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[2015] ZACT 33
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Deltrade 83 (Pty) Ltd v Property Management Business of Liberty Holdings Limited Known as LP Manco and Retail Property Management Business of JHI Properties Known as JHI Retail Division (020404) [2015] ZACT 33 (15 April 2015)
COMPETITION TRIBUNAL OF
SOUTH AFRICA
Case No: 020404
In
the
matter
between:
DELTRADE
83 (PTY) LTD
Primary
Acquiring
Firm
And
THE PROPERTY MANAGEMENT
BUSINESS OF LIBERTY
HOLDINGS
LIMITED KNOWN AS LP MANCO
AND THE RETAIL PROPERTY
MANAGEMENT BUSINESS OF
JHI
PROPERTIES
KNOWN AS JHI RETAIL
DIVISION
Primary
Target Firms
Panel
: N Manoim (Presiding Member)
: F.
Tregenna (Tribunal Member)
: A
Wessels (Tribunal Member)
Heard
on
: 25 March 2015
Order
Issued on
: 25 March 2015
Reasons
Issued on : 15 April 2015
Reasons for Decision
Approval
[1]
On
25
March
2015,
The
Competition
Tribunal
("Tribunal")
conditionally approved
the
acquisition
by
Deltrade
83
(Pty)
Ltd
("Deltrade")
soon
to
be I renamed JHI Retail (Pty) Ltd
("JHI
Retail")
to acquire the property
management business of Liberty Holdings Limited
("LHL")
known as LP Manco and the retail
property management business of JHI Properties known as JHI Retail
Division.
[2]
The reasons for approving the proposed
transaction follow.
Parties to the
transaction
[3]
The primary acquiring firm is Deltrade, a
newly incorporated entity formed for the purposes of housing the
property management business
of LHL and the retail property
management
business
of JHI Properties.
[4]
JHI Properties provides management services
to property owners, it has three operational divisions, namely,
commercial, retail and
brokering. LHL is a financial service group
that develops, markets and manages various financial services to
individuals and corporate
clients. Relevant for the purposes of the
proposed transaction are the activities of Liberty Group Properties
(Ply) Ltd
("LGP").
LGP
has two wholly owned operating subsidiaries; Liberty Property
Management
("LP Manco")
and
Liberty Property Development
("LP
Devco").
LP Manco is the appointed
property manager responsible for the day-to-day operational
management of LGP Property Portfolio
("LPP")
and JHI Retail Division which conducts
retail-focused property management for JHI Properties.
Proposed Transaction
[5]
JHI Retail intends to purchase the
businesses of the JHI Retail Division and LP Manco as a going
concern. Both businesses will be
transferred to the Deltrade and
post-merger JHI Retail will manage the retail property management
businesses of LP Manco and the
JHI Retail Division.
Rationale
[6]
For JHI Properties, the proposed
transaction will increase its portfolio under management and
strengthen its retail property management
specialisation. For LHL,
inter alia,
entering
into the joint venture will facilitate improved property management.
Relevant Market and
Impact on Competition
[7]
Both the merging parties own buildings. LP
Manco provides property management services internally or in-house
only, whilst JHI Properties
provides property management services
in-house and to third parties as well.
[8]
The Commission found no product overlap
between the activities of the merging parties as Liberty offers
property management services
for in-house purposes whilst JHI offers
for third parties as well. However, in the market for management
services, which is the
market Deltrade will be active in, vertical
overlaps do arise as LHL through LGP owns properties which could be
managed by property
managers. In the market for the provision of
third party property management services, Deltrade will have an
estimated market share
of between 10-20%. It will still face strong
competitors,
inter alia,
Broll
Property Group (Pty) Ltd, Eris Property (Ply) Ltd, Finlay Retail
(Ply) Ltd t/a Finlay & Associates and Capital Property
Fund Ltd.
There are also a number of companies that render property management
services in-house such as Growthpoint Properties
Limited, Acucap
Properties (Ply) Ltd and Redefine Property Income Fund.
[9]
The Commission is of the view that there
are no vertical foreclosure concerns that will arise as a result of
the proposed transaction.
Liberty did not out source these services
pre-merger therefore the services are currently not available to the
general market.
In addition, market participants did not raise
foreclosure concerns as there is an influx of customers to procure
their services
and
property
funds
also
outsource
their
property
management function to different property
managers. The Commission was of the view that the vertical
relationship between the merging
parties was unlikely to raise
foreclosure concerns, as LPP is currently managed internally and
therefore no property management
businesses will be foreclosed. The
proposed transaction is unlikely to substantially prevent or lessen
competition in the provision
of property management.
[10]
The Commission also considered whether
Liberty might gain access to economically sensitive information about
its competitors in
the property ownership market through Deltrade
which might lead to co-ordinated effects. Liberty submitted that it
will only be
privy to certain non-sensitive information as sensitive
information will not be discussed at board meetings. Competitors
contacted
by the Commission raised no concerns except one firm,
Finlay, who indicated that the proposed transaction would have a
negative
impact in the market. However, the customers of the merging
parties have confirmed that they procure services from various
property
management service providers in the market indicating that
there are available alternatives.
Public Interest
[11]
The Commission identified a right of first
refusal clause in the Property Management
Service Level Agreement whereby Liberty has
a right to refuse to lease any premises in circumstances where any
competitor of the
Liberty Group wishes to lease any such premises.
The Commission engaged the merging parties on the clause and the
merging parties
have agreed to remove the clause from the Property
Management Service Level Agreement. The clause has since been
removed.
Employment
[12]
The merger will result in potential
redundancies. Both firms employ substantial work forces, many in
overlapping jobs. At the same
time the merger is justified on the
basis of rationalisation and introducing efficiencies. The potential
for merger
related
retrenchments
is
thus
evident.
The
merging
parties
were
unable to give an undertaking that the merger would not result in
retrenchments as the necessary due diligence had not been
done as the
parties considered such an exercise might be considered
pre-implementation of the merger. They intend to undertake
this
exercise once the merger is implemented. (We say more on this aspect
below). As a result they were nevertheless willing to
give an
undertaking that there would be no merger specific retrenchments for
two years, post approval of the merger.
[13]
The
Commission recommended that the merger be approved subject to a two
year moratorium from what it termed the 'effective' date
as opposed
to the 'approval' date. There was some uncertainty therefore as to
what time period the Commission was recommending.
[1]
The Commission explained that the effective date was a date 12 months
after the approval of the merger when the parties had finalised
the
implementation of the transaction. In effect this meant that the
Commission was seeking a three year moratorium on merger specific
retrenchments.
[14]
The merging parties as noted were willing
to agree to a two year moratorium on retrenchments from the approval
date, but not three
years. They stated that no basis had been
established for requesting that the moratorium run for an additional
year. This would
be a burden to the merged firm and would result in
costs increasing disproportionately compromising their
competitiveness.
ANALYSIS
[15]
As we found that the concept of an
'effective' date was confusing we indicated to the parties that the
trigger date should be the
approval date i.e. the date on which the
Tribunal approves the merger. Both parties were agreeable to this
suggestion. The issue
then was whether the period should be two or
three years.
Misrepresentation
[16]
The Commission indicated that it had
departed from the standard 2 years it normally recommends in such
situations and added an additional
year, because the merging parties
had misrepresented themselves during the Commission's investigation.
The Commission indicated
that through its own investigation they
discovered that the parties Due Diligence report contained evidence
that merger related
retrenchments had been contemplated but not
disclosed.
[17]
The merging parties denied the
misrepresentation allegations and indicated,
inter
alia,
that detailed answers were
provided in all the question and answer sessions. Mr van der Merwe,
an attorney for the merging parties
added further that, the confusion
may have been because the Due Diligence document the Commission was
referring to, contained information
about possible retrenchments that
had been considered at an early stage, pre-merger, but were no longer
contemplated.
As
he pointed out the document itself indicates that the position had
subsequently changed. This change in approach was contained
in
footnotes (as opposed to the body of the text which the Commission
sought to rely on) as the document had been amended subsequently.
[18]
We are satisfied with this explanation and
have concluded that the merging parties did not misrepresent
themselves and that the
document the Commission was referring to is
no longer reflective of their current thinking. There is therefore no
basis to justify
an extended period beyond the two years offered by
the parties.
Notification
[19]
Furthermore, the Commission was also of the
view that the merging parties had failed to properly consult with the
employees. Liberty
for its part had informed the employees of the
merger but it seems that specifics of the implications of the
possible retrenchments
were not discussed. The merging parties
conceded that a thorough consultation process had not been
followed.They justified this
by claiming that a more detailed process
pre-merger might be construed as pre-implementation of the merger.
[20]
The Commission had invited employee
representatives to be present and asked if they could be given an
opportunity to address us
which we agreed to. Ms Ferguson, an
employee of Liberty Properties representing the staff, confirmed that
consultations had taken
place. She added that the only concern from
the employees was with regards to employment being guaranteed for a
certain period
of time and the kind of benefits they would be
receiving from JHI. She further indicated that that the staff would
have liked more
consultation with
JHI
to
address those concerns. Lastly she indicated that they would like a
three year moratorium but they would leave this decision
to the
Tribunal to decide.
[21]
We indicated to the merging parties during
the hearing that we would like to see a condition relating to
notification being given
to affected employees before the end of the
two year period. The parties indicated a willingness to do so.
Discussion was held
about whether notice could be given three months
after the approval date to the employees concerned. The merging
parties indicated
that specifying individual names might contravene
their Labour Relations Act obligations because employees have a right
to be consulted
on retrenchments and alternatives before a final
decision is taken.
[22]
The
merging parties proposed instead that after three months the merged
firm would indicate in which divisions retrenchments might
take place
and the proposed numbers.
In
our view this is a reasonable compromise that meets the interests of
both statutes. The parties drafted an amendment to the proposed
condition to reflect this.
[2]
CONCLUSION
[23]
We are satisfied with the Commission's
reasoning that the proposed merger is unlikely to substantially
prevent or lessen competition.
[24]
Furthermore we are satisfied that the
public interest concerns concerning the merger's effect on employment
are adequately dealt
with the two conditions proposed; a two year
moratorium on merger related retrenchments, post approval and a
limited notification
to employees within three months of the approval
date. These conditions are made part of our order and are contained
in
Annexure A
hereto.
[25]
Given
the fact that merging parties had not adequately consulted with
employees pre-merger on possible retrenchments because they
felt this
might constitute implementation of a merger in contravention of
section 13(4)
[3]
of the Act, we
asked the Commission to clarify its position on this issue.
[26]
We were fortunate to have attending the
hearing
Mr
Hardin
Ratshisusu, the Head of Mergers at the Commission who clarified that;
"We
encourage merging parties to consult with the employees to provide
the files of these mergers and inform employees on what
is
going to happen to them after the
merger'.
[27]
This a vice is worth noting for other
merging parties.
Mr
N Manoim
15
April 2015
Prof
F Tregenna and Mr A Wessels concurring
Tribunal
Researcher:
Moleboheng
Moleko
For the merging
parties:
Vani Chetty of Baker McKenzie
For the
Commission:
Lindiwe Khumalo
and Maanda Lambani
[1]
See
transcript pages 24- 25.
[2]
See
clause 3.1.2 of the condition.
[3]
A
party to a merger contemplated in subsection (3) may take no further
steps to implement that merger until the merger has been
approved or
conditionally approved.