COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case No.: 38/LM/May05
In the large merger between:
Dunns Stores (Pty) Limited
and
Shoe City Holdings (Pty) Limited
REASONS FOR DECISION
Approval
1. On 13 June 2005 the Competition Tribunal issued a Merger Clearance
Certificate approving unconditionally the merger between Dunns Stores (Pty)
Ltd (“Dunns”) and Shoe City Holdings (Pty) Ltd (“Shoe City”). The reasons for
this decision follow.
The merging parties
2. The primary acquiring firm is Dunns, a wholly owned subsidiary of Pepkor Limited
(“Pepkor Limited”), ultimately controlled by Pepkor Holdings Limited (“Pepkor”). 1
3. The primary target firm is Shoe City, a South African incorporated
company owned by a number of shareholders. 2 Shoe City controls Shoe
City (Pty) Ltd (“Shoe City subsidiary”).
The Merger Transaction
4. Dunns would acquire 90% of the issued share capital and shareholders’
claims against Shoe City from various shareholders of Shoe City. Post
1 The major shareholders of Pepkor, previously known as Castellina, are: Titan Nominees (Pty) Ltd
(“Titan Nominees”) (36.8%); Old Mutual Life Assurance Company (South Africa) Limited
(“OMLACSA”) (20.5%); South African Private Equity Trust III (“SAPET”) (11.8%); Pepkor Holdings
Ltd Share Incentive Trust (10%); and Capital Africa Limited (“CAL”) (8.7%). See the letter from
the merging parties’ attorneys dated 11 May 2005.
2 The following are the shareholders of Shoe City: South African Private Fund I (“SAPEF I”) and
Tarkus Holding B.V. (“Tarkus”), collectively (58.3%); S Michel Family Trust (management) (15%); T
Rebeiro Family Trust (management) (10%); F Ramos Family Trust (management) (1%); J Ettisch
Family Trust (management) (2%); DG Rodwell Family Trust (10.9%); and Citizens Corporation (Pty)
Ltd (“Citizens”) (2.2%). See page 273 of the record.
merger, Pepkor – through its wholly owned subsidiary Dunns – would hold
90% shareholding in Shoe City. Pepkor will thus be vested with sole control
over Shoe City. 3 We were told at the hearing that the four family trusts who
represent certain executive members in the company would retain the
remaining 10% of the issued share capital. 4
Rationale for the transaction
5. According to the parties the private equity funds, Tarkus and SAPEF seek
to sell their interests in Shoe City in that they have reached their investment
targets and therefore the investors wish to exit this investment. This is
particularly motivated by the fact that Shoe City is currently prospering in the
local footwear industry and therefore shareholders can expect good returns if
their investment is realised now.
6. Pepkor considers the acquisition as complementary to its offerings in
footwear because Shoe City also has a cashonly, valuebased business
strategy that sits comfortably with Pepkor’s own business strategy. Pepkor
would be able to compete directly with other stockists of branded wear notably
the Edgars and Foschini group of companies. However, Brait as a
shareholder of Pepkor has an added benefit of retaining an interest in Shoe
City.5
The relevant market
Product market
7. The transaction involves a number of firms involved directly or indirectly in
the retail market through investment and private equity whose activities are
irrelevant for our purposes. The only relevant firms for our analysis would be
Pepkor, which is in direct competition with Shoe City. This is explained in
detail below.
8. Pepkor and Pepkor Ltd are investment holding companies that form
Pepkor Group , which in turn trades as Dunns, Pep and Ackermans.6
Globally Pep, Dunns and Ackermans collectively have 2 000 stores of which 1
Globally Pep, Dunns and Ackermans collectively have 2 000 stores of which 1
345 are located in South Africa. Pep, Dunns and Ackermans have
3 The merger comprises several interlinked transactions in the following stages: (1) Dunns will acquire
60.44% of the issued share capital of and shareholders’ claims against Shoe City from Tarkus, SAPEF
and Citizen; (2) Dunns will acquire 60.44% of the issued share capital of and shareholders’ claims
against Shoe City from the Michel Family Trust, the Ribeiro Family Trust, the Ramos Family Trust,
and the Ettisch Family Trust; and (3) Dunns will acquire 10.90% of the issued share capital of and
shareholders’ claims against Shoe City from the Rodwell Family Trust. (See pages 56, 61 and 65 of the
record).
4 See Mr Cilliers’ testimony, page 4 of the transcript of 13 June 2005.
5 See page 67 of the record.
6 See Pepkor Group Structure (page 88 of the record).
2
approximately 920, 150 and 275 retail stores in South Africa respectively. 7
These 3 groups are commonly involved in the retail of ladies’ wear; men’s
wear; boys wear; girls wear; school wear; foot wear (men’s, ladies’ and
children’s shoes); cellular telephone products; and other product accessories
such as hand bags, belts, jewellery, and cosmetics. In addition, Pep is also
involved in the retail of textiles, whereas Ackermans retails infants’ wear and
home ware .
9. Shoe City is an investment holding company with a chain of 63 cashonly
valuebased footwear stores countrywide. 8 Its customer base is the middle to
lower income group. Shoe City’s stores sell men’s, ladies’ and children’s
shoes.
10. Shoe City competes with Pepkor in the retail of footwear. Therefore, an
overlap exists with respect to the retailing of footwear. However, the
Commission contended that the broader footwear category could be generally
divided into 3 product lines: (1) men’s footwear; (2) ladies’ footwear; and (3)
children’s footwear. It further analysed the market from both broad and narrow
perspectives.
Geographic market
11. We were advised that the merging parties adopt a national pricing strategy
when selling their products. In special circumstances, Pepkor allocates budget
to counter localised competition from independent stores in the form of
regional competitions, specials or markdowns. Moreover, Store Managers
usually alert regional managers to special promotions within their areas and at
their discretion regional managers would then allocate a budget to counter
such competitive activity. According to the Commission the merging parties’
assertion suggests that the geographic markets are local, while the
Commission preferred a national market
Impact on competition
12. The merging parties provided us with the market share figures which are
reproduced below.
Retailer Men’s
footwear
Ladies’
footwear
Children’s
footwear
Total
Footwear
Retailer Men’s
footwear
Ladies’
footwear
Children’s
footwear
Total
Footwear
Pepkor 15.1% 10.7% 36.2% 18.7%
Shoe City 8.7% 3.7% 2% 4.7
Merged entity 23.8% 14.3% 38.1% 23.5%
Source: Retail Liaison Committee (RLC)
7 See the Commission’s Report (page 7).
8 That is, Gauteng (21); Western Cape (12) Limpopo (6); Eastern Cape (6); Free State (5); Kwazulu
Natal (4); Mpumalanga (4); North West (3); and Northern Cape (2).
3
13. The following figures reflect the market shares in the broader footwear
market: Edcon (34%); Woolworths (25%); Pepkor (18.7%); Foschini
Group (14%); Shoe City (4.7%); Mr Price (2%); and Others (1.8%) .9 While
the Commission conceded that penetrating this market with a few outlets /
stores is relatively easy, it nevertheless contended that the barriers to
establishing a new national chain were extremely high. However it pointed out
that the accretion in market share in each of the market segments is relatively
slight. It appears that postmerger Pepkor will only gain 2% resulting in it
having a significant 38.1% market share in the children’s footwear market.
Other major retail stores such as Edgars, Woolworths and Pick ‘n Pay
Hypermarket exist in this market.
14. From the market share figures above, it appears that Pepkor has 18.7%
market share whilst Shoe City – which the Commission does not consider to
be a significant competitor enjoys a mere 4.7% in the broader footwear
market. The merged entity would have a combined postmerger market share
of 23.4% within the broader market (including all types of footwear). This will
result in the merged entity being the third largest retailer of footwear following
Edcon (34%) and Woolworths (25%). It was the Commission’s contention that
the additional market share that would be gained by Pepkor would be
relatively low. It appears there are numerous other players retailing in the
same range of products as the merging parties in addition to the big and
popular players.
Public Interest
15. The merging parties advised us that they do not anticipate any job losses
pursuant to the merger.
Finding
16. In light of the information submitted to us, the Tribunal’s view is that
competition would remain in the footwear retailing market posttransaction.
competition would remain in the footwear retailing market posttransaction.
We agree with the Commission’s submission that the transaction would not
prevent or lessen competition substantially. We accordingly approve this
merger unconditionally.
_____________ 24 June 2005
David Lewis Date
9 The RLC did not provide the parties with separate market shares for the other market participants.
These were market shares figures from the RLC together with the parties’ estimates.
4
Concurring: Norman Manoim and Yasmin Carrim
For the merging parties: Coreen Fouch é (Jan S. De Villiers Attorneys)
For the Commission: Edwell Mtantato assisted by Maarten van
Hooven ( Mergers & Acquisitions )
5