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[2015] ZACT 50
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RCS Cards Proprietary Limited v Consumer Finance Business of the JD Group Limited (LM193Feb15/020644) [2015] ZACT 50; [2015] 1 CPLR 267 (CT) (11 June 2015)
COMPETITION
TRIBUNAL OF SOUTH AFRICA
Case
No: LM193Feb15/020644
DATE:
11 JUNE 2015
In
the matter between:
RCS
Cards Proprietary
Limited
....................................................................
Primary
Acquiring Firm
And
The
Consumer Finance Business of the JD Group
Limited
.............................
Primary
Target Firms
Panel
: Norman Manoim (Presiding Member)
:
Andiswa Ndoni (Tribunal Member)
:
Medi Mokuena (Tribunal Member)
Heard
on
: 20 May 2015
Order
Issued on
: 20 May 2015
Reasons
Issued on
: 11 June 2015
Reasons
for Decision
Approval
[1]
On the 20 May 2015 the Competition
Tribunal (“Tribunal”) conditionally approved the merger
between RCS Cards Proprietary
Limited (“RCS Cards”) and
The Consumer Finance Business of the JD Group Limited (“Consumer
Finance Business”).
[2]
The reasons for conditionally approving
the proposed transaction follow.
Parties
to transaction
Primary
acquiring firm
[3]
The primary acquiring firm is RCS Cards,
a company incorporated in accordance with the company laws of the
Republic of South Africa.
RCS is a wholly-owned subsidiary of RCS
Investment Holdings Limited (“RCS Investment”) which is
controlled by BNP Paribas
Personal Finance S.A (“BNP”).
BNP in turn is controlled by BNP Paribas S.A which is fisted on the
Euronet Paris Stock
Exchange.
[4]
The primary activity of RCS Cards is the
provision of unsecured credit and retail credit card facilities. RCS
also provides insurance
products which are ancillary to the provision
of this credit.
Primary
target firm
[5]
The primary target firm is the Consumer
Finance Business of the JD Group Limited. The Consumer Finance
Business is operated through
JD Group’s wholly owned
subsidiaries JD Consumer Finance (Pty) Ltd (“JDCF”) and
JDG Trading (Pty) Ltd (“JDGT”).
[6]
The Consumer Finance Business provides
secured and unsecured consumer credit. The Business is also involved
in the evaluation of
credit applications and administrative work
related to the provision of credit.
[7]
The JD Group is involved in the retail
business with brand stores retailing furniture, electronics,
appliances, building materials
and DIY. The JD Group also has three
entities which provide long and short term insurance.
Proposed
transaction and rationale
[8]
The proposed transaction involves RCS
Cards acquiring the Consumer Finance Business from JDCF and JDGT. As
a result of RCS Cards
acquiring direct control of the Consumer
Finance Business the JD Group will cease to provide consumer credit
to its customers in
its retail stores. This transaction does not
include an acquisition of the JD Group Insurance Business (“JDGI
business”).
However it should be noted at this juncture that
the Sale of Business Agreement contains a restraint of trade clause
which restricts
the JD Group from offering credit life insurance to
customers for a period of three years.
[9]
For RCS, the acquisition of the Consumer
Finance Business is an investment opportunity which would allow it to
expand further into
South Africa’s consumer finance sector. As
part of its current restructuring process the JD Group decided to
exit the consumer
finance business and instead focus its attention on
its retail operations.
[10]
In
order to provide an understanding of the effect the transaction would
have on the day-to-day business at retail stores within
the JD Group
the merging parties provided the Tribunal with an explanation
comparing the pre and post-merger situation. This is
illustrated by
using the example of a consumer walking into a JD Group store with
the intention of purchasing a TV on credit. In
the pre-merger
situation the consumer would be assisted by a retail store employee
who would assist the consumer with the application
process.
Thereafter this credit application would be sent to the Consumer
Finance Business which would evaluate the application
and decide on
whether credit should be granted. Once credit was approved cashiers
in-store would receive monthly payments from
the consumer if the
consumer elected not to have a debit order run off his account. These
operations would be overseen by in-store
managers. The change in this
process post-merger would be that the evaluation of the application
which was previously done by the
in-house Consumer Finance Business
would be taken over by RCS. In respect to this the merging parties
state that RCS would not
have any of its employees present at an
in-store level.
[11]
in
instances where unsecured credit is granted a credit provider may
require a consumer to take credit life insurance out in order
to
protect the underlying debt. This is seen as ancillary to the
provision of credit and is considered to be a meaningful sales
opportunity. In the pre-merger situation credit life insurance was
provided by the JDG! business. According to the restraint of
trade
clause the JD Group is restrained from providing credit life
insurance for three years post-merger. The merging parties submit
that the rationale for this exclusivity is the protection of the
underlying value of that sales opportunity.
Impact
on competition
[12]
The
Commission and the merging parties agreed that the relevant market
for this transaction is the national market for the provision
of
unsecured credit. The Commission found that there is an overlap in
the provision of unsecured credit. In its investigation the
Commission identified an excess of ten market participants with
dominating firms being banks such as African Bank, Capitec Bank
and
Standard Bank. The Commission found that the merging party’s
post-merger market shares are nominal and as a result it
concluded
that the merger is unlikely to raise significant competition
concerns.
[13]
In
respect to the restraint of trade clause the Commission evaluated its
effect on competition as well as its impact on public interest.
The
Commission considered the following factors in its assessment; the
rationale for including a restraint of trade, whether the
transaction
could be concluded without the restraint, length or duration of the
restraint, the ambit of such a restraint, whether
the restraint was
an attempt to preserve a cartel and whether competitors were entering
into the restraint of trade. The Commission
found that the restraint
of trade was justifiable as it was common practice for a purchaser to
protect its investment. The Commission
further found the restraint of
trade to be reasonable as it is limited in its duration to that of
three years. The public interest
effect of the non- compete clause
will be detailed under public interest.
Public
interest
[14]
The
merging parties submitted that the proposed transaction would not
have any public interest issues as the 870 employees currently
employed under the Consumer Finance Business would be transferred to
RCS.
[15]
The
Commission evaluated whether the restraint of trade clause would
negatively impact the JDGI business and result in retrenchments
of
all the employees within that division.
[16]
JD
Group submitted that the JDGI business would continue to be
sustainable posttransaction despite the restraint of trade
clause as the business has alternate sales offerings such as funeral
cover. In order to ensure that the transaction would not negatively
impact on the employees of the JDGI business, the JD Group undertook
not to retrench any employees falling under the JDGI business
as a
result of the merger. It further undertook to ensure that the JDGI
business remains running three years post the implementation
date of
the merger. The Commission concluded that the JDGI business would
likely continue to be sustainable post-merger and undertakings
by the
JD Group further provided the Commission with the comfort of
concluding that the proposed transaction would not lead to
a negative
effect on employment levels.
[17]
During
its investigation it emerged that two other classes of employees
would be affected by the transaction. The two classes are;
employees
taken over by RCS and employees in the JD Group who were not part of
the JDGI business. The merging parties gave an undertaking
not to
retrench any of the employees taken over by RCS. The Commission found
that this undertaking mitigated any public interest
concerns in
relation to JD Group employees who were taken over by RCS
postmerger.
[18]
The
Commission also investigated whether the remaining class of employees
viz. those JD Group employees not part of the JDGI business,
would be
affected by the merger It concluded that although restructuring was
currently taking place within the broader JD Group,
any retrenchments
that this process might lead to would not be merger specific.
Accordingly the Commission did not recommend any
conditions in
respect of this class of employees.
[19]
When
the matter came to the Tribunal for hearing, SACCAWU asked to make
representations as it was not satisfied with the undertakings
concluded between the merging parties and the Commission.
[20]
At
the hearing representatives from SACCAWU alleged that retrenchments
which had occurred prior to the merger as well as retrenchments
envisioned as part of the restructuring were merger specific. They
alleged that the proposed transaction would result in job
duplications
between the Financial Services Division and RCS. SACCAWU
alleged that this would result in 3290 employees of the Financial
Services
Division who provide in-store credit assessments, credit
scoring and follow- ups on defaulting payment losing their jobs.
SACCAWU
therefore opposed the proposed transaction.
[21]
The
JD Group submitted that the restructure was independent of the
proposed transaction and operational in nature. It further submitted
that the JD Group and SACCAWU are currently in a protracted labour
dispute in relation to the restructure and that the additional
protections requested by the Union were better granted by a different
forum.
[22]
However
at the hearing the Commission changed its position on the conditions.
The Commission submitted that in order to allay SACCAWU’s
fears
that retrenchments may be merger specific the proposed merger
conditions be amended to include an undertaking that no retrenchments
within the JD Group be allowed if merger specific. SACCAWU has
submitted that this would be an agreeable outcome and would address
their concerns.
[23]
The
merging parties opposed this suggestion. While they submitted that
they were willing to undertake not to retrench any employees
as a
result of the merger they would not want the inclusion of such in the
merger conditions as it would result in a possible floodgate
situation in light of the operational restructure that the JD Group
envisions.
Our
approach
[24]
We
accept that there are three categories of employees affected by the
proposed transaction; employees taken over by RCS, employees
of the
JDGl business, and employees of the JD Group not part of the JDGl
business or taken over by RCS.
[25]
In
respect to employees taken over by RCS, we are satisfied that the
undertaking by RCS not to retrench this group of employees
mitigates
any public interest concerns.
[26]In
respect of the JDGl business of employees, we find that the
undertaking not to retrench mitigates possible public interest
concerns. As this is a specific concern and an undertaking which the
merging parties have entered into with the Commission, we
find it
appropriate that the burden of proof rests with the merging parties
if any of this class of employees is retrenched, to
establish that
the retrenchments are not merger specific. We inserted condition
2.6.1 as an amendment to the existing condition
which did not speak
to the issue of onus, to reflect that.
[I]
We explain our reasons for this below after we first deal with the
position of JD Group employees.
[27]
In
respect of the JD Group employees, we find that the Union had fairly
raised concerns that they might be affected as a result
of the
merger. We are however also cognisant of the merging parties concern
that extending protection to the JD Group as a whole,
could be overly
burdensome, as employees retrenched as part of the restructuring
process, might claim their retrenchments were
merger specific.
[28]
Our
solution to the problem was to insert a variance in the onus of
proof. The condition, 2.6.1 which is in relation to the JDGI
business, requires that the firm prove that retrenchments are riot
merger specific. This is in contrast to 2.6.2 which is in relation
to
the JD Group and which requires a retrenched employee to prove that
the retrenchment is merger specific.
[29]
The
reasons for adopting this approach to the onus is that on the facts
of this case retrenchments within the JD Group are less
likely to be
merger specific as the restructuring process whilst contemporaneous
with the merger, is not occasioned by it, but
there is always a
danger that the two processes might be elided and the merger creates
the opportunity for the JD Group to retrench
more extensively than
might otherwise have been the case. Since this possibility is slight,
the onus is placed on the employee
to establish merger specificity.
By contrast, the JDGI business is directly affected by the merger,
and it is more likely that
if retrenchments take place there, they
are merger specific. Hence we reversed the onus, requiring the
employer to prove that the
retrenchment was not merger specific.
[30]
We
have not altered the time period for the conditions of three years,
as set out in accordance with 3.5 of the Order.
Conclusion
[31]
In
light of the above, we conclude that the proposed transaction is
unlikely to substantially prevent or lessen competition in any
relevant market. In addition, any public interest issues which may
arise from the proposed transactions are mitigated by the conditions
of this order. Accordingly we approve the proposed transaction
subject to the conditions of this order.
11
June 2015
DATE
lyptotian
Manoim
Andiswa
Ndoni and Medi Mokuena concurring
Tribunal
Researcher: Aneesa Ravat
For
the merging parties: Judd Lurie of Bowman Gilfiilan
For the
Commission: Amanda Mfuphi, Lebohang Mabidikakane
and Seema
Nunkoo For SACCAWU: Nelson Nthapo and Angie Phetlhe
[I]
Previously in the recommendation the draft condition 2.3 read as
follows “JD Group shall not retrench any
employees
in the employ of JDGl as a result of the merger”