COMPETITION TRIBUNAL OF SOUTH AFRICA
Case NO: 12/LM/Jan08
In the matter between
Vodacom Service Provider Company (Pty) Ltd Primary acquiring firm
And
Global Telematics South Africa (Pty) Ltd Primary target firm
Panel : D Lewis (Tribunal Member); Y Carrim (Tribunal Member) and N
Manoim (Tribunal Member)
Heard on : 12 March 2008
Decided on : 20 March 2008
Reasons Issued : 8 April 2008
Reasons for Decision
Approval
[1] On 20 March 2008 the Competition Tribunal issued a Merger Clearance Certificate
unconditionally approving the merger between Vodacom Service Provider Company (Pty)
Ltd and Global Telematics South Africa (Pty) Ltd. The reasons appear below.
Parties
[2] The primary acquiring firm is Vodacom Service Provider Company (Pty) Ltd (“VSP”),
a wholly owned subsidiary of Vodacom (Pty) Ltd (“Vodacom”). The shareholding of Vodacom
is shared equally between Telkom SA Ltd (“Telkom”) and Vodafone Holding SA (Pty) Ltd
(“Vodafone”).
[3] VSP sells and distributes cellular handsets and accessories, as well as prepaid
starter packs, cellular airtime contracts, vouchers, airtime and mobile data to distribution
channels and directly to customers. VSP also acts as a franchisor of franchised businesses.
Vodacom (Pty) Ltd is a cellular network operator.
[4] The primary target firm is Global Telematics South Africa (Pty) Ltd (“GTSA”), a wholly
owned subsidiary of Thales SA, a public listed company incorporated in accordance to the
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laws of France. Its largest shareholders are the French government with 26.59% and
AlcatelLucent with 20.83%.
[5] GTSA is involved in providing vehicle telematics and fleet management solutions for
professional and consumer markets. GTSA is also a fully licensed service provider for
Vodacom (Pty) Ltd in South Africa. GTSA contracted the provision of certain Vodacom
cellular services and products to Glocell Service Provider Company (Pty) Ltd (“Glocell”). In
terms of the agreement between Glocell and Global Telematics – referred to as the Glocell
Super Dealer Agreement Glocell entered into agreements with dealers or subscribers
relating to registration of subscribers on the Vodacom network for a minimum period of 24
months, as well as registering subscribers who will utilise or have access to the Vodacom
network by purchasing prepaid airtime. Thus through Glocell, the target company GTSA
operates in the cellular telecommunications industry, providing a wide variety of products,
services and solutions.
Transaction
[6] GTSA had been an exclusive service provider for Vodacom in terms of a Vodacom
Service Provider licence. The licence agreement was due to terminate on 31st March 2008.
Vodacom had indicated that it did not intend to renew this agreement but intended to
acquire, through its wholly owned subsidiary, VSP, GTSA’s subscriber base, that is, GTSA’s
business relating to the registration of contract and prepaid subscribers of the Vodacom
network. Given, GTSA’s arrangement with Glocell, the proposed transaction consists of two
interlinked steps, both of which were filed simultaneously. The first step (“the Glocell
Transaction”) entails the cession, transfer and assignment by Glocell to Global Telematics,
of all of Glocell’s rights and obligations in respects of its agreements with dealers and
subscribers which relate to the registration of subscribers by Glocell on the Vodacom
network in terms of the Super Dealer Agreement. On completion of this step, Global
Telematics will, therefore, control the cellular business of Glocell. The second step (“the
Vodacom transaction”) is interlinked and conditional upon the first step. This entails the
cession, transfer and assignment by GTSA to VSP of all agreements concluded between
Global Telamatics/Glocell and their customers relating to the registration of both contract
and prepaid subscriber on the Vodacom network.
The competition analysis
[7] We should immediately note that this is not the first transaction of this nature that has
come before us. It appears that a significant portion of Vodacom’s products – essentially
contracts and prepaid airtime on the Vodacom network – had been marketed through
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independent service providers as well as through VSP, the acquiring firm and Vodacom’s in
house service providers. As is characteristic of many distribution arrangements of this type,
Vodacom supplies its products to the downstream service providers at a discount, a portion
of which was retained by the service provider with the remainder passed on to the end
customer. This provides for at least the possibility of competition between the various
downstream providers of Vodacom products. While it is generally accepted that this mode of
competition (referred to as ‘intrabrand’ competition) is not as important as ‘interbrand’
competition (which, in this instance, refers to competition between different
telecommunications networks), the prospect of a diminution of intrabrand competition in
consequence of a merger demands the attention of merger regulators, the more so in
markets characterised by weak interbrand competition.
[8] Other transactions of this type involving the Vodacom Group that have come before
us are the acquisition of GSM 1, Teljoy Holdings 2, Smartcall 3, Tiscali 4 and Africell. 5 We
have also adjudicated a transaction of this nature in which the service provider owned by
MTN, Vodacom’s largest competitor in the provision of network services, acquired Cell
Place.6 In short, by systematically declining to extend the contracts of the independent
service providers, Vodacom has taken inhouse an increasing share of the distribution of its
products, and by acquiring the erstwhile service providers it has ensured the retention of the
subscriber base of those independent service providers. This has occurred in relatively
small increments which has, for obvious reasons, rendered the competition evaluation
complex because of the requirement to show that a ‘ substantial lessening of competition’
results from the transaction before us. In other words while no single transaction – including
the one presently before us – may have passed the test of substantiality, the sum of the six
transactions that have, over time, come before us may well have resulted in a substantial
diminution of intrabrand competition for Vodacom services.
[9] On each occasion that these transactions were examined, the impact on intrabrand
competition was queried by the competition authorities, both at the investigative stage by the
Commission and at the adjudicative stage by the Tribunal. This was done not only because
1 Case NO: 10/LM/Nov04
2 Case NO:13/LM/Nov99
3 Case NO: 68/LM/Dec03
4Case NO: 87/LM/Oct04
5 Case NO: 48/LM/04
6 Case NO: 83/LM/Sep05
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a negative impact on intrabrand competition is worthy of examination in its own right, but
also because there are considerable grounds for doubting the strength of interbrand
competition in the highly concentrated, oligopolistic market for mobile telecommunications
services. However on each occasion we were assured that competition between the service
providers was weak at best and that their discounting practices did not effectively
differentiate their respective service offerings. We were repeatedly assured that Vodacom’s
objective in assuming responsibility for the distribution of its product (thus diminishing intra
brand competition) was driven by its desire to ensure the more effective distribution of its
product (in other words, to strengthen its hand in interbrand competition). We were also
assured that it mirrored a global trend in the distribution of this product.
[10] The examination of this transaction followed the established pattern. Which is to say
that in the course of the Commission’s investigations concerns were again raised regarding
the impact of the transaction on the ability of the remaining service providers to negotiate
meaningful discounts from Vodacom given that an increasing share of its product was
distributed through its inhouse provider, VSP, the acquiring party in this transaction. The
Commission’s enquiries elicited objections from two prominent telecommunications
companies. One submitted in a letter to the Commission that the reduction in the number of
independent service providers weakened the ability of those remaining to negotiate “SP
discounts” with the network operators.
[11] The other submitted that the elimination of another service provider in the market
diminishes its ability to attract larger discounts. Both submitted that the effects of precious
Vodacom and MTN mergers with their service providers has been a lessening of competition
among service providers and a reduction of discounts provided to them.
[12] However, the merging parties responded in familiar vein. They argued that discounts
provided by service providers to dealers are not passed on to consumers, and hence that
that even if discounts were reduced postmerger, this would have no effect on final
consumers. In its competitiveness report VSP repeated the familiar rationale for the
transaction:
“The declining growth of the service provider market discussed more fully in 8.3
below and the desire by Vodacom to consolidate its service delivery chains in line
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with worldwide trends in order to have management over the delivery of a more
uniform consistent service to its customers. ”
[13] For its part, GTSA submitted that the rationale for the transaction is that the
Vodacom Service Provider license with Global Telematics expires on the 31 st March 2008
and the agreement makes no provision for the license to be extended beyond that date. The
termination of the Vodacom Service Provider license held by Global Telematics will result in
the termination of the Glocell Super Dealer Agreement with Global Telematics terminating
and Glocell will therefore be unable to provide services to its customers and dealers.
[14] The Commission analysed the concerns regarding the discounts, or, expressed
otherwise, the concerns regarding the transaction’s impact on intrabrand competition. As
we elaborate below it also requested additional internal documentation from the acquiring
firm but it was not forthcoming. It ultimately concluded that because Vodacom had no
intention of extending its agreement with Glocell/Global Telematics, the latter would,
regardless of the decision on the merger, cease to be a competitive force. On this basis the
Commission concluded that there was no necessity to decide whether discounts have
indeed been passed on to the end users. 7 In summary the Commission concluded that
opposing this merger would not make any difference, because both parties submitted that
the service provider licence between Vodacom and GTSA will not be renewed and will
terminate on 31 March 2008. The Commission therefore recommended that this transaction
be approved unconditionally.
[15] After receiving the Commission’s recommendations, the Tribunal wrote to the
merging parties on 6 th March 2008 requesting additional information. We directed that
Vodacom make available to us all board minutes relating to the transaction/acquisition of
Global Telematics and Glocell Service Provider. We also requested all documents, including
board presentations, presentations made to any committee, strategy documents,
correspondence and memoranda relating to the transaction. On 10 th March 2008
7 Please also note that in the hearing the Commission intimated that these customer
concerns and the effects of previous mergers would have amounted to a substantial
lessening of competition were it not the case that the Service Provider agreement is
terminating and that Vodacom would largely have accrued this market share absent the
merger.
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Vodacom’s attorneys filed the stipulated information. From GTSA we requested copies of the
documents and/or presentations made at the strategy presentation meetings referred to in
the minutes dated 11 th August 2006 on page 170 of the record. On 7 th March 2008 we
received an email from GTSA’s attorneys that no such documents were ever prepared or
presented.
[16] A hearing was held on 12 th March 2008. At the hearing the Commission informed us
that in the course of its investigation it had, on two occasions, requested the information
provided pursuant to our direction to Vodacom. However it was not provided – indeed the
documents in question, those that had been provided pursuant to the Tribunal’s direction,
were only provided to the Commission on the day before the hearing. The merging parties’
attorneys submitted that they were initially informed that all relevant documents had been
filed with the Commission and that it was only after our request that the additional
documents were discovered.
[17] While we have no reason to doubt the word of the acquiring party’s attorneys, it is our
firm belief that the documentation in question was intentionally withheld from the
Commission by Vodacom. After all the key document provided to us (and withheld from the
Commission) is entitled ‘ Proposed Acquisition of the subscriber base of Global Telematics
South Africa (“GTSA”) from the Thales Group”. 8 The title alone would reveal to a child – let
alone the legal officers of a major corporation the relevance of the document. But more
than this, the content of the document exposes the falsehood – or, at best, the halftruth –
contained in the Competitiveness Report. Under the heading ‘strategic rationale for the
acquisition’, the document states that ‘there are several strategic reasons for acquiring the
acquisition’, the document states that ‘there are several strategic reasons for acquiring the
GTSA subscriber base’. These, in marked contrast with the rationale articulated in the
competitiveness report, are
• ‘The transaction is in line with Vodacom’s overall strategy to consolidate
and own more of its subscribers thereby improving the operating margins
of Vodacom and bringing it closer to the customer. Should this acquisition
proceed, Vodacom will have acquired all purchasable service providers
and there will effectively only be three Vodacom affiliated service
providers left in the market, namely Vodacom Service Provider, Nashua
8 Our emphasis
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and Autopage, the latter two having concluding new five year SP
agreements with Vodacom, on a non-exclusive basis.
• Acquiring the GTSA business presents an opportunity of buying back margin by
reducing the total commission payments that Vodacom would have had to make to
GTSA on the existing GTSA base.
• GTSA is in direct competition with VSPC and the only differentiator that it can offer
the market is increased discount rates. This result in an overall increase in discounts
offered in the market as GTSA’s competitors have to at least match these rates in
order to compete for the same customers. The average retail rate offered by GTSA is
22% across their postpaid subscriber base, compared to Vodacom levels closer to
15%, and Vodacom will therefore have effectively removed the ‘competitive quote’
scenario in the market with the acquisition. Future profit growth will be enhanced by
reducing these discount rates.’ 9
[18] It is not surprising that in the covering letter accompanying the document VSP’s
attorneys should have attempted an explanation of this paragraph. In so doing it provides a
brief and simple text book example of the operation of competition:
After Global Telematics was appointed as a service provider for the purpose of
negotiating benefits for its telematics subscribers, it expanded its business to act as
a service provider in respect of other subscribers as well. In order to attract
customers, it passed a larger share of its margin on to its customers.
[19] Followed immediately, and without elaboration, by the standard excuse proferred by
those intent upon snuffing out competition:
It is not sustainable for VSP to provide the same level of discounts to its customers
and this level of discounting is not in line with its discounting policy.
[20] We directed that the Commission consider this document which, despite its obvious
[20] We directed that the Commission consider this document which, despite its obvious
centrality to a competition analysis, VSP had not seen fit to place on the record during the
9 Proposed acquisition of the subscriber base of Global Telematics South Africa (‘GTSA’)
from the Thales Group page 2. Our emphasis. This document was the ‘final’
presentation to the ‘Investment Committee’. It is not clear whether this is a Vodacom or
VSP committee.
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investigation of the merger. The Commission indicated in the hearing that it feared that in
the event that the merger was not approved the service provider agreement would
nevertheless be terminated which may cause considerable prejudice to the target firm and
its subscribers. VSP’s legal representatives undertook to take instructions on this.
[21] On the 14 th March 2008 we received a letter from Vodacom indicating that it did not
intend to renew or extend the service provider agreement. The Commission confirmed then
that on the basis that the termination of the agreement would take the acquiring party out of
the market anyway, it therefore recommended the unconditional approval of the transaction.
[22] We comment as follows:
[23] Firstly, we do not agree with the Commission’s stated basis for approving the merger.
VSP and its parent, Vodacom, clearly have no wish to terminate their relationship with GTSA
through the simple expiration of the agreement. Quite the contrary, VSP is willing to pay a
considerable sum of money in order to purchase GTSA because Vodacom is intent upon
purchasing the GTSA subscriber base thus effecting the seamless transfer of GTSA’s
customer base to Vodacom. Presumably if the termination of the arrangement was not
effected in this manner – that is, if it was simply terminated by the expiry of the agreement –
it risked losing the subscribers either to one of the few remaining independent service
providers or, worse, to one of the competitor networks. Sympathy for the presumed plight of
the shareholders of GTSA is not an appropriate basis for approving the merger –
presumably GTSA could have sold its subscriber base to one of the other independent
service providers who have recently extended their agreements with VSP/Vodacom. A key
service providers who have recently extended their agreements with VSP/Vodacom. A key
strategic rationale for the transaction is, as the document submitted to the VSP/Vodacom
Investment Committee indicates, to eliminate the competition generated by GTSA’s
aggressive discounting strategy. This is the proper basis for deciding this transaction.
[24] Second, it does not follow from this that we are of the view that the transaction
should be prohibited.
[25] As already indicated, it is difficult to assess the impact on competition of an
incremental acquisition of market share. It is highly unlikely that any of the six acquisitions of
Vodacom service providers could, by virtue of the small accretion of market share that each
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accounts for, have permitted a finding of a substantial lessening of (intrabrand) competition
even if the cumulative effect of the transactions viewed with the benefit of hindsight may well
have substantially lessened competition. In this instance in the market for the resale of
Vodacom contracts at the service provider level, the market share accretion is small
(between 46%). In the market for prepaid subscribers the accretion is less than 1%. This
market share accretion virtually assures the transaction a safe passage through the merger
review process although the rationale cited in the submission to the investment committee
indicates that GTSA was something of a maverick in its discounting practices.
[26] However VSP’s steady acquisition of the market share of the erstwhile service
providers has meant that its market share is already overwhelming and the accretion is too
small to justify a finding of a substantial lessening of competition. We repeat: had we been
able to review the six transactions as a single transaction, it would have been vulnerable to
prohibition.
[27] In any event, Vodacom is entitled to present an efficiency defence. Indeed because
the transaction embodies an important vertical dimension, with the upstream supplier of a
service vertically integrating the distribution function, the efficiency defence usually
associated with a vertical transaction has been presented as the rationale for the
transaction. In our previous decisions, we indicated that this was a defence that we were
inclined to accept. In other words, the acquiring party had little reason to fear prohibition of
its transaction and yet it still chose to withhold material information from the Commission that
it was obliged to file, to craft its disclosure obligations in such a way as to avoid making this
denial on oath, and subsequently, at a later stage, when requested again by the
Commission to produce information relevant to the transaction denied, stating that all
relevant documents had been provided. Other than being advised that the relevant person
is no longer with the company no satisfactory explanation has been given for this conduct. If
the relevant person was unaware of the documents she should have not been chosen to
make the affidavit, if she was then the consequences are intentional nondisclosure.
[28] Thirdly, and following directly from the point above, it may well be asked whether any
acquiring party should be expected to file internal company information that may be
inconsistent with the case it is making to support the merger. The simple answer is that a
party filing a merger notification with the Commission is required to tell the truth, and this
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includes submitting all the stipulated documentation, in order to enable the competition
authorities to properly assess the merger. Form CC 4(2) – the ‘Statement of Merger
Information’ – requires merging parties to submit to the Commission, inter alia, the following
documents: ‘ each report or other document assessing the transaction with respect to
competitive conditions’ and ‘any document, including minutes, reports, presentations and
summaries, prepared for the Board of Directors regarding the transaction’. It also requires
the merging parties to submit ‘the most recent report you provided the Securities Regulation
Panel during the past year’. Form CC4 (2) also requires the filing parties to submit a
‘certification of accuracy’ which confirms that where ‘ completed information has not been
provided because it is unavailable’ then it must submit an ‘affidavit …explaining why the
information is unavailable’.
[29] The requisite affidavit submitted on behalf of the acquiring firm by Ms. Eleni
Christodoulou, the then Group Executive: Corporate Legal Affairs of the Vodacom Group,
expressly acknowledges the requirement to, in her words, ‘ submit an explanatory affidavit in
respect of any information requested on that form which is not available’ and then in the
following paragraph concludes her affidavit by affirming that ‘ Vodacom Service Provider
Company (Pty) Ltd has not submitted a report to the Securities Regulation Panel during the
past year in respect of the transaction under review and accordingly is unable to provide
such a document to the Competition Commission’. What, of course, her affidavit omits to do
is to explain why she has in fact not provided ‘ each report or other document assessing the
transaction with respect to competitive conditions’ and ‘any document, including minutes,
reports, presentations and summaries, prepared for the Board of Directors regarding the
transaction’. The document entitled ‘ Proposed Acquisition of the subscriber base of Global
Telematics South Africa (“GTSA”) from the Thales Group’ clearly falls into one or both of
these categories. So while her affidavit may be technically true insofar as no document
submitted to the Securities Regulation Panel has been omitted, Vodacom has not complied
with the Act in submitting all the other relevant documentation required nor the requisite
affidavit explaining this omission. If this was the approach taken in this transaction we are
concerned that similar internal documentation may have been omitted from previous filings
accompanied by the same thoroughly cynical, essentially deceitful affidavit.
[30] We take an exceedingly dim view of the contempt that Vodacom’s conduct reveals
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for the regulatory process and recommend that the Commission takes the same view. It is,
after all, not possible to administer the merger provisions of the Act effectively if parties
cannot be relied upon to comply with the Act’s requirements to submit relevant information.
It has come to our attention that merger filings are increasingly accompanied by similarly
carefully constructed, deceitful affidavits. They should be rejected by the Commission. And
where the Commission discovers the halftruth – and, consequently the noncompliance –
that these affidavits seeks to camouflage it should not hesitate to prosecute the guilty parties
to the full extent of the law. Where it discovers that a merger has been approved on the
basis of misleading information – and this would include the withholding of pertinent
documentation – it is entitled to revoke its approval of the transaction and/or ask the Tribunal
to impose an administrative penalty.
[31] It is our earnest recommendation that the Commission treats failures to comply with
provisions of this sort as serious contraventions of the Act. We have noted that the affidavits
required to be submitted in Terms of Form CC4 (2) are frequently submitted in the format
employed in this filing. It should be seen for what it is – a cynical legal stratagem to comply
with the technical letter of law while circumventing its true purpose, which, in this instance is
designed to ensure that information is filed that enables the competition authorities to
undertake a thorough and expeditious assessment of a transaction’s impact on competition
and the public interest. The alternative is a merger decision based upon deficient and, as a
result of critical omissions in the filings, blatantly misleading information, or, a Tribunal
process supplemented by the massive discovery processes leading to lengthy hearings and
decision making processes.
decision making processes.
[32] In our view the only way of putting an end to this flagrant contempt for the law, a
contempt which seriously undermines the ability of the authorities to effectively administer
the Act, is to prosecute offenders.
Conclusion
[33] While we are firmly of the view that the acquiring party has wilfully failed to comply
with the Act in order to ensure a favourable competition assessment, we believe that even
on a full consideration of the evidence, including the documentation belatedly provided to the
competition authorities, this transaction will not, on its own, result in a substantial lessening
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of competition. There are no public interest issues. Accordingly the transaction is
unconditionally approved.
___________________ 8 April 2008
D Lewis Date
Tribunal Member
Y Carrim and N Manoim concurring
Tribunal Researcher : J Ngobeni
For the merging parties : Hofmeyr and Webber Wentzel Bowens
For the Commission : Grace Mohamed (Mergers and Acquisitions)
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