COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case no.: 68/LM/Jul05
In the large merger between:
ApexHi Properties Limited
and
Prima Property Trust
________________________________________________________________
Reasons
________________________________________________________________
Introduction
1.
1. On 21 October 2005 the Competition Tribunal approved the merger
between ApexHi Properties Limited and Prima Property Trust. The
reasons are set out below.
The parties and the transaction
2. ApexHi Properties Limited ("ApexHi") is acquiring the entire business of
Prima Property Trust ("Prima") as a going concern. The business
comprises the properties, lease agreements, and other contracts of Prima
and its propertyowning subsidiaries.
3. ApexHi is a variable rate property loan stock company listed on the JSE in
the real estate sector. Prima is a collective investment scheme, also listed
on the JSE.
4. The purchase price will be paid partly in cash and partly in the linked "A"
and "B" units in ApexHi.
5. ApexHi owns and rents out properties in the retail, commercial (office),
and industrial categories. Prima also operates in these categories.
Overlap exists between these categories in some of the geographical
areas or nodes in which the parties each have properties.
Rationale for the transaction
6. ApexHi considers that the transaction will enhance and complement the
quality and size of its portfolio of properties and will add diversity to and
lower the risk of its business operations. Prima appears to consider that it
is too small an entity, and has properties which are individually too small,
for it to thrive in what the parties perceive as a highly competitive industry.
Primary acquiring firm
7. ApexHi asserts that is not directly or indirectly controlled by anybody. Its
unitholders are listed as follows:
Investec funds 5%
Stanlib 7%
Redefine Income Fund 1 10%
Marriott Property Fund 2 13%
Other 65%
8. ApexHi owns a portfolio of properties valued at 30 June 2004 (the date of
the latest annual report) at some R3 billion. In terms of value, these
properties are broken down by category as follows:
Percentage of total portfolio
Retail 35
Commercial (offices) 47
Industrial 18
These properties are widely dispersed over the cities and towns of South Africa.
9. In terms of market capitalisation, the combined value of ApexHi's A and B
units (which have different entitlement rights to the income of the
company) was R4.1 billion at 5 July 2005, making it the thirdlargest
property loan stock company listed on the JSE.
1 Another property company listed on the JSE.
2 Also a JSElisted property company.
2
Primary target firm
10. Prima is represented for formal purposes by a trustee, Absa Bank Limited
and by Prima Property Trust Managers ("PPTM") as manager. The
Tribunal was not provided with information about the identity of its
unitholders but they can be assumed to be a variety of institutional and
private investors.
11. From the annual report for the period ending 30 April 2004 it appears that
Prima's property portfolio at that date was valued at R510 million.
Measured in net income, the categories in this portfolio were:
Percentage
Retail 57
Commercial 31
Industrial 10
In addition, interest contributed 2% of income, bringing the total to 100%.
12. The properties in Prima's portfolio are chiefly smaller properties, spread
over seven provinces, with 47% of net income being generated in
Gauteng and 12% in Mpumalanga.
13. Prima's market capitalisation at 5 July 2005 was R0.7 billion, making it the
smallest of the listed property unit trusts.
Market shares in the property industry
14. From the state of the papers referred to the Tribunal in this merger, it
would seem that comprehensive and reliable statistics on the size of the
market and on market shares in South Africa are either not maintained or
are at least difficult to come by. The Commission, faced with a bewildering
presentation of illassorted data in the parties' merger documents, gave up
the attempt to make a proper quantitative assessment, and largely
approached the merger on the basis of a socalled qualitative analysis.
This analysis, relying apparently on such factors as the purported
canniness in negotiations of large retail and other tenants, and the alleged
ease with which property lease agreements can be amended or
abrogated, led the Commission to conclude that in none of the three
3
property categories mentioned above was there a concern about possible
anticompetitive effects of the merger.
15. The Commission did however essay some analysis of market shares,
using statistics produced by the South African Property Owners'
Association ("SAPOA") and an organisation named Independent Property
Databank. In calculating postmerger market shares on the basis of the
figures originally supplied by the parties, the Commission, while warning
that it considered some of the figures unreliable, produced tables which
included such improbable outcomes as that the merging parties' share of
the convenience retail sector in the Johannesburg CBD would exceed
100%.
16. Only on 17 October 2005 did the Commission, in response to an urgent
appeal for more complete and accurate figures, receive somewhat more
acceptable statistics from the parties' legal representatives. These figures
suggest that in some of the areas or nodes in which there is overlap
between the samecategory operations of ApexHi and Prima, the post
merger market shares are in fact slight or possibly even insignificant.
Specific corrections were made in respect of Cgrade office space in the
Johannesburg CBD (11.08%), Bgrade office space in the Rivonia node
(11.5%), and industrial space in the Spartan/Kempton Park node (3.2%).
17. We are unconvinced that in this case a thorough and purposeful approach
to the task of assembling the essential facts of market size and market
share was adopted. It is to be hoped that players in the property industry
will apply their undoubted resources and talents to improving this position,
and that due heed will be paid to the presentation of information in the
documents filed in property mergers in future to ensure that an imbroglio
of this kind is not repeated.
18. As it is, the best approach the Tribunal was able to take to the overall
18. As it is, the best approach the Tribunal was able to take to the overall
dimensions of the market, apart from the corrected details mentioned
above, was based on the parties' exposition in their merger documents of
the market capitalisation of the major participants in the property industry,
to the extent that these are listed entities. From the data on this subject
presented on pages 8183 of the record, it appears that property loan
stock companies collectively have a total capitalisation of R30 billion, and
property unit trusts R13 billion. Moreover the market capitalisation of very
large propertyowning entities outside the listed property sector are Old
Mutual R10 billion, Sanlam R8 billion, and Liberty Life R6 billion. This
information appears to have been correct as at 8 July 2005. In this context
the market capitalisation of ApexHi (R4.1 billion), and Prima (R0.7 billion),
4
as mentioned above, demonstrate that both pre and postmerger they are
relatively small players in the overall property market, to the extent that it
is listed. The unlisted portion, which has not been quantified in the papers
made available to the Tribunal, adds a further and apparently significant
quantum to the size of the overall market.
19. Market capitalisation is not a reliable proxy for market share, measured in
terms of the usual metric of the property industry, namely the area (square
metres) of competitors in like categories in geographical nodes
representing relevant markets. Wrapped within market capitalisation may
be a premium or discount in relation to net asset value, and even net
asset value may not have a simple relationship to the area (in square
metres) of underlying properties, while the issue of property categories
further complicates the relationship. Valuation procedures and the timing
of valuations have their own complications and inconsistencies, to add yet
further complexity. Despite all this, the conclusion is inescapable that the
combined ApexHiPrima entity will not be a large player overall, and the
geographical breakdowns of the ApexHi and Prima portfolios, to the extent
to which they are intelligibly presented in the papers before the Tribunal,
do not reveal significant nodes where there is sufficient market strength to
raise competition concerns.
The issue of control
20. There is a further aspect of this case where the Tribunal considers the
groundwork was not adequately done in the papers making up the record
which it was required to consider. This is the issue of control of ApexHi
and Prima, and for that matter certain other entities which have links to
them.
21. It emerges from the papers, and specially from the organogram of the pre
merger corporate structure set out on page 17 of the record, that a
merger corporate structure set out on page 17 of the record, that a
company named Madison Property Fund Managers ("Madison") owns
100% of a subsidiary named Million Up Investments 158, which in turn
owns 100% of PPTM, the management company of Prima, mentioned
earlier. Madison is also the majority shareholder of ApexHi Manco Trust,
a company which undertakes the operational management of ApexHi.
Madison moreover provides the operational management for the Redefine
Income Fund, a listed company owning a variety of property assets, and it
has a 30% interest in the management company of a yet further listed
property loan stock company, Hyprop, which has a significant interest in
the Canal Walk complex outside Cape Town, which is in turn managed by
5
a company in which Madison once again has a significant interest, in this
instance 24%.
22. Madison is stated in the organogram as filed to be owned as to 50% by
Standard Bank, which is known to control the Liberty assurance group a
major owner of property in South Africa, particularly in the retail area. The
other shareholders are two individuals, Messrs Cesman and Wainer. At
the hearing we were told that since the date of the merger notification
Standard Bank had disposed of half of its holding to a Mr ShawTaylor,
who now, with Messrs Cesman and Wainer, each have a 25% stake in
Madison.
23. Madison is thus at the centre of the operations of several listed properties
and has shareholding links to others. Two of its individual shareholders,
Messrs Cesman and Wainer, are also on the boards of some of these
listed entities, including ApexHi. The decision taken by PPTM on behalf of
Prima to conclude the merger agreement with ApexHi was taken at a
board meeting of PPTH held on 7 April 2005, at which the directors
present were recorded as Messrs Haasbroek (chairman), Levy, Wainer
and Cesman. The relevant entry in the minutes reads:
THE APEXHI OFFER
The meeting referred to the ApexHi offer ….and accompanying draft
Agreement….the contents of which were noted by the meeting.
Prior to discussing the issue, Messrs Cesman and Wainer made Directors'
Declarations if Interest in the proposed transaction and requested that it be noted
that they are directors of ApexHi, Redefine, Hyprop and directors and
shareholders of Madison Property Fund Managers (Pty) Ltd, and are to be
regarded as interested parties in the proposed transaction. It was further noted
that A. Levy is employed as the asset manager of Prima…. The Chairman
observed that in the light of the Declarations of Interest by the other directors of
PPTM, it appeared that he was the only director that did not have a potential
PPTM, it appeared that he was the only director that did not have a potential
conflict of interest in the matter."
24. At the hearing before the Tribunal, Mr Feinblum, a director of ApexHi,
stated that because of the extent of the conflict of interest mentioned
above an independent expert opinion had been obtained by Mr Haasbroek
to confirm that the offer by ApexHi was fair and reasonable.
25. While these issues of conflict of interest appear on the face of them to
have more to do with the interests of investors than with competition, there
is an unexplored competition issue which should be mentioned.
6
26. Mr Feinblum, when asked about the extent to which Madison influences
the decisions taken by the boards of directors of the entities to which
Madison and its subsidiaries provide management services, was candid
about the matter. He said that in some cases the directors of property
companies have very little practical knowledge and experience of the
property industry and therefore bring in experienced professional
managers who effectively run the companies for them. This raises in a
clarion manner the question whether Madison does not have effective
control of some or all of the property companies which it or its subsidiaries
manage, at least within the definition set out in s. 12(2)(g) of the
Competition Act. S. 12(2) reads:
A person controls a firm if that person
a) beneficially owns more than one half of the issued share capital of the
firm;
b) 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…..
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
g) has the ability to materially influence the policy of the firm in a manner
comparable to a person who, in ordinary commercial parlance, can
exercise an element of control referred to in paragraphs (a) to (f).
27. The essential features of s. 12(2) (g) are thus whether there is "material
influence" over the affairs of a firm and if so the nature of that influence
when compared with the other, classic, forms of control of a firm.
28. If there is control as contemplated by s.12(2)(g) by Madison over Prima
and possibly also of ApexHi, then the question arises of the extent to
which the merging parties in this transaction have been accurately
described, and whether others, even extending to the very large retail
property interests of Liberty Life (through its controlling entity, Standard
Bank) are not implicated in the merger.
7
29. Paradoxically, however, such control by Madison might have the
consequence that the transaction between ApexHi and Prima would not
be a notifiable merger since both would be controlled by Madison, pre
and postmerger.
30. Both sections 4 and 12 of the Competition Act contain pitfalls for firms
which coordinate their activities through agreements or concerted
practices to the point where they enter the zone of prohibited anti
competitiveness, and these features of South African competition system
should not be overlooked in their potential application to merger
transactions.
31. Regrettably these issues were not explored at all in the merging parties'
notifications nor in the Commission's consideration of the transaction and
its ultimate recommendation to the Tribunal. The Tribunal raised certain
questions with Mr Feinblum at the hearing which may warrant
consideration when similar cases arise of mergers in which there are
interlocking relationships between the directors of companies which
nominally own assets and the companies which exercise operational
management over them.
Effect on competition
32. Given the state of the information in the record which it was called upon to
consider, the Tribunal has no basis for saying that the merger will have
any anticompetitive effects.
Public interest
33. The transaction does not raise any public interest issues.
Conclusion
34. Accordingly, the merger must be approved.
____________ 10 November 2005
L Reyburn Date
8
Concurring: T Orleyn, M Mokuena
9