Brief Summary

Competition — Merger approval — Acquisition of assets of failing firm — Phodiclinics (Pty) Ltd and DJF Defty (Pty) Ltd proposed to acquire assets of New Protector Group Holdings (Pty) Ltd, which was in provisional liquidation — Competition Commission recommended unconditional approval, citing lack of substantial lessening of competition due to New Protector's failing status — Opposing parties, including Netcare and Supreme Health, argued merger would create dominance in local markets and adversely affect competition — Tribunal found that countervailing presence of medical schemes mitigated anti-competitive effects and approved the merger unconditionally.

Comprehensive Summary

Summary of Judgment

1. Introduction

The proceedings concerned a large merger before the Competition Tribunal of South Africa in which the Tribunal was required to determine whether to approve the acquisition by the acquiring firms of the assets of New Protector Group Holdings (Pty) Ltd and related target entities, which were in liquidation. The matter was contested because several intervening parties opposed the merger on competition grounds notwithstanding the target’s liquidation status.

The acquiring firms were Phodiclinics (Pty) Ltd and DJF Defty (Pty) Ltd, with Medi-Clinic Corporation Ltd (through its subsidiaries) holding a controlling interest in Phodiclinics and controlling Defty in terms of the Competition Act 89 of 1998. The target firms included Protector Group Medical Services (Pty) Ltd (in liquidation), President Pharmacy (Pty) Ltd, several property-owning special purpose vehicles, and New Protector Group Holdings (Pty) Ltd (in liquidation).

The Competition Commission recommended approval of the merger without conditions on 3 March 2006. Following a pre-hearing in March 2006 and a further pre-hearing in July 2006, the Tribunal granted leave to intervene to Network Healthcare Holdings Ltd (Netcare), Supreme Health Administrators (Pty) Ltd (Supreme Health), and the Council for Medical Schemes (CMS). The merger hearing ran from 4–8 September 2006 and continued on 17–20 October 2006. The Tribunal unconditionally approved the merger on 31 October 2006, and issued reasons in a non-confidential version (with the release date recorded in the judgment).

The general subject-matter of the dispute was whether the acquisition of four hospitals and associated pharmacies (as assets of an insolvent group) by a Medi-Clinic-controlled vehicle would substantially lessen or prevent competition, particularly in local hospital markets such as the Vaal Triangle, and whether the transaction should be assessed through the lens of the failing firm consideration in section 12A(2)(g) of the Competition Act.

2. Material Facts

New Protector Group Holdings (Pty) Ltd (New Protector) was placed under provisional liquidation on 2 September 2004, and its key subsidiaries housing the trading assets were liquidated soon thereafter. The assets relevant to the merger comprised four hospitals—Medivaal Hospital (Vanderbijlpark), Kathu Hospital (Kathu), Marapong Hospital (Marapong), and Kingsley Hospital (Pretoria)—together with the pharmacies operating within or associated with those hospitals (including Grootgeluk Pharmacy, Employees Dispensary Pharmacy, Ferrochem Pharmacy, and President Pharmacy). The transaction also included certain property-owning entities holding the premises on which hospitals were situated.

Medi-Clinic, through a subsidiary, owned 51% of Phodiclinics, with the remaining 49% held by Phodiso Clinics (a subsidiary of Phodiso Holdings Ltd described as predominantly black-owned). Medi-Clinic operated a national network of private hospitals, and Defty provided pharmaceutical services to and on behalf of Medi-Clinic hospitals, within a regulatory structure that prescribes separation between hospital operations and pharmaceutical services.

The background to New Protector’s failure was central to the Tribunal’s analysis. New Protector had been established after Glenrand MIB disposed of its interest in the “old” Protector Group as part of a transaction presented as a BEE transaction involving a consortium (Tradeworx) and another shareholder (Freefall Trading 65 (Pty) Ltd). The transaction was funded by the Industrial Development Corporation of South Africa (IDC) and valued at R130 million, with competition approval having been obtained in June 2004. Shortly thereafter, New Protector encountered a sequence of events that culminated in liquidation, including the disappearance of approximately R70 million paid into New Protector’s bank account (with signing powers resting with two individuals who later became unavailable), the loss of a key medical scheme administration contract (with significant monthly revenue), and the adverse consequences of acquiring a pharmacy business (TMC) with substantial liabilities and inadequate due diligence.

By July 2004, banks had exercised security rights and frozen bank accounts of New Protector and subsidiaries, and banks were unwilling to extend further facilities. The group lacked cash flow to pay salaries, procure food and provisions for hospital patients, pay rent, or service debt. Creditors were active, and the evidence recorded total liabilities substantially exceeding assets, together with severe operational distress. The IDC provided post-liquidation funding to keep essential services operating while a buyer was sought.

The liquidator pursued a process aimed at selling the assets as a going concern rather than by a fire sale. Information packs were made available to interested parties (including Medi-Clinic, Netcare, and Dr Mini of Supreme Health). The liquidator received a range of approaches and proposals; however, the Tribunal distinguished between proposals that were unconditional and capable of acceptance and those that were conditional on further IDC funding, guarantees, equity participation, or waivers. Ultimately, an unconditional cash offer of R120 million submitted by the Medi-Clinic/Phodiclinics vehicle was accepted, and the Tribunal found that other proposals were not capable of acceptance because they depended on IDC commitments which the IDC had made clear it would not provide.

On competition effects, it was common cause that Medi-Clinic would implement its national tariffs at the acquired hospitals, implying tariff increases relative to Protector’s generally lower tariffs. The Commission and Tribunal considered both national and local competitive conditions, with particular attention to the Vaal Triangle (where Medivaal and Vereeniging Medi-Clinic were proximate) and Kathu (where the merger would result in Medi-Clinic being the only private hospital group in that town).

3. Legal Issues

The central legal questions were whether the proposed acquisition was likely to substantially prevent or lessen competition in the relevant market(s), and how the Tribunal should weigh competition concerns against the statutory factor in section 12A(2)(g), namely whether the business of a party to the merger “has failed or is likely to fail.” The dispute therefore involved a mixed assessment of law, fact, and the application of legal standards to economic and commercial facts, together with evaluative judgment on the weight to be afforded to the failing firm consideration relative to alleged competitive harm.

A further set of legal issues concerned the definition of the relevant geographic market, particularly whether the competitive assessment should be conducted primarily at a national level (given centralized pricing policies and national medical scheme negotiations) or at a local/regional level (given patient choice, catchment areas, and non-price competition). Intervenors argued for a stronger focus on local dominance and regional leverage in bargaining with medical schemes.

Additional contested issues included whether the merging parties had discharged the onus associated with reliance on the failing firm doctrine as articulated in prior Tribunal authority, including whether there were reasonable alternative purchasers that would have posed a less severe danger to competition, and whether proposed alternative offers raised during the hearing could be treated as relevant “alternatives” for purposes of the failing firm enquiry.

Although not determinative of the merger outcome, procedural questions arose regarding requests by Netcare’s representatives to stand the matter down for a potential recusal application and a late application for postponement to lead additional expert evidence in response to material relied on by the CMS.

4. Court’s Reasoning

The Tribunal applied the Competition Act’s merger assessment framework, beginning with market definition. The relevant product market was not in dispute and was treated as the market for the provision of private hospital services, understood as a cluster of specialist and related hospital services. The Tribunal emphasized that hospitals compete both on price at a national level (particularly through negotiations with medical schemes) and on non-price dimensions at a local level (including location, quality, range of services, and the ability to attract specialists).

On geographic market definition, the Tribunal considered the Commission’s “multi-perspective” approach, including the Commission’s use of a fixed-radius test to identify a local market in the Vaal Triangle. The acquiring parties’ expert evidence used patient-flow methodologies (including the Elzinga–Hogarty test) to argue for narrower or different market boundaries. The Tribunal did not make a definitive finding on the general appropriateness of the Elzinga–Hogarty test in hospital mergers, observing that, at best, it provided only an initial view requiring support from other indicia. The Tribunal relied on a combination of proximity, internal documents, and witness testimony to conclude that Medi-Clinic regarded Medivaal as a local rival, and therefore found that the Vaal Triangle was the relevant local market for assessing local overlap.

The Tribunal recorded that market share figures in the Vaal Triangle could indicate very high post-merger concentration depending on which facilities were included as effective competitors. Excluding certain smaller rivals, the merged entity’s share on a bed-based measure was presented as 71% with a high post-merger HHI and a substantial HHI accretion, which the Tribunal acknowledged as ordinarily raising significant competition concern. The Tribunal nevertheless treated these “stark figures” as mitigated by other considerations addressed later in the analysis, chiefly the failing firm position and the limited evidential basis for foreclosure theories advanced by intervenors.

The Tribunal’s reasoning placed substantial weight on the statutory “failing firm” factor. It interpreted and applied section 12A(2)(g) in light of prior Tribunal authority, particularly Iscor Ltd and Saldanha Steel (Pty) Ltd, and discussed the relationship between more stringent and less stringent formulations of the failing firm test as described in comparative frameworks referenced in that authority. The Tribunal applied the elements described as the United States failing firm defence criteria, focusing on (i) inability to meet financial obligations in the near future, (ii) inability to reorganize successfully, (iii) unsuccessful good-faith efforts to elicit reasonable alternative offers that would keep assets in the market and be less harmful to competition, and (iv) likely exit of assets absent the acquisition.

On financial failure and inability to reorganize, the Tribunal detailed the collapse of funding and banking facilities, the loss of key revenue streams, the disarray in records and corporate structure, the operational fragility of the hospitals and pharmacies, and the continued losses under liquidation absent extraordinary IDC funding. It found there was no doubt that New Protector was already a failed firm by the time of provisional liquidation and that subsequent revelations about ownership structure and record-keeping compounded the inability to reorganize.

On good-faith efforts and reasonable alternatives, the Tribunal examined the liquidator’s sales process and the proposals received. It found that the liquidator pursued a going-concern sale, distributed information packs, engaged potential buyers, and sought to improve offers. Critically, it found that alternative proposals advanced by Tradeworx, Nulane, and Grand Bridge were each conditional on further IDC support and therefore were not capable of acceptance once the IDC refused to increase or maintain its exposure. The Tribunal treated the unconditional R120 million cash offer as the only offer capable of acceptance at the relevant time. It also rejected as irrelevant a later funding proposal raised by Netcare and Dr Mini during the hearing, holding that “reasonable alternatives” in the failing firm enquiry must exist at the time the liquidator procures offers and concludes a transaction, not later during the competition hearing process. The Tribunal interpreted the “has made unsuccessful good-faith efforts” requirement as directed to efforts already undertaken by the time approval is sought, rather than an ongoing obligation to continue searching for alternatives.

On the “exit” element, the Tribunal accepted evidence that, absent the transaction, the hospitals and associated assets were likely to be broken up and disposed of piecemeal, with a real prospect of closure given the IDC’s stated reluctance to continue funding, the risk of staff and specialist attrition, and the need for substantial capital injection and operational expertise. It accepted that Medi-Clinic was the only purchaser offering both an unconditional purchase and commitments to invest in upgrades.

Turning to the intervenors’ competition concerns, the Tribunal addressed alleged exclusionary strategies in the Vaal Triangle, including predicted closure or rationalisation of specialised units at Medivaal, refusal to accept patient referrals from Netcare’s facilities, refusal to cooperate in lending equipment or staffing support, and interference with specialist practice patterns. It found no credible evidential basis for these concerns. It accepted evidence that Medi-Clinic had committed to upgrading facilities and had no commercial incentive to refuse referrals, as referrals represent revenue and Medivaal was intended to be made profitable. It also reasoned that specialist practice across multiple hospitals already occurred and no evidence showed that hospitals prevented specialists from working at rival hospitals; accordingly, the merger was not shown to change these dynamics in the manner alleged.

On tariffs, the Tribunal accepted that the transaction would lead to tariff increases at Protector hospitals due to Medi-Clinic’s national pricing approach, and treated the precise magnitude as unnecessary to decide. It reasoned that most patients were medical scheme members and that national tariff agreements would limit the effect on premiums, particularly given the small national market share of the target. For private (non-scheme) patients, the Tribunal accepted that increases would occur but observed that such patients had alternatives within the Vaal Triangle and constituted a minority of Medivaal’s patient base.

The Tribunal accepted that barriers to entry in private hospitals are high due to regulation, licensing constraints, moratoria on new licences, and the capital and expertise required. It nevertheless found that medical schemes enjoy some countervailing power in tariff negotiations and was not persuaded that the small national market share accretion (0.8%) would materially shift bargaining power or impede preferred provider arrangements in the manner contended by the CMS. The Tribunal treated the CMS’s broader “creeping mergers” and industry cost escalation arguments as raising serious concerns but characterized the remedy sought—effectively preventing the major hospital groups from acquiring further hospitals and forcing sale to a new independent group—as a sector-wide remedy not available to the Tribunal in merger adjudication, which must assess each merger on its own statutory merits.

In dealing with procedural events at the end of the hearing, the Tribunal recorded that it refused an informal stand-down request associated with a contemplated recusal application, noting that time was available to bring a formal application the next day, which did not occur. It also refused a late postponement sought by Netcare to lead rebuttal expert evidence, reasoning that Netcare had opportunities to cross-examine witnesses on the report in question and could have filed evidence earlier, and that delay would prejudice the merging parties and the failing target by prolonging uncertainty.

Overall, the Tribunal concluded that the competitive harm alleged by intervenors was overstated and that any competition loss was outweighed by the failing firm factor, leading to unconditional approval.

5. Outcome and Relief

The Tribunal approved the merger unconditionally, concluding that New Protector was a failing/failed firm within the meaning of section 12A(2)(g) of the Competition Act and that the merging parties had discharged the required onus for reliance on the failing firm consideration as applied in the Tribunal’s prior approach. The Tribunal found that the competitive harm in local markets, including the Vaal Triangle and Kathu, was not established to a degree that would justify prohibition or conditions, particularly given the likely exit of assets absent the transaction.

No specific costs order is recorded in the provided text of the reasons. The Tribunal also refused a late application for postponement to file additional expert evidence and recorded its handling of an indicated but unpursued recusal-related request during the proceedings.

Cases Cited

Iscor Ltd and Saldanha Steel (Pty) Ltd, Competition Tribunal Case No: 67/LM/Dec01.

Merger between Massmart and Moresport, Competition Tribunal Case No: 62/LM/Jul05.

Afrox Healthcare Ltd and Amalgamated Hospitals Ltd, Competition Tribunal Case No: 53/LM/Sep01.

Business Venture Investments 790 and Afrox Healthcare Ltd, Competition Tribunal Case No: 105/LM/Dec04.

Legislation Cited

Competition Act 89 of 1998, including sections 12A, 12A(2)(g), 12(2)(g), and 54.

Public Finance Management Act 1 of 1999.

Medical Schemes Act 131 of 1998.

Insolvency Act 24 of 1936 (referenced in relation to section 89 realisation costs).

Companies Act (referenced via commentary in Henochsberg in relation to compromises/arrangements in insolvency context, without the Act number specified in the provided text).

United States Bankruptcy Act (Chapter 11), referenced comparatively in the articulation of the failing firm defence criteria.

Rules of Court Cited

No specific rules of court are cited in the provided text as such. The only procedural provision expressly identified is the discovery application brought in terms of section 54 of the Competition Act 89 of 1998.

Held

The Tribunal held that New Protector Group Holdings (Pty) Ltd (in liquidation) was a failing/failed firm for purposes of merger assessment under section 12A(2)(g) of the Competition Act. It held that, at the time the liquidator accepted the Phodiclinics offer, there was no other offer capable of being accepted because alternative proposals were conditional on IDC participation that the IDC had refused.

The Tribunal further held that the alleged competitive harm in the Vaal Triangle and Kathu was overstated and not supported by sufficient evidence of likely exclusionary conduct, that tariff increases would occur but would have limited competitive impact in context, and that the transaction’s national market share accretion was small. The merger was accordingly approved without conditions.

LEGAL PRINCIPLES

The Tribunal applied the principle that merger assessment under the Competition Act requires consideration of the factors in section 12A, including whether a party’s business has failed or is likely to fail. The failing firm consideration was treated as capable of outweighing competitive harm where evidence shows that the target cannot meet obligations, cannot reorganize successfully, has been subject to good-faith attempts to find reasonable alternatives, and that assets are likely to exit the market absent the merger.

The Tribunal applied the principle that “reasonable alternatives” in a failing firm enquiry must be assessed with reference to the time when the liquidator elicits offers and the transaction is concluded, and that belated proposals raised during the competition hearing process do not constitute relevant alternatives for purposes of that enquiry.

In defining geographic markets in a differentiated product setting such as hospital services, the Tribunal applied the principle that patient-flow tools may, at most, provide an initial indication and that market definition may properly be supported by other indicia, including proximity, industry and participant evidence, and internal strategic documents reflecting how firms perceive rivalry.

The Tribunal applied the principle that high concentration and barriers to entry are relevant but must be assessed alongside evidence of actual competitive constraints, including countervailing power (here, medical schemes’ bargaining capacity) and the practical realities of local competition, and that the Tribunal’s remedial authority in merger proceedings does not extend to imposing blanket sector-wide prohibitions on acquisitions by particular firms absent a transaction-specific showing under the Act.

Phodiclinics and Others v Protector Group Medical Services (Pty) Ltd (in Liquidation) and Others (122/LM/Dec05) [2006] ZACT 102 (21 February 2006)