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COMPETITION TRIBUNAL OF SOUTH AFRICA




Case No:36 /AM/Apr12




In the matter between:



Kenilworth Racing Pty (Ltd)
Acquiring Firm

And

Gold Circle Pty (Ltd)
Target Firm



And the matter between:



The Thoroughbred Horseracing Trust
Acquiring Firm

And

Kenilworth Racing Pty (Ltd)
Target Firm





Panel : Norman Manoim (Presiding Member)
Yasmin Carrim (Tribunal Member)
Merle Holden (Tribunal Member)
Heard on : 10 – 29 and 31 October 2012
Final written submissions on 5 November 2012
Order issued on : 15 November 2012
Reasons issued on : 07 February 2013

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Reasons for Decision


Introduction

[1] This merger involves the sale in two transactio ns of the Western Province
horse racing assets of a company called Gold Circle to a newly formed
shelf company known as Kenilworth Racing.
[2] The two transactions considered are: first a demerger of the Western Cape
assets and operations of Gold Circle Pty (Ltd) (“Go ld Circle”) from Gold
Circle to Viacor Trade 72 trading as Kenilworth Rac ing Pty (Ltd)
(“Kenilworth Racing”); and, secondly, a sale of the shares of Kenilworth
Racing to the Thoroughbred Horseracing Trust (“the Trust”).
[3] Gold Circle is one of only two horse racing ope rators in the country, the
other being Phumelela. At present Gold Circle opera tes all the racing
assets in KwaZulu Natal and the Western Cape, whils t Phumelela controls
all the racing assets, such as they are, in the remaining seven provinces.
[4] Post merger Kenilworth will be owned by a Trust known as the
Thoroughbred Horseracing Trust which is also a 35.2 6% shareholder of
Phumelela. Kenilworth will, if the merger is approv ed enter into a
management agreement with Phumelela to manage its business.
[5] A key question in this transaction is whether P humelela will post merger
control the Western Province assets and thus whethe r the merger is in
reality one between Phumelela and Kenilworth.
[6] The issue underlines a key point of difference between the Competition
Commission which prohibited the mergers and the mer ging parties who
have brought this consideration application and see k approval without
conditions.
[7] The transaction also involves licence transfers . These transfers are not
subject to our approval, but where appropriate, of the respective regulatory
authorities that granted the licences. At the time of writing we do not know
of the outcome of these applications.
The Hearing

[8] The factual and expert evidence in this merger was heard from the 18th to
the 29th of October 2012 with closing arguments hea rd on the 31st of

the 29th of October 2012 with closing arguments hea rd on the 31st of
October 2012. The Tribunal issued its order on 15 N ovember 2012
approving the merger subject to conditions. Our rea sons for the approval
are set out below.

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[9] The factual witnesses called by the Commission were:
• Jeremy Marshall – CEO and owner of Marshalls World of Sport
• Charles Savage – CEO of Purple Capital
• Gary Van Dyk – Corporate finance specialist at Pur ple Capital
[10] The Commission also called James Hodge, an ec onomist from
Genesis Analytics, as an expert witness
[11] The Factual witnesses called by Kenilworth Racing and the Trust were:
• Johannes Hattingh Van Niekerk – Director of Phumel ela Gaming
and Leisure, a trustee of the Trust, and director o f Kenilworth
Racing post merger
• Vidrik Lionel Thurling – Chairman of Gold Circle W estern Cape
and a director of Kenilworth Racing
• Adriaan Du Plessis – CEO of Phumelela Gaming and L eisure
[12] The Factual witness called by Gold Circle was:
• Michel Laurence Nairac – CEO of Gold Circle.
[13] Kenilworth Racing and the Trust, together with Gold Circle, called Patrick
Smith, an economist from RBB Economics, as a joint expert witness.
[14] Two interested stakeholders in horseracing als o made representations.
These were:
• Chopela Simoto – Grooms’ Association
• Phindi Kema and Ian Jayes – Africa Race Group

Background to the consideration

[15] On 19 March 2012 the Commission prohibited two linked transactions
that had been notified to it as intermediate mergers.
[16] In terms of the first transaction termed the ‘ demerger transaction’ by the
parties, Gold Circle sells its assets and operation s in the Western Cape as
a going concern to Kenilworth Racing – which has as its sole shareholder
the Western Province Regional Racing Association (“ WPRRA”). In terms

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of the second transaction the WPRRA sells its shares in Kenilworth Racing
to the Trust.
[17] The Trust is thus the ultimate acquiring firm. The initial seller and the
ultimate acquirer were not always in agreement as t o whether the
transactions were inextricably linked. They have no w confirmed that they
are. It is therefore not necessary for us to view t he transactions
separately.
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[18] Both transactions were the subject of consider ation applications and
hence the matters came before us through this proce dure. We were thus
not confined to the record before the Commission an d we heard additional
evidence from all parties as well as having the ben efit of hearing witness
testimony.
[19] Although separately represented, Gold Circle a nd the ultimate acquirers
made common cause on the core substantive issues th at we must
consider in terms of section 12A.
[20] The Western Cape racing assets compromise a li cense and various
properties that make up two core businesses: the ra ce track operating
business at Kenilworth and Durbanville, the only two horse racing tracks in
the Western Province; and, a betting business via tote license, the only
license of its kind operative in that province.
[21] More specifically these assets are:
• Kenilworth Racecourse – the premier racecourse in the Western
Cape
• Durbanville Racecourse – a secondary racecourse in the
Western Cape
• Milnerton training centre – the larger thoroughbre d training
centre in the Western Cape housing approximately 800 horses
• Philippi training centre – the smaller thoroughbre d training
centre in the Western Cape housing approximately 300 horses
• A Helderberg tote property – Gold Circle owns the property on
which the Helderberg tote is located rather than re nting the
premise themselves or co-locating with a bookmaker which they
do for their other off-course tote outlets.
• Modderrivier farm – a farm on the West Coast which is to be
sold.

sold.

1Adv Gordon closing argument, page 2340 – 2341 of the transcript for the 31 st October 2012.

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[22] Historically this business operated independen tly and was run by
Western Province Racing an organisation of racehors e owners and other
stakeholders. Western Province Racing experienced f inancial difficulties in
the 1980s and again in 1993 requiring assistance fr om the government in
both instances. By 2000 it was again running into f inancial problems.
Western Province Racing concluded that the only sol ution was to merge
with another operator in the industry. Two choices were open to them at
the time; a merger with Phumelela, then a new entra nt which had
corporatized, or the three KZN turf clubs who had r ecently (1998)
reorganised themselves into Gold Circle.
[23] They chose their KZN counterparts, Gold Circle , which operated as a
section 21 company. The company had local chapters running racing
locally but a board of directors at the top respons ible for running the
company as a whole composed of directors appointed by each of the
chapters according to an agreed formula. In this pr ocess Western
Province Racing became the WPRRA and formed a local chapter within
Gold Circle. It is for this reason that the merging parties regard the first
transaction as a de-merger: it directly reverses th e transaction that
occurred in 2000.
[24] To run the company executives were appointed w ith staff reporting to
them. The governance of the company has been fractious; over time board
composition has changed often sometimes dramaticall y and chief
executives have reigned powerfully for a short peri od of time and then
been ousted.
[25] Underlying some of its problems and the one re levant to these
proceedings has been that Cape racing has underperf ormed in relation to
KZN. The merger far from settling the Cape’s financ ial woes seems to
have exacerbated them, with perceptions that KZN wa s subsidising the
loss making Western Cape.
[26] Conversely Phumelela has had a spectacular tra jectory in its short
history. Formed in 1997 in Gauteng it emerged from a deal struck between

history. Formed in 1997 in Gauteng it emerged from a deal struck between
Gauteng horse racing clubs and the newly formed pro vincial government
of Gauteng. The horse racing industry said it would fail with devastating
social and economic consequences if it was not give n tax relief. An
agreement was reached allowing the clubs to form th emselves into a profit
making entity that would list on the Johannesburg S tock Exchange. The
quid pro quo was that part of the company’s profits would be ploughed
back into the horse racing industry and sport more generally. This
accounts for the structure of Phumelela today. It c urrently has as its major
shareholder the Trust which holds 35.26% of its sha res with 5% going to
SASCOC, indirectly via Gride Investments.

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[27] We discuss Phumelela’s structure in greater depth later.
[28] Phumelela has had a mixed relationship with Go ld Circle. Despite this it
has entered into two significant arrangements with Gold Circle. The first is
Phumelela Gold Enterprises (“PGE”), a joint venture with Gold Circle that
broadcasts horse racing coverage on a dedicated DST V channel known
as Teletrack. Secondly, it has an agreement to amal gamate its tote betting
with Gold Circle, an arrangement known in the indus try as ‘commingling’.
Both these agreements and the concept of comminglin g are discussed
further in these reasons.
[29] At one point in time, before this transaction was finalised, Phumelela had
given serious consideration to a merger with Gold C ircle and had also
considered merging with the Western Cape business o f Gold Circle.
Neither occurred, instead we have the present trans action where the Trust
as owner of Kenilworth has purchased what was once the Western Cape
Gold Circle business whilst at the same time enteri ng into a management
agreement with Phumelela to manage its business. Al though the new
company has yet to have its first board meeting its only two directors have
already procured its entry into an agreement with t he Racing Association
concerning stakes and it is anticipated without muc h doubt that it will
become a party to newly signed substitute partnersh ip agreements and
commingling agreements between Gold Circle and Phum elela. These new
agreements were only finalised during the course of our hearings.
[30] The Commission’s case is that Phumelela, will post merger, be able to
control the Kenilworth business. Its ability to con trol derives from several
sources; for this the Commission relies on the mana gement agreement
that has already been concluded and is conditional on the approval of the
merger, several industry agreements to which Kenilw orth will post merger
become party to and which regulate its most crucial industry relationships

become party to and which regulate its most crucial industry relationships
and finally the fact that the Trust is a common sha reholder. Thus if the
transaction is to be properly analysed, it must be considered as one
between Phumelela as an acquiring party and Kenilwo rth as target despite
the fact that Phumelela has not been notified as pa rty to the merger. The
Commission argued that if Phumelela acquired de fac to control over
Kenilworth and hence the Western Cape racing indust ry, then given that it
already operates race tracks in four provinces and controls tote licenses in
seven, coupled with the fact that it has industry a greements with Gold
Circle who post merger will control the same in the only other province,
this will lead to a substantial lessening or preven tion of competition in the
horse racing operating and betting markets.
[31] The merging parties offered an array of alternative defences to this theory
of harm. In the first place, they contended that ev en if Phumelela is

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deemed to control Kenilworth, the merger does not l ead to an increase in
concentration as the race tracks they administer fo rm discrete geographic
markets and thus compete neither for punters nor ho rse owners, whilst in
the betting market, even at its narrowest construct ion, the relevant
products constitute complements, not substitutes. A ccordingly the merger,
even if Phumelela is deemed to be in control of the target, would not
lessen or prevent competition. However their first contention is that
Phumelela is a manager and not a controller of the Kenilworth business.
[32] If these two defences cannot pass scrutiny the y contend that Kenilworth
is a failing firm with no other realistic prospects for survival than this
merger. Finally if they fail to pass muster on comp etition and failing firm
grounds, they argue that the merger can be justifie d on public interest
grounds; the argument here is that if the Western C ape exits the horse
racing industry, this will adversely affect the wid er economy of the region
whilst also, nationally impacting on the horse racing industry as a whole.
The Racing Association
[33] The Racing Association (“RA”) was established to represent the interests
of race horse owners in the Phumelela provinces. It is run by a board of
directors of seven elected from the ranks of its members in their respective
regional chapters. The RA is not a party to the mer ger, but is structurally
linked to parties that are, making it a vital compo nent of the complex web
of inter-dependent institutions that run the horse racing industry. The RA
appoints five of the seven trustees to The Trust; S ASCOC appoints the
other two. The Trust in turn is Phumelela’ largest shareholder currently
holding 35.26% of its equity.
[34] But this is not the only connection. The RA is party to a stakes agreement
with Phumelela in terms of which it negotiates what percentages of
Phumelela’s take out will be contributed to the national stakes pot.

Phumelela’s take out will be contributed to the national stakes pot.
[35] At present horse race owners in the Western Ca pe are not members of
the RA, as theirs is not a Phumelela region. Howeve r in terms of the
present transaction they will become eligible for m embership. The
demerger agreement and the sale of business agreeme nt are subject to
the condition that the Racing Association adopts the necessary resolutions
to create a Western Cape Chapter. The consequence o f this is that it
allows the Western Cape Chapter to appoint one dire ctor on the board of
the RA and also provides that one trustee nominated by the RA to the
Board of the Trust, is a person nominated by the Western Cape Chapter.

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Activities of the parties

The Thoroughbred Horseracing Trust

[36] After the implementation of the second transac tion, the Trust will become
the sole shareholder of Kenilworth Racing.
[37] The Trust was formed in 1997 to become the vehicle to hold the shares of
the former Turf Clubs in Phumelela and to distribut e dividends accrued on
that investment back into the industry. This merger extends the role of the
Trust even further. In terms of Kenilworth Racing’s articles of association,
the Western Cape chapter of the Racing Association will have the right to
make nominations to the board of Kenilworth, and th e Trust will do what is
reasonably in its power to ensure that one third of the directors to the
board of Kenilworth come from these nominations. Th e Commission’s
interest in the Trust stems from the fact that the Trust also holds shares in
Phumelela, and with a 35.26% shareholding is the la tter’s largest
shareholder.
[38] If Phumelela and Kenilworth are considered com petitors it means the
Trust has the power to appoint directors to both bo ards. This has in fact
happened. Two trustees of Kenilworth, Johannes Van Niekerk and Marcus
Jooste, are also directors of Phumelela and have be en nominated by the
Trust to serve on the Kenilworth board. Their tripa rtite role is partly what
led to the Commission to suggest that Phumelela is the controller not
merely the manager of Kenilworth. Van Niekerk, who testified at the
hearing, was cross examined by the Commission on th is relationship. He
testified that his fiduciary obligations remained t o that of the entity on
whose board he sat and it was possible to serve all three masters at the
same time without conflicts of interest arising. Th e Commission did not
accept this. Partly as a response to this criticism , the merging parties
offered certain conditions for the approval of the merger which we discuss
later.
[39] The Trust, apart from these holdings, exists l argely to further the interests

later.
[39] The Trust, apart from these holdings, exists l argely to further the interests
of the industry. That is, it uses income from its h oldings to redistribute to
advance public interest purposes that relate to racing.
[40] The Trust is of modest means; it has no staff and makes use of office
space in the RA premises as well their secretarial staff.
[41] The Trust is precluded by its deed from carryi ng on business itself. It is
thus not the activities of the Trust itself that co ncern the Commission but
its role as a conduit pipe between the RA, Phumelela and Kenilworth.

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Kenilworth Racing

[42] At present Kenilworth Racing is a shelf compan y with no assets or
operations and an incomplete board. It is to be the company which will
purchase the Western Cape assets and operations of Gold Circle, and will
then have its shares fully purchased by the Trust.
[43] On its own Kenilworth’s purchase of the Wester n Cape racing assets
would be uncontroversial from a competition perspec tive. What changes
the equation is the fact that the Trust becomes its sole shareholder with
the right to control the appointment of the majority of its board.
[44] Kenilworth currently has two board members and has signed a number of
transaction agreements
2 and agreements that come into force
contemporaneously with the transaction 3. There are also a number of
agreements that Kenilworth is expected to become a party to once they
have a fully constituted board 4.
Phumelela Gaming and Leisure

[45] In June 1997 the Gauteng Provincial Government and the three horse
racing clubs then operative in Gauteng, entered int o a memorandum of
understanding, the main purpose of which was to res tructure the horse
Racing Industry in the Gauteng Province to ensure i ts sustainability.
5 They
agreed to re-organise and restructure the business of the racing industry
into a single corporate entity listed on the JSE wi th a broad base of
shareholders, including previously disadvantaged communities.
[46] In giving effect to this agreement the parties agreed to merge the assets
and activities of the racing clubs, the totes and t he Highveld Racing

2 Revival Agreement between Gold Circle (Pty) Ltd and Viacor Trade 72 (Pty) Ltd; Sustainability
Agreement between Western Province Racing Club and Viacor Trade 72 (Pty) Ltd and The Racing
Association (Pty) Ltd; Share Sale Agreement between Western Province Regional Association and The
Thoroughbred Horseracing Trust and Western Province Racing Club and the Racing Association (Pty)

Ltd and Viacor Trade 72 (Pty) Ltd; Second Revival Agreement between Gold Circle (Pty) Ltd and
Kenilworth Racing (Pty) Limited (Previously known as Viacor Trade 72 (Pty) Ltd; Third Revival
Agreement between Gold Circle (Pty) Ltd Kenilworth Racing (Pty) Limited (Previously known as
Viacor Trade 72 (Pty) Ltd); Fourth Revival Agreement between Gold Circle (Pty) Ltd and Kenilworth
Racing (Pty) Limited (Previously known as Viacor Trade 72 (Pty) Ltd; and, Fifth Revival Agreement
between Gold Circle (Pty) Limited and Kenilworth Racing (Pty) Limited (Previously known as Viacor
Trade 72 (Pty) Limited.
3 Management agreement between Kenilworth Racing (Pty) Limited and Phumelela Gaming and
Leisure Limited; Commingling Agreement between Phumelela Gaming and Leisure Limited and
Kenilworth Racing (Pty) Limited (it’s marked draft for discussion purposes only); and, Licence
Agreement between Kenilworth Racing (Pty) Ltd and Phumelela Gaming and Leisure Limited (Marked
for discussion purposes only)
4Telly Track Partnership Agreement (Kenilworth, Gold Circle & Phumelela); Commingling Agreement
(Kenilworth and Phumelela); Substitute Sport Administration Agreement (Kenilworth, Gold Circle &
Phumelela); and, Licence Agreement (Kenilworth and Phumelela)
5The three clubs were Turffontein, Newmarket and Gosforth Park.

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Authority. For the purposes of listing, the shareho lders of the new
company, which became Phumelela, comprised the foll owing: the Trust
(30%), BEE Groups (22.5%), Management (20%), employ ee share
program (2.5%), general public (15%) and the racing public (10%).
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[47] Subsequently, over time a number of other turf clubs joined. Currently
Phumelela operates all horseracing activities in Ga uteng, the Eastern
Cape, the Northern Cape and the Free State as well as the tote activities
in these same provinces plus Mpumalanga, Limpopo an d the Northern
Province (there is no horseracing operation present ly in these latter three
provinces). At the time of the merger the only hors e racing activities that
do not fall under Phumelela are those of Gold Circl e located in KwaZulu
Natal and the Western Cape.
[48] Of relevance to this merger are three markets in which Phumelela
currently does business as;
i. a race track operator;
ii. a provider of betting services specifically in horse racing and more
specifically as a licensee of several totes; and
iii. a partner in a TV horse racing channel known a s PGE.
[49] Its horse racing operations comprise five race courses and training
centres run out of its head office at Turffontein Racecourse.
[50] Its betting operations comprise seven provinci al tote licenses, a
bookmaking firm and gambling outlets through the op eration of what are
termed limited payout machines. The tote businesse s offer over the
counter (OTC) betting to punters either at racetrac ks or off course
premises. But more recently totes have started to o ffer what are termed
non-over the counter (non-OTC) betting opportunitie s for punters via call
centres and the internet. The bookmaking activities are conducted through
a wholly owned subsidiary Betting World, one of the largest bookmakers in
South Africa. Gold Circle had previously built up B etting World, having
acquired it from its founders. Gold Circle first so ld a stake in Betting World

acquired it from its founders. Gold Circle first so ld a stake in Betting World
to Phumelela, and recently sold the residual intere st to Phumelela. Betting
World provides fixed odds bets on sports, including horseracing and
soccer amongst others.
[51] PGE is a joint venture with Gold Circle althou gh it is managed by
Phumelela. PGE owns a horse racing channel which vi ewers can access
on the DSTV bouquet. The channel broadcasts live ho rse racing from

6The Trust currently holds 32,5%.

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tracks in South Africa. As this is not sufficient t o provide material to a 24/7
channel, PGE has also purchased the rights to broad cast racing from
overseas tracks.
7 PGE also sells its broadcasts of South African rac ing to
overseas counterparts.
Gold Circle Pty Ltd

[52] Gold Circle is the only other race course and tote operator in South
Africa. In KwaZulu Natal it is the only operator licensed to run a tote and to
operate race tracks. In the Western Cape it is the sole licensed tote
operator. Horseracing operations do not require a l icense in the Western
Cape, however, it was common cause that it is unlik ely for an operator to
enter without also being licensed to run a tote.
[53] The three turf clubs in KwaZulu Natal have had a different approach to
their counterparts in Gauteng. Instead of entrustin g their operations to an
administrator with a profit motive, the Phumelela m odel, they preferred to
house their operations in a non-profit company and so ensure that all
profits that accrued are ploughed back into the sport.
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[54] Race owners in the Western Cape have been ambi valent about which
model would be best for them. In 2000, beset by fin ancial problems the
Western Cape Turf Club decided it needed to join up with either
Phumelela or Gold Circle. They decided to merge wit h Gold Circle in 2000
and, as the fourth turf club in the non-profit comp any, received a 25%
shareholding.
[55] The Western Cape assets of Gold Circle were se t out earlier and include
their racecourses, training facilities and other pr operties. Gold Circle owns
fewer assets in KwaZulu Natal than in the Western C ape because of the
recent sale of Clairwood and the fact that they lea se from municipalities
rather than own their race courses. The KwaZulu Nat al facilities used by
Gold Circle are:
• Greyville Racecourse in Durban: leased from the mu nicipality on
a long term lease.
• Scottsville Racecourse in Pietermaritzburg: leased from the
municipality

• Scottsville Racecourse in Pietermaritzburg: leased from the
municipality
• Clairwood Racecourse in Durban: recently sold for R430 million
but it has retained a short term lease to allow it to continue
racing at the venue.

7 E.g. include the UK, Dubai, Singapore, Hong Kong, Australia, France, Mauritius and the USA.

8Article 6.3 of Gold Circle’s Articles of Association.

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• Summerveld training facility: owned by Gold Circle and located
in Shongweni
• Ashburton training facility: owned by Gold Circle and located in
Pietermaritzburg.

Gold Circle is the other partner in PGE and receive s 39% of the profits of
PGE in accordance with the PGE Partnership Agreement.
Phumelela’s relationship with Kenilworth Racing

[56] Once the two legs of the merger have been comp leted the Trust will own
all the shares in Kenilworth, which in turn owns th e assets and operations
of horseracing in the Western Cape. Kenilworth has already, pre-merger
concluded several significant agreements. Perhaps t he most significant is
the management agreement in terms of which Phumelel a will manage its
business operations. It has also concluded various industry agreements
with Phumelela and Gold Circle regulating the tote betting, racing
administration and television broadcasting aspects of its business. Some
new agreements have recently been concluded between Phumelela and
Gold Circle but provision is made for Kenilworth to become a party to
these agreements post merger.
[57] The terms of the management agreement are couc hed in broad terms
affording both the Commission and the merging parti es the opportunity to
credibly reach opposing conclusions over its implic ations for Phumelela’s
ability to control Kenilworth.
[58] The Commission argued that practical business realities would result in a
lack of independence between Kenilworth and Phumele la. Amongst the
reasons for this lack of independence apart from th e terms of the
management agreement are that: Phumelela has contro l over important
industry wide agreements including PGE; Kenilworth has already, pre-
merger, become a party to some of these agreements and there is little
doubt it will become party to those that it has no t yet become party to but
which contemplate it as a contracting party; alread y prior to the merger
Phumelela had taken over management of the Western Cape business

Phumelela had taken over management of the Western Cape business
through a contract with Gold Circle; and the widesp read cross
directorships and relationships that exist or will exist post merger that are
glued together by the interrelated shareholding and the influence of the
RA.
[59] But Phumelela’s ability to control Kenilworth has a further dimension
unknown prior to the hearing. It emerged at the hea ring for the first time,
that Vidrik Thurling, one of two initial directors of Kenilworth and a key

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player in arranging the demerger and merger transactions, had reached an
oral agreement with Du Plessis of Phumelela for any necessary bridging
finance. The Commission was rightly critical of the fact that this evidence
was never revealed before in the witness statements of the parties or their
earlier submissions.
[60] The Commission also argued that the board of K enilworth was effectively
operating on a part time basis. Kenilworth would no t have its own staff and
would have to depend on Phumelela for everything in cluding strategic
direction and preparation of budgets. Given Phumele la’s expertise in the
industry and superior knowledge, it seems highly li kely that its managers
could persuade the part time directors of Kenilwort h of what the latter’s
best interests were. Indeed, it is the Commission’s position that Phumelela
is acquiring control of Kenilworth Racing and they should have been
notified as a party to the merger. Furthermore, the interim management
agreement with Phumelela amounts to prior implementation of the merger.
[61] The merging parties had a completely different reading of the
management agreement. Phumelela might be empowered to manage the
day to day activities of Kenilworth, but this would be subject to the ultimate
approval of the board. They rely on the fact that various decisions such as
the sale of an asset or the entering into of an agr eement greater than 12
months in duration will require board approval. The y also argued that the
board members will have a fiduciary duty to the com pany, irrespective of
any other position a board member might also hold.
[62] The merging parties further suggested that the management agreement
was akin to having a firm serving the role of manag ing director and since
no firm regards the change in the identity of the m anaging director as one
worthy of constituting a change of control for merg er regulatory purposes,
why should they have considered Phumelela’s role an y differently. We

why should they have considered Phumelela’s role an y differently. We
need not consider now whether this argument has merit.
[63] Whether or not Phumelela is acquiring control of Kenilworth Racing is an
issue that would have to be determined in other pro ceedings. In the
present one we are confined to considering whether the merger as notified
can be approved. If the Commission is correct and P humelela should have
been notified as an acquiring firm then it is still able to take enforcement
action against it and the merging parties in a subs equent proceeding. So
too, the merger parties could, together with Phumel ela, resubmit the
merger with Phumelela as a merger party. We cannot make a decision on
a case that is not before us regarding parties who are not represented.
[64] The fact that we are not deciding whether ther e has been a failure to
notify control, but leaving that to subsequent proc eedings if they are

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brought, does not mean the issue of control is irre levant to this merger.
Control, as a procedural issue, must be distinguish ed from control as a
substantive issue. If a merger has as its effect the creation of an ability of a
non-notifying party to control, then that issue mus t be considered as a part
of the substantive enquiry into the effects of the merger.
[65] Because in a section 12A procedure, we are dec iding a substantive not a
procedural issue, we are able, as a matter of discr etion, to approach the
analysis by assuming that control exists and then e xamine whether it will
lead to an anti-competitive effect; if it does, we then have to decide the
issue of control as a substantive matter of fact, a s this factual question will
prove decisive in considering the merger.
9 Conversely, we do not have to
determine the issue of control conclusively, if ass uming control does not
lead to such a conclusion. It is this latter approach that we have adopted.
[66] Thus in this decision the merger will be analy sed as one where we
assume that Kenilworth will cooperate fully with Ph umelela post merger.
We will assume that while Phumelela is not a merge r party, the change to
the competitive landscape is equivalent to a scenar io where Phumelela is
a merger party; more specifically the acquiring party,

Competitive analysis of the relevant markets

[67] The merger will have an effect on three possib le markets. One is
relatively uncontroversial to define, the market fo r horse racing operations;
so is another, the market for television and broadc asting rights for horse
racing. The third is a betting market whose product boundaries are in
dispute. The market may be narrowly confined to hor se racing as the
Commission suggests, or may be broader to include b etting on other
sports and other forms of gambling, as the merging parties suggest. We
go on to examine each of these three candidate mark ets in turn. Since

go on to examine each of these three candidate mark ets in turn. Since
horse racing operations and betting are regulated m arkets – one cannot
operate the service without the requisite license - we start each section
with an examination of the legal regime and then go on to consider the
economic issues.
Horseracing operator market

[68] In most provinces except the Western Cape an o perator requires a
license from the provincial gambling board to operate a race course. It also
appears that some form of local authority permissio n is required, although
at the hearing no one was particularly sure of the practice. What is


9We leave open the question as to whether the substantive test for control for 12A purposes is the same
as that for procedural or jurisdictional section 12 purposes.

15

uncontroversial is that the practice adopted by the provincial boards is to
grant only one tote license per province and to gra nt that to the race
course operator. Thus whilst there may be no legal barriers to licensing
new entrants as operators, unless regulatory author ities change their
approach new entry in this market is unlikely in th e short term. For this
reason we conclude that as result of regulatory policy, at least as presently
practiced, no new entry to this market is likely.
[69] Nor does the economics of becoming a horse rac ing operator suggest
new entry is likely either. Being a racetrack opera tor requires owning or
leasing a racecourse as well as stabling and traini ng facilities. Personnel
are required to operate the race. Critically it als o requires access to funds
in order to pay stakes which attract the racehorse owners to enter their
horses into races.
[70] Horseracing operators seek to attract both rac e goers as well as high
quality race horses to view and participate in thei r events respectively. In
this sense the market can be regarded as two- sided ; competition for race
goers and competition for owners.
[71] We consider competition for race goers first. While some provinces in
South Africa have multiple racecourses, there is on ly a single owner and
operator per province. This results in large distan ces between any given
racecourse and the nearest competing racecourse. Gi ven these distances
there is little possibility to compete for attendance. The only exceptions are
for the occasional feature races such as the Durban July where punters
nationally may be attracted by the glamour of the e vent. Because feature
races are rare, and there is generally no overlap b etween racecourse
operators for race goers, no likely potential harm is expected to result from
the merger. Both the Commission and the merging par ties were in
agreement on this.
[72] A more contentious issue during the proceeding s was whether

agreement on this.
[72] A more contentious issue during the proceeding s was whether
horseracing operators competed with one another to attract quality
racehorses. There is some evidence of movement of h orses between
seasons, although no agreement on its cause or exte nt. According to the
Commission, whose expert’s graphs exhibited a more exaggerated view of
this movement than those of the merging parties, th is was evidence of
race operators competing over who offered higher st akes. The merging
parties’ witnesses testified that the majority of racehorse owners choose to
domicile their horses where they lived, and would b e unlikely to relocate
their lives because of relative changes in stakes. The limited movement of
racehorses between regions, their expert Patrick Sm ith argued, is better
explained by feature seasons and the dynamics of th e merit rating system
than by competition over size of stakes

16

[73] Ultimately we were not presented with sufficient evidence to establish that
a relative decrease in stakes in one province would result in a significant
number of racehorses exiting that market in the sho rt run. The more likely
outcome is that a reduction in stakes would result in a reduction in the
number of new racehorses being bought and trained f or a region, and
hence a long run reduction in the stock of race hor ses in a region. This
reduction in quantity is not a substitution effect away from a relatively
lower stake region to a relatively higher stake region, but rather a partial or
complete exit from the market by a portion of racehorse owners.
[74] For these reasons horseracing operators are pr otected from competition
between themselves for race goers as well as raceho rses by the large
distances that exist between competing race courses . These are
effectively regional monopolies where the regions a re constituted by
provincial boundaries, because of the manner in whi ch they are licensed
by the provincial gambling boards. Given such a geo graphic market
definition for these two horseracing operator produ cts, a full competitive
assessment becomes unnecessary.
[75] Additionally, however, there is also little po ssibility of harm to result from
the merger through lower stakes in the Western Cape than would
otherwise be expected because of the nature of how stakes levels are
formulated. Stakes in the Phumelela regions are cal culated by formula
according to the Stakes Agreement. This is an agree ment between
Phumelela and the RA which requires Phumelela to al locate certain
proportions of betting take-out and commissions to the stakes pot.
Phumelela, because it has been bound to the terms o f the Stakes
Agreement from its inception, is not able to reduce stakes below the
decided levels. Furthermore, Phumelela is incentivi sed to increase betting
revenue in order to increase profits, and so is inc entivised to increase

revenue in order to increase profits, and so is inc entivised to increase
stakes as a by-product of its profit motive. Gold C ircle’s stakes are not
calculated by a fixed formula but instead by the fa ct that they are anon-
profit organisation. As such Gold Circle revenues after operating expenses
go to the sport of horseracing either as stakes or some other
developmental or training endeavour. For these reas ons, stakes are not,
and are unlikely to become, a significant variable of competition between
the horserace operators in South Africa.
[76] A final point on the stakes is that the curren t set up of the inclusion of the
Western Cape to the Stakes Agreement, and the assoc iated ratios, are at
the instance of racehorse owners in the Western Cap e. It is possible that
stakes could have grown above this level in the fut ure if betting on
horseracing in the Western Cape grows faster than i n other Phumelela
regions over a long period of time, however, such a possibility would have

17

been balanced by racehorse owners in the Western Ca pe. While
racehorse owners might have varying backgrounds, a large number of
them are highly successful business owners or manag ers. They would
have the ability to weigh up the benefits and certa inty of being included on
the Stakes Agreement against the possibility of hig her stakes at some
stage in the future, and choose the course of actio n which is most
beneficial to themselves. A theory of harm that suggests racehorse owners
are at risk of being harmed seems at odds with their revealed preference.
[77] The final competitive dynamic between horserac ing operators that
warranted investigation was the market for timeslot s in the national race
calendar. This is not to say that horseracing operators would want to stage
additional (costly) races, but rather compete for m ore valuable races and
reduce the number of less valuable races staged in their region.
Specifically, Saturday races are preferred in most regions with KZN having
a preference for Sunday Races. Weekday races are un animously
regarded as inferior because they make greater dire ct losses. While the
markets for patronage at races and for quality race horses was at a
regional level, competition for preferred timeslots in that national calendar
is at a national level.
[78] The theory of harm raised in relation to race scheduling is that there will
be a shift in the balance of power from a relativel y balanced pre-merger
situation to one that would see Phumelela being abl e to dominate
scheduling decisions post-merger.
[79] There are a number of reasons to suggest that the scenario is not as dire
as the split in voting rights might suggest. The fi rst is that all operators will
want to continue to have 364 days of racing a year otherwise their tote
revenues and stakes in PGE will suffer. For this re ason, Gold Circle KZN’s
smaller number of races is very important to Phumelela.
[80] More importantly, this theory is a theory of h arm to Gold Circle KZN and

[80] More importantly, this theory is a theory of h arm to Gold Circle KZN and
not to consumers. The majority of consumers (punter s) place their bets
away from the race course or online. There was no e vidence to suggest
that punters would be harmed should there be an inc rease in the ratio of
weekday to weekend races in KZN. Also, if racehorse owners are being
harmed by potentially lower stakes at weekday races , then Gold Circle
KZN could divert the stakes that they were paying o n weekend races to
weekday races such that racehorse owners are no wor se off. This process
may or may not see Gold Circle losing some profits to the benefit of
Phumelela, but this is a theory of profit division between firms and not a
theory of harm to consumers.

18

[81] For these reasons we find that there is no rea sonable expectation of a
significant lessening of competition in the horseracing operating market.
Betting market

[82] The next major activity is that of betting. Ho rseracing operators operate
totes and use the betting revenue to fund the loss making activity of
horseracing operations. This was the case in earlie r years when each
racecourse was owned by a turf club, and continues to be the reality in the
new industry structure of Phumelela and Gold Circle . While the provincial
gambling boards are not obliged by their legislatio n to allocate only one
tote license per province, and to do so to the hors eracing operator, in
practice the licenses are paired and no second tote license has been
allocated. The closest alternative betting option t o a tote bet, given that
there is only one tote operator per province, is to bet on fixed odd bets or
open bets available at various bookmakers in each r egion. These can be
bets on horseracing or indeed on a plethora of othe r global sporting
events. Other gambling options included casinos, li mited payout machines
and the lottery.
[83] Extensive arguments were made regarding the ea se of switching
between betting on horseracing and these various al ternative gambling
opportunities. The merging parties argued that punt ers desire a game
where the outcome is sufficiently uncertain and the process to produce
that outcome is credible. Thus they argued that all the alternatives listed
above were legitimate constraints on horseracing be tting products. The
Commission and its expert James Hodge argued that t here was specific
knowledge necessary to participate in each type of gambling, and that
there are large price differentials between differe nt forms of gambling.
Thus the product market should be narrow and only i nclude tote and
bookmaker horseracing betting product.
[84] Defining a product market is only necessary if there is some significant

[84] Defining a product market is only necessary if there is some significant
possible accretion in the geographic market. Becaus e we will conclude
that the geographic market for horseracing betting is regional (provincial),
the exercise of product market definition in the be tting market is
unnecessary. As such we have left it open at this stage.
[85] While totes cannot have a physical infrastruct ure providing tote bets
outside of the province for which they are licensed , they are able to
compete for customers through electronic means. The se would include
telephone betting and internet betting. This non-ov er-the-counter (“non-
OTC”) sales channel is currently available to punte rs. Phumelela and Gold
Circle split these revenues in a fixed ratio and he nce, by agreement, do
not use the non-OTC channel to compete with one another.

19

[86] The merging parties argued that the non-OTC ma rket could not be
national for legal reasons. A tote licensed in one province is not allowed to
accept bets from persons not resident in that provi nce. They base this
legal argument on a case decided by the Supreme Court of Appeal (‘SCA’)
in relation to a casino license.
10 In that case, more popularly referred to as
‘Piggs Peak’, after the name of the casino in quest ion, the SCA held that a
casino licensed in Swaziland was not allowed to acc ept bets on the
internet from South Africa as it was not licensed i n South Africa. The
merging parties argued that the so called ‘Piggs Pe ak’ principle applied by
logical extension to totes. Since totes are license d to accept bets in a
particular province, by the regulator having jurisd iction in that province,
they may not accept bets from punters outside that province. The
Commission argued that the Piggs Peak principle did not apply to tote
licenses. This is not something we have to decide. Indeed the merging
parties do not appear to be that certain that ‘Pigg s Peak’ applies. In their
commingling agreement, an agreement concluded durin g the course of
these proceedings they provide for alternatives dep ending on whether
‘Piggs Peak’ applies or not to tote licenses.
[87] We have decided the case on the assumption tha t it does not apply to
tote licensing and that licensed totes may accept n on-OTC bets on a
national basis.
[88] The geographic market for OTC bets is provinci al while, at a technical
level, the geographic market for non-OTC bets is na tional. Despite the
technical ability and hence potential for competiti on between totes using
non-OTC channels, such competition does not exist p re-merger and is
unlikely post merger.
[89] The reason for this relates to the incentives of the respective tote
licensees. The first disincentive for a tote in one province to compete with
a tote in another province via non-OTC channels is that it would result in a

a tote in another province via non-OTC channels is that it would result in a
reduction in the OTC revenues to the instigating co mpetitor. Access to
non-OTC devices, particularly cell phones with inte rnet access, will mean
that a tote that reduces its price on non-OTC chann els will have to offer a
similar reduction on their OTC products. Failure to do so will see
significant switching from OTC sales to non-OTC sal es of either their own
channel or their competitors’. This is the standard economic outcome of a
firm that is unable to price differentiate between customers, it is not
peculiar to the betting market. The important concl usion then is that it is
the tote with the smallest relative OTC sales volum es that is most likely to

10 Casino Enterprises (Pty) Ltd vs. The Gauteng Gambling Board and Others SCA [2011] ZASCA 155;
2011(6) SA 614 (SCA); [2011] 4 ALL SA 573 (SCA).

20

engage in price competition with other totes over n on-OTC channels. In
crude terms, they have the least to lose and the most to gain.
[90] The above dynamic is a pro-competitive dynamic that results in small
firms being able to constrain the pricing behaviour of far larger firms. The
facts of the South African tote market, however, un dermine this
mechanism. Punters have a strong preference for a c ommingled product
in the largest possible pool; Phumelela’s betting v olumes from Phumelela
regions and international punters are far larger th an betting volumes in the
Western Cape and KwaZulu Natal jointly; and, the So uth African betting
market is not large enough for two commingled pools . The argument here,
which was raised by Smith, is that if a tote were a llowed to use non-OTC
channels to compete with Phumelela and so reduced i ts take-out rate,
Phumelela would react by excluding that tote from the commingling pool.
[91] Before continuing, the process of commingling and the importance of the
commingling pool warrant explanation. Tote or total isator bets are so-
called because they add together all the bets of th e same type into a
single pool. From this pool the operator takes its take-out and the
remainder is divided up evenly amongst the winning bets. Punters have a
strong preference for larger pools because there is greater stability in
expected payouts. Commingling adds together the bet ting pools of two or
more totes to form one, larger, commingled pool.
[92] The rationale for the previous conclusion that Phumelela would exclude
any tote that destabilises the commingled pool is t hat the alternative
response is a similar or punitive take-out rate reduction by Phumelela. This
price (Bertrand) competition in the long run would result in prices equal to
marginal cost. The marginal cost of a punter placin g a non-OTC bet is
zero, and so prices would be zero and totes would m ake losses. It would

zero, and so prices would be zero and totes would m ake losses. It would
not be in Phumelela’s interest to compete on this b asis and they would be
able to continue operations, because of the size of their pool, without the
competing totes’ contribution to the commingled poo l. Hence the
conclusion that Phumelela would simply exclude the competing tote from
the commingled pool in the first instance.
[93] That the smaller totes depend on the larger to te (Phumelela) for access
to the larger commingled pool is known to them. They would never engage
in such aggressive competition with a firm that the y rely on to the lengths
that they do. The conclusion is that Phumelela woul d set the price and
other totes, acting in their own best interest, wou ld not act to undermine
such a price. This is indeed how the commingled poo l currently operates
with Gold Circle not having control over the take-o ut rate applied to
commingled bets.

21

[94] Lastly, the betting market is a highly regulat ed market with gambling
boards setting maximum take-out rates. This is effe ctively the price a
punter pays for the bet and hence the market is a p rice regulated market.
Hodge shows that the take-out rates for more ‘compl icated’ type bets are
close to or, in most cases, at their regulated maxi mum. The ‘less
complicated’ bets have take-out rates below their r egulated maximum
because of competition from bookmakers.
11 Any potential reduction in
competition between totes would thus not translate into increased take-out
rates because they are either at their regulated ma ximum pre-merger or
are being constrained by other forms of betting.
[95] Given the regional geographic market of OTC be ts and the fact that totes
do not and are extremely unlikely to start competin g with one another
through non-OTC channels, there is unlikely to be c ompetitive harm in the
betting market as a result of this merger. Expresse d differently the merger
is unlikely to adversely affect competition in the tote market, assuming
against the merging parties that this is the releva nt product market,
because of a combination of a number of factors; th e way legislation has
structured this market, consumer preferences for co mmingling and price
regulation. In addition, were there some potential increase in market power
by the totes, they would be unable to profit from i t given the price
regulations that exist in the market.
Horseracing broadcasting market

[96] The third market for consideration is that for the broadcasting of
horseracing events. The importance of this product to consumers was
summed up by Jeremy Marshall, a bookmaker who testi fied for the
Commission. Marshall testified that bookmakers woul d lose their
customers if they did not have the races broadcast live in outlets.
12 This
fact together with the fact that the majority of be ts are placed at an outlet

12 This
fact together with the fact that the majority of be ts are placed at an outlet
away from the track makes broadcasting the race a c ritical input to selling
tote and bookmaker bets on horseracing.
[97] The downstream product used by South African o utlets (totes and
bookmakers alike) is called Teletrack. PGE televise s the South African
races together with international races alongside r ace specific information
such as odds. Approximately 25% of the content on T eletrack is South
African and 75% is international. 13 The signal is broadcast on DSTV
through a deal between PGE and Multichoice.

11 See table 2 and paragraph 18 of the Genesis Report.
12 Marshall at page 154, 157, and 205 of the transcript.
13 Du Plessis at page 1133 of the transcript.

22

[98] PGE also packages the races in other forms or languages to distribute
internationally. These other downstream products co ntribute significantly
to the profitability of PGE, and hence are importan t when considering the
intrinsic value of track broadcasting rights and th e need to maintain the
number of races held in the Western Cape.
[99] There is also an upstream market for the sale of rights to broadcast
horseraces held at each racecourse. Currently these rights vest with PGE
and the racecourse owners are compensated through j oint ownership and
profit sharing from PGE.
[100] Thus there is a downstream market for the dis tribution of Teletrack in
South Africa, and an upstream market for the broadc asting rights for each
racecourse in South Africa.
[101] The downstream broadcasting market is current ly a monopoly with PGE
providing all the equipment at the racecourse, mana ging the partnerships
with and amalgamation of the feed from internationa l partners, and makes
the feed available to individuals, totes and bookmakers from an agreement
with Multichoice.
[102] The Commission argued that it would be possible for a truly independent
Kenilworth to launch its own competing channel. Thi s could be done by
combining race broadcasts from the Western Cape wit h that of
international partners.
[103] It is unlikely that Kenilworth will have suff icient South African content to
provide a valuable proposition in competition with the Tellytrack channel
currently available. More importantly it is not cle ar what the incentive
would be to split from an efficient and highly prof itable monopoly and
launch a new competing channel, one with far less S outh African content
and hence a competitive disadvantage. Such a strate gy would be very
risky with little or no upside as compared to a 14. 04% stake in a very
profitable monopoly.
[104] Ultimately we do not consider it likely that PGE will be dismantled or a
new television channel would enter the market under any potential

new television channel would enter the market under any potential
counterfactual. For this reason there is not expect ed to be any change to
the functioning of PGE as managed by Phumelela. Thi s would include
pricing levels and policies.
[105] In the upstream market the Commission argued that the proposed PGE
revenue split with Kenilworth Racing was inequitable when considering the
percentage of South African races they host. This w ould be an important
consideration for increased profitability under a f ailing firm argument.

23

Under the current transaction structure, the issue of a shift in the balance
of power manifest by a disproportionately low profi t share from PGE is an
issue of division of rent rather than one with any consequences for end
consumers. Whether Kenilworth Racing could extract greater than the
proposed 14.04% from PGE should they negotiate inde pendently, is a
matter of speculation however, even if they could a s the Commission
contended, this is a commercial decision without an y potential harm to
consumers.
Failing firm defence

[106] In the absence of the likelihood of a signifi cant lessening of competition
to result from the merger, there is no need to cons ider the merits of the
merging parties failing firm defence.
[107] Should there have been a likelihood of a sign ificant lessening of
competition, it is unlikely that the arguments rais ed by the merging parties
would have met the requirements of the test set out in the Tribunal’s
decision in Iscor/Saldanha .
14 This is because there was no convincing
evidence that Kenilworth assets would exit the mark et, and also it did not
seem that possible alternatives had been explored appropriately. 15

The open bet and potential foreclosure

[108] The third and final competition concern is t hat the merger may enable
the merged firm subject to the control of Phumelela to exclude
bookmakers from offering a product known as the ‘op en bet’ which
competes with the products offered by the tote. Giv en the lack of the
competition in the tote market we discussed earlier , the exclusion of any
possible rivalry from a potentially competitive pro duct, offered by other
firms, is a relevant issue.
[109] First we need to explain what the open bet is . An open bet is a bet
offered by a bookmaker which, unlike a fixed odd be t, has an unknown
payout to the punter at the time of placing the bet . The specific type of
open bet at issue is one which mirrors the tote pay out on a certain event

open bet at issue is one which mirrors the tote pay out on a certain event
such that the punter would be indifferent to placin g a bet into the tote pool
and placing it with the bookmaker. After the race h as taken place and the
tote announces the payout on winning bets from the pool, each bookmaker


14 ISCOR Limited and Saldanha Steel (Pty) Ltd case number 67/LM/Dec01.
15 Considerable time during the hearing was devoted to whether Purple Capital, an investment company
that was also interested in bidding for Kenilworth, had made a plausible, less anti-competitive, counter
offer to that of the present merging parties. We do not for the reasons explained need to consider this
dispute.

24

then announces a similar payout (‘dividend’) for wi nning open bets subject
to adjustments for taxation.
16
[110] Bookmakers can use the open bet to mirror the payouts from a pooled
bet of the same type and in so doing replicate tote products. This then
results in direct competition between totes and boo kmakers, and has
resulted in totes seeking to stop bookmakers from p lacing the open bet. At
the centre of this grievance is the fact that tote operators, because they
are also the horseracing operator, have to fund the large cost of staging
the horserace, while bookmakers do not. For this reason, tote operators, in
essence Phumelela and Gold Circle believe they are entitled to a
monopoly over tote type bets.
[111] The merger specific issue at hand here, as ar gued by the Commission,
is that Gold Circle is less likely than Phumelela t o stop bookmakers from
placing the open bet. As such, the transaction will result in reduced
competition post- merger.
[112] Bookmakers make use of tote outlets under the control of Phumelela
and Gold Circle to operate their businesses. Whilst not wholly dependent
on them, the bookmakers and operators both benefit from this
arrangement as it ensures more traffic through the door for both. Given
that licensed premises are both expensive and scarc e, due to licensing
restrictions, bookmakers are dependent on these pre mises for their
businesses. If they cannot offer the open bet as pa rt of their license
conditions according to Marshall, alternatives are expensive, time
consuming and commercially unattractive. 17
[113] The issue in this case which was only raised by Marshall and not any
other bookmaking firm, was that in the Western Cape , post-merger,
Phumelela would be more incentivised and hence more likely to enforce
exclusionary lease provisions at tote outlets where his firm was offering
the open bet.
[114] In the Western Cape, Gold Circle has a lease agreement with Marshall’s

the open bet.
[114] In the Western Cape, Gold Circle has a lease agreement with Marshall’s
firm, MWOS, that prevents it from offering the open bet on Gold Circle’s
premises. This lease restriction arose prior to the merger. However Gold
Circle has yet to enforce this lease provision desp ite the fact that legally it
could. The reason this arises as a question relevan t to this merger is the
suggestion that post-merger, Phumelela would, as an operator of a

16 See Marshall at page 121 of the transcript where he states that “we actually inflate the dividend that is
given out by the totes so that when we deduct the tax off the dividend it comes back to the original
dividend that was released by totes.”
17 Licensing restrictions in Cape Town apparently restrict the proximity of betting outlets within a
certain distance of schools, places of worship etc. Given that bookmakers require premises that are
convenient for consumers this regulated restriction leads to a scarcity of available premises.

25

bookmaking firm Betting World (recall, acquired rec ently from Gold Circle)
and according to the Commission, controller of Keni lworth, be more
incentivised to ensure that Kenilworth evicted book makers who offer the
open bet than would Gold Circle or another owner.
[115] The argument that Gold Circle is more amenabl e to the open bet arises
out of an experiment that Gold Circle seemingly all owed MWOS to
conduct. Gold Circle initially allowed MWOS to sel l the open bet at one of
its premises, in Parow Valley, for a period of four months, after which the
situation would be re-evaluated. Following this ini tial period, Gold Circle
agreed to extend the experiment to seven outlets fo r another four month
period.
18 Thereafter it was contemplated that a re-evaluatio n would again
take place. It seems this re-evaluation never occur red and MWOS
continued to place open bets.
[116] In June 2012 Marshall met with Michel Nairac who had returned as Gold
Circle CEO. Nairac conveyed a message from du Pless is of Phumelela to
the effect that du Plessis wanted MWOS to stop sell ing the open bet in the
Western Cape and that this was in contravention of their lease
agreements. Marshall asked that du Plessis contact him directly. 19 In
August 2012 MWOS agreed to stop selling the open be t in all their
branches except Parow Valley (the latter an excepti on apparently because
of a large punter who they feared they would lose).20
[117] The merging parties downplayed the role allegedly played by Du Plessis
in instructing Nairac what to do. Rather they alleg e that both firms were
equally opposed to the open bet and hence the merge r makes no
difference. The fate of the open bet has been seale d they contend, with or
without the merger. MWOS’s alleged honeymoon period in offering the
open bet, despite the contrary provisions of its le ases with Gold Circle,
were attributable to the actions of Nairac’s predec essor who acted without
his board’s mandate in doing so.

his board’s mandate in doing so.
[118] We do not know if this is correct since the p redecessor was not called
as a witness. It seems that it was as likely to mak e business sense to
reach an agreement with bookmakers as to exclude th em. It seems also
likely that Phumelela was more incentivised to excl ude bookmakers and
that Du Plessis was able to exercise his influence over Gold Circle to
achieve this. Noteworthy too, is that Phumelela had brought a court
challenge to interdict bookmakers from offering the open bet although this
challenge failed. Nevertheless this does not make the issue a merger

18 Marshall’s evidence was this was an oral agreement between him and Dinish Rajpaul the Commercial
Operations manager of Gold Circle in the Western Cape sometime in 2010.
19 See transcript at page 243.
20 See transcript at page 241.

26

specific one. It seems that Phumelela can flex this muscle without the
merger given the arrangements that exist already be tween the two firms
where Gold Circle is very much the junior partner.
[119] Further the “honeymoon” period apart, Gold Ci rcle has had an
ambiguous relationship with bookmakers over the ope n bet. When it
bought the bookmaking businesses that would later b ecome Betting
World, and at a stage that it didn’t wholly own thi s business, it took steps
to ensure that it did not offer the open bet. Later an interest in this
business was sold to Phumelela who now wholly own i t. Does this mean
that now that it no longer owns an interest in a bookmaker, its incentives to
suppress the open bet might change again? It seems not. Nairac who
testified during the hearing, clearly placed more v alue on his relationship
with Phumelela than appeasing some bookmakers. Furt her, whilst
Marshall was convinced of the advantages for Gold C ircle of retaining
bookmakers offering the open bet on its premises, N airac seemed less
convinced.
[120] We cannot conclude from these facts that Gold Circle is more amenable
to bookmakers taking the open bet than would be Ken ilworth under
Phumelela’s management. The experiment afforded to MWOS seems to
be something of an anomaly which arose for very spe cific reasons and is
not informative of likely future competitive dynami cs. Thus there is no
conclusive evidence that bookmakers are more likely to be foreclosed from
offering the open bet as a result of this merger.
[121] Furthermore, were the merger to result in bookmakers being ‘foreclosed’
from offering open bets at venues where they sub-le ase from the tote, it is
not clear what the consumer harm is. These argument s were made using
foreclosure terminology however, there was no real theory of foreclosure
put forward by the Commission.
[122] It was not argued that bookmakers would be fo rced to exit the market.

[122] It was not argued that bookmakers would be fo rced to exit the market.
Furthermore, it seems unlikely that such a strategy by totes would force
them to exit the market. This is firstly because bo okmakers offer fixed odd
bets which they were able to sell profitably. This is true before they started
offering the open bet and also true for outlets whe re they co-locate with a
tote and are not allowed to offer the open bet. Not being able to sell open
bets does not turn a profitable business into a los s making business. The
second reason is that totes have no power to stop bookmakers offering the
open bet at locations owned or leased directly by t he bookmaker.
Bookmakers have the choice about whether to co-loca te with a tote at a
tote premise and perhaps be stopped from offering t he open bet, or to
invest in their own location and have complete free dom over what
products they offer.

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[123] It also does not seem that punters will be h armed by such a
‘foreclosure’ strategy by totes. Punters will not h ave reduced options at
outlets where a tote and a bookmaker co-locate beca use they can place a
tote type bet with the tote itself and fixed odds b ets with the bookmaker.
Likewise, punters will have access to both options at bookmaker-only
outlets, because they will continue to offer the op en bet alongside their
fixed odds bets. Lastly, the strategy is unlikely to harm punters by resulting
in a higher price than would otherwise be the case. This is because totes
set the price and bookmakers simply replicate it wi th punters being no
better or worse off. If bookmakers were to genuinel y start competing with
totes by offering better prices than the tote on op en bets, they can do so
through their outlets which are not co-located on tote premises.
[124] This conclusion is reinforced by Marshall’s p roposal which he wanted
the regional bookmakers associations to take to the totes. This was that
bookmakers receive a higher commission for divertin g or ‘repatriating’
open bets back to the tote. As a quid pro quo their commission would have
to be raised from 4%, to 7% or 8%. The end result w ould have been that
bookmakers did not compete with totes because the b et was being placed
in the tote pool rather than with the bookmaker.
[125] Ultimately the tension that exists between bo okmakers and totes with
respect to the open bet is purely about an appropri ate division of the rent.
Punters’ welfare is independent of the outcome of t his ongoing negotiation
between totes and bookmakers.
[126] With respect to the open bet, there is insuff icient evidence for us to
conclude that Kenilworth under Phumelela’s manageme nt will be more
aggressive towards bookmakers offering the open bet than Gold Circle
was. Furthermore, there is no consistent theory of harm resulting from the
concern that bookmakers might be forced to stop sel ling the open bet for

concern that bookmakers might be forced to stop sel ling the open bet for
those premises where they sub-lease from a tote.

Competition for the market

[127] The competitive landscape has, to a large ext ent, been formed by the
regulatory environment. In the early stages of Sout h Africa’s democracy it
was decided that gambling should be regulated at a provincial level. Each
provincial regulator thus decides how the horseraci ng market is structured
in its province. It is technically possible to have very different models being
applied in different provinces.
[128] In reality the provinces have broadly similar regulatory environments for
horseracing. The tote license is paired with the ho rseracing license and

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there is a provincial monopoly created by the regul ator. There does not
seem to be any appetite for multiple tote licenses, and this would in fact be
problematic given the model of commingling adopted by the totes. The
only competitive influence that the provincial regu lators have allowed into
the market is for multiple bookmaker licenses per p rovince and for
bookmakers to be allowed to sell the open bet. The regulators have
chosen the level of competition in the market along with other factors such
as the maximum tote price (take-out rate), tax rate s and transfer rates (3%
from bookmakers to horseracing operators).
[129] There was no suggestion by the Commission, or any other party, that
the gambling boards have been incompetent in settin g the limits on what
firms are allowed to do in this market. It is impor tant to reiterate that the
gambling boards not only ensure proper functioning of the market, but they
are a price regulator. To the extent that there are undesirable
developments in the market, they can revise their p rice regulation to
ensure socially optimal outcomes.
[130] Regulators which have decided that it is opti mal for a market to operate
as a monopoly still have the option to retain compe tition for the market.
Such was done with the South African national lotte ry, where a single
national operator license is allocated but is revie wed periodically. At each
review firms compete for the monopoly.
[131] The option to have periodic renewal of horser acing and tote licenses
was not raised as something that the regulators are currently considering.
It does, however, remain an option available to reg ulators in order to
ensure socially optimal outcomes in the provincial monopolies that they
have created. There is a problem in pursuing such a n avenue where the
racecourses are owned by the licensee rather than t he regulator.
Specifically, it does not seem likely that firms wi ll tender for the

Specifically, it does not seem likely that firms wi ll tender for the
horseracing and tote licenses without some reassura nce that they will
have access to lease the racecourses. This is a pos sibility in KwaZulu
Natal, where the racecourses are leased from variou s municipalities,
however less likely to be the case in other provinc es, where they are
owned by the horseracing operator.
[132] An alternative regulatory model is to have mu ltiple tote licenses in each
province and in so doing introduce competition ‘into the market’ rather than
‘for the market’. Horseracing operators that curren tly have the sole tote
license will lose revenues as a result of this chan ge. Should this
undermine the sport the regulator can adjust the tr ansfer fee from betting
institution (tote or bookmaker) upwards from the current level of 3%.

29

[133] The underlying rationale of such an alternati ve model is akin to that
behind the liberalisation of power generation in Eu rope and the United
States. The real monopoly is the distribution netwo rk or ‘grid’. Power
generation and supply on the grid, however, is not a natural monopoly and
so can be privatised. Likewise, one might think of the racecourse and
horseracing operations as the natural monopoly with tote outlets not being
a natural monopoly. Thus it would be beneficial to introduce competition
into the area which is not a natural monopoly and s et up a mechanism
(appropriate transfers from totes and bookmakers to horseracing
operators) to ensure the sustainability of the natural monopoly.
[134] These are merely alternatives available to th e regulator should they
deem it necessary either currently or in the future to alter market
outcomes. It is not the expectation that the regula tors are going to need to
change the regulatory environment as a result of th is merger as the
Tribunal does not find a significant lessening of c ompetition to be a likely
result of this merger.
Interested Parties

The Grooms’ Association: Chophela Simoto

[135] Chophela Simoto, national chairperson of the Groom’s Association,
raised a concern that Phumelela at the time of its inception had promised
to invest R17.5m in training and housing of grooms and that this
investment had not been made.
21
[136] Simoto also argued that the proposed merger w ould not benefit the
grooms in any way and would not aid black economic empowerment of the
sport.
[137] Simoto’s concerns appear to be grievances wit h Phumelela’s
management style and history in the industry. He do es not locate his
concerns specifically to the merger. The most that can be said for his
argument is that any increase in Phumelela’s influe nce over the racing
industry is against the public interest. Unfortunat ely his argument lacked
specificity and in particular, merger specificity a nd we cannot discern in

specificity and in particular, merger specificity a nd we cannot discern in
what he propounded, a rationale for prohibiting the current merger.

21 Simoto’s concern about investments was confirmed by Ian Jayes, Kema’s advisor. He explained
that Phumelela were given a tax benefit, part of which was for investing in grooms accommodation
and training facilities. A very small proportion of these monies were used for their intended
purpose, but the majority was given as a dividend to Phumelela’s shareholders.

30

Perhaps these industry wide concerns are best raise d with the provincial
regulators.
[138] Similarly his employment concerns were not me rger specific, As Simoto
himself confirmed, in the racing industry grooms ar e employed by owners
of race horses, not by racetrack administrators. Si nce the merger will not
have an effect on owners, it is unlikely to have an effect on the
employment of grooms. Whilst Simoto may have a vali d public interest
concern it is one related to the industry in genera l and not one that arises
from the merger.
Africa Race Group – Phindi Kema and Ian Jayes

[139] Phindi Kema and her colleague Ian Jayes repre sent a firm called the
Africa Race Group which we understand seeks to ente r the market as an
operator. Khema and Jayes both expressed concern ov er the affect that
Phumelela currently has over the industry and its i mplications for
diversifying ownership particularly to previously d isadvantaged
communities. They also suggested that Phumelela had been guilty of
asset stripping and that its commercially driven ag enda was bad for the
industry. Underlying this presentation was an assum ption that the Tribunal
process could be used to ensure that Kenilworth was sold to a new
entrant.
It is not our task however to tell Gold Circle who to sell to. We can only
decide if their current choice of purchaser would l ead to a substantial
lessening of competition or not be justifiable on s ubstantial public interest
grounds. Again, like those of Simoto, these concern s were not relevant to
the context of the merger. Rather they expressed a concern with the state
of the industry. For this reason we believe that th ese concerns are best
addressed by an authority charged with the responsi bility of issuing
licenses to operators.
Discussion of potential conditions

[140] The Commission recommended that the merger be prohibited. During
argument at the end of the hearing the Commission s uggested for the first

argument at the end of the hearing the Commission s uggested for the first
time that it might support approval of the merger i f conditions could be
proposed that ensured that Kenilworth was not subje ct to the control of
Phumelela, but rather had a “truly independent” boa rd.
22 The merging
parties undertook to consider proposing such conditions. Subsequent to us
hearing final argument the merging parties forwarde d their proposals.
These included:

22 See pages 2270 and 2271 of the transcript.

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• “Independent Kenilworth Racing Board
Of the 6 (six) directors appointed by the Trust to the board of
Kenilworth Racing, at least 3 (three) will be indep endent (i.e. not
employees, directors, trustees or advisors of the T rust or
Phumelela Gaming and Leisure Limited (“Phumelela”)) .
Therefore, 3 (three) directors will be appointed by the Western
Cape Chapter of the Racing Association (“WCRA”) and 3 (three)
directors will be independent. The majority of the board will be
constituted by independent directors and directors appointed by
WCRA.
The memorandum of incorporation of Kenilworth Racin g will be
amended to include a provision that the management and
control of Kenilworth Racing’s business vests in th e board of
Kenilworth Racing, and that the shareholders of Ken ilworth
Racing may not limit or fetter the discretion of the board.
No director of Kenilworth Racing may hold shares in
Phumelela.”
• “Industry Agreements
The draft industry agreements (i.e. the Commingling Agreement,
the Substitute Sports Administration Agreement, the License
Agreement and the Teletrack Partnership Agreement) to which
Kenilworth Racing is to become a party, will afford to Kenilworth
Racing the unilateral right to terminate any of tho se agreements
on 90 (ninety) days’ notice.”
• “Phumelela Management Agreement
The duration of the management agreement concluded between
Phumelela and Kenilworth Racing will be 5 (five) ye ars,
renewable for 3 (three) periods of 5 (five) years e ach at the
instance of Kenilworth Racing.”
• “Kenilworth Racing Branding
The board of Kenilworth Racing will always have the right to
adopt Kenilworth Racing’s own branding.”
23
[141] The Commission was not satisfied with these conditions and persisted in
recommending a prohibition of the merger.

23 Paragraphs 1.1, 1.2, 1.3 and 1.5 from the letter to the Competition Tribunal from Roodt Inc on 1
November 2012.

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[142] If the Commission is correct and that Phumele la through the merger will
be able to control Kenilworth then the tendered con ditions do little to
alleviate that concern. They are largely window dre ssing and do nothing to
inhibit Phumelela’s ability to assert its influence over Kenilworth. On this
issue we agree with the Commission. However, becaus e there is no
expected likely lessening of competition, even when effectively treating
Phumelela as though it were a party to the merger, such conditions or an
improvement on them are not considered necessary.
[143] Therefore we did not seek to make the merger conditional upon these
conditions tendered by the merging parties.
[144] We take a different approach to the issue of conditions relevant to the
public interest issue of employment.
[145] The possibility of retrenchments at Gold Circ le Western Cape arose in
the course of the hearing. It was argued that the m anagement contribution
by Phumelela extended far beyond the 7 or 8 executi ves necessary to
head up the divisions, but also included a large nu mber of support staff.
Smith estimated this number at between 120 and 140 people who are
currently at Phumelela and are supporting the execu tives currently
involved in managing the Western Cape operations.
24
[146] The consequence of this is that there are dup lications that might result
from the merger and the management agreement with Phumelela. This will
probably result in retrenchments.
[147] Prompted by the Commission, the merging parti es proposed a condition
to halt any merger specific retrenchments for a period of two years. 25
[148] We agree with the Commission that there is po tential risk of
retrenchments especially given the lack of consulta tion by Gold Circle with
any unions or directly with employees. Thus we deci ded that the tendered
condition was appropriate to address public interes t concerns and made
approval of the merger conditional upon it.

CONCLUSION

approval of the merger conditional upon it.

CONCLUSION


[149] We have found, for the reasons set out in thi s decision that the merger
will not lead to a substantial lessening or prevent ion of competition even
after assuming that Kenilworth will not act indepen dently of Phumelela
post-merger.


24 Mr Smith at 2033 of the transcript.
25 See para 1.4 of the letter to the Competition Tribunal from Roodt Inc on 1 November 2012.

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[150] The merger may however adversely affect the p ublic interest because it
may result in a large number of redundancies and he nce retrenchments
post-merger. The parties tendered a condition to ad dress this concern.
The Commission was satisfied with the adequacy of t his condition and so
are we. For this reason we approved the merger sub ject to this condition
on the 15 November 2012. The condition has already been made an order
of the Tribunal and we attach it to these reasons a gain for convenience as
Annexure A.

____________________ 07 February 2013

Norman Manoim DATE

Yasmin Carrim and Merle Holden concurring.


Tribunal Researcher: Thabani Ngilande and Andrew Sylvester
For the merging parties: Alfred Cockrell SC and Michelle le Roux instructed
by Roodt Inc.

For the merging parties: David Gordon SC and Matthew Swain instructed
by Barkers Attorneys

For the Commission: Michael van der Nest SC and Jerome Wilson
instructed by the State Attorney