Mr Michael Flemming, CEO of AHL, when asked by the Commission about the T2,
particularly his knowledge about the hospitals to be disposed of by Bidco to MediClinic,
responded as follows: “As far as I’m aware no official or legal agreement exists between Bidco
and MediClinic around which hospitals. I have attended a meeting where a number of potential
targets were discussed, but that was not either a complete or exhaustive list and from that
discussion we were unable to leave the meeting with any definitive answer of which hospitals
would be taken over”. He went further to say that at the first meeting about disposals, Medi
Clinic, Bidco and 3 members of Afrox executive were present, and this was where he indicated
his unhappiness to their proposal and in fact terminated the meeting at his instance and further
indicated to MediClinic and Bidco that he would not continue as Chief Executive Officer of
Ahealth if that was the case. See the transcript of Mr Flemming’s interview by the
Commission on 15 March 2004, page 3, 19.
24
attempted, at the outset, to participate in the bidding for Ahealth’s assets but was
rebuffed by the investment bankers. The evidence is that even during the course of the
battle for control of Ahealth there were exchanges between Dr. Edwin Hertzog and Mr.
Michael Sacks, respectively the chairmen of MediClinic and Netcare. Inshort, Netcare
was thwarted in its efforts to acquire Ahealth; it, in turn, was instrumental in preventing
MediClinic from acquiring Ahealth. And, in the end, an agreement has been reached
that ensures that, in the event of Ahealth selling any of its hospitals, neither MediClinic
nor Netcare will be advantaged in that sale. We repeat: we understand why Netcare is
satisfied with this outcome. And we understand that, though second best, MediClinic,
its wounds salved by a payment (from the coffers of the empowerment parties) of some
R50 million, is at least assured that it will get a ‘fair’ chance to acquire assets in the
future. For our part, this remains very far from a disavowal of interest in the assets of
Ahealth.
71. For these reasons we believe that it is prudent to ensure that the competition
authorities remain involved in any subsequent attempt to dispose of Ahealth or Bidco
equity. We have, moreover, required that any future disposition of Ahealth assets to
Netcare or MediClinic be subject to the scrutiny that a large merger invites, that is, that
it be subject to our authorisation. This we have done, because our processes are
transparent and allow for intervention by third parties. Had the MediClinic transaction
not been subject to the powerful disinfectant that sunlight proved to be, it may well
have escaped effective competition scrutiny.
Para 1.2 of Part B of our order – vertical concerns
72. Although there are several vertical relationships contained in the restructured
transaction, it is only through RMB’s participation in the present transaction that
potentially serious competition concerns are raised. OMLACSA’s interest in managed
care and healthcare funding is noted. These interests are, however, relatively minor
and will not be dealt with further.
73. RMB is a subsidiary of FirstRand Limited (“FirstRand”), a large financial services
group with various interests in the healthcare sector. However it is only FirstRand’s
interest in Discovery Holdings Limited that is of significance for our purposes. Note
the organogram below:
25
74. FirstRand Ltd. controls both Discovery Ltd and RMB Private Equity. It holds a65%
shareholding in Discovery Holdings Limited (“Discovery Holdings”). Discovery
Holdings, in turn, controls Discovery Health (medical aid fund), Discovery Life (life
insurance products), Destiny Health (USbased healthcare products) and PruHealth
(UK based healthcare products). Our concern lies with the vertical relationship from
Discovery Medical Scheme through to its administrator, Discovery Holdings.
75. At the prehearing held on 25 January 2005, we requested that the Commission
and merging parties file a submission commenting on the vertical issues arising from
RMB’s links to Ahealth and, through the FirstRand Group, to Discovery Holdings.
76. We also requested RMB to make a available a witness who would be capable of
dealing with these vertical issues and who would also be able to elucidate the financial
structure for the new transaction. We also requested that the Council for Medical
Schemes (“Council”) comment on this vertical link.
77. Our concerns are closely echoed by the Council for Medical Schemes which has
undertaken a characteristically comprehensive analysis of this potentially troublesome
link. In brief, the Council, like us, believes that vertical integration between, on the one
32.08%
9.03%
REMGRO
RMB Holdings
FirstRand Limited
23.08%
52%
32.08%
Medi Clinic
RMB Private
Equity
88%
Discovery Holdings
Limited
65.6%
Discovery Health
(Pty) Ltd (medical
fund)
BIDCO
(Ahealth)
26
hand, a major player in the medical scheme administrator and managed care markets
and, on the other, a key participant in the private hospital market, bodes ill for the
healthcare sector. The Council referred to indications in certain documents of
thepossibility of RMB increasing its equity stake. In particular, the Council’s concerns
related to the FirtRand Group’s strategic intentions with respect to the healthcare
sector. Clearly Discovery is regarded as a strategic investment. The question arises:
does FirstRand’s participation in this transaction represent the assumption of a similar
strategic interest in another part of the healthcare value chain? The Council also noted
that since the transaction involved a high degree of leveraging from the FirstRand
Group, there was a risk that, at a later stage, this debt may be converted into equity
and, hence, the assumption of a significantly greater stake in Ahealth.
78. The Council advised that after having met with the parties, it was satisfied that RMB
did not regard its interest in Ahealth as strategic, but rather as a specific investment
made in the ordinary course of its banking activities to facilitate this transaction. From
the Council’s discussions with the merging parties it seemed that only in extreme
circumstances would the debt be converted into equity and only in the event of the
entire arrangement failing.
79. We have, nevertheless, elected to impose a condition to address vertical concerns
that would arise should First Rand increase its stake in Ahealth to over 25%. Should
this occur, and should they continue to hold equity in excess of 45% in Discovery
Holdings, then their assumption of additional equity in Ahealth would have to be
notified to the Competition Commission as a large merger. This condition would not
notified to the Competition Commission as a large merger. This condition would not
apply were First Rand to dispose of the additional equity so acquired within three
months.
80. Although strictly speaking a horizontal concern, we also note here potential
concerns arising from Remgro’s substantial interest in RMB Holdings. Consult again
the organogram above. This reveals that Remgro, through RMB Holdings and a direct
equity stake, has an equity stake of some 17% in FirstRand Ltd, which, in turn, controls
Discovery Holdings Ltd. and shares in control of Bidco. Remgro is also shown to
control MediClinic. Again, given the background to this transaction, we were anxious
to ensure that this did not hold out the possibility of facilitating cooperation between
Ahealth and MediClinic. However this concern was persuasively dispelled by
witnesses at the hearing.
81. Mr. Swiegers averred that Remgro could not, through an equity interest of some
27
17%, exercise control over RMB much less over its subsidiaries, including Discovery,
several links down the corporate ownership structure. Swiegers stated:
“Discovery is an independent company. They have got shareholders listed on
the Johannesburg Stock Exchange and that company and the Board of that
company needs to act in its fiduciary capacity towards all the shareholders,
including those minorities…Discovery is a different listed company from
FirstRand.”27
82. Mr. Archer, who gave evidence on behalf of RMB’s Private Equity Division, echoed
the view that the ability of Remgro to influence FirstRand was extremely limited:
I have no knowledge of it. I mean what I can do is, clearly I have read the press
and I saw the allegations. So the one thing I did go and do was just check up what
Remgro’s effective shareholding was in the First Rand Group. It holds 9.5%
directly. It holds indirectly via RMB Holdings, RMB Holdings in turn holds directly
into First Rand. So its effective collective interest directly into First Rand is 17.04%
and secondly there are 14 Directors on the First Rand Board of which only one is a
Rembrandt nominee, being an individual I think called Dennis Falk.
So, my sense is the influence there is quite limited. Clearly if you are looking further
down the group to Discovery, well First Rand only owns 65% of Discovery. So
there are obviously significant further dilutions. If you are trying to look at the
Rembrandt, look through effective interest and if you were to look down the other
leg of the deal being First Rand’s effective holding in Ahealth, remembering
working backwards, we are in all likelihood a 10.1% shareholder.
In the various entities that hold those interests, there are minority shareholdings in
RMB Private Equity and RMB Ventures and then we go all the way up the group to
RMB Private Equity and RMB Ventures and then we go all the way up the group to
First Rand Limited. The monitories in RMB Venture are 15%. RMB Private Equity
are 6% and RMB Private Equity holds the Group’s interest in ventures. So there
are significant dilutions. So by the time you look through at the effective holding
through RMB’s 10% interest in A Health, you are talking about a very small stake.
Allied to the fact that they have no involvement or interaction. I have got no
involvement interaction. So that is all I can tell you from the actual, factual
27 Transcript of 11 February 2005, pages 4447.
28
shareholding position.” 28
83. Archer was asked whetherRMB would be, by virtue of its parent company’s stake in
Discovery, be able to ensure that the Discovery business was placed with a particular
hospital group, in this case, Ahealth. 29 He noted that the shareholders’ agreement
provided for the recusal of parties involved in potential interest conflicts of this sort. The
Agreement also contained specific minority protections that required, in related party
dealings, the written approval of shareholders holding 10% or more. These protections,
and RMB Equity’s relatively small stake in Ahealth, limited its ability to influence the
process.
Public Interest Issues
84. Although there are residual competition concerns arising from the particular back
ground to this transaction and from certain vertical considerations, we note that it is an
important boost to black economic empowerment. We are satisfied that the MediClin
ic’s exit from the transaction and the conditions imposed ensure that these public in
terest gains are not achieved at the expense of consumers of private hospital services.
Finding
85. The transaction is conditionally approved. Our order is reproduced above.
___________ 09 May 2005
David Lewis Date
Concurring: Norman Manoim and Thandi Orleyn
For the merging parties: Adv. Arnold Subel SC with him Adv. Robin Pearse
instructed by Knowles Hussein Lindsay Inc .
For the Commission: Adv. Martin Brassey SC with him Adv. Hamilton Maenetjie
instructed by Mahlangu Nkomo Mabandla Ratshimbilani Inc .
28 Transcript of 11 February 2005, page 7980
29 Ibid, page 88.
29