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[2015] ZACT 112
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Telkom SA Soc Limited v Business Connexion Group Limited (Dimension Data (Proprietary) Limited Intervening) (LM065Aug14) [2015] ZACT 112; [2015] 2 CPLR 688 (CT) (12 October 2015)
COMPETITION
TRIBUNAL OF SOUTH AFRICA
Case
No:
LM065Aug14
In
the matter between:
TELKOM
SA SOC
LIMITED
Acquiring Firm
And
BUSINESS
CONNEXION
GROUP
LIMITED
Target Firm
And
DIMENSION
DATA
(PROPRIETARY)
LIMITED
Intervening Party
Panel
: Yasmin Carrim (Presiding Member)
: Mondo Mazwai (Tribunal
Member)
: lmraan Valodia
(Tribunal Member)
Heard
on
: 30, 31 July and 3, 4 August 2015
Order
Issued on
: 04 August 2015
Reasons
Issued on
: 12 October
2015
Reasons
for Decision
CONDITIONAL
APPROVAL
[1]
On 4 August 2015, the Competition Tribunal ("Tribunal")
conditionally approved the large merger between Telkom SA
SOC Limited
("Telkom") and Business Connexion Group Limited ("BCX").
[2]
The reasons for the conditional approval follow.
PARTIES
TO THE TRANSACTION AND THEIR ACTIVITIES
[3]
The
primary
acquiring firm
is Telkom,
a public company incorporated
in terms of
the
laws
of
the
Republic
of
South
Africa
and
listed
on
the
Johannesburg
Securities Exchange Limited ("JSE").
[1]
Telkom is a telecommunications
service
provider and is
organised
into three
operating
divisions,
namely
Telkom
Consumer
which
includes
Telkom
Mobile,
Telkom
Business
and
Telkom
Wholesale
and
Networks.
Telkom
Consumer
offers
mobile,
fixed
and
wireless
voice
and
data
services
to
residential
customers.
Telkom Business offers mobile,
fixed and
wireless
voice and data services to business customers. Telkom Wholesale
offers wholesale fixed lease lines to mobile network operators
("MNOs"), fixed line
operators
and
other
licensed operators
("OLOs").
[4]
The target firm,
BCX, is a
public company
listed on
the JSE.
[2]
BCX is an ICT
service provider
and
is
organised
into
six
operating
divisions.
Each
division
offers
a wide
range of fixed line services to enterprise business customers. These
services include cloud
infrastructure
services,
communication,
security
and
network
services,
workspace
services, professional services, application
services
and
service
integration
and
management.
PROPOSED
TRANSACTION
AND
RATIONALE
[5]
The proposed transaction involves an acquisition by Telkom of the
entire issued ordinary share capital of BCX. Upon implementation
of
the proposed merger, BCX will be delisted from the JSE and become a
wholly owned subsidiary of Telkom.
[6]
In terms of rationale, Telkom submitted that its fixed line voice
services are under significant pressure and that its business
lacks
the necessary capability to compete in the ITS market. Significantly,
the strategy documents reveal that the proposed transaction
would
enable Telkom to enter the ITS market on a sufficient scale in
circumstances where organic growth does not appear viable.
Further,
the proposed transaction provides Telkom with opportunities to
provide bundled service offerings to enterprise customers
as
customers buy connectivity, network and ITS
services together.
[7]
BCX's submitted rationale is that the proposed transaction is in line
with its convergence strategy where communication, applications
and
infrastructure will become cloud based and where Telkom's
infrastructure network will facilitate the delivery of these
converged
service offerings to business customers.
RELEVANT
MARKETS AND IMPACT ON COMPETITION
[8]
The Commission assessed the impact of the proposed transaction on
the following relevant markets:
•
Upstream market for the
supply of wholesale fixed-leased lines;
•
Downstream market for the
supply of MNS;
•
Broad downstream market
for the supply of MNS and VANS;
•
Downstream market for the
supply of hosting services;
•
Downstream market for the
supply of ITS; and
•
Market for the downstream
retail supply of mobile services (voice, data and sms).
[9]
In its horizontal analysis, the Commission found there to be no
horizontal overlap in the upstream market for the provision
of
wholesale fixed lease line services but noted that the merging
parties compete with each other across all of the downstream
markets
listed above. However, based on market shares, the Commission found
it unlikely that the proposed transaction would result
in unilateral
effects in any of the downstream markets. According to the
Commission, in markets where Telkom was found to have
a strong
presence (MNS and VANS), with market shares ranging between 20%-30%,
BCX was found to be weak with market shares of less
than 5%.
Conversely, in markets where BCX's position is strong (ITS), Telkom's
is weak, with a market share of less than 5%.
[10]
According to the Commission, the only downstream market that
appeared to raise competition concerns was hosting services
(co-location) as the merged entity would have a market share of
approximately 41% (16% accretion) based on space rented to third
parties on a commercial basis. However, as
there is excess capacity available from
various third
parties, the Commission found that the proposed merger would not lead
to unilateral effects in this segment.
[11]
In its vertical analysis, the Commission considered whether
Telkom's extensive fibre network, which is used to provide wholesale
fixed lease lines and which is an essential input to third parties'
downstream offerings, raised any foreclosure concerns. The
Commission
found that Telkom has market power in the upstream market and as such
would be able to engage in an input foreclosure
strategy. In this
regard, a settlement agreement concluded between Telkom and the
Commission
which
sought to resolve an enforcement case between Telkom and the
Commission ("2013 Settlement Agreement")
[3]
is relevant as it
sought to
address Telkom's ability to foreclose downstream rivals
through
margin
squeeze
strategies.
[4]
[12]
The Commission further emphasised the need to consider Telkom's
overall market position, since post-merger Telkom would be
the only
service provider capable of offering wholesale connectivity, coupled
with the full suite of downstream services, without
having to procure
any component from a third party. Thus, in the Commissions' view, the
proposed merger would enable Telkom to
engage in bundling strategies
that would potentially exclude competitors, non-vertically integrated
ones in particular.
[13]
Having found that the proposed transaction would give rise to
anticompetitive effects in the form of input foreclosure and
bundling, the Commission invited the merging parties to propose
conditions to alleviate these concerns. The merging parties contended
to the Commission that the 2013 Settlement Agreement, in its current
form, would be enough to prevent the merger specific theories
of harm
that it had identified.
[14]
The Commission was not convinced by the argument put forward by the
merging parties that the 2013 Settlement Agreement, in
its current
form, would be enough to prevent the merger specific theories of harm
that it had identified. The merging parties submitted
potential
remedies that would alleviate the anti-competitive effects arising
from the proposed merger which the Commission accepted.
[15]
The Commission accordingly recommended that the merger be approved
subject to these proposed conditions. In brief terms, these
proposed
conditions stemmed from the 2013 Settlement Agreement and included
certain extensions to the Transfer Pricing Program
(''TPP")
contained in the 2013 Settlement Agreement. These can be summarized
as follows:
15.1
That 'Fibre Access' be added as a product for which transfer prices
are to be calculated under Telkom's TPP.
15.2
That the tenure of the TPP be extended from 18 July 2018, which
was
the original end of the Condition Period, to 31 December 2020.
15.3
The quality of Fibre Access services provided by Telkom Wholesale to
other licensed operators ("OLO's") must be substantially
similar to the Fibre Access Telkom Wholesale provides to Telkom
Retail.
15.4
Where Fibre Access is included as part of a bundled offering to
Telkom's Enterprise Customers, Telkom must ensure that the prices of
these bundles adhere to the TPP. In terms of monitoring
and
transparency, separate internal accounts must furthermore be kept for
managed network services ("MNS"), value added
network
services ("VANS"), hosting and information technology
services ("ITS") in order for the profitability
of these
retail products to be monitored by the Commission. Also the revenue
derived from supplying bundles, which includes Fibre
Access, must
exceed the input costs associated therewith.
TRIBUNAL
PROCEEDINGS
[16]
At the pre-hearing conference on 9 June 2015, Dimension Data, a
significant player in the South African ICT services market
and a
competitor to the merging parties, was admitted as an intervener in
the proceedings. Dimension Data claimed that the Commission's
proposed conditions were insufficient to address the effects arising
from the theories of harm analysed by the Commission. The
scope of
its intervention was limited to the adequacy of the Commission's
proposed conditions in relation to the following issues:
•
Input foreclosure;
•
Conglomerate effects
(bundling); and
•
The effect of the
proposed transaction on the information and technological
communications ("JCT") sector as contemplated
in section
12(A)(3)(a) of the Competition Act.
[17]
Prior to the hearing, Dimension Data was given an opportunity to
respond to the adequacy of the Commission's proposed conditions,
and
in so doing, submitted additional conditions which purportedly
addressed its concerns.
[18]
Given that no party to these proceedings was of the view that the
merger should be prohibited, it was agreed that the scope
of the
Tribunal's hearing would be limited to the adequacy of the conditions
proposed by the Commission and the appropriateness
of the additional
conditions proposed by Dimension Data.
[19]
However, during the Tribunal hearing, which commenced on 30 July
2015, the parties were able to submit a set of revised conditions
to
which all parties, including Dimension Data agreed. The Tribunal
considered these conditions and has approved the merger on
such
basis.
SUBMISSIONS
ON THE
PROPOSED
CONDITIONS
[20]
Dimension Data raised the following competition concerns about the
merger:
•
That post-merger the
merged entity could subsidise its retail business by charging lower
prices in the retail while raising prices
in the upstream market for
wholesale fixed leased lines, even if these high prices are charged
on a non-discriminatory basis. ("Cross
Subsidisation Concern").
•
That Telkom and BCX's
strengths on product offerings are complementary in nature, which
provides opportunities for bundling strategies
which will exclude
rivals, in particular non-vertically integrated firms that cannot
effectively mimic the merged entities' bundles
post-merger.
("Bundling").
•
Dimension Data alleged
that they were unable to obtain service level agreements ("SLA's")
from Telkom Wholesale and were
thus forced to purchase connectivity
from Telkom Retail in order to get an SLA. ("SLA's").
•
Dimension Data was
concerned that the TPP did not provide for adequate monitoring
provisions to ensure that the compliance regime
is properly enforced.
("Transparency and Monitoring").
•
Dimension Data was
concerned that Telkom with its extensive legacy copper network could
foreclose downstream competitors through
its ability to rely on its
copper infrastructure during the transition to fibre. Dimension Data
noted that although the demand
for copper links are declining with
the move to fibre, copper infrastructure still plays an important
role in South Africa's move
to fibre. Thus Dimension Data proposed
that the
TPP
be extended to include Telkom's copper
infrastructure.
[21]
As noted above, the conditions initially agreed upon between the
merging parties and the Commission stemmed from the 2013 Settlement
Agreement. Following the commencement of the hearing, the parties
(including Dimension Data who was instrumental in this process)
revised and supplemented the initial conditions and were able to
reach agreement on such basis. The merging parties made it clear
during the hearing that they do not necessarily agree with the
concerns raised by the Commission and by Dimension Data, but have
agreed to the Conditions nonetheless.
[22]
We shall now turn to discuss the theories of harm raised by the
Commission and Dimension Data and whether the remedies proposed
adequately address the concerns.
Cross
Subsidization
[23]
The merger conditions that were ultimately submitted to the Tribunal
involved,
inter alia
a transfer pricing programme and a price
freeze. The transfer pricing programme serves to ensure that Telkom
Wholesale will:
•
price
network
services
it provides
to both
OLOs and
Telkom Retail
on
a
non discriminatory
basis
for
common
components;
and
•
price non-common
components to OLOs
at no more than cost
plus a reasonable return and non-common components to Telkom
Retail at no less than cost
plus a
reasonable
return.
[24]
The 'price freeze' ensures that
Telkom
will not
increase
the prices
of
the
affected products above the
prices for those products
as at the approval date.'
[25]
Dimension
Data
and the
Commission
are
satisfied
that
the
pricing
freeze
condition
which
ensures
that
Telkom
will
not
increase
the
prices
of
the
affected
products
above
the
prices
for
those products
as
at the approval date",
alleviates
the concern that
post-merger
the
merged
entity
could
subsidise
its
retail
business
by charging
lower
prices
in the
retail
while
raising
prices
in the
upstream
market for
wholesale fixed leased
lines,
even if
these high
prices
are
charged
uniformly (non
discriminatory).
[5]
[26]
This form of cross subsidization was not previously covered by the
2013 Settlement Agreement as that agreement sought to prevent
a
margin squeeze through discriminatory pricing. This price freeze
condition is applicable to both Diginet and Metroclear products
(both
copper and fibre based products) supplied by Telkom Wholesale to
Telkom Retail and OLO's. The reason for including copper
products is
because copper would still be used as an upstream input by
competitors of Telkom in the downstream market in the foreseeable
future and in remote outlying areas with low traffic volumes.
Conglomerate
effects (Bundling)
[27]
The Commission found, that given Telkom's upstream market power in
relation to wholesale fixed leased line, and further that
Telkom and
BCX's strengths on product offerings are complementary in nature,
this provides opportunities for bundling strategies
which will
exclude rivals, in particular non-vertically integrated firms that
cannot effectively mimic the merged entities' bundles
post-merger.
The reason for this opportunity is that the merged entity would be
the only party to have strengths across all three
broad market
segments (MNS, VANS and ITS).
[28]
This concern is adequately addressed by Clause 3.2.3 of the merger
conditions which provides that where Fixed Network Products
are
supplied as part of a bundle of other products/services supplied by
Telkom Retail to Enterprise Customers (as opposed to an
input in the
provision of these services), Telkom will:
"Ensure
that
the
prices for
bundled
offerings
that
include Fixed
Network Products adhere to the principles
of the
Transfer Pricing Programme
set out in Clause
3.
1.1
above.
Ensure
that
it
keeps
separate,
internal
accounts
for
its
downstream
retail offerings, namely MNS, VANS
(including voice over internet protocol or VoIP), Hosting and ITS, in
a
way that permits the profitability
of these
retail products to
be monitored by the Competition
Commission.
Ensure
that where
Fixed
Network Products are
included in
a
bundle of products/services
supplied
to Enterprise
Customers,
the pricing
is
such
that
the
revenues derived from
supplying
the
bundle exceed the
input costs
associated
therewith."
[29]
Thus the Transfer Pricing Programme has been extended in that the
non discrimination principles shall now apply to Fixed
Network
Products.
6
Service
level agreements ("SLA's")
[30]
Dimension Data alleged that they were unable to obtain SLA's from
Telkom Wholesale and were thus forced to purchase connectivity
from
Telkom Retail in order to get an SLA. Further, that the absence of an
SLA is a severe impediment to competing effectively
for
enterprise business. This was denied by Telkom who nevertheless
agreed to Clause 3.2.1.4 which provides as follows:
'To
the extent that Telkom wholesale supplies any service level
agreement on Common Components
to Telkom Retail,
it will offer such service
level agreement
on Common
Components to OLO's on
a
non-discriminatory basis."
Transparency
and monitoring
[31]
Dimension Data raised a concern that the TPP in its current form did
not make provision for the preparation of separate statements
for
Regulated/Unregulated Segments; Business; and Services. As such,
Dimension Data claim that this level of disaggregation does
not allow
products or services to be evaluated at an individual level. While n
the Commission's proposed conditions it stated that
separate internal
accounts be kept for MNS, VANS, hosting and ITS in order for the
Commission to be able to monitor the profitability
of these retail
products, however Dimension Data argued, the disaggregation of
products and the large variation in the profitability
of the
different products supplied by Telkom Retail would allow for
situations where the high margins of some products will compensate
below cost margins of others, and thus be insufficient in preventing
a margin squeeze.
[32]
Clauses 4.2.5 and 4.2.6 are intended to alleviate these concerns as
the merged entity is now required to provide external
profitability
reports which shall reflect not only the profitability of BCX as a
whole but also BCX's profitability by segment
[i.e. MNS, VANS
(including VoIP), Hosting and ITS treating information technology
outsourcing (ITO) as a sub-segment]. This will
allow for greater
transparency which will make it easier for potential complainants of
alleged anticompetitive conduct to prove
their case. Furthermore,
because these profitability reports are to be prepared externally by
an independent expert accountant,
there is now less reliance on
internal assurances from the merging parties on the one hand, and on
the other hand placing a less
burdensome regulatory function on the
Commission.
PUBLIC
INTEREST
[33]
In relation to employment, the merging parties anticipated that the
proposed transaction would potentially result in 60 employees
being
retrenched. The Commission found that the potential affected
employees are highly skilled and constitute a relatively
small
proportion of the overall Telkom employees (less than 1% of the total
workforce). Nonetheless, a condition was imposed limiting
the number
of merger specific job losses to a maximum of 60 employees in
positions and grades identified by the merging parties
over a three
year period. These job losses are further limited to a maximum of 20
employees per year in each of the three years.
CONCLUSION
[34]
Flowing from negotiations that followed the commencement of the
hearing, revised conditions were offered up by the merging
parties,
which the Commission and Dimension Data were satisfied addressed the
competition and public interest concerns they had
previously.
[35]
We have approached this merger on the basis that the Commission and
Dimension Data's concerns were correct. On that assumption
we have
considered whether the revised conditions, which will be made
conditions for the approval of this merger, are sufficient
to address
those concerns.
[36]
In our view the revised conditions proposed by the parties adequately
address the concerns of both the Commission and Dimension
Data
and that the proposed transaction is unlikely to substantially
prevent or lessen competition in the relevant markets
and further
alleviates any public interest concerns. Accordingly we approved the
proposed transaction subject to the conditions
attached hereto marked
"Annexure A".
12
October 2015
DATE
_____________________
Yasmin
Carrim
Mondo
Mazwai and lmraan Valodia concurring
Tribunal
Researcher:
Derrick Bowles assisted by Ammara Cachalia
For
the merging parties:
Mark Garden and Derushka Chetty from ENS
For
the intervening party:
Robert Wilson and Desmond Rudman from Webber
Wentzel
For
the Commission:
Grashum Mutizwa
[1]
Telkom's four largest shareholders as at 31
March 2014
are
the
following: The Government of
the
Republic of
South
Africa (39.76%), Government Employees Pension Fund (11.66%), Allan
Gray (4.84%) and Investment
Solutions
(2.68%).
[2]
BCX's
largest
shareholders
as at 30
May 20
1
4
are
as
follows:
Investec
Asset
Management
(
1
4.40%),
Allan Gray Investment Council (
1
4.11%),
Visio
Capital Management (ZA) (13.96%), Gadlex Proprietary Limited (9.53%)
and Mazi Capital Proprietary Limited (7.30%).
[3]
Tribunal Case number: 0
1
6865.
The main purpose of the Settlement Agreement
was to
implement functional separation between
Telkom
Wholesale
and
Telkom
Retail.
The
underlying
philosophy
was
that
this
would
prevent a
recurrence
of the anticompetitive
conduct
admitted to by Telkom, i.e. margin squeeze and bundling. In
this
regard see paragraphs 6.2.1and 3.2 of the Settlement Agreement.
[4]
In terms of the 2013 Settlement Agreement, Telkom agreed to a
functional separation between its wholesale and retail businesses
and a Transfer Pricing Programme (TPP) which would regulate
transactions relating
to the
provision
of
fixed
network
products
between
these
divisions
(Annexure
A
to
the
Settlement
Agreement).
In addition,
a
Retail
Pricing
Programme
(RPP)
was
implemented
to
reduce
the
potential
for
Telkom
Retail to
engage in a margin squeeze of rival OLO's (Annexure B to the
Settlement Agreement).
[5]
This theory of harm was reffered to by the Commission its Report in
Paragraph 300 as “cross subdidization.”
6
Fixed Network Products are defined at Clause 1.22 as
Fibre Access
or Copper Products supplied by Telkom
Wholesale with or
without service level agreements.