COMPETITION TRIBUNAL OF SOUTH AFRICA
Case NO: 107/LM/Oct 08
In the matter between
Mobile Telephone Networks Holdings (Pty) Ltd Primary acquiring firm
And
iTalk Cellular (Pty) Ltd Primary target firm
Panel : D Lewis (Tribunal Member); U Bhoola (Tribunal Member) and N
Manoim (Tribunal Member)
Heard on : 06 January 2009
Decided on : 06 January 2009
Reasons Issued : 20 February 2009
Reasons for Decision
Approval
[1] On 06 January 2009 the Competition Tribunal issued a Merger Clearance Certificate
unconditionally approving the merger between Mobile Telephone Networks Holdings (Pty)
Ltd and iTalk Cellular (Pty) Ltd. The reasons appear below.
Parties
[2] The primary acquiring firm is Mobile Telephone Networks Holdings (Pty) Ltd (“MTN
Holdings”), a wholly owned subsidiary of MTN Group Ltd (“MTN Group”).
[3] MTN Group is listed on the JSE and does not have a controlling shareholder. The
shareholders holding in excess of 5% of MTN Group’s issued share capital are: The Public
Investment Corporation (“PIC”), which holds a 13.27% interest; Newshelf 684 (Pty) Ltd,
which holds a 13.06% interest; and Lomard Odier Darier Hentsch & Cie (M1 Limited), which
holds a 9.82% interest.
[4] MTN Group controls a number of subsidiaries, including but not limited to MTN
Holdings, and MTN Management Services (Pty) Ltd. MTN Holdings in turn controls a
number of subsidiaries three of which are relevant for the purposes of the current transaction
namely Mobile Telephone Networks (Pty) Ltd; MTN Service Provider (Pty) Ltd (“MTN SP”)
and MTN Network Solutions (Pty) Ltd (“MTN NS”). MTN Holdings has a 41% interest in
iTalk, the primary target firm.
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[5] The primary target firm is iTalk Cellular (Pty) Ltd (‘iTalk”), a cellular service provider
owned and controlled by the Bebinchand Seevnarayan Trust (“the S Trust”) 1 and MTN
Holdings.2 The S Trust and MTN Holdings hold 59% and 41% of the shares in iTalk
respectively.
[6] MTN and iTalk are both active in the telecommunications sector. The MTN Group is a
multinational telecommunications provider and offers services in the Information
Communication and Technology (“ICT”) sector. In South Africa MTN is a mobile network
operator that provides mobile voice and data services. iTalk is a cellular service provider that
contracts with consumers and corporate customers directly for the provision of MTN airtime,
handsets and related products. iTalk entered into a service provider agreement3 with MTN
on 11 May 1999 for the provision of these services. This agreement effectively enables iTalk
to distribute MTN’s products at a significant discount. MTN also owns its own service
provider MTN SP, which is a dedicated provider of its products and competes with iTalk.
MTN is thus in the curious position of being a supplier, competitor of, and shareholder in,
iTalk.
Transaction
[7] In terms of the proposed transaction, MTN Holdings intends to acquire the
remainder of the shares (59%) in iTalk by exercising its pre-emptive right according the
shareholders agreement. Post-merger, the S Trust will exit as a shareholder in iTalk. MTN
Holdings will hold 100% of the total issued share capital in iTalk and will therefore exercise
sole control over iTalk. The significance of the transaction is that MTN, presently a joint
controller of iTalk, becomes its sole controller.
Rationale for the Transaction
[8] In recent years there have been a series of mergers involving acquisitions by mobile
network operators of their service providers. The mergers are Vodacom GSM 4, Vodacom
1 The S Trust holds shares in Budget Properties (Pty) Ltd;Two Two Four Chamberlain Road Properties (Pty)
Ltd;Lyl-Properties (Pty) Ltd;Windermere Road Properties (Pty) Ltd;Seevbrook Road Properties (Pty) Ltd;Serta
Bedding (Pty) Ltd;Lyl Bedding Spring Manufacturers (Pty) Ltd;Kiran Sales (Pty) Ltd; and iTalk. None of these
entities are involved in the telecommunications industry.
2 iTalk does not own or control any subsidiaries.
3 iTalk used to be an exclusive service provider to MTN but the exclusivity in the iTalk/MTN Service Provision
Agreement expired on 13 March 2003. Therefore while currently iTalk only sells MTN services, it is a non-
exclusive independent service provider and it is entitled to provide services in respect of both Vodacom and Cell
C airtime products should it choose to do so.
4 Case NO: 10/LM/Nov99
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Teljoy Holdings5, Vodacom Smartcall6, Vodacom Tiscali7 and Vodacom Africell8, Vodacom
Glocell/Global Telematics9. 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.10 We approved all of these mergers unconditionally.
[9] MTN submits that the proposed transaction must be seen against this background. It is
part of MTN’s strategy to increase its distribution footprint through ownership and increased
control of the distribution channel. MTN has developed a branded channel distribution
strategy with the aim of providing its customers with a common customer experience.
Through this strategy, MTN claims that it can: control the quality of service; ensure that
customers have a homogenous brand experience; ensure that staff training and motivation
and incentives of staff are consistent and provide the customer with an overall seamless
experience.
[10] MTN also claims that it is shortening the distribution chain through increased vertical
integration with substantial expected efficiency gains.
Background
[11] Despite the strategy of MTN set out above, the transaction came about because the
S Trust took a decision to sell its interest in iTalk. However MTN was not its first choice of
buyer. On 28 January 2008, a sale of share agreement was signed between the Huge
Group (Huge) and the Trust in terms of which Huge agreed to purchase the Trust’s 59%
shareholding in iTalk. 11 According to Huge the purpose of the acquisition was to enable
Huge to acquire and distribute MTN’s products at a significant discount afforded to iTalk in
terms of the Service Provider Agreement. Huge submitted that such an acquisition would
have enabled it to aggressively compete with MTN SP and other independent service
providers, in providing MTN’s products to individual customers and in particular to Huge’s
providers, in providing MTN’s products to individual customers and in particular to Huge’s
significant corporate customer base. 12 This transaction was notified to the Competition
Commission (the Commission”) as an intermediate merger and approval was granted. After
5 Case NO:13/LM/Nov99
6 Case NO: 68/LM/Dec03
7Case NO: 87/LM/Oct04
8 Case NO: 48/LM/06
9 Case NO:12/LM/Jan08
10 Case NO: 83/LM/Sep05
11 Huge is a company listed of the Johannesburg Stock Exchange. It provides value added, cost
controlling telecommunications services to corporate customers in South Africa, including cellular
least cost routing (“CLCR”) services, bulk SMS solutions and call cost management services. Huge
Telecom (Pty) Ltd (“HugeTel”) is a wholly owned subsidiary of Huge Group. HugeTel provides cellular
airtime (“SIM cards”) to its corporate customers as part of CLCR services. HugeTel is a customer of
iTalk and according to Huge Group; HugeTel currently competes with MTN SP and the other two
independent MTN cellular service providers being Autopage Cellular (Pty) Ltd (“Autopage”) and
Nashua Mobile (Pty) Ltd (“Nashua”). See Huge Group submission, record page 3 paragraph 2.2.
12 See para 5 page 17 of Mr. James Herbst’s founding affidavit in the intervention application.
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the conclusion of the Huge transaction agreements, MTN exercised its pre-emptive rights in
terms of the iTalk shareholders agreement so as to purchase the Trust’s shares itself. The
proposed transaction between MTN and iTalk was then notified to the Commission and the
Huge transaction was never implemented.
[12]During its investigations of the proposed MTN transaction, the Commission received a
number of objections from the merging parties’ competitors. Huge, the erstwhile purchaser,
submitted that it was concerned that MTN would use its control of iTalk as a tool to diminish
competition in the service provider market, and thereby restrict the ability of service
providers to spark competition in the upstream market for voice telephony products and
services. Huge argued that MTN would use its control of iTalk to eliminate the discounting
arrangement that is currently secured through the Service Provision Agreement between
MTN and iTalk and thereby restrict competition amongst service providers.
[13]According to Huge, iTalk is one of the only three non exclusive service providers left in
the market and if MTN acquires iTalk, there is no prospect that iTalk would become a tri-
service provider. Huge therefore submitted that the merger effectively results in the
reduction of competition because the number of independent non-exclusive service
providers will be reduced from three to two. By tri-service provider, Huge means a service
provider that sells the products of all three networks, Cell C., MTN and Vodacom. At present
we are advised only two firms are tri-service providers, Autopage and Nashua. Because
iTalk which was once contracted exclusively to MTN up until 13 March 2003 is now free to
contract with the two other networks it is, in Huge’s view, the only firm placed to become a
number three tri-service provider. If MTN becomes sole controller this potential will not be
realised because MTN has not through MTN SP ever distributed the products of its two rival
networks.
networks.
[14] Huge’s also argued that there should be a real concern about the diminution of
competition between iTalk and MTN. According to Huge currently MTN offers genuine intra
brand competition on price, distribution and pre-sales and after sales service with MTN SP,
Autopage and Nashua Mobile. Huge argues that such intra-brand in turn drives inter brand
competition.
[15] On 1 December 2008, Huge brought an application before this Tribunal for leave to
intervene and participate in the merger proceedings in terms of section 53(1) (c) (v) of the
Competition Act 89 of 1998 (‘the Act’) read with rule 46 of the Competition Tribunal Rules.
We were notified by the other competitors who raised concerns during the Commission’s
investigations of the proposed merger that they did not intend to participate further in the
merger proceedings. The application to intervene was opposed by the merging parties. The
intervention application was heard on 9 December 2008. After hearing the intervention
application we dismissed it on the same day. 13 The merger hearing was set down for 6
January 2009. We did however permit Huge to make submissions at the hearing; one
13 The burden of Huges’ submissions were directed at why it would be a more competitive buyer of iTalk than
MTN. The role of merger adjudication is not decide whether one firms is better buyer than another but to decide
whether the notified transaction will substantially prevent or lessen competition.
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submission was to come from its chief executive and the other from its economist Geoff Parr
who had prepared a report on the potential anti-competitive effects of the merger. In this
report, Parr had prepared a table in which he compared the prices for MTN post paid
packages offered by iTalk with those of other sellers of MTN packages, which suggested
that overall, iTalk provided the cheapest contracts.
[16] Mr Parr did not take up the invitation to testify – in fairness to him we do not know if
this decision was his own or that of his client and so he did not have an opportunity to
defend his thesis. Nevertheless Mr James Herbst the Group Financial Director of Huge
made an oral submission on the firms’ behalf at the hearing on 6 January. When he did
testify Mr Herbst submissions were completely different from those signalled in the
intervention application. His submissions were largely about how with Huge, if it bought
iTalk, would utilise the SPA to sell contracts to new entrants to the post paid market by
allying itself with micro finance firms.
Competition Analysis
Relevant Market
[17] As can be seen above in paragraph 7, both MTN and iTalk are involved in the
telecommunications sector. Whilst MTN provides a number of services, iTalk is a cellular
service provider that contracts with consumers and corporate customers directly for the
provision of MTN airtime, handsets and related products. The merging parties submit that
there are at least two types of relevant product markets to consider in the
telecommunications sector, the upstream market for the provision of mobile network access
and the downstream service provider market.
[18] The upstream market is the market for network access, provided by cellular
companies. The market consists of the three cellular networks, namely Vodacom, Cell C and
MTN and these companies provide access to their individual networks. All three networks
MTN and these companies provide access to their individual networks. All three networks
are active in the upstream and the downstream markets. In the downstream market service
providers are the links between the consumer and the networks.
[19] There are two classes of customer in the downstream market, pre-paid customers
who buy airtime to get service each time they need it and customers with contracts, referred
to in the industry as post paid. Post paid customers are considered more credit worthy and
hence pay after the fact, hence post paid. Service provider firms are primarily concerned
with this customer segment because they assume the risk of non-payment not the network
itself. Hence they receive discounts from the networks to sell the product, give some of the
margin to the customer, and keep the rest for themselves. The pre-paid business model
works differently, as the customer buys upfront, and the distributor assumes no risk. Hence
many outlets offer pre-paid products, typically retailers, and the role of service providers in
serving this customer segment is limited.
[20] Service providers have the responsibility for marketing and selling different mobile
network operators’ services; billing customers; setting credit limits; collecting debts and
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offering after sales service and technical support. The Commission’s view was that the
downstream product market comprised service providers who sell post paid services. It did
not come to a definitive conclusion as to whether the market might be even narrower than
this and confined to service providers who sell packages for a particular network, in this case
MTN. The Commission noted that certain post paid customers could not easily substitute
between networks and hence the adoption of a narrow market definition might be
appropriate. It did not have to come to this conclusion as it assumed the narrowest market
as a possibility and still found no reason for concern.
[21] The Commission did not examine the prepaid market because prepaid customers are
a small percentage of iTalk’s business.14
[22] Another service offered by iTalk is that of cellular least cost routing or CLCR.15
Whether this constitutes a separate market is not something the Commission again
concerned itself with, as iTalk’s exposure to this service was too limited to raise concerns.
[23] The Commission also did not come to any conclusion on a geographic market
definition. However in its assessment of the impact on competition the Commission focussed
on iTalk’s presence in KwaZulu-Natal (“KZN”) as iTalk’s presence in other provinces is
significantly smaller.16
[24] We agree with the Commission’s approach overall as it has assumed the narrowest
view of the market to assess the potential competition concerns and hence, the one least
favourable to the merging parties.
Effect on Competition
[25] As we noted above it is common cause that there is an increasing trend amongst
network providers to vertically integrate downstream, by buying up their service providers
and provide the services themselves. This is also in line with international trends. 17 This
transaction has both a horizontal and a vertical dimension.
[26] The Commission’s report reveals that although firms in the downstream market sell a
[26] The Commission’s report reveals that although firms in the downstream market sell a
range of products they are predominantly distributors of post paid products as the fact that
only 3% of iTalk’s business is on pre-paid reveals. There does not seem to have been any
dispute that post paid contracts are insufficiently constrained by pre-paid, the latter being
more expensive for the consumer, so the issue is whether the relevant market is one for post
paid in a particular networks contracts, for example, MTN only or that of post paid for all
there networks. This is not something we need to decide on for the purpose of this merger.
On the market shares if the market shares are those of post paid on all three networks then
14 According to the Commission iTalk’s prepaid base constitutes 0.02% of MTN’s prepaid customer base and is
less than 3% of iTalk’s total customer base. Please see page 23 of the Commission’s report.
15 Least Cost Routing takes advantage of the fact that calls from “cell-to cell” are cheaper than “landline-to-cell”
calls. The “cell-to cell” calls are cheaper than “landline-to-cell”phone calls because of the cheaper rates and the
per-second billing as compared to the per minute billing with Telkom. The saving is achieved by utilizing the
Least Cost Routing, which converts the outgoing “landline-to-cell” calls to “cell-to cell” calls. See submissions by
Du Pont Telecom (Pty) Ltd on page 266 of the record.
16 According to the Commission 88% of iTalk’s sales are in KZN and 85% of its subscribers are in KZN. See the
Commission’s record page 16.
17 See Case No: 87/LM/Oct04 at paragraph 5.
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MTN SP has a pre-merger market share of 22.7%, iTalk of 1.9% leading to a post merger
market share of 24.6%. If the market is only MTN post paid then the market shares are MTN
SP 62.5%, iTalk 4.9% and a post merger combined market share of 67.4%. Although MTN
SP’s market share is high post merger, it is also high pre-merger. At the level of market
share it holds, even an additional 5% accretion is unlikely to materially alter the market
power it already enjoys. But the effective accretion of market share is less than 5% and
more in the region of 3% as as MTN pre-merger owns 41% of iTalk.
[27] It is therefore highly unlikely that the other networks will sell their products through a
service provider that is partially owned and controlled by a rival network. Even if this
transaction is prohibited MTN remains a joint controller of iTalk. There is thus no basis for
assuming that this merger is potentially anti-competitive on these grounds.
[28] The one possible anticompetitive effect may be on intra-brand competition for MTN
post paid customers. If iTalk is offering customers greater discounts than MTN SP then there
may be something to this theory. However we have no evidence that this is the case and
both MTN and the S Trust have denied this.18 Secondly, even if it is the market share of
iTalk in post paid is so small as to not meet the test for substantiality. Thirdly, iTalk even if it
is a greater discounter it is not going to enjoy its present service provider agreement with
MTN much longer. The contract expires at the end of 2010. In the absence of the merger, if
MTN does not want to continue the level of discount it offers to iTalk presently it does not
have to offer a new contract. Thus if iTalk is a more aggressive discounter, it has
notwithstanding this approach, failed thus far to improve its market share amongst MTN post
paid subscribers, beyond a very modest market share. Nor, given the imminent lapsing of
paid subscribers, beyond a very modest market share. Nor, given the imminent lapsing of
the contract with MTN, which is allegedly the source of its ability to discount aggressively, is
this potential going to be long in the market, unless MTN wishes it to be.
[29] But we don’t know if iTalk is such a discounter. Indeed its market share has been flat
of late and since last year declined. This would suggest consumers are not aware that it is
this aggressive discounter. Of course, as the merging parties frankly concede, consumers
find it difficult to compare the packages of the respective networks and indeed even
packages offered by the same network. Mr Parr who claimed to be able to do the latter did
not testify in the end. But even if the product differentiation of the networks has led to ill
informed consumer choices to date, it is hard to see how preventing the merger is going to
rectify this.
[30] We are thus not in a position to conclude that there is a diminution of intra brand
competition – iTalk may be offering no more discount to consumers than MTN SP. Nor, even
if it did, that given its market share, and the near conclusion of its contract with MTN, this
would be material.
[31] The merger also has a vertical dimension as MTN will be strengthening its position in
the downstream service provider market. With regard to vertical effects the Commission
analysed both input and customer foreclosure. According to the Commission in terms of
customer foreclosure, the concern would be the ability of MTN to deprive its upstream rivals
of access to iTalk as means of distribution. We are of the view that iTalk’s ability to become
a tri-service provider offering contracts of all three operators is not changed by this merger.
Despite the fact that it is five and half years since iTalk’s exclusivity with MTN ended, iTalk
18 See page 6 of iTalk’s answering affidavit in the intervention application.
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has not become a tri-service provider. We know from Vodacom’s previous transactions
before this Tribunal that they intend to vertically integrate and that they do not intend to issue
any new service provider licences. Neither Vodacom nor Cell C had concerns about the
merger. It seems highly unlikely that rival networks, who like MTN want to own their own
distribution, would want to use as an outlet a small provider partially controlled by a rival.
This would explain why since the period of exclusivity ended iTalk has never become tri-
service provider.
[32] We now turn to the input foreclosure theory. This theory is premised on the fact that
MTN has market power both upstream and downstream in the market for post-paid MTN
contracts and could use this position to restrict supply of its post-paid contracts to its
downstream service provider rivals namely Nashua, Orion and Autopage. We are of the view
that MTN can engage in this type of foreclosure with or without the merger and we therefore
agree with the Commission that MTN’s ability to engage in input foreclosure is neither
merger specific nor likely.
[33] There are no public interest issues. Accordingly the transaction is unconditionally
approved.
___________________ 20 February 2009
N. Manoim Date
Tribunal Member
U Bhoola and D Lewis concurring
Tribunal Researcher : Jabulani Ngobeni
For the merging parties : Adv Arnold Subel SC instructed by Feinsteins
Attorneys
For the Commission : Thabelo Masithulela and Kate Morris (Mergers and
Acquisitions)
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