COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case No: 42/LM/May06
In the large merger between:
Government Employees Pension Fund represented by Public Investment
Corporation Limited
and
Denel (Pty) Ltd
Reasons for Decision
_________________________________________________________________
Approval
1. On 22 June 2006 the Competition Tribunal issued a merger clearance
certificate approving the merger between the Government Employees’
Pension Fund represented by Public Investment Corporation Limited and
Denel (Pty) Ltd. The reasons appear below.
The Parties
2. The acquiring firm is the Government Employees Pension Fund
represented by Public Investment Corporation Limited (“PIC”). The
government of South Africa is the sole shareholder in PIC. PIC directly or
indirectly controls the following companies:
2.1. ADR International Airports South Africa (Pty) Ltd (100%)
(“ADRIASA”);1 and
1 ADRIASA was acquired from Aeroporti di Roma (“ADR”) by PIC on behalf of the Government
Employees Pension Fund. ADRIASA holds 20%of the shares in Airports Company of South Africa
(“ACSA”). ADRIASA jointly controls ACSA with the Minister of Transport. See PIC/ADRIASA case
number 108/LM/Nov05 (“PIC/ADRIASA” case).
2.2. Advent Asset Management (Pty) Ltd (60%).
3. The primary target firm is Bonaero Park (Pty) Ltd (“Bonaero Park”), a
property investment company. Bonaero Park is a wholly owned subsidiary
of Denel (Pty) Ltd (“Denel”). Denel is wholly owned by the government of
South Africa. Denel was incorporated as a company in 1992 in terms of the
Companies Act 61 of 1973. Denel also directly or indirectly control other
companies including Denel Properties (Pty) Ltd (“Denel Properties”). 2
The Merger Transaction
4. In terms of the merger agreement, PIC will acquire the entire property
portfolio which includes immovable properties and the business of Bonaero
Park with regard to leases and the property letting enterprises conducted in
respect of such properties, from Denel. 3 These properties comprise
commercial office space, retail, and industrial office space located
throughout South Africa.
5. The following tables show the office, retail and industrial properties being
acquired:4
TABLE 1: OFFICE PROPERTY PORTFOLIO BEING ACQUIRED
Property Geographic Area Type Grade
Castle Walk
Corporate Park
Pretoria East
(Erasmuskloof)
Office A
Kasteel Park
Complex
Pretoria East
(Erasmuskloof)
Office B
Kasteel Park
Complex
Pretoria East
(Erasmuskloof)
Vacant land
TABLE 2: RETAIL PROPERTY PORTFOLIO BEING ACQUIRED
Property Geographic Area Type Grade
2 The names of the other companies directly or indirectly controlled by Denel are listed on pages
112113 of the record, being schedule 3 to Bonaero Park’s Form CC4(2).
3 The properties being acquired exclude the Dendustri factory and residential stand in
Erasmuskloof Township that is to be disposed of to Curamed Holding Limited. See pages 9394 of
the record. A copy of the Merger Agreement is on pages 4787 of the record.
4 PIC’s property portfolio is listed on pages 43 and 44 of the record. The parties have submitted in
the email dated 30 June 2006 that these properties are controlled by PIC on behalf of the
Government Employees’ Pension Fund.
2
Castle Walk
Garage
Pretoria
(Erasmuskloof)
Retail Neighbourhood
Shopping Centre
Castle Walk
Shopping Centre
Pretoria East
(Erasmuskloof)
Retail Neighbourhood
shopping centre
Waterkloof
Lifestyle
Pretoria East
(Waterkloof Ridge)
Retail Neighbourhood
shopping centre
Winmore
Shopping Centre
Pretoria East
(Moreleta Park)
Retail Neighbourhood
shopping centre
Equestria
Shopping Centre
Pretoria East
(Wilgers)
Retail Neighbourhood
shopping centre
Eastwood
Shopping Centre
Pretoria (Arcadia) Retail Neighbourhood
shopping centre
TABLE 3: INDUSTRIAL PROPERTY PORTFOLIO BEING ACQUIRED
Property Geographic Area Type Grade
Kruger Avenue Pretoria
(Centurion)
Light Industrial Secondary
Ergon Avenue Pretoria
(Centurion)
Light Industrial Secondary
Nordey Heights Pretoria Residential Area Single bachelor’s
flat
Rationale for the Transaction
5.1. PIC intends to increase its property investment portfolio and
Denel is in urgent need of cash which this transaction will
provide.
The Parties’ activities
Primary acquiring firm
3
PIC
5.2. PIC invests funds on behalf of the public sector entities, including
Government Employees Pension Fund. It also has investment
interests in properties consisting of commercial, retail and
industrial properties located largely in Johannesburg, Mmabatho,
Rustenburg and Northern Pretoria regions.
Airports Company of South Africa (“ACSA”)
5.3. ADRIASA holds 20% of the issued shares in ACSA.
ADRIASA is a wholly owned subsidiary of PIC. 5 Thus PIC, on
behalf of the Government Employees’ Pension Fund
indirectly holds 20% of the shares in ACSA and has joint
control with the Minister of transport. 6
5.4. ACSA develops, provides, maintains, manages and operates
airports, parts of airports or any facilities or services that are
normally performed at an airport. Such activities include the
letting out of retail and office space as well as the installation and
integration of computer systems and hotel operations.
Primary target firm
Denel
5.5. Denel is a high technology South African company in the defence
and aerospace industry. It concentrates in the product design,
development, manufacturing, marketing and product support
capabilities in the defence and aerospace industry.
Bonaero Park
5 In the PIC/ADRIASA case PIC acquired 100% of the issued shares in ADRIASA and thus
acquired 20% shareholding in ACSA.
6 In the PIC/ADRIASA case PIC acquired 100% of the issued shares in ADRIASA. PIC continues
to enjoy the same rights that ADR had in terms of the shareholders’ agreement that ADR had with
the government. Thus joint control over ACSA was perpetuated. See page 2 of the PIC/ADRIASA
reasons and page 448 of the PIC/ADRIASA record.
4
5.6. Bonaero Park is an investment property company, which
generates its income from rentals of commercial office space,
retail and industrial space.
The relevant product markets
5.7. The Commission has submitted that grade A, B, C and P office
property are different product markets. This grading is based on
differences in quality, age, finishing and there are also distinct
rentals charged for the different categories of office properties.
5.8. The Commission has further submitted that the product
market for industrial space is divided into light industrial
space and heavy industrial space, and that the market for
retail property is classified according to size. The
Commission came to this conclusion on the basis of
previous Tribunal decisions. 7
5.9. We find no reason to differ with the Commission’s definition of the
relevant product market.
5.10. Indeed the activities of the parties overlap in respect of office,
retail and industrial properties. However, as shall be seen below,
the overlap is small and does not raise serious competition
concerns. Moreover, the properties owned by the merging parties
are in different geographic locations and the market shares of the
merging parties are small.
The Geographic market
7 For instance Tribunal cases 34/LM/Jul03, 66/LM/Jul05 and 68/LM/Jul05.
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5.11. The Commission has submitted that the market in relation to
office space is local. The IPD has identified different nodes in
consultation with market participants and South African Property
Owners’ Association (“SAPOA”). Different geographic areas that
compete with each other are grouped into nodes. Market players
usually compete with each other in the same node and properties
in the same nodes command similar prices.
5.12. The Commission further submitted that the market is potentially
broader when it comes to industrial space. Thus it could be
regional or national depending on the type of business and the
economic viability of manufacturers.
5.13. In relation to retail space, the Commission submitted that the
geographic market in retail properties is considered to vary
depending on the type and size of the retail property.
5.14. Geographic location of the properties is significant in defining the
market. There is no geographic overlap of the parties’ properties.
This is so because PIC’s office properties and industrial
properties are located in Johannesburg and Mmabatho (NW
Province), while the target firm’s properties are situated in
Pretoria East Region. With regards to retail properties PIC’s
portfolio is in Mabopane (N.Pretoria), Mmabatho, Rustenburg and
Mthatha, while target properties are situated in the Pretoria East
Region.
5.15. Moreover, ACSA’s properties are located around the various
airports across South Africa. 8None of ACSA’s properties are
located in Pretoria where the target firm’s properties are
located.
5.16. There is therefore no need to delineate the precise geographic
markets since it is clear that on any reasonable delineation of
these markets there will not be a significant overlap between the
merging parties.
Effect on competition
merging parties.
Effect on competition
6. The merging parties submitted market figures only for commercial office
space based on the figures from the South African Property Owners
8 ACSA’s property portfolio is situated at the following airports Johannesburg International Airport;
Cape Town International Airport; Durban International Airport; Port Elizabeth Airport; East London
Airport; George Airport; Bloemfontein Airport; Kimberly Airport; Upington Airport and the 35 year
concession held by ACSA to manage the Pilanesburg International Airport.
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Association (“SAPOA”). 9 According to the parties, the estimated market
share of the target firm is 0.23% of the national market, and the market
share for the acquiring firm is 1.47%. The combined market share of the
merging parties is therefore approximately 1.7%.
7. The parties estimated that the market share is even lower for the retail and
industrial space.
8. The market shares are small and do not raise any serious competition
concerns.
9. The market share of the ACSA properties have not been included in the
parties’ analysis of the market. In the PIC/ADRIASA case the parties
thereto submitted that the nature of office, retail, industrial and other space
provided at the airports controlled by ACSA is sui generis (not easily
substitutable or interchangeable for other office, retail and other rentable
space) and more specifically not interchangeable to the office, retail and
other rentable space provided by PIC. 10 This argument is equally true in
the present case. Even if ACSA’s market share is considered the parties’
market share post merger remains small and does not raise competition
concerns.11
Public Interest
9.1.1. There are no public interest issues.
Conclusion
10. We conclude that the merger will not lead to a substantial lessening or
prevention of competition. Nor are there public interest issues raised by this
transaction. The merger was accordingly approved without conditions.
13 July 2006
D. Lewis Date
Concurring: N Manoim and M Mokuena
9 See pages 3537 of the record.
10 See page 454 of the PIC/ACSA record.
11 On pages 458462 of the PIC/ADRIASA record where it surfaces that ACSA’s market share in
the broad market of office, retail and industrial space is less than 3% in the said categories.
7
For the merging parties: M Phukubje and A. Asmal, PPM Attorneys
For the Commission : Leonard Lamola, Mergers and Acquisitions
8