Commercial Property Finance Division of ABSA Bank Limited and Equity Estates (Pty) Ltd (17/LM/Feb06) [2006] ZACT 42 (19 May 2006)

78 Reportability

Competition Law

Brief Summary

Competition — Merger Approval — Merger between ABSA Bank Limited and Equity Estates (Pty) Ltd — ABSA to acquire 50% of issued shares in Equity Estates limited to A grade office properties — No significant overlap in market shares post-merger — Tribunal finds merger will not substantially lessen or prevent competition in the relevant market — Public interest concerns addressed as employment unaffected.

Comprehensive Summary

Summary of Judgment

1. Introduction

These reasons concern large merger proceedings before the Competition Tribunal of South Africa under Case No: 17/LM/Feb06. The Tribunal was required to decide whether to approve a proposed transaction in terms of which the Commercial Property Finance Division of ABSA Bank Limited (the acquiring firm, “ABSA”) would acquire a 50% shareholding in Equity Estates (Pty) Ltd (the target firm, “Equity Estates”).

The Tribunal issued a merger clearance certificate on 17 March 2006 approving the merger. The document provided is the Tribunal’s reasons for decision, dated 19 May 2006, signed by Y Carrim with D Lewis and M Holden concurring.

The general subject-matter of the dispute was whether the proposed acquisition—limited to immovable properties comprising grade A office space—was likely to result in a substantial prevention or lessening of competition, and whether any public interest considerations arose from the transaction.

2. Material Facts

ABSA is a public company listed on the JSE Securities Exchange and is controlled by Barclays Plc. The Tribunal recorded that Barclays did not control any other firm in South Africa apart from ABSA. ABSA conducts business across a range of banking and financial services activities, and it also engages in property interests and related functions. ABSA also held various non-controlling interests in several property portfolios (as listed in the reasons), which formed part of the factual context for assessing overlap.

Equity Estates carried on business in property investment, management, development and related activities. It was controlled by shareholders including the David Brown Family Trust (58%), the Vaughn Richardson Family Trust (14%), the Carl Jankowitz Family Trust (8%), and African Life Company Limited (20%). Equity Estates had a number of subsidiaries and associate companies (identified in the reasons), which held or related to its property interests.

The transaction was structured so that ABSA would subscribe for 50% of the issued shares in Equity Estates. A key factual feature relied on by the Tribunal was that ABSA’s acquisition was limited to the acquisition of immovable properties of grade A office space from Equity Estates.

Before ABSA acquired its 50% shareholding, Equity Estates was required to dispose of the rest of its business to MRX64 Investments Holdings (Pty) Ltd (“MRX”), which would be owned by the existing shareholders of Equity Estates. Post-merger, MRX would be appointed to manage the business of Equity Estates. The Tribunal recorded (based on confirmation sought at the hearing) that post-merger Equity Estates would be 50% owned by ABSA and 50% owned by the existing shareholders in their current proportions.

The Tribunal recorded that, post-merger, ABSA and the current shareholders would jointly own various properties that Equity Estates and its associate subsidiaries owned. For competition analysis, the Tribunal treated the relevant factual overlap as arising in rentable grade A office property in the Woodmead, Sandton, and Bryanston nodes.

As to motivation, ABSA regarded the acquisition as an attractive investment in grade A office space due to steady demand in the relevant nodes, while Equity Estates viewed the transaction as an opportunity to recoup returns on its investments.

3. Legal Issues

The central legal questions the Tribunal was required to determine were whether the merger was likely to result in a substantial lessening or prevention of competition, and whether any public interest concerns arose that would affect the approval decision.

The dispute required an application of competition law concepts to the recorded facts, including the identification of the relevant product markets and geographic market, and an assessment of likely competitive effects based on market shares, competitive constraints, and any vertical integration concerns. The public interest enquiry required an assessment of the transaction’s impact on matters such as employment, as addressed in the reasons.

4. Court’s Reasoning

On product market definition, the Tribunal accepted the submissions of the parties and the Competition Commission that grade A, B, C and P office property constitute different product markets. The Tribunal linked this differentiation to differences in quality, age, finishing, and distinct rentals charged for different categories of office blocks. The Tribunal also recorded the Commission’s submission that the parties’ activities overlapped in grade A office space, and noted that neither firm owned P, E or C grade office property, so no further analysis was required in relation to those categories.

On the geographic market, the Tribunal accepted the Commission’s submission that the market is local, organised into different nodes identified through consultation with market participants and the South African Property Owners’ Association (SAPOA). The Tribunal accepted that properties compete within nodes and command similar prices within the same node. Although it noted that the Investment Property Databank (IPD) had generally redefined nodes on a narrower basis, the Tribunal found that this had little impact on the present transaction. The Tribunal identified the overlap as occurring in Woodmead, Sandton and Bryanston for rentable grade A office property.

In evaluating competitive effects, the Tribunal noted that the parties relied on information from IPD, SAPOA and industry experts, while observing that the IPD data was not fully accurate because it was estimated to cover only approximately 60–70% of industry participants. Notwithstanding this limitation, the Tribunal assessed the market share figures in narrowly defined markets and found the increase in market shares to be insignificant, with post-merger shares remaining low and not raising competition concerns.

The Tribunal further considered that even if a broader rental market were assumed for grade A office space in the northern suburbs of Johannesburg (including, as described, the incorporation of surrounding areas into the Sandton node), the combined firm would own less than 3% of rentable grade A office space across that broader area, and thus the transaction would not give rise to competition concerns on that approach either. The Tribunal also recorded that post-merger the merged entity would continue to face competition from major competitors such as Liberty Life Properties, Old Mutual Properties, and RMB/Momentum Properties.

On vertical issues, the Tribunal stated that no serious vertical integration concerns were raised. It reasoned that ABSA would continue to rent grade A office space from other property owners, and the merger would have no effect on those owners. It also recorded that there were no incentives for ABSA to refuse to let office space to competitors, given the loss of rental returns and the ability of competitors to establish their own offices if office space were withheld.

On public interest, the Tribunal accepted the parties’ submission that the transaction had no effect on employment, because Equity Estates’ business would be transferred to MRX along with all employees, who would continue employment on the same terms and conditions. The Tribunal concluded that there were no public interest issues raising serious competition concerns.

5. Outcome and Relief

The Tribunal approved the merger, having concluded that it would not lead to a substantial lessening or prevention of competition. A merger clearance certificate was issued on 17 March 2006, and the Tribunal’s reasons were dated 19 May 2006.

No costs order is recorded in the reasons provided.

To reflect the competitive assessment recorded in the reasons, the post-merger market shares in the relevant nodes for grade A office space were stated as follows:

| Node | Equity Estates pre-merger share | ABSA pre-merger share | Combined post-merger share |
|---|---:|---:|---:|
| Woodmead | 9% | 2% | 11% |
| Sandton | 7% | 2% | 9% |
| Bryanston | 4% | 2% | 6% |

Cases Cited

No cases are expressly cited in the reasons provided.

Legislation Cited

No legislation is expressly cited in the reasons provided.

Rules of Court Cited

No rules of court are expressly cited in the reasons provided.

Held

The Competition Tribunal held that the merger, structured as ABSA’s subscription for 50% of the issued shares in Equity Estates and limited to the acquisition of immovable properties comprising grade A office space, would not substantially prevent or lessen competition in any relevant market.

The Tribunal further held that the merger raised no serious vertical integration concerns, and that there were no public interest concerns, including because employment would be unaffected as employees would transfer to MRX on unchanged terms. The merger was accordingly approved.

LEGAL PRINCIPLES

The Tribunal applied the principle that office property markets may be segmented by grade (including grade A, B, C and P) where differences in quality, age, finishing, and rental levels justify distinct product markets.

The Tribunal applied the principle that geographic markets for office property can be local and node-based, reflecting that competition typically occurs within defined commercial nodes where properties command similar prices and compete for tenants.

In assessing competitive effects, the Tribunal applied the principle that low and insignificantly increasing market shares, together with the continued presence of significant competitors, generally indicate that a merger is unlikely to substantially lessen competition, even where underlying market data may be incomplete.

The Tribunal further applied the principle that vertical concerns require evidence of incentive and ability to foreclose, and that where foreclosure would be commercially unattractive (for example due to loss of rental income and the availability of alternatives to competitors), vertical theories of harm will not ordinarily be sustained.

Finally, the Tribunal applied the principle that, in the public interest enquiry, a merger may raise no public interest concern where employment is unaffected, including where employees transfer to another entity with continuity of terms and conditions.