Brief Summary

Competition — Merger approval — Competition Tribunal approving merger between Mercanto Investments (Pty) Ltd and Johnnic Holdings Ltd subject to divestiture condition — Merger involving hostile takeover with pre-existing shareholding — Tribunal found no substantial lessening of competition in relevant markets, thus approving merger with conditions for divestiture of Gallagher Estate Exhibition and Convention Centre or Johnnic's shareholding in Gallagher Estate Holdings Ltd within 12 months.

Comprehensive Summary

Summary of Judgment

1. Introduction

The proceedings concerned the Competition Tribunal’s adjudication of a large merger in terms of the Competition Act, arising from a hostile takeover. The acquiring firm was Mercanto Investments (Pty) Ltd (“Mercanto”), and the primary target firm was Johnnic Holdings Ltd (“Johnnic”). Mercanto was a wholly owned subsidiary of Hosken Consolidated Investments Ltd (“HCI”), an investment holding company listed on the JSE, while Johnnic was itself an investment holding company listed on the JSE.

The procedural history reflected an ongoing contest for corporate control within a broader shareholding structure involving gaming and related assets. Prior to the merger hearing, Johnnic had brought a separate application before the Tribunal seeking declaratory and interdictory relief on the basis that HCI had allegedly implemented or proposed a merger without approval; that application was dismissed on the basis that Johnnic had failed to show that HCI had acquired control of Johnnic. In the present matter, Mercanto filed a merger notice with the Competition Commission, after which Johnnic indicated it would file a separate merger notification under the applicable Commission rules. The Commission ultimately referred its recommendation to the Tribunal, and the Registrar set the matter down for hearing on 6 December 2005.

The general subject-matter of the dispute was whether the merger should be approved under the merger control provisions, particularly considering potential competitive effects in two identified areas: the gaming, hotels and leisure sector and the exhibition and conference facilities sector. The hearing also raised procedural and relevance disputes concerning a late-filed expert report and a subpoena directed at a third-party witness.

The Tribunal approved the merger on 7 December 2005, subject to a divestiture condition relating to the Gallagher Estate Exhibition and Convention Centre (or the relevant shareholding). These reasons were issued on 17 January 2006.

2. Material Facts

Mercanto already held 35% of the share capital in Johnnic and, in the context of a hostile takeover, made a compulsory offer to acquire the remaining shares in Johnnic under the auspices of the Securities Regulation Panel process described in the record. The corporate relationship between the firms was “intertwined” through a complex set of cross-shareholdings in subsidiaries and related entities, and the wider background included a protracted contest for control of Tsogo Investment Holding Company (Pty) Ltd (“TIH”), the controlling shareholder in Tsogo Sun Holdings (Pty) Ltd (“TSH”), described as the largest gaming and hotel group in South Africa.

In the Commission’s investigation, two product markets were identified as relevant: a Gaming, Hotels & Leisure market and an Exhibition & Conference facilities market. In relation to gaming, the Commission found the transaction would not change TSH’s market share because the transaction would merely increase HCI’s shareholding in TIH and related interests, and Johnnic had no other casino interests beyond those held through its indirect shareholding in TSH.

In relation to exhibitions and conferences, it was common cause for the Tribunal’s purposes that both HCI and Johnnic had interests in the Sandton Convention Centre (“SCC”) and that Johnnic owned Gallagher Estate in Midrand. The Commission treated the geographic market as national and, within a broad product market for exhibition and conference facilities, identified sub-segments by event size (less than 1000 delegates and more than 1000 delegates). The Commission concluded that competition was not substantially lessened, including for larger events, even on a narrow Johannesburg-area geographic framing, and therefore recommended approval without conditions.

A factual dispute (or at least a sharp divergence in characterisation) arose during the hearing from Johnnic’s opposition. Johnnic sought to introduce (on 5 December 2005) a Genesis report on the impact on competition in exhibition facilities. The Genesis report’s conclusions were that exhibitions and conferences should be treated as separate product markets, that exhibitions were regional rather than national, that there were effectively a limited set of major exhibition venues in Gauteng, that entry was limited, and that negotiated pricing predominated. On that basis, Genesis concluded that combining SCC and Gallagher under common control was likely to substantially lessen or prevent competition in a regional market for exhibition facilities.

A further area of controversy concerned a “special arrangement” described in an HCI circular issued to Johnnic shareholders, involving HCI and Gold Reef City Casinos (“GRC”). Johnnic’s merger opposition in respect of the casino market was based on the contention that this arrangement was related to another potential transaction, namely a possible acquisition by GRC of SABSA’s 49% stake in TSH, and that the arrangement constituted a restricted practice under section 4 of the Competition Act. Johnnic subpoenaed Mr Steven Joffe, the CEO of GRC, at short notice to testify and produce documents, contending his evidence was necessary to address the competitive implications of the special arrangement.

During the hearing, before the Tribunal communicated a decision on the admissibility of the late Genesis report, HCI tendered a remedy in the form of a divestiture undertaking. The proposed condition contemplated that the merged entity would divest, within 12 months, either the Gallagher Estate Exhibition and Convention Centre business as a going concern or Johnnic’s entire shareholding in Gallagher Estate Holdings Ltd. The Commission did not object to this proposed condition. Johnnic’s remaining concern, supported by evidence from Ms Carol Weaving (managing director of Thebe Exhibitions and Events Group), was that common control of SCC and Gallagher during the divestiture period could allow prices to rise, service levels to deteriorate, or preferential access to be granted to a competitor, particularly given the long lead times and advance booking practices in exhibitions.

3. Legal Issues

The Tribunal identified two central legal questions that determined the disposition of the hearing.

The first question was whether it was necessary and relevant to hear evidence relating to the casino market, particularly the evidence of Mr Joffe, where Johnnic’s casino-market opposition was premised on the “special arrangement” and a potential future GRC/SABSA transaction rather than on competitive effects arising from HCI’s acquisition of Johnnic as such. This issue primarily concerned the application of law to fact, namely the scope of inquiry in a merger proceeding, the relevance threshold for evidence, and whether the merger hearing could properly be used to ventilate allegations framed as prohibited practices.

The second question was whether the proposed divestiture of Gallagher Estate cured the competition concerns raised in Johnnic’s Genesis report (as supported by Ms Weaving’s evidence), and in particular whether divestiture after implementation, within a 12-month period, was an adequate remedy and whether additional safeguards were required during the interim. This issue concerned the application of merger control principles to the evidence and involved an evaluative judgment as to whether a structural remedy and related operational safeguards would sufficiently address alleged competitive harm.

Although the hearing also raised the question of the admissibility of the Genesis report due to late service, and the propriety of the subpoena served on Mr Joffe, the Tribunal’s stated approach was that the approval decision ultimately “turned on” the two questions above, and that its relevance finding made it unnecessary to decide certain procedural objections.

4. Court’s Reasoning

On the casino-market question, the Tribunal reasoned that Johnnic’s opposition did not identify competition concerns in the casino market arising from the merger itself, but instead sought to link the merger to a separate potential transaction involving GRC and SABSA and to characterise the special arrangement as contravening section 4 of the Competition Act. The Tribunal examined the text of the special arrangement as described in the HCI circular and treated it as reflecting, at most, an intention and conditional undertaking to support GRC if GRC made an offer to purchase SABSA’s shares, together with the possibility of future joint control mechanisms such as a voting pool agreement.

The Tribunal emphasised that any possible joint control of TSH by HCI and GRC depended on contingencies outside the merger: first, that SABSA (as an independent third party) would have to agree to sell its stake; and second, that such a transaction would require regulatory approvals, including from the competition authorities. On this footing, the Tribunal characterised the GRC/SABSA transaction, if it were to occur, as a discrete notifiable transaction between different parties, the competition effects of which would require assessment at the time of notification. It further noted that, as a matter of public record, SAB Miller had indicated it did not intend to sell its stake and discussions had ceased well before the hearing, reinforcing the contingent and uncertain nature of the proposed transaction.

The Tribunal drew a conceptual distinction between merger control and prohibited practices enforcement. It reasoned that the Act does not generally prohibit competitors from acquiring each other’s businesses or forming joint ventures, but regulates such structural changes through the merger control framework, which assesses whether a transaction is likely to prevent or substantially lessen competition. To the extent that Johnnic alleged the special arrangement itself constituted a contravention of section 4(1)(a), 4(1)(b)(ii), and 4(1)(b)(iii), the Tribunal considered that the appropriate route would be a complaint investigated by the Commission as a prohibited practice, rather than attempting to conduct that inquiry within the merger hearing. In this context, the Tribunal rejected the proposition that approval of the present merger would amount to approval of the separate, contingent GRC/SABSA transaction.

Because the Tribunal concluded that evidence about the special arrangement and the possible GRC/SABSA acquisition was not relevant to the merger under consideration (the acquisition of Johnnic by HCI through Mercanto), it held that Mr Joffe’s evidence was not required. Having made that relevance finding, it considered it unnecessary to determine whether the subpoena process was abusive, while nevertheless recording concern about the short notice on which the subpoena had been served.

On the exhibition and conference facilities issues, the Tribunal addressed the competition concerns raised in Genesis’ market framing and the evidence of Ms Weaving, but treated the matter as being capable of resolution through an appropriate condition. It accepted that Ms Weaving’s evidence reflected practical features of the exhibitions industry, including the significance of venue suitability for certain exhibitions, the prevalence of negotiated pricing, and the fact that bookings are typically made at least a year in advance (with some bookings in her business extending several years ahead). It also accepted that interim common control of SCC and Gallagher for a period of 6 to 12 months could, in principle, raise concerns such as increased prices, reduced service levels, and potentially preferential treatment.

However, the Tribunal placed weight on the content of the proposed condition (as ultimately attached), including safeguards requiring the merged entity to preserve and maintain the economic and competitive value of the Gallagher business and to refrain from acts that would adversely affect it or alter its commercial strategy during the divestiture period. It also relied on mechanisms providing for the appointment of a trustee, intended to ensure the divested business would be run independently and maintained separately from the merging parties’ strategies until sold. The Tribunal further relied on provisions directed at the purchaser maintaining the divested business as a viable and active competitive force in competition with the merging parties.

In dealing with Johnnic’s argument that divestiture should occur prior to implementation of the merger, the Tribunal reasoned that the attached safeguards and the supervisory role contemplated for the Commission (including approval relating to the trustee and the sale) were sufficient to address the risk of interim competitive harm. It concluded there was therefore no need to require divestiture before implementation. The Tribunal also stated that, with divestiture, the remedy would remove overlap between the merging parties in the exhibition and conference facilities market, whether defined as Genesis proposed or as the Commission had defined it, describing divestiture as a structural remedy adequate to address the concerns.

Finally, the Tribunal recorded that the transaction raised no public interest concerns.

5. Outcome and Relief

The Tribunal approved the merger between Mercanto Investments (Pty) Ltd and Johnnic Holdings Ltd, but did so subject to a condition requiring divestiture. The merged entity was required, within 12 months of the date of the order, to divest either the business of the Gallagher Estate Exhibition and Convention Centre as a going concern and/or Johnnic’s entire shareholding in Gallagher Estate Holdings Ltd.

The Tribunal also determined, as part of its approach to the conduct of the hearing, that it was not necessary to hear evidence from Mr Steven Joffe in relation to the casino-market issues raised by Johnnic, because those issues related to a separate and contingent future transaction and to allegations more appropriately investigated as prohibited practices rather than determined in the merger hearing.

No costs order is reflected in the reasons, and the Tribunal stated that the transaction did not raise public interest concerns.

Cases Cited

Johnnic Holdings Ltd v Hosken Consolidated Investments Ltd and Competition Commission, Tribunal Case No: 65/FN/Jul05.

Legislation Cited

Competition Act (sections 4(1)(a), 4(1)(b)(ii), 4(1)(b)(iii), and 12, as referenced in the reasons).

Rules of Court Cited

Rule 28 of the Competition Commission Rules for the Conduct of Proceedings.

Held

The Tribunal held that the evidence sought from a third-party witness (Mr Steven Joffe of Gold Reef City Casinos) concerning a “special arrangement” and a possible future GRC/SABSA transaction was not relevant to the merger under consideration, because any such future acquisition would be a separate, divisible, and independently notifiable transaction requiring its own competition assessment if it occurred. Allegations that the “special arrangement” constituted restricted practices under section 4 were held to be more appropriately pursued through the Commission’s prohibited practice processes, not through the merger hearing.

The Tribunal further held that competition concerns raised in relation to the exhibition and conference facilities sector could be adequately addressed through a structural divestiture remedy, coupled with conditions designed to preserve the competitive value and independent operation of the divested business pending sale and to ensure the purchaser would maintain it as an effective competitive force. On that basis, the merger was approved subject to the divestiture condition.

LEGAL PRINCIPLES

Merger proceedings are directed at assessing whether the notified transaction is likely to prevent or substantially lessen competition in relevant markets, and the Tribunal’s inquiry is confined to the competitive effects of the merger that is actually before it. Evidence directed primarily at a separate, contingent, and future transaction involving different parties may be treated as irrelevant to the merger proceeding, particularly where the future transaction would itself require notification and approval if it materialised.

The Competition Act draws a functional distinction between merger control (which regulates market structure through ex ante assessment of acquisitions of control) and prohibited practices enforcement (which addresses certain forms of anti-competitive conduct). Where a party’s objections are framed as contraventions of section 4, the Tribunal treated such allegations as ordinarily requiring initiation and investigation through the Commission’s prohibited practice processes rather than being determined within the merger hearing.

A divestiture condition may operate as a structural remedy capable of eliminating problematic overlaps between merging parties. In evaluating whether post-implementation divestiture is adequate, the Tribunal accepted the relevance of interim risks but relied on safeguards aimed at maintaining the divested asset’s economic and competitive value, requiring operational separation (including through a trustee mechanism), and ensuring the divested business remains a viable competitive constraint after sale. The Tribunal treated these protections, together with Commission oversight of key steps, as sufficient to avoid the need for divestiture prior to merger implementation.

Mercanto Investments (Pty) Ltd and Johnnic Holdings Ltd (78/LM/Aug05) [2006] ZACT 2; [2006] 1 CPLR 157 (CT) (17 January 2006)