Brief Summary

Competition Law — Merger Control — Prohibition of merger between Massmart Holdings Limited and Moresport Limited — Competition Tribunal found that the merger would substantially lessen competition in the retail market for sports and recreational goods — Massmart, a significant national retailer, sought to acquire control over Moresport, which operates prominent sports retail chains — Tribunal determined that the merger would likely lead to a dominant position detrimental to competition, thus prohibiting the transaction in terms of section 16(2)(c) of the Competition Act.

Comprehensive Summary

Summary of Judgment

Introduction

The proceedings were large merger proceedings before the Competition Tribunal of South Africa in which the Tribunal was required to decide whether to approve or prohibit a proposed acquisition. The acquiring firm was Massmart Holdings Limited (a JSE-listed public company) and the target firm was Moresport Limited (a private company controlled by Vestacor Limited, Nedcor Investments Limited, and a management consortium).

The proposed transaction entailed Massmart acquiring sole control of Moresport by purchasing 84.12% of Moresport’s issued share capital, with the balance remaining with certain members of Moresport’s management. Massmart’s stated rationale was to expand its participation in sports retail, while certain Moresport shareholders wished to realise their investments and Moresport’s management wished to expand operations.

The Competition Commission filed a recommendation on 14 October 2005 that the merger be prohibited. The Tribunal heard the matter over multiple hearing days between 30 January 2006 and 27 March 2006. The Tribunal also requested and received additional internal documents and directed that a comparative “shop-out” be undertaken to assist with the factual assessment of product overlap and competitive constraints. On 10 April 2006 the Tribunal prohibited the merger in terms of section 16(2)(c) of the Competition Act read with Rule 35(5), and it subsequently furnished reasons (dated 12 May 2006).

The general subject-matter of the dispute concerned whether the merger would likely lead to a substantial prevention or lessening of competition in the retailing of sports and recreational/outdoor goods, and in particular the extent to which the parties competed in the sports and outdoor equipment space, how the relevant market should be defined, and whether high concentration could be mitigated by entry, countervailing power, efficiencies, public interest considerations, or remedies.

Material Facts

It was common cause that both Massmart and Moresport were involved in the retailing of sports and recreational goods, and that the relevant Massmart divisions for this transaction were its Makro, Game and Dion chains (referred to as the “Massstores” in the decision). Moresport sold sports and recreational goods through Sportsmans Warehouse, Outdoor Warehouse, and Sports Shoe World.

The Commission’s investigation and the parties’ later alignment established that no competition concerns arose in the sports apparel and sports footwear markets and likewise none arose in outdoor apparel and outdoor footwear. It was also common cause that there were no vertical concerns, and that the competition concerns, if any, arose only in the equipment space (sports equipment and outdoor equipment).

A central factual dispute concerned market definition, specifically whether the equipment segment should be treated as a single relevant market (as the Tribunal ultimately did), or whether it should be segmented into different product “levels” (entry versus middle/prime) such that Massmart and Moresport would fall into different sub-markets (as argued by the merging parties). In support of the segmentation argument, the merging parties relied materially on an expert report by Mr James Hodge (Genesis-Analytics), which drew on indicia including median pricing and margins, brand access, store format, service levels, and advertising.

The Tribunal relied heavily on several categories of factual material to assess rivalry and competitive constraint. First, it placed weight on internal strategic and valuation documents that treated the parties as competitors. These included Massmart’s board approval materials that identified Sportsmans Warehouse among the market participants in the sports equipment market, and a Nedbank valuation of Moresport that identified the Massmart group as a significant competitor in the relevant space. The Tribunal also considered Moresport’s internal strategic meeting minutes that required formal monthly competitor shop-outs and listed Massmart stores as competitors across multiple equipment categories.

Second, the Tribunal relied on the evidence of experienced buyers (including witnesses subpoenaed by the Commission) who described routine competitor monitoring, price benchmarking, and the extent and nature of overlap between the parties’ equipment offerings. This evidence supported the proposition that the parties monitored each other closely and that overlap was often category-dependent and not confined to a narrow “entry-level only” band.

Third, after the close of evidence the Tribunal considered the results of a comparative shop-out undertaken at specified outlets (Game Menlyn, Dion Sandton, Makro Woodmead and Sportsmans Warehouse Woodmead) in defined categories (including cricket bats, racquets, hockey sticks, rugby and soccer balls, treadmills, exercise bikes, and golf clubs). The Tribunal stated that it relied on a reworked/corrected version of the shop-out information prepared by Mr Hodge (described as the “revised shop-outs”). On those revised shop-outs the Tribunal found that there was overlap in brands and price points across many categories, with Massmart generally having lower opening price points and Moresport exiting at higher price points, but with meaningful overlap across the range.

On barriers to entry, the Tribunal accepted evidence that while a single store might be established with some capital, entry on a scale sufficient to constrain the merged entity required establishing or expanding a national chain with appropriate footprint, procurement capability, and expertise. The Tribunal relied notably on Massmart’s own evidence about the time and cost of building national brands and on the history of growth by acquisition in Massmart’s development.

It was also factually material that the merging parties expressly confirmed during proceedings that they were not relying on an efficiencies defence if the Tribunal found a substantial lessening of competition, and that they sought either outright approval or outright prohibition (that is, they did not seek conditional approval).

Legal Issues

The central legal questions were whether the merger was likely to lead to a substantial prevention or lessening of competition in any relevant market and, if so, whether that outcome would be outweighed or offset by efficiencies or public interest considerations, or could be adequately addressed by conditions (noting the parties’ position that they did not seek conditional approval).

The dispute principally concerned the application of competition-law principles to facts, particularly the factual and evaluative determination of the relevant product market and geographic market in a retail context characterised by product differentiation and non-price competition. It also required an evaluative assessment of competitive effects (including the significance of removing a close competitor), the role of market shares and concentration (including HHI changes), and the likelihood and sufficiency of entry and competitive constraints from other market participants.

In addition, the Tribunal had to determine whether segmentation within the equipment market (entry-level versus middle/prime) was justified on the evidence, and whether independent retailers (general or specialist) should be treated as effective competitors within the relevant market.

Court’s Reasoning

The Tribunal approached market definition as an exercise in business reality in which the key question was where effective competitive constraints were experienced, rather than an exercise in merely cataloguing differences between retailers. In a retail sector with product differentiation and non-price competition, the Tribunal stated that traditional tools such as the SSNIP test and cross-elasticity calculations were not necessarily decisive or readily available, and that practical indicia and evidence of rivalry could be used to identify relevant markets. The Tribunal referred to the practical indicia approach associated with Brown Shoe and reflected in earlier Tribunal decisions, emphasising that indicia are used to identify where competition in fact exists.

On the merging parties’ proposed segmentation (entry-level versus middle/prime), the Tribunal found the segmentation case unpersuasive. It considered that the merging parties’ reliance on median prices and margins was not a reliable method for defining separate antitrust markets in the circumstances of this case. The Tribunal reasoned that median prices and margins were not the basis on which consumers choose retailers and did not, without more, demonstrate an absence of competitive constraint. The Tribunal also found that reliance on Federal Trade Commission v Staples Inc. and Office Depot Inc. was misplaced because that matter involved extensive econometric evidence and identified competitive effects through observed price differences across localities, whereas the present matter did not provide comparable econometric proof and the median-price methodology was not shown to capture competitive behaviour.

The Tribunal further reasoned that attempting to define markets purely by price differentials risked error where price differences reflected actual or perceived quality differences, because lower-priced products may still constrain higher-priced products through consumer trade-offs between price and quality. It accepted evidence that pricing at one level could discipline pricing at adjacent levels, and it considered this inter-level constraint inconsistent with a rigid segmentation of the market in which Massmart and Moresport allegedly did not constrain each other.

The Tribunal found strong evidence of rivalry in the parties’ internal documents, buyer testimony, and competitor shop-outs. It accepted evidence that both firms monitored each other’s prices and that both sought to match (or respond to) each other’s entry price points across categories, either by lowering prices or introducing alternative products. It also relied on evidence that product overlap was fluid and category-specific, with significant overlap in some categories and less in others, and that the parties had become closer over time in product and price positioning. The Tribunal considered that these features supported the conclusion that the parties competed in the same market for general sports and outdoor equipment rather than in separate, non-overlapping segments.

In assessing other indicia, the Tribunal was not persuaded that differences in advertising, store format, service levels, or brand access justified market segmentation. It found that advertising materials displayed more similarities than the merging parties suggested, with both parties using broadsheet leaflets and emphasising price and savings. On brands, it accepted that some suppliers might restrict distribution of certain premium brands, but it found brand access to be fluid over time and observed substantial overlap in brands in the revised shop-out material, with limited evidence that Moresport had a credible prime-level offering across the relevant equipment categories.

Having rejected segmentation, the Tribunal concluded that the relevant product market was the retailing of general sports and outdoor equipment, and it agreed with the Commission that the geographic market was national, primarily because both parties followed national pricing policies, operated national chains, and located stores in close proximity within major retail nodes, with only limited reactive local price matching.

On competitive effects, the Tribunal held that the post-merger entity would have a very large market share and that the market would be highly concentrated on any plausible approach to shares and market participants (including scenarios more favourable to the merging parties). It treated the elimination of rivalry between the two largest general national competitors in this equipment space as central. It accepted that independents (general and specialist) did not provide effective constraint comparable to the rivalry between the merging parties, largely due to limited footprint, specialist focus, location outside major retail nodes, and the merging parties’ national pricing strategies. While it considered the Pro Shop and Golfers Club as possible exceptions in the golf category, it found that including such players did not alter the concentration concerns in any material way.

On barriers to entry, the Tribunal found that effective entry sufficient to constrain the merged entity would require building or expanding a national chain, which it considered costly and time-consuming. It relied on Massmart’s evidence about the cost and risk of organic brand-building, the time it took Massmart to achieve its scale through acquisitions, and the general proposition that those likely to enter timeously would not be sufficient, and those capable of sufficient entry would not do so timeously. The Tribunal also found that consumers, as individual retail customers, had little countervailing power against mass merchants.

The Tribunal then considered whether any efficiencies or public interest factors could offset the anticompetitive effects. It noted that the merging parties did not rely on an efficiencies defence if a substantial lessening of competition were found, and it found no public interest concerns raised by the merger. In the absence of proposed conditions capable of remedying the anticompetitive effect (and in light of the parties’ stance that they did not seek conditional approval), the Tribunal concluded prohibition was appropriate.

Outcome and Relief

The Tribunal prohibited the merger between Massmart Holdings Limited and Moresport Limited in terms of section 16(2)(c) of the Competition Act read with Rule 35(5). The prohibition was based on the finding that the merger was likely to lead to a substantial prevention or lessening of competition in the national market for the general retailing of sports and outdoor equipment, with no efficiencies or public interest factors advanced to justify approval despite that finding and with no conditions sought to remedy the concern.

The reasons as provided do not record any distinct costs order.

Cases Cited

Brown Shoe Co. v. United States, 370 U.S. 294; 82 S.Ct. 1502.

Federal Trade Commission v. Staples Inc. and Office Depot Inc., 970 F. Supp. 1066.

Bon-Ton Stores Inc v May Department Stores, WDNY 1994.

Federal Trade Commission v. Swedish Match et al, 131 F. Supp. 2d 151 (D.D.C. 2000).

JD Group Limited and Ellerines Holdings Limited, Competition Tribunal Case No: 78/LM/Jul00.

Tongaat-Hulett and Transvaal Suiker Beperk, Competition Tribunal Case No: 83/LM/Jul00.

Nampak Ltd and Malbak Ltd, Competition Tribunal Case No: 29/LM/May02.

Trident Steel (Pty) Ltd v Dorbyl Ltd, Competition Tribunal Case No: 89/LM/Oct00.

Xstrata South Africa (Proprietary) Limited and Egalite (Proprietary) Limited and International Carbon Holdings (Proprietary), Competition Tribunal Case No: 54/LM/Jul04.

Legislation Cited

Competition Act 89 of 1998 (as referenced in the decision, including section 16(2)(c)).

Rules of Court Cited

Rule 35(5) of the Competition Act rules (as cited in the prohibition order).

Held

The Tribunal found that the relevant market was the national retailing of general sports and outdoor equipment and that the merging parties’ proposed segmentation into entry-level and middle/prime sub-markets was not supported by the evidence of rivalry, pricing conduct, product and price-band overlap, and internal documents.

The Tribunal held that the merger would eliminate rivalry between the two largest and most effective national general retailers in the equipment space, creating a highly concentrated market structure and enabling the merged entity to exercise market power with limited constraint from existing competitors, independents, or timely and sufficient new entry.

The Tribunal further held that barriers to the emergence of an effective national competitor were high, that individual consumers had limited countervailing power, and that the anticompetitive effects were not offset by efficiencies or public interest considerations. The merger was accordingly prohibited.

LEGAL PRINCIPLES

Market definition in differentiated retail markets is grounded in commercial reality and focuses on identifying effective competitive constraints and evidence of rivalry, including internal documents, pricing policies, consumer-facing price overlap, and market participants’ conduct, rather than on superficial differences in format or presentation.

The existence of different price points, product ranges, or quality tiers does not, without persuasive evidence, justify segmentation into distinct antitrust sub-markets, particularly where there is evidence that pricing at lower levels constrains pricing at higher levels and where competitive overlap is fluid across categories.

In merger assessment, high concentration indicators (including market shares and HHI changes) are materially relevant, but the competitive analysis also requires evaluating whether entry would be timely, likely and sufficient to constrain the merged entity, and whether customers possess meaningful countervailing power.

Where a merger removes a close and effective competitor in a concentrated market with high barriers to effective entry, and where no efficiencies defence or public interest justification is advanced (and no remedy is proposed), prohibition may follow on a finding of likely substantial prevention or lessening of competition.

Massmart Holdings Limited and Moresport Limited (62/LM/Jul05) [2006] ZACT 40 (12 May 2006)