COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case No: 121/LM/Dec05
In the large merger between:
Old Mutual Healthcare (Pty) Ltd Primary Acquiring Firm
and
Kwacha (Pty) Ltd Primary Target Firm
Reasons for Decision
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Approval
1. On 14 June 2006 the Competition Tribunal issued a merger clearance
certificate approving the merger between Old Mutual Healthcare (Pty) Ltd
and Kwacha (Pty) Ltd. The reasons appear below.
The Parties
2. The acquiring firm is Old Mutual Healthcare (Pty) Ltd (”Old Mutual”). Old
Mutual is a wholly owned subsidiary of Old Mutual South Africa Limited,
(“Old Mutual SA”). Old Mutual SA is in turn indirectly controlled by Old
Mutual plc, which has its business address in London, United Kingdom. Old
Mutual also controls Visimed Properties and Administrators (Pty) Ltd, which
is in the process of being liquidated. 1
3. The primary target firm is Kwacha (Pty) Ltd (“Kwacha”). Kwacha’s largest
shareholder is Micawber 148 (Pty) Ltd which has 14% of the issued shares
in Kwacha. Apart from that no other firm or individual controls Kwacha. 2
Kwacha in turn controls the following firms:
1 See page 4 of the Commission’s recommendations and page 20 of the record.
2 Kwacha has many shareholders. The parties have submitted that 37 out of a total of Kwacha shareholders
are historically disadvantaged individuals and these account for 97.368% of the entire shareholding in
Kwacha. See page 22 of the record for details.
3.1. Sizwe Medical Services (Pty) Ltd (“Sizwe”);
3.2. Cheiron Health Technologies (Pty) Ltd (“Cheiron”);
3.3. Kwacha Property Holdings (Pty) Ltd;
3.4. Recent Investments (Pty) Ltd; and
3.5. Investment Facility Six Five Four (Pty) Ltd.
The Merger Transaction
4. The transaction is divided into two parts. In the first leg of the transaction,
Old Mutual will acquire 51% of the issued shares in Sizwe and 90% of the
issued ordinary shares in Cheiron from Kwacha.
5. In the second leg of the transaction, Old Mutual will issue to Kwacha new
ordinary shares in the issued ordinary shares in Old Mutual comprising
23.3% of the entire issued ordinary share capital of Old Mutual. Kwacha will
acquire joint control over Old Mutual by virtue of the minority protections
contained in the shareholders’ agreement concluded by Kwacha, Old
Mutual, and Old Mutual SA. 3
Rationale for the Transaction
5.1. Old Mutual perceives the proposed transaction as providing it with an
opportunity to introduce an empowerment partner. Old Mutual
regards Kwacha as an ideal empowerment partner since it has
significant experience the business conducted by Old Mutual.
5.2. The proposed merger is perceived by Kwacha as providing Sizwe
and Cheiron with access to the Old Mutual’s group’s marketing and
distribution channels as well as the strong brand of the group.
The merging parties’ activities
3 See page 179 of record for a copy of the shareholders’ agreement and page 195198 of the record for the
minority protections afforded to Kwacha. At the hearing Old Mutual indicated that it subsequently intends to
acquire 100% and does not intend to have any other minority shareholder holding a minority stake whether in
the form of ordinary shares or in the form of preference shares that give it a degree of control. See page 4 of
the transcript.
2
Old Mutual
8.1. Old Mutual is a provider of administration and managed care
services to medical schemes. Currently, Old Mutual provides
administration and managed care services to three open
membership medical schemes namely Oxygen Medical Scheme,
Medical Expenses Distribution Society and Selfmed Medical
Scheme.4 Old Mutual is also currently providing administration and
managed care services to ten corporate/ restricted membership
schemes. The services offered by Old Mutual can be segmented as
follows:
8.2. administration services which include the following:
8.1.1. provides call centre services to both members and providers in regard to
various queries;
8.1.2. member services focus on key areas such as member registration,
written enquiries and credit management;
8.1.3. claims adjudication and assessment services, which focuses on
payment of providers and members;
8.1.4. financial reporting, which includes preparation of scheme accounts for
auditing purposes and the provision of management information to
medical schemes;
8.1.5. IT infrastructure services, which includes the provision of IT hardware
and software catering for different benefit structures;
8.1.6. contribution collection includes services of collecting contributions from
members; and
8.1.7. scheme management provides a contact channel between Old Mutual
and the relevant medical scheme administered by it. It also prepares
information for the board of Trustee meetings, operations meetings,
Audit Committee and Annual General Meetings.
8.2. Managed care services which include the following:
8.2.1. Hospital benefit management
This involves managing the level and intensity of care medical scheme
members that are hospitalised aiming at elimination of waste through
members that are hospitalised aiming at elimination of waste through
4 However, Selfmed has given notice to terminate Old Mutual’s service with effect from 31 December 2005.
See page 28 of the record for details.
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the inappropriate use of resources. 5
8.2.2. Pharmacy benefit management
It manages the usage of medicine for both acute and chronic conditions
of medical scheme members. 6
8.2.3. Disease management services
This department manages certain diseases that have a high prevalence
at a potential high cost to medical schemes. It includes programs such
as HIV and AIDS, oncology management, maternity, renal care,
psychiatry, and other lifecare programmes.
8.2.4. Provider relations Services
This involves development of relationships with risk management
strategies of old Mutual and medical schemes, retrospective statistical
trend analysis on claims from different providers and investigate
possible fraudulent claims from providers or medical scheme members.
8.2.5. Medical Advisory Services
These services include provision of clinical expertise, treatment
algorithms and guidelines underpinning clinical decisions
8.2.6. Business Intelligence Services
This department guides the board of Trustees of the relevant medical
scheme in risk management strategies. Services offered by this
department include risk identification, management reports that indicate
clinical trends and scheme clinical risk reports.
8.2.7. Actuarial and legal consulting services
Old Mutual offers legal services such as preparation of resolutions for
the Board of Trustees, provision of legal advice in respect of the drafting
of contracts and in respect of member enquiries, complaints and
agreements and other legal services.
Kwacha
8.3. Kwacha is a holding company which invests in companies rendering
healthcare, managed care and administration services.
5 This includes precertification services prior to admission to ensure that a medical scheme member is
eligible for benefits in a specific scheme option, case management and concurrent review to ensure the
appropriate level of care and discharge management to ensure an appropriate institution for care required.
6 It includes activities such as authorization of members for access to chronic medicine benefits, enrolling
members on medical management programme for prescribed minimum benefits, drug utilization review,
member support services and medical formulary management that is evidence based.
4
Sizwe
8.4. Sizwe provides administration services to the Sizwe Medical Fund. These
services include membership services, claims related services, and
accounting and investment of funds. It provides:
8.5. Membership Services including processing of member applications,
arrangement for receipt and banking of contributions, maintenance and
updating of member records, issuing of member cards, billing of clients
and the monthly production of a list of active members.
8.6. Claims related services including payments to suppliers of services or
refunds to members, handling of members’ queries (through a national
call centre), dispatching of monthly claims transaction and claim
processing.
8.7. Accounting and investment of funds, including depositing of all
contributions into the medical scheme’s bank account, investment of
surplus funds subject to the Medical Schemes Act, production of
monthly income and expenditure statements and balance sheets for
Trustees, balancing and reconciling of Medical schemes’ books of
account or audit purposes and the production of monthly statistics of
expenditure on each major category of service.
Cheiron
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8.8. Cheiron provides managed care services to Sizwe Medical Fund. The
services include hospital benefit management, total drug management
across acute and chronic medication as well as clinical auditing. Cheiron
also provides disease management to Sizwe Medical Fund in the areas of
HIV/AIDS Diabetes, Hyperlipidaemia, Hypertension and Asthma. Further
Cheiron provides the IT platform to the Sizwe Medical Fund for the
purpose of administering its membership.
8.9. Chronic Medical Services;
8.10. Hospital utilisation management programme including:
8.11. preauthorisation;
8.12. casemanagement; and
8.13. clinical auditing; and
8.14. disease management.
Recent Investments (Pty) Ltd
8.15. Recent Investments (Pty) Ltd (“Recent Investments”) is a special
purpose vehicle, which has been established for the purpose of
holding a noncontrolling interest in Network Healthcare Holdings
Limited (“Netcare”). 7 According to the Commission Recent
Investments holds approximately 2% of the issued share capital in
Netcare. The parties have submitted that Recent Investments is in
the process of disposing its interest in Netcare. 8
Investment Facility Six Five Four (Pty) Ltd
8.16. Investment Facility Street Five Four (Pty) Ltd (“Investment Facility”).
Investment Facility is a special purpose vehicle, which has been
established to hold shares in Mx Healthcare Corporation (Pty) Ltd
(“Mx Health”). Kwacha has now disposed of its indirect interest in
Mx Health. 9
7 See page 21 of the record.
8 See email from WWB dated 22 February 2006 on page 502 and 503 of the record. However, at the hearing
the parties advised that Recent Investment’s stake in Netcare has already been sold. What remains is Recent
Investment’s 0.02% shareholding in Netcare and this amounts to 449 000 ordinary shares. See page 3 of the
transcript.
transcript.
9 The Commission under Case No. 2005Sept1850 approved this transaction. See page 21 of the record.
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The relevant product markets
8.17. According to the parties and the Commission the relevant product market
is in two parts, namely the provision of medical scheme administration
services and the provision of managed care services.
8.18. The parties have submitted that in order to be eligible to provide
administration services to a medical scheme, the Council for Medical
Schemes must accredit a medical administrator. Medical scheme
administration services comprise of a package of services such as
membership services, claims related services, accounting and investment
of funds and query services. The administration services can be divided
into two, namely, the provision of such services to restricted schemes and
the provision of such services to open schemes. The parties have
submitted that there is no restriction preventing an administrator from
providing services on both restricted and open schemes. The Commission
accordingly defined the relevant market broadly as the provision of
medical scheme administration services.
8.19. The parties submitted that managed care services may be provided as
comprehensive and integrated clinical risk management services to the
members within a medical scheme (“integrated services”) or limited range
of services focusing on one area of risk management (“focused services”).
However, according to the parties, these services compete with each
other whether they are integrated or focused. The Commission did not
make a definitive conclusion on the product market relating to the market
for managed care services. For the purpose of analysing this transaction
the commission defined the product market as the broad market for the
provision of managed care services.
8.20. There is a product overlap in the activities of the parties as they both
provide administration services to medical schemes and they also provide
managed care services. Old Mutual and Sizwe provide medical scheme
administration services and Old mutual and Cheiron provide managed
care services. It should be noted that Cheiron provides these services
only to the Sizwe Medical Fund.
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Relevant Geographic market
8.21. The Commission has defined the geographic market as national since the
merging parties and their competitors provide medical scheme
administration services and managed care services nationally.
Effect on Competition
8.22. As shown in Table 1 below, the combined market share of the
merging parties is estimated to be 8.06% post merger in the market
for the provision of medical schemes administration. The market
share post merger is considered small and consequently, does not
raise serious competition concerns. This market share is based on
the number of beneficiaries both in open schemes and restricted
schemes. The Council separated the figures for open medical
schemes and for restricted medical schemes. However, such a
distinction reveals that there is no real difference in the market
shares in both open medical schemes and restricted medical
schemes. The market shares in the open medical schemes and the
restricted medical schemes are more or less similar to each other. 10
Table 1 showing the market shares in the market for the provision of medical
schemes administration services .11
10 See pages 3334 of the record where the parties gave the two tables indicating market shares in the open
medical schemes and the restricted medical schemes. On page 61 of the record the parties submitted that
should the market for the provision of administration services be separated into provision of administration to
open medical schemes and to restricted medical schemes, the combined merging parties’ shareholding will
be 8.41 % in the market for the provision of administration services to open medical schemes and 7.25% for
the provision of administration services to restricted schemes.
11 These figures have been obtained from the council for Medical Schemes Annual Report 20045 and page
33 of the record which is the parties’ competitive report. On pages 303306 of the record the Council give
further details in respect of this market.
8
Administrator Estimated market share as at
December 2004
Discovery Health (Pty) Ltd 24%
Medscheme Administrators (Pty) Ltd 16.3%
Metropolitan Health Group 8.6%
Mx Network Systems (Pty) Ltd 7.1%
Old Mutual Healthcare 5.7%
Sovereign Healthcare Limited 4.4%
Sizwe 2.36%12
8.23. The parties have submitted that, in addition to having a low market share
postmerger, there are currently approximately twentyfive independent
medical scheme administrators participating in this market. Sizwe
administers only one medical scheme namely Sizwe Medical Fund. Old
Mutual on the other hand, administers three open membership medical
schemes and ten restricted membership medical schemes.
8.24. In the market for the provision of managed care services, the parties did
not have market share figures available. They estimated that the
combined market share postmerger will be approximately 8%. Since
Cheiron provides managed care services only to Sizwe Medical Fund, it
was submitted that it has a small market share. Moreover, the parties
submitted that they provide managed care services to the same
customers to whom they provide medical schemes administration
services. Since the parties’ combined market share post merger in the
provision of administration services is estimated to be 8.06% the parties
do not expect their market share in the managed care services to be more
than 8.06%.
8.25. The merging parties compete with various other accredited managed care
services providers such as Discovery Health (Pty) Ltd, Eternity Healthcare
(Pty) Ltd, Eyenet (Pty) Ltd, Faranani Health Solutions (Pty) Ltd, Huntrex 5
(Pty) Ltd, Prime Cure (Pty) Ltd, Care Cross Health (Pty) Ltd, Medscheme
Holdings (Pty) Ltd, and Netdirect (Pty) Ltd and various others. These
companies will continue to compete with the merging parties postmerger.
Submissions by the Council
Submissions by the Council
12 See page 61 of the record. At the hearing the parties submitted that the figures in the combined market
shares should be 5.7% for Old Mutual and 2.36% for Sizwe and the combined market share will be 8.06%.
See page 1 of the transcript.
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8.26. The Council for Medical Schemes (“the Council”) was approached by the
Commission to give its input with regard to the transaction. In its
response, the Council focused more on the issue of shareholding of
medical schemes administrators in hospital groups. More particularly, the
Council referred to the shareholding of Old Mutual Life Assurance
Company of South Africa Limited which holds 10.1% in Life Healthcare,
previously known as Afrox Healthcare. The Council submitted that Old
Mutual SA should not be permitted to increase its shareholding in hospital
groups. In advancing this argument, the Council stated that there is a
restriction on the First Rand Group prohibiting it from increasing its
shareholding in Life Healthcare.
8.27. The Commission submitted that the present transaction does not give rise
to or facilitates Old Mutual SA’s ability to increase its shareholding in
either Life Healthcare or Netcare. According to the parties
Kwacha/Sizwe’s interest in Netcare is approximately 2% and it was
submitted that that stake is in the process of being disposed of. The
Commission is of the view that no active steps need to be taken at this
point in time to ensure that Old Mutual SA does not increase its
shareholding in a hospital group. The Commission further stated that the
likely effect of any increase in shareholding will be dealt with as and when
there is a proposed acquisition.
8.28. Having regard to the various issues surrounding the nature of this
transaction, the Tribunal agrees with the conclusions of the Commission.
Indeed the Commission will deal with the issue of Old Mutual SA’s
shareholding in hospital groups as and when the need arises. Such a
shareholding in hospital groups as and when the need arises. Such a
transaction will be referred for approval and when that happens, the
Commission will deal with the matter.
Public Interest
8.28.1.There are no public interest issues that may raise serious competition
concerns.
Conclusion
9. We conclude that the merger will not lead to a substantial lessening or
prevention of competition.
10
15 August 2006
M Mokuena Date
Concurring: M Moerane and U Bhoola
For the merging parties: Justin Balkin for Edward Nathan Corporate Law
Advisors and Jocelyn Katz, Webber Wentzel Bowens
For the Commission: Maarten Van Hooven, Mergers and Acquisitions
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