Brief Summary

Competition Law — Merger Approval — Pepkor Limited and Manrotrade Four (Pty) Ltd — The Competition Tribunal approved the merger between Pepkor Limited and Manrotrade Four (Pty) Ltd, allowing Pepkor to acquire 100% of Manrotrade's issued share capital. The merger was assessed based on its impact on competition within the relevant markets, including menswear, ladies' footwear, and cellular telephone products. The Tribunal found that the merger would result in a minimal increase in market share for Pepkor, which did not raise significant competition concerns, and concluded that the merger would not substantially lessen or prevent competition in the national market.

Comprehensive Summary

Summary of Judgment

1. Introduction

These reasons concern a large merger determination by the Competition Tribunal of South Africa in Case No: 06/LM/Jan06. The proceedings involved an application for merger approval in terms of which Pepkor Limited sought to acquire Manrotrade Four (Pty) Ltd, the entity that ultimately controlled the John Craig retail business.

The acquiring firm was Pepkor Limited (a wholly owned subsidiary of Pepkor Holdings Limited), operating a group of retail chains including Pep, Ackermans, Dunns, Shoe City, and Hang Ten. The primary target firm was Manrotrade Four (Pty) Ltd, which controlled other entities culminating in control over the John Craig retail operations.

The Tribunal recorded that it issued a merger clearance certificate on 5 April 2006, approving the merger. The document sets out the Tribunal’s reasons for that approval, dealing with market definition, competitive effects, and public interest (with particular reference to submissions made by SACTWU, the Southern African Clothing and Textile Workers’ Union).

The general subject-matter of the dispute was whether the proposed acquisition—resulting in Pepkor’s control of John Craig—was likely to substantially prevent or lessen competition in any relevant market and whether it raised substantial public interest concerns, particularly regarding employment and procurement patterns (including the potential for increased imports).

2. Material Facts

Pepkor conducted retail clothing operations through several chains, selling (among other items) clothing, footwear, household textiles, and telecommunication products. The target business, John Craig, operated 37 stores, located mainly in Gauteng and KwaZulu-Natal, and sold predominantly men’s clothing and shoes, with a limited offering of ladies’ footwear. John Craig was also involved in cellular telephone products and had an associated insurance product offered to account holders.

The merger was implemented through two inter-related sale-of-shares agreements. Under the first (the “Smith Agreement”), Pepkor would acquire Cecil Norman Smith’s 21.277% shareholding in Manrotrade, together with Smith’s claims against Manrotrade and certain related entities, with effect from 1 July 2005. Under the second (the “other agreement”), Pepkor would acquire the remaining 78.725% of the issued share capital of Manrotrade from other sellers, together with their claims against the same entities, also with effect from 1 July 2005.

The combined effect of the two agreements was that Pepkor would acquire 100% of the issued shares in Manrotrade and thereby become the sole controller of John Craig.

The Tribunal recorded the acquiring firm’s rationale for the transaction as an intention to develop Pepkor’s multi-brand speciality retail offering by expanding into the premium price branded segment of the clothing retail market, and to leverage John Craig’s expertise and technology. It also recorded that the target’s executives/shareholders were willing to sell their investment while continuing to manage the business within Pepkor.

On market definition, the Competition Commission identified the relevant markets as the national retail sale (through chains) of menswear, ladies’ footwear, mens footwear, cellular telephone products, and insurance products. The Tribunal accepted the Commission’s product market description for purposes of the transaction and agreed that the geographic market was national, based on the parties’ national pricing strategies.

On competitive effects, the reasons record estimated post-merger increments in market share that were described as small. In menswear, the merged entity’s market share was stated to increase by approximately 1.1% to 17.9%. In ladies’ footwear, the increase was stated to be approximately 0.3% to 19.6%. For mens footwear, precise market shares for all market participants were not provided; however, based on representations and prior information referred to by the Commission, the merged entity was estimated to hold 25.8% post-merger, reflecting an increase of about 2%. In cellular phone products, the Commission concluded the merged entity’s market share would be less than 5%, and in long-term insurance, less than 2%.

The public interest facts addressed by the Tribunal included SACTWU’s written submissions raising concerns about employment and what it characterised as increasing concentration in the retail market due to a pattern of acquisitions. Pepkor gave undertakings to SACTWU regarding employment effects at John Craig and Pepkor’s manufacturing plant (Pepclo), including that there would be no retrenchments at John Craig or Pepclo as a result of the merger and that terms and conditions of employment of SACTWU members employed by Pepkor would not be negatively affected. SACTWU also raised concerns about possible increased imports to the detriment of local manufacturing employment; the reasons record that SACTWU did not advance evidence on this aspect and sought information about local procurement patterns that was not provided by the merging parties.

3. Legal Issues

The central questions for determination were whether the merger was likely to lead to a substantial prevention or lessening of competition in any relevant market and whether it raised substantial public interest concerns that would warrant prohibition or conditional approval.

The dispute required the Tribunal to make a determination involving a combination of application of law to fact and evaluative judgment on (i) the appropriate delineation of relevant markets (product and geographic), (ii) the competitive significance of estimated market shares and increments, and (iii) the weight to be given to public interest submissions concerning employment and procurement/import-related effects.

Within the public interest enquiry, the Tribunal also had to decide whether any undertakings offered by the acquiring firm should be made conditions of approval, which involved an element of discretionary evaluation based on the facts placed before it in this matter.

4. Court’s Reasoning

On market definition, the Tribunal accepted the Commission’s identification of product markets and its approach to a national geographic market. The reasons indicate that this acceptance was informed by prior Tribunal decisions and, in particular, by the practical consideration that where parties’ pricing strategies are national, the geographic market may appropriately be treated as national. The Tribunal noted that the parties submitted their pricing strategies were national and therefore agreed with the Commission on geographic scope.

On competitive effects, the Tribunal evaluated the transaction primarily through the lens of market share estimates and the anticipated increment attributable to the acquisition. It noted that in earlier proceedings (Edcon), the Tribunal had characterised certain market share figures relied upon by the Commission (for ladieswear and ladies’ footwear) as “clearly incomplete and unreliable.” Nonetheless, the reasons indicate that the figures available in the present matter showed only slight increases in relevant markets, which the Tribunal considered insufficient to raise serious competition concerns.

In menswear, the Tribunal accepted that a post-merger market share of 17.9% following a 1.1% increase did not raise competition concerns. In ladies’ footwear, it similarly accepted that an increase of approximately 0.3% to 19.6% was small and not of concern. For mens footwear, although accurate market shares for all competitors were not provided, the Tribunal recorded the Commission’s estimate of a 25.8% post-merger share with an increment of 2%, and accepted that this increase was small and did not amount to a substantial lessening or prevention of competition. For cellular telephone products, the Tribunal accepted the Commission’s conclusion that the merged entity’s share would be below 5% in a highly competitive market, and therefore not competitively significant. For insurance products, it accepted that a share of less than 2% would not substantially lessen competition given the continued presence of other major participants.

On public interest, the Tribunal dealt with two strands of SACTWU’s concerns. First, it considered the submission about “concentration” due to an apparent pattern of acquisitions in the retail clothing sector. The Tribunal acknowledged an apparent pattern of acquisitions of smaller retailers by larger players, but stated that the present transaction did not itself lead to a substantial prevention or lessening of competition. On that basis, it treated the broader concern as falling beyond what it could address in this merger assessment, while urging the Commission to maintain vigilance in the market.

Second, the Tribunal considered employment-related concerns. It recorded Pepkor’s undertakings to SACTWU concerning no retrenchments and no negative effects on employment conditions at John Craig and Pepclo, and related assurances about bargaining fora and acquisition funding. Although Pepkor was willing for those undertakings to be made conditions of approval, the Tribunal decided there was no reason to impose conditions on the facts of this case, and it did not appear that SACTWU was insisting on conditionalisation.

Regarding SACTWU’s concerns about procurement patterns and the possibility that Pepkor’s control might lead John Craig to prefer imports over locally manufactured products, the Tribunal recorded that SACTWU advanced no evidence on this aspect and that information sought about the target firm’s local purchases was not provided. The Tribunal also raised the issue at the hearing and recorded Pepkor’s explanation that John Craig was essentially a branded clothing business and that manufacturing-location decisions were determined by the brands rather than by John Craig, making it difficult for Pepkor to commit to local purchasing.

In addressing the import-related concern, the Tribunal treated the issue as materially similar to that dealt with previously in the Edcon case, where it had concluded that concerns about cheaper imports could not be cured by imposing a merger condition on a single firm because it was a sector-wide phenomenon requiring sector-level instruments. The Tribunal stated that it had no reason to alter that conclusion in the present matter.

5. Outcome and Relief

The Tribunal approved the merger and issued a merger clearance certificate on 5 April 2006.

The approval was granted without conditions, notwithstanding Pepkor’s stated willingness to have certain employment undertakings made conditions, because the Tribunal found no basis on the facts of the case to do so.

No costs order is recorded in the reasons.

Cases Cited

Pepkor Limited and Fashaf (Pty) Ltd Competition Tribunal Case No 02/LM/Jan03.

Edgars Consolidated Stores (Pty) Ltd and Rapid Dawn 123 (Pty) Ltd Competition Tribunal Case No 21/LM/Mar05.

Dunns Stores (Proprietary) Limited and Shoe City Holdings (Proprietary) Limited Competition Tribunal Case No 38/LM/May05.

Legislation Cited

No legislation is expressly cited in the reasons.

Rules of Court Cited

No rules of court are expressly cited in the reasons.

Held

The Tribunal held that the merger, resulting in Pepkor acquiring sole control of Manrotrade Four (Pty) Ltd and thereby John Craig, was unlikely to lead to a substantial prevention or lessening of competition in the identified national retail markets for menswear, ladies’ footwear, mens footwear, cellular telephone products, and insurance products.

It further held that the merger did not raise substantial public interest concerns warranting conditional approval or prohibition. In particular, employment-related concerns were addressed by undertakings from Pepkor, but the Tribunal found no reason on the facts to make those undertakings conditions of approval. Concerns regarding imports and manufacturing employment were treated as sector-wide issues not appropriately addressed through merger conditions imposed on a single firm, consistent with the Tribunal’s earlier approach.

LEGAL PRINCIPLES

The Tribunal applied the principle that geographic market definition may appropriately be treated as national where the parties’ pricing strategies are set on a national basis, using pricing conduct as a practical indicator of market scope.

In assessing unilateral competitive effects in a merger, the Tribunal applied an approach that considers whether the merger leads to a material increment in market power, with particular attention to market shares and changes in market shares in the relevant markets. Small increments, in the context of continued competition from substantial rivals, were treated as unlikely to indicate a substantial lessening or prevention of competition.

In relation to public interest considerations, the Tribunal applied the principle that concerns which are sector-wide in nature—such as the competitive pressures associated with cheaper imports—are not readily addressed by imposing merger conditions on a single firm in the absence of a merger-specific basis grounded in evidence. The Tribunal also treated the decision whether to convert voluntary undertakings into enforceable merger conditions as dependent on the facts of the case, and declined to do so where it saw no justification for conditionalisation on the record before it.

Pepkor Limited and Manrotrade Four (Pty) Ltd (06/LM/Jan06) [2006] ZACT 33 (19 April 2006)