Brief Summary

Competition — Merger Approval — Acquisition of subscriber base — Mobile Telephone Networks (Pty) Ltd's acquisition of Nashua Mobile (Pty) Ltd's MTN subscriber base unconditionally approved by the Competition Tribunal. The Tribunal found that the transaction would not substantially lessen competition in the relevant market, as Nashua's market share was minimal and declining. The Tribunal also considered the public interest implications, noting Nashua's commitment to mitigate employment impacts through generous severance packages and redeployment efforts, ultimately concluding that the merger was permissible under competition law.

Comprehensive Summary

Summary of Judgment

1. Introduction

This was a large merger proceeding before the Competition Tribunal of South Africa concerning the acquisition by Mobile Telephone Networks (Pty) Ltd (MTN) of the MTN subscriber base held by Nashua Mobile (Pty) Ltd (Nashua), described in the reasons as the acquisition of each Nashua subscriber who utilised MTN as the mobile network operator.

The primary acquiring firm was MTN, a vertically integrated mobile network operator operating from network infrastructure through to the retail provision of mobile telecommunications services. The primary target firm was Nashua, but only in respect of its MTN subscriber base, Nashua being a service provider and retail/distribution channel for mobile network operators rather than a network operator itself.

The matter was heard on 26 September 2014, with the Tribunal issuing an order on 29 September 2014 and furnishing its reasons on 31 October 2014. The Tribunal noted that this transaction was one of seven separate yet interrelated transactions arising from Nashua’s decision to exit the market, and that related transactions were heard together on the same hearing date.

The general subject-matter of the dispute concerned whether the proposed acquisition would result in a substantial prevention or lessening of competition in the relevant market, and whether there were public interest concerns, particularly relating to employment effects, arising from Nashua’s exit and associated retrenchments.

2. Material Facts

The Tribunal placed the transaction in the context of the mobile telecommunications value chain in South Africa. It accepted that South Africa has a limited number of mobile network operators (MNOs), including MTN, and that MNOs are vertically integrated in that they operate the network at an upstream level and provide retail services to end-users downstream. Nashua, by contrast, was a service provider (SP) that did not operate networks; it functioned as a retail and distribution channel for MNOs and competed with MNOs only at the downstream retail level.

The proposed transaction formed part of Nashua’s broader decision to exit the market. The specific transaction involved MTN assuming Nashua’s position in respect of each contract concluded between Nashua and Nashua’s MTN subscribers, meaning that subscribers previously contracting with Nashua in relation to MTN services would instead be in a contractual relationship with MTN. The Tribunal treated this as the acquisition of Nashua’s MTN subscriber base, rather than the acquisition of Nashua’s business as a going concern.

The Tribunal recorded the merging parties’ explanation for Nashua’s exit and for MTN’s rationale in acquiring the subscriber base. Historically, service providers performed an intermediary role that reduced MNOs’ exposure to credit risk associated with post-paid contract customers, particularly in the early period before prepaid products existed. Over time, the Tribunal accepted that market and regulatory developments, the growth and maturation of the industry, and increased MNO investment at retail level had shifted incentives, with MNOs regarding direct retailing as core to their business models. MTN’s position, as recorded, was that the service provider model was becoming inefficient or obsolete and that the transaction reflected a continued trend of vertical integration of the service provider function. Nashua’s position, as recorded, was that margins at retail level had been declining since 2008 and that Nashua’s offering was largely mirrored by the MNOs; while it was not facing immediate collapse, its long-term viability was uncertain and it chose to exit while able to offer severance packages and some shareholder returns. The Tribunal also recorded that service provider agreements between Nashua and the MNOs were up for renegotiation and that Nashua did not consider the terms on offer sufficiently favourable to support long-term competition.

On market definition, the Tribunal recorded that the merging parties considered a definitive product market definition unnecessary because, on their case, the transaction raised no substantial competition concerns under any plausible market definition. The Competition Commission nevertheless assessed the transaction in the market for the resale of MTN post-paid subscription and services, and both the Commission and the merging parties considered the geographic market to be national.

On competitive effects, the Tribunal relied on the Commission’s analysis that the merged entity would have a market share of between 30% and 40%, with the transaction contributing an accretion of between 0.1% and 1.5%, which the Commission regarded as minimal. The Tribunal further accepted the Commission’s view that service providers had limited ability to influence end-user pricing, and that the question was whether the transaction and Nashua’s removal would materially reduce service levels to end-users. Nashua’s own position, as accepted by the Tribunal, was that it had fallen behind certain market trends (for example, in online or automated account management) and that meaningful service upgrades would require significant IT investment which it was unwilling to undertake given downward pressure on margins. The Tribunal also accepted that MNOs compete robustly with one another on service and are subject to regulatory obligations to provide high service levels.

The Tribunal additionally considered the Commission’s assessment of interbrand competition and the impact of Nashua’s removal. It accepted that Nashua accounted for a small and declining share of post-paid subscribers, and it recorded that the sale of the subscriber base did not enable individual MTN customers to switch to another MNO merely because the customer’s terms and conditions remained governed by the existing contractual framework involving MTN and Nashua.

On public interest, the Tribunal treated as important the fact that approval of the transaction would coincide with Nashua’s market exit and that many Nashua employees would face retrenchment. The Tribunal noted initial uncertainty about the precise number of employees affected, which was clarified at the hearing. It accepted that Nashua had made substantial commitments aimed at minimising adverse employment effects, including redeployment of a significant number of affected employees within the Reunert group (expected to be between 100 and 150), and severance packages described as particularly generous relative to the minimums contemplated by the Labour Relations Act. The Tribunal recorded that support structures were established to assist affected employees with counselling, CV preparation and circulation within the group, preferential consideration for vacancies, and references. It further recorded Nashua’s specific undertaking to redeploy affected unskilled employees within the Reunert group. The Tribunal also took into account certain undertakings given by MTN to mitigate employment concerns, as set out in the Tribunal’s order and merger clearance certificate.

3. Legal Issues

The central legal questions were whether the proposed transaction was likely to result in a substantial prevention or lessening of competition in the relevant market and, even if not, whether the transaction raised public interest concerns that required intervention in the merger assessment.

The dispute was principally one of the application of competition law and public interest criteria to the facts found or accepted by the Tribunal. It involved evaluative assessments regarding competitive constraints (including service-based competition), market structure and accretion, and the likely effects of Nashua’s exit on customers and employees.

4. Court’s Reasoning

The Tribunal approached market definition pragmatically. It recorded that the parties did not regard it as necessary to conclude definitively on the product market because the transaction raised no substantial competition concerns under alternative plausible definitions. While noting the Commission’s preferred market description—the resale of MTN post-paid subscriptions and services—the Tribunal stated that even if it assessed the transaction on the Commission’s basis, it considered competition effects unlikely to raise concerns.

In assessing competitive effects, the Tribunal relied on the Commission’s quantitative and qualitative analysis. The Tribunal accepted that the merged entity’s market share would be in the 30%–40% range but emphasised that the increment attributable to the transaction was minimal. On that basis, the Tribunal considered the transaction unlikely to alter market structure materially or increase market power in a manner that would lessen competition.

The Tribunal then addressed whether Nashua’s removal would reduce the quality of service available to end-users, given that service providers had limited pricing influence. It accepted Nashua’s evidence that it had, in certain respects, fallen behind market service trends and would need costly IT investment to catch up—investment Nashua was unwilling to undertake in light of declining margins. The Tribunal weighed this against the MNOs’ submissions that they compete robustly on service and continuously seek to improve their service offerings. The Tribunal also noted that MNOs are obliged by regulatory instruments to maintain high levels of service. In that context, it was satisfied that the transaction would not result in a substantial lessening of service levels.

The Tribunal considered interbrand competition and the potential impact on switching and customer choice. It accepted that Nashua represented a small and declining proportion of post-paid subscribers and recorded that the transfer of the subscriber base did not of itself facilitate customer switching between MNOs because customer terms and conditions remained governed by the contractual arrangements already in place. These factors supported the Tribunal’s conclusion that the competitive impact of Nashua’s removal would not be substantial.

Having found no substantial lessening of competition, the Tribunal emphasised that merger assessment also requires consideration of public interest. It treated the employment consequences as significant, acknowledging that Nashua’s exit would lead to retrenchments and that employees would not transfer to MTN because the transaction was not a sale of a business as a going concern. However, the Tribunal evaluated the mitigating measures and undertakings. It took cognisance of Nashua’s redeployment efforts within the Reunert group, enhanced severance packages, employee support initiatives, and the special undertakings in respect of unskilled employees. It also noted MTN’s undertakings intended to mitigate employment concerns. These factors led the Tribunal to conclude that, while employment concerns were significant, they were ameliorated by the commitments and undertakings described.

On the basis of the minimal accretion, the absence of a likely substantial lessening of competition, and the mitigation of public interest concerns, the Tribunal approved the merger.

5. Outcome and Relief

The Tribunal unconditionally approved the acquisition by MTN of Nashua’s MTN subscriber base.

No conditions were imposed as part of the approval in the Tribunal’s reasons, although the Tribunal recorded that employment-related undertakings were given by Nashua and MTN and were set out in the Tribunal’s order and merger clearance certificate dated 29 September 2014.

The reasons do not record any separate costs order.

Cases Cited

No case authorities were cited in the Tribunal’s reasons.

Legislation Cited

Labour Relations Act 66 of 1995.

End-User and Subscriber Service Charter Regulations (issued by the Independent Communications Authority of South Africa in 2009).

Rules of Court Cited

No rules of court were cited in the Tribunal’s reasons.

Held

The Competition Tribunal held that the acquisition of Nashua Mobile (Pty) Ltd’s MTN subscriber base by Mobile Telephone Networks (Pty) Ltd would result in minimal market share accretion, would not materially alter market structure, and was unlikely to substantially prevent or lessen competition in the relevant market, including on the Commission’s proposed market framing.

The Tribunal further held that, although the transaction had significant employment implications due to Nashua’s exit and associated retrenchments, the adverse public interest effects were mitigated by Nashua’s and MTN’s undertakings and support measures. On this basis, the Tribunal approved the transaction unconditionally.

LEGAL PRINCIPLES

The Tribunal applied the principle that in merger control the decisional inquiry is whether a transaction is likely to lead to a substantial prevention or lessening of competition, assessed with reference to market structure, market shares and accretion, and qualitative indicators of competitive constraints such as the extent of rivalry on non-price parameters including service.

The Tribunal further applied the principle that even where competitive harm is not established, the Tribunal remains obliged to assess the transaction’s implications for the public interest, including employment effects, and to evaluate whether commitments and undertakings mitigate those effects sufficiently in the circumstances of the transaction.

The Tribunal’s reasoning reflects an approach in which definitive product market delineation may be treated as unnecessary where the outcome does not turn on the precise market boundary, provided the Tribunal is satisfied that under the relevant plausible market framing the transaction does not raise substantial competitive concerns.

Mobile Telephone Networks (Pty) Ltd v Nashua Mobile (Pty) Ltd (019018) [2014] ZACT 78 (31 October 2014)