Summary of Judgment

1. Introduction

These proceedings concerned the approval of a large merger before the Competition Tribunal of South Africa. The matter was determined by a Tribunal panel consisting of Yasmin Carrim (Presiding Member), Medi Mokuena (Tribunal Member), and Andreas Wessels (Tribunal Member).

The merging parties were Shoprite Checkers (Pty) Ltd as the acquiring firm, and Metcash Seven Eleven (Pty) Ltd together with a portion of the Friendly Distribution Division of Metcash Trading Africa (Pty) Ltd as the target firm(s). The transaction was presented as an acquisition of control by Shoprite, implemented through its OK Franchise Division (OKFD).

The procedural history reflected that the merger was heard on 1 August 2011, and on that date the Tribunal conditionally approved the transaction. The Tribunal’s reasons were issued subsequently on 26 August 2011, explaining the basis on which competition and public interest considerations were assessed and why approval was granted subject to an employment-related condition.

The general subject-matter of the dispute concerned whether the proposed acquisition would be likely to substantially prevent or lessen competition in relevant retail and franchising markets for fast-moving consumer goods (FMCG), and whether any public interest concerns—particularly relating to employment—required intervention by way of conditions.

2. Material Facts

Shoprite Checkers (Pty) Ltd was described as a private company and a wholly owned subsidiary of Shoprite Holdings Ltd, a JSE-listed entity with a widely dispersed shareholding and no single controlling shareholder. Shoprite’s business activities were described as predominantly involving the retail and distribution of a broad range of FMCG through multiple retail formats and divisions, including the division relevant to this transaction, namely OKFD.

The target firms consisted of two components. First, Metcash Seven Eleven (Pty) Ltd functioned as a franchisor and holder of intellectual property rights associated with the Seven Eleven and Friendly Seven Eleven franchise stores, and was not itself a trading entity. Second, the Friendly Distribution division comprised distribution centres located across South Africa which provided product support and deliveries to the relevant franchise stores and to other Metcash franchise stores. The distribution centres held stock tailored to the requirements of stores in their supply areas and made weekly or bi-weekly deliveries depending on store size.

In terms of the transaction structure, Shoprite would acquire 100% of the shareholding in Metcash Seven Eleven and would acquire the business of the Friendly Distribution division. The practical effect was that Shoprite would obtain full control of the target businesses through OKFD. The acquiring firm’s stated rationale was business expansion through additional franchise agreements and increased turnover in supplying merchandise to franchisees. Metcash Trading’s rationale for disposal was group restructuring to focus on its core wholesale distribution business in FMCG.

On the competition facts considered material by the Tribunal, the Commission identified relevant markets in FMCG retail (convenience retail stores and supermarket retail stores) and in franchise opportunities (for convenience-store and supermarket-store formats). The merging parties accepted a horizontal overlap in the supply of franchise opportunities in the convenience and supermarket FMCG franchise segments, because both Shoprite and Metcash Seven Eleven provided franchise opportunities in those submarkets.

A limited vertical relationship was also identified. OKFD occasionally supplied some Seven Eleven stores when they could not obtain full stock requirements from Metcash’s distribution division. The Tribunal recorded that, in 2010, these purchases amounted to approximately 0.1% of OKFD’s turnover, indicating a small level of vertical interaction on the facts placed before it.

Third-party concerns were recorded in relation to public interest. NAFCOC complained inter alia about employment losses, but the Commission’s investigation (as reported in the reasons) indicated that the employment losses occurred and were expected in the Friendly Distribution Division and not in the franchise operation. SACCAWU objected due to negative effects on employment at the Friendly Division. Although SACCAWU was afforded an opportunity (by prior Tribunal order) to file submissions, it ultimately made no submissions. Notwithstanding this, at the hearing the merging parties undertook to find employment for employees facing retrenchment as a result of the transaction and accepted that this undertaking could be imposed as a condition.

3. Legal Issues

The central legal questions, as reflected in the reasons, were whether the merger was likely to substantially prevent or lessen competition in any relevant market and, if not, whether the merger nonetheless raised public interest concerns requiring conditions.

The dispute primarily concerned the application of competition-law assessment to the economic and commercial facts presented. This included evaluating market definition (as adopted by the Commission), assessing the competitive significance of the parties’ market presence (including the Commission’s finding that market shares were below a threshold described as de minimus), and considering constraints from competitors and the possibility of entry. It also required an evaluative judgment regarding whether the market characteristics described (saturation, low profits, availability of franchise opportunities, and relatively low costs of entry) supported the conclusion that anti-competitive effects were unlikely.

In addition, the matter required a public interest assessment focused on employment effects linked to the Friendly Distribution business and whether an employment-related condition was appropriate in light of concerns raised and undertakings given.

4. Court’s Reasoning

The Tribunal’s reasoning proceeded from the Commission’s identification of the relevant markets: FMCG retail in convenience-store and supermarket formats, and FMCG franchise opportunities in corresponding formats. It accepted that the merger presented a horizontal overlap in franchise opportunities and a limited vertical aspect arising from occasional supply by OKFD to Seven Eleven stores.

In evaluating competitive effects, the Tribunal relied on the Commission’s conclusion that the merging parties’ market shares in the franchise opportunities market were below the de minimus threshold, and on that basis were not likely to raise significant competition concerns. The Tribunal also accepted the Commission’s view of competitive constraints in the FMCG retail sector, namely that supermarkets constrain other supermarkets and convenience stores constrain other convenience stores, with convenience stores generally unable to compete with supermarkets on price due to their smaller size and reduced bargaining power with suppliers.

The Tribunal further accepted the Commission’s assessment that barriers to entry into FMCG retail and FMCG franchising were fairly low, referencing the availability of numerous franchise opportunities and relatively low setup costs. It also endorsed the Commission’s view that the South African FMCG retail market was very competitive, highly saturated, and characterised by low operating profits, and noted the confirmation of these features by a competitor that had franchised a significant number of stores in a recent period.

Against this factual and market background, the Tribunal accepted the Commission’s conclusion that if the merged entity attempted anti-competitive conduct it would face competitive discipline from existing retailers and the possibility of entry. The reasons also recorded third-party concerns premised on Shoprite’s size and its ability to obtain supplier discounts; however, the Tribunal accepted the Commission’s reasoning that such discounts were likely to be passed on to consumers because Shoprite would continue to face competition from other retailers.

On public interest, the Tribunal recorded that NAFCOC’s concerns about job losses related to the Friendly Distribution Division rather than the franchise operation, and that other concerns were not merger-specific. In relation to SACCAWU’s employment objection, the Tribunal noted that SACCAWU did not ultimately file submissions. The Tribunal nonetheless placed weight on the merging parties’ undertaking at the hearing to find alternative employment for employees facing retrenchment due to the transaction, and treated this as suitable for incorporation as a merger condition.

The Tribunal’s overall evaluative conclusion was that the transaction was unlikely to substantially prevent or lessen competition and that the principal public interest issue requiring attention could be addressed by an employment-related condition.

5. Outcome and Relief

The Tribunal approved the merger subject to a condition. The condition required Metcash to find alternative employment for the remaining 8 employees who had not yet been retrenched or provided with alternative employment. In respect of 18 employees who had applied for retrenchment but whose applications had not yet been accepted, Metcash was required to find them alternative employment unless Metcash accepted those applications for voluntary retrenchments.

No separate costs order was recorded in the reasons.

Cases Cited

No cases were cited in the reasons.

Legislation Cited

No legislation was expressly cited in the reasons.

Rules of Court Cited

No rules of court were cited in the reasons.

Held

The Tribunal held that the proposed acquisition by Shoprite of Metcash Seven Eleven and the Friendly Distribution business was unlikely to substantially prevent or lessen competition in the relevant FMCG retail and franchising markets identified in the Commission’s analysis. It further held that the principal public interest concern raised (employment impacts associated with the Friendly Distribution Division) could be addressed through a merger condition requiring the finding of alternative employment for specified categories of affected employees, subject to the stated exception relating to acceptance of voluntary retrenchments.

LEGAL PRINCIPLES

The Tribunal applied the principle that merger assessment requires identification of relevant markets and an evaluation of whether the transaction is likely to substantially prevent or lessen competition, having regard to competitive constraints, market characteristics, and entry conditions as presented on the record.

It applied the principle that where market presence in a relevant area of overlap is below a de minimus threshold (as characterised in the Commission’s analysis), the merger is less likely to raise significant competition concerns on those facts.

It applied the principle that competitive effects analysis may consider constraints from existing competitors, market saturation, profit conditions, and barriers to entry, and may conclude that anti-competitive conduct is unlikely where effective competitive discipline and entry possibilities are present on the evidence relied upon.

It applied the principle that public interest concerns, particularly employment effects, may be addressed through conditions attached to merger approval where such conditions are supported by the record and undertakings made in the proceedings.