1
COMPETITION TRIBUNAL OF SOUTH AFRICA
Case No: 49/LM/Jun06
In the matter between:
The Trustee for the time being of the Growthpoint
Securitisation Warehousetrust Acquiring Firm
And
Business Connexion Technology
Holdings (Pty) Ltd and Other Target Firm
______________________________________________________________
Panel : DH Lewis (Presiding Member), N Manoim (Tribunal
Member), and U Bhoola (Tribunal Member)
Heard on : 12 July 2006
Decided on : 12 July 2006
REASONS FOR DECISION
Approval
[1]. On 12 July 2006, the Tribunal unconditionally approved the proposed
merger between the abovementioned parties. The reasons for the decision
follow.
Parties
[2]. The acquiring firm is The Trustees for the time being of the
Growthpoint Securitisation Warehouse Trust (“Growthpoint Trust”). The
Growthpoint Trust is a wholly owned subsidiary of Growthpoint Properties
Limited (“Growthpoint”) a variable rate stock company listed on the
Johannesburg Stock Exchange on the real estate sector1. Growthpoint is not
controlled by any entity. Growthpoint is in the business of acquiring property
for rental to third parties. The primary target firm is Business Connexion
Technology Holdings (Pty) Ltd (“BCTH”). BCTH i s a wholly owned subsidiary
of Business Connexion Group Limited (“BCX Group”) and it is involved in the
broader IT sector.
1 A list of all the firms that hold more than 5% of the issued capital of Growthpoint can be found on
page 2 of the Commission’s Report.
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Transaction
[3]. The proposed transaction comprises of two interrelated phases in
which Growthpoint is acquiring several properties from Business CX. The first
phase consist of the Absa Restructuring and the FirstRand Restructuring. The
second phase involves the acquisition of eight properties from BCTH and
BXC FirstRand Properties. The BCX Group concluded financing transactions
with Absa Group2 and the FirstRand Group3.
For the sake of convenience we will from now on, simply refer to the acquiring
entity as Growthpoint and the selling entity as Business Connexion as the
involvement of the particular legal entities directly implic ated in the sale has
no bearing on the competition analysis
Below is a table reflecting the Property Portfolio to be acquired
Table 1: PROPERTY PORTFOLIO BEING ACQUIRED
Property Geographic
Area
Type Grade
Glenfield Park Faerie Glen (G) Office A
Business Midrand (G) Office A
Connexion Park
Block A, B, C
Business
Connexion Park,
Block D, E and Q
Midrand (G) Office A
Century City Montague
Gardens (CT)
Office A
1 Cranbrook La Lucia (KZN) Office A
2 The financing transac tions with the Absa Group were meant for the acquisitions of certain properties
and such transactions were structured such that Biprops 44(Pty) Ltd (“Biprops”) will own BCX Absa
Properties. The restructuring agreements provide for the sale by Biprops of th e BCX Absa Properties to
BCTH with the effect that the sole control of the BCX Absa Properties will be with the BCX Group
immediately before the transfer to Growthpoint. For a list of the BCX Properties owned by Biprops,
see page 518 of the parties Competi tive Report. 3 The financing transactions with the FirstRand Group were meant for the acquisition of certain
properties and such transactions were structured that three companies (La Lucia Properties (Pty) Ltd,
Keriod Investment (Pty) Ltd and Atlantic Ocea n Properties (Pty) Ltd) controlled by FirstRand Group
are registered owners of BCX Properties (Frosterly Crescent, a Lucia, Durban located in La Lucia
Durban is owned by La Lucia Properties (Pty) Ltd; Business Connexion Park, Midrand, Blocks D, Q
and E located in Midrand are owned by Keriod Investment(Pty)Ltd; Century City located in Montague
Garderns, Cape Town and 106 Park Drive Port Elizabeth is owned by Atlantic Ocean Properties
(Pty)Ltd.
3
Crescent
7 Cranbrook
Crescent
La Lucia (KZN) Office A
Frosterly
Crescent
La Lucia Office A
106 Park Drive St Georges Office A
Rationale of the Transaction
[4]. Business Connexion has made a decision that property holding is not
related to its core business of being an IT company. Growthpoint is alway s in
the market for property acquisition opportunities.
Competition Analysis
[5]. In this transaction it is not necessary to define a relevant market more
precisely than that of lettable commercial property in South Africa, despite the
overlaps. The Midr and properties being acquired by Growthpoint are not
presently part of the market because up to now they have been used by the
owner Business Connnexion for its own purposes and have not been
available to compete in the commercial rental market. Post merg er, Business
Connexion will have ten - year lease over the properties and this means that
for at least that period they will not form part of the market competing for
commercial tenants. After the ten -year period assuming the properties are
released on to the market they will of course add to the supply of lettable
commercial property, but given the dynamic nature of these markets, this is
not a problem that presents itself for apprehension now.
[6]. Growthpoints’ holding in Menlyn, which could conceivabl y be regarded as
competitive with the Business Connexion property in Faerie Glen. The
Commission has taken comfort in the fact Faerie Glen and Menlyn fall into
different nodes, but we find that this is not the proper way to approach
adjacent suburbs as we explain more fully below. Nevertheless, we agree
that this acquisition again raises no concerns, as the post merger accretion is
sufficiently small regardless of where the correct geographic boundaries lie.
Growthpoint’s holding in Menlyn comprises one p roperty and only some of
that space is available for commercial letting, the rest being retail. The
that space is available for commercial letting, the rest being retail. The
commercial space is considerably smaller than that in Glenfield suggesting
that up until now Growthpoint has not been a significant player in either of
these areas. The same consideration applies to its Port Elizabeth acquisition
where the Commission and the merging parties’ geographic analysis lack
precision.
[7]. For this reason, the merger without the need for further analysis raises no
competition concerns.
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Public interest
[8]. No public interest issues arise from this merger
Post-script analysing property mergers
[9]. The facts of this merger have given us an opportunity to comment on a
problematic feature of analysis in recent mergers in the pro perty sector that
have come before us.
[10]. Acquiring parties in this industry have urged the Commission and the
Tribunal, in the absence of a proper competitive analysis of markets, to accept
data obtained by the South African Property Association (‘SA POA’) as a
proxy. The Commission and merging parties have of late used SAPOA data
to perform two functions – to define geographic markets in which properties
can be said to compete, and secondly, to define the types of products that can
be considered subs titutes. Thus SAPOA divides commercial retail property
into four classes (P, A, B and C) and properties are not considered substitutes
unless they are of the same class.
[11]. This merger has shown up the limitations of SAPOA’s data in both these
respects. In its filing Growthpoint submitted that its post merger share of
Grade A commercial properties located in the Midrand node expressed as a
percentage share of lettable grade A commercial buildings in Midrand market
would be 20,2 %.
Below is a table re flecting the parties market shares as well as the
combined market shares in Grade A commercial properties located in
the Midrand node based on total rentable area for commercial use
Table2
Party Gross Lettable Area Market Share %
Growthpoint 34 307 12.6
Business Connexion 20 846 7.6
Combined 55 153 20.2
Others 217 947 78.8
Total 273 100 100
[12]. The Tribunal queried this as in a recent merger involving
Growthpoint/Tresso 4 Growthpoint alleged that its post merger market share
was 33.48%. The expl anation for this sudden dilution in market share
unravelled in a most unsatisfactory manner.
4 18/ LM/Feb06
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[13]. At the hearing, we were told that SAPOA data could not be relied on in
this respect and the properties required further sub - classification between
office blocks and office parks. As what was being acquired in Midrand was an
office park, it appears only office parks were taken into account in the new
statistic, hence the new and lower number in respect of market share. We
were also informed that Growthpoin t had commissioned experts to plot
commercial properties in Midrand and come up with a new set of data for their
holdings in Midrand. In terms of this data we were informed that Growthpoint’s
share could be as low as 4%. It was not entirely clear whether this was 4% of
the new defined sub- market namely office parks or whether this was in terms
of the hoary old commercial class A. The Tribunal, somewhat perplexed by
Growthpoint’s movement from 34% in the Growthpoint/Tresso merger to
20,2% in this filing, and now to 4%, asked the merging parties to file this new
report for us to evaluate it. Rather than dispelling the confusion created, the
report added to it. Not only did it not serve as a source to advance the
promised 4%, it comes up with yet another m arket share figure, namely, 8 %.
However, the relevant product market was not class A, or office parks but
commercial property in toto. Thus in one filing the product market had at one
moment been alleged to be narrower than commercial grade A, and then later
shifted as wide as possible to include all commercial property, irrespective of
class or specie.
[14]. That all these redefinitions have been self- serving to Growthpoint did not
pass unnoticed. We would urge parties and the Commission to be wary of
using the SAPOA data, and to investigate a proper methodology for defining
property markets in the future and to do more by way of evaluation, of
competitive effects than mouth the industry statistics. The fact that buildings
may fall into what SAPOA reg ards as a class for its own purposes, does not
may fall into what SAPOA reg ards as a class for its own purposes, does not
mean that consumers would not regard them as substitutes or even if not
functional substitutes that they would not exercise some constraint on the
prices of another class.
[15]. Thus a consumer evaluating if they should lease commercial grade A
office space may have regard to the prices for grade B in considering whether
the price differential is justified in the consumers mind by an increase in
perceived value. Similar considerations may influence a choice between an
office park and an office block albeit they may have some different
characteristics. Thus to seize on a particular class of building or specie
without regard to possible substitutes that may constrain pricing in that class
may be incorrect from an antitrust point of view. 5
[16]. The use of SAPOA’ s area nodes in this case has exposed similar
deficiencies. SAPOA classifies urban areas into nodes, or clusters of suburbs,
adjacent to one another, which it believes tenants would consider
interchangeable. When nodes are some distant for one another they may
serve as a useful proxy for screening out potential problems in evaluating the
boundaries of geographic markets. The problem with reliance on this data is
5 See for instance our analysis in the Massmart H oldings Limited and Moresport Limited Case No:
62/LM/Jul05 paragraph 86 -87
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when nodes are adjacent to one anothe r. The Commission adopts the
attitude that because buildings are in different nodes, they are not in the same
geographic antitrust markets. This does not follow. A building on the outer
edges of one node presumably would be considered a competitive subs titute
for another situated on the nearest boundary of an adjacent node. They might
even be across the road from one another, because SAPOA for whatever
reason sought to establish its line of delineation on that street. This is
illustrated in this case w here the Commission has regarded the building
acquired from Business Connexion in Faerie Glen, as not being in the same
market as the building in Menlyn, despite their being in adjacent suburbs,
simply because SAPOA treats them as separate nodes.
[17]. Growthpoint in its filing acknowledges that nodes are not a satisfactory
proxy for an antitrust market when its states that because of chain of
substitution effects, a relevant market may be broader than a single node. 6
As a theoretical proposition, this ma y well hold true in some areas but again
this approach is self -serving. A proper analysis may need in some cases to
approach the node more narrowly than the single node or to disregard the
boundaries of nodes when properties may be in adjacent nodes.
[18]. This is not to say that SAPOA statistics may not be useful as a filter to
determine which cases require more analysis and which raise no issues. We
are mindful of not putting merging parties or the Commission to the burden in
respect of minor matters. However the filter, as this case has shown, has its
flaws, and sole reliance on it in future cases may not be satisfactory; we
caution all concerned that we may send them back to do more homework if
we are not satisfied with the analysis.
[19]. Commerci al property mergers are a frequent feature of mergers that
come before us and concentration levels would appear to be on the increase,
come before us and concentration levels would appear to be on the increase,
although this is not to suggest that they are in anyway alarming it does require
the effort necessary to make a proper evaluation of them.
Conclusion
[20]. Based on the above the transaction will not result in a substantial
lessening or prevention of competition in the identified markets and is
accordingly approved unconditionally
___________________
07August 2006
Date
N Manoim
Tribunal Member
6 See record page 525
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D Lewis and U Bhoola concur in the judgment of N Manoim.
Tribunal Researcher : J Ngobeni
For the merging parties :Ilse Gaigher and Zanele Mngadi Jowell Glyn and
Marais and Paul Coetser(Brink Cohen Le Roux)
For the Commission :Mogale Mohlala and Edwina Ramohlola
Mergers and Acquisitions