Summary of Judgment

1. Introduction

The proceedings were merger control proceedings before the Competition Tribunal of South Africa concerning the approval of a proposed acquisition, ultimately granted subject to conditions.

The acquiring side was Mystic Blue Trading 62 (Pty) Ltd (referred to as “Newco”), a wholly owned subsidiary within the Masscash/Massmart corporate group (ultimately linked to Wal-mart Inc). The target side was the Rhino Group, comprising 16 Rhino stores located predominantly in KwaZulu-Natal and the Eastern Cape (collectively referred to as the Rhino Group stores).

The matter came before the Tribunal after an investigation by the Competition Commission. The Tribunal heard the matter on 14 December 2011, issued an order approving the merger on 20 December 2011, and subsequently issued reasons on 29 February 2012. The order approved the acquisition with divestiture conditions that had been agreed to by the merging parties and the Commission. The Tribunal’s reasons indicate that, given this agreement, the remaining task was to determine whether the agreed conditions were sufficient to remedy the merger’s anti-competitive effects.

The general subject-matter of the dispute concerned whether the transaction, as notified, was likely to result in a substantial lessening or prevention of competition in certain local grocery and liquor markets, and whether divestiture conditions would adequately address those concerns.

2. Material Facts

Newco was described as a newly formed entity and, in itself, did not provide services. The acquiring corporate structure was set out to show that Newco was part of the Masscash/Massmart grouping, with Massmart being a subsidiary of Wal-mart Inc. The Tribunal recorded the internal divisions of the broader group and noted that, for purposes of the competitive assessment, the relevant activities related to Masscash’s involvement in the wholesale and retail/hybrid supply of grocery and liquor, with a focus on customers in lower income categories.

The target business consisted of 16 Rhino stores, largely in KwaZulu-Natal and the Eastern Cape. Rhino’s stores were active in the sale of grocery and liquor products, and Rhino was described as a family controlled company. The Tribunal recorded that Rhino’s stores were exclusively engaged in the retail of grocery, save for one store that traded as a wholesale store, namely Matat Wholesalers.

The transaction structure was that Masscash, through Newco, would acquire the entire issued share capital of each of the firms comprising the Rhino Group stores, resulting in Masscash obtaining sole control over the Rhino business.

The Tribunal recorded the commercial rationale advanced by the parties. Masscash stated that the acquisition supported its strategy of expanding its grocery retail presence in urban and peri-urban areas. Rhino’s shareholders viewed the transaction as an opportunity to realise a return on investment, linked to the absence of a family succession plan.

On the Commission’s market investigation, the Tribunal recorded product and geographic distinctions relevant to competition. The Commission distinguished between the wholesaling and retailing of grocery products, and noted the existence of hybrid wholesale stores with retail components that compete with retail stores. In liquor, while licensing differentiates wholesale and retail, the Commission found that market participants often did not adhere strictly to that distinction; however, for purposes of this transaction, the Commission took into account only retailing of liquor, given how it assessed overlaps in the parties’ activities and licensing positions.

The Commission further considered the Living Standard Measure (LSM) segmentation and found that both Masscash and Rhino targeted lower income consumers in LSM 2–6.

The Commission identified geographic overlaps in retail grocery and liquor in Nongoma, Ulundi, Mtubatuba, Mthatha, Lusikisiki, and Matatiele, and defined the relevant retail geographic market as a 1.5 km radius around the main taxi ranks in the overlapping towns, based on the shopping patterns of consumers who use public transport and the clustering of retailers. For grocery wholesaling, the overlap was only in Matatiele, and the Commission defined the relevant geographic market as Matatiele and a surrounding 120 km radius, reflecting delivery distances.

On market shares, the Commission found that only certain areas reflected high post-merger combined shares, namely retail grocery in Nongoma (72.4%), retail liquor in Matatiele (56.4%) and Nongoma (51.6%), and wholesale grocery in Matatiele (64%). The Commission concluded that these markets were highly concentrated and likely to result in a substantial lessening or prevention of competition absent a remedy.

The divestiture conditions, as recorded by the Tribunal, required the merging parties to sell the retail and liquor businesses of the Rhino Group in Nongoma (KwaZulu-Natal) and the wholesale and liquor businesses of the Rhino Group in Matatiele (Eastern Cape) to independent third parties.

On public interest, the merging parties submitted that the transaction would not have a significant effect on employment, and no contrary finding is recorded in the reasons.

The Tribunal did not identify material disputes of fact in its reasons; rather, it proceeded on the Commission’s delineation of markets, overlaps, and market share outcomes, together with the parties’ acceptance of the proposed divestiture remedy.

3. Legal Issues

The central legal questions the Tribunal was required to determine were whether the proposed merger was likely to lead to a substantial lessening or prevention of competition in the relevant markets identified, and—given that approval was granted with agreed conditions—whether the divestiture conditions were adequate to remedy the anti-competitive effects arising from the merger.

The dispute predominantly concerned the application of competition-law standards to economic and market facts, including market definition (product and geographic), the assessment of concentration and market shares, and the selection and adequacy of a structural remedy (divestiture) to restore competitive constraints in specific localities.

A further issue, treated briefly, concerned public interest, specifically whether the transaction would have any significant effect on employment.

4. Court’s Reasoning

The Tribunal’s reasoning proceeded from the Commission’s market delineation and competitive assessment. It accepted the Commission’s distinction between retail and wholesale grocery markets, while acknowledging that some wholesale outlets may have a retail component that competes with retail stores. It also accepted that grocery products comprised a broad basket of goods, including food and certain non-edible consumables.

For liquor, the Tribunal recorded the Commission’s view that, while licensing regimes distinguish wholesale and retail, market conduct often does not follow that separation. Nonetheless, for the purposes of the overlap analysis in this merger, the Commission focused on retail liquor. The Tribunal did not indicate disagreement with that approach.

In geographic terms, the Tribunal accepted the Commission’s definition of local retail markets as centred on consumer transport patterns and retail clustering, namely a 1.5 km radius around main taxi ranks in the towns where the parties’ activities overlapped. For wholesale grocery in Matatiele, it accepted a broader radius (120 km) aligned to the delivery footprint of the target’s wholesale operation.

Applying these market definitions, the Tribunal relied on the Commission’s findings that, among the overlapping areas, only Nongoma and Matatiele presented post-merger market shares that were sufficiently high to indicate problematic concentration. It recorded that the Commission concluded these markets were highly concentrated and likely to yield a substantial lessening or prevention of competition.

The Tribunal then turned to remedy. It noted that the divestiture conditions—requiring the sale of Rhino’s relevant businesses in Nongoma and Matatiele—were agreed between the merging parties and the Commission. The Tribunal framed its task as assessing whether those agreed conditions were sufficient to cure the identified competition concerns. It accepted the Commission’s view that the divestitures would restore post-divestiture competition in the affected markets, specifically retail grocery and liquor in Nongoma, and wholesale grocery (and the relevant liquor activity) in Matatiele.

On public interest, the Tribunal recorded the parties’ submission that the transaction would not significantly affect employment and did not identify a public-interest basis to prohibit or further condition the merger beyond the structural remedy aimed at competition concerns.

In conclusion, the Tribunal agreed with the Commission that the relevant markets in Nongoma and Matatiele were highly concentrated and likely to lead to a substantial lessening or prevention of competition, and it expressed satisfaction that the divestiture conditions were adequate to address those effects.

5. Outcome and Relief

The Tribunal approved the acquisition by Mystic Blue Trading 62 (Pty) Ltd of the Rhino Group subject to conditions.

The conditions required divestiture, namely that the merging parties sell the Rhino Group’s retail and liquor businesses in Nongoma (KwaZulu-Natal) and the Rhino Group’s wholesale and liquor businesses in Matatiele (Eastern Cape) to independent third parties, as set out in the conditions attached to the reasons as Annexure “A”.

No costs order is recorded in the reasons.

Cases Cited

No external case law citations are recorded in the reasons.

Legislation Cited

No specific legislation is expressly cited in the reasons.

Rules of Court Cited

No rules of court are expressly cited in the reasons.

Held

The Tribunal held that, on the Commission’s assessment accepted by the Tribunal, the merger would result in highly concentrated markets in retail grocery and retail liquor in Nongoma and in wholesale grocery (and associated liquor activity) in Matatiele, such that the transaction was likely to lead to a substantial lessening or prevention of competition in those local markets absent a remedy.

It further held that the agreed divestiture conditions were sufficient to remedy the identified anti-competitive effects and therefore approved the merger subject to those conditions.

LEGAL PRINCIPLES

The Tribunal applied the principle that a merger may be approved subject to conditions where a remedy—here, divestiture to independent third parties—is adequate to address a merger’s likely anti-competitive effects in properly defined product and geographic markets.

The Tribunal proceeded on the principle that competitive effects must be assessed with reference to market definition (including differentiation between retail, wholesale, and hybrid formats), relevant customer targeting (here, lower-income consumers as proxied by LSM categories), and local geographic constraints reflecting consumer shopping patterns (such as concentration of retail activity around transport nodes).

The Tribunal also reflected the principle that where evidence indicates high post-merger market shares and high concentration in specific local markets, a structural remedy may be required to prevent a substantial lessening or prevention of competition, and that the adequacy of such a remedy is assessed by whether it is capable of restoring competitive conditions in the affected areas.

On public interest, the Tribunal applied the principle that merger proceedings also consider public-interest factors such as employment, and where the parties indicate no significant employment effect and no contrary finding is made, public-interest concerns may not necessitate additional conditions beyond those addressing competition.