Brief Summary

Competition — Merger approval — Conditional approval of merger between Clicks Retailers (Pty) Ltd and Netcare Pharmacies 2 (Pty) Ltd — Proposed transaction involving acquisition of retail pharmacy businesses within Medicross Clinics and Netcare Hospitals — Competition concerns addressed through agreed conditions — Tribunal finds no substantial lessening or prevention of competition resulting from the merger.

Comprehensive Summary

Summary of Judgment

1. Introduction

These proceedings concerned an application for approval of an intermediate/large merger before the Competition Tribunal of South Africa. The matter was adjudicated under the merger-control framework administered by the Competition Commission and subject to Tribunal approval, including the imposition of conditions where necessary to address competition and public interest concerns.

The primary acquiring firm was Clicks Retailers (Pty) Ltd (“Clicks”), ultimately controlled by Clicks Group Limited, a JSE-listed company. The primary target firms were two business components within the Netcare group: (i) the retail pharmacy business carried on by Netcare Pharmacies 2 (Pty) Ltd within Medicross Clinics (referred to in the reasons as the Medicross Pharmacies) and (ii) the front shops of the in-house retail pharmacies operated by Netcare Pharmacies (Pty) Ltd within Netcare Hospitals (referred to as the Front-shops). The target businesses were under the overarching control of Netcare Limited (“Netcare”), also JSE-listed.

The procedural history reflected that the hearing had initially been anticipated to proceed on a contested basis. However, before the commencement of the hearing, the merging parties, the Competition Commission (“the Commission”), and the Minister of the Economic Development Department (“the Minister”) resolved the outstanding disputes through agreement on an appropriate set of conditions. The Tribunal issued its conditional approval order on 10 November 2016, and later issued written reasons on 9 December 2016.

The general subject matter of the dispute was whether the proposed acquisitions—covering both a full retail pharmacy acquisition (Medicross Pharmacies) and a limited retail/front-shop acquisition within hospitals (Front-shops)—would substantially prevent or lessen competition, including potential co-ordinated effects and vertical effects, and whether any public interest concerns (particularly employment, local procurement, and training commitments) required conditions.

2. Material Facts

Clicks formed part of the retail offering of the Clicks Group and operated a network of retail outlets, with a significant number including in-store pharmacies. Two Clicks Group subsidiaries were relevant to the competitive assessment: United Pharmaceutical Distributors (“UPD”), holding a wholesale pharmacy licence and supplying pharmaceutical products, and Unicorn Pharmaceuticals (Pty) Ltd (“Unicorn”), a marketer of generic pharmaceutical products supplying Clicks stores.

Netcare operated a private hospital network in South Africa and operated institutional and retail pharmacies within hospitals, as well as certain retail pharmacies in some Medicross Centres. The proposed transaction had two components. First, Clicks would acquire the Medicross Pharmacies, comprising both the front-shop retail component and the dispensing pharmacy component, with the result that Clicks would acquire the pharmacy licences associated with those Medicross pharmacies. Second, Clicks would acquire only the Front-shops located within in-hospital retail pharmacies operated by Netcare, namely the retail space and business selling front-of-shop consumables and certain low-schedule products.

A central undisputed structural feature was that, in the Front-shop component, Clicks would not acquire the “behind-the-counter” dispensing pharmacy business at Netcare hospitals. The hospital pharmacy businesses, including dispensing of Schedule 1 and higher medicines requiring a pharmaceutical licence, would remain under Netcare’s ownership, and no transfer of a hospital pharmacy licence to Clicks would occur. The Tribunal also recorded that branding at Netcare pharmacies would make it apparent that those pharmacies remained owned and controlled by Netcare.

The transaction also included lease agreements under which Clicks would lease premises for the Medicross pharmacies and the front-shop areas within Netcare hospital pharmacies. A material feature of the leases was that rent would be calculated with reference to the net monthly turnover of the relevant businesses, and the lease provisions contemplated inspection rights and information provision connected to that turnover calculation.

Where the Tribunal distinguished disputed from undisputed matters, it noted that the Commission’s and the merging parties’ market share calculations differed significantly. However, because the competition concerns were addressed through agreed conditions that the Tribunal accepted, the Tribunal considered it unnecessary to resolve which market share calculations were correct.

3. Legal Issues

The central legal questions were whether the merger, in each of its two components and in combination, was likely to substantially prevent or lessen competition in any relevant market, and whether any potential harm could be adequately addressed through conditions.

Within that broad enquiry, the Tribunal was required to determine (i) whether the Front-shop acquisition created any material horizontal issues given product overlap in low-schedule items, (ii) whether the Medicross acquisition materially affected rivalry in retail pharmacy services, and (iii) whether specific contractual features created a risk of co-ordinated effects, especially through information exchange enabled by turnover-based rent calculations and through a right of first refusal over new sites.

The Tribunal also had to consider potential vertical effects, specifically whether UPD or Unicorn could, post-merger, engage in input or customer foreclosure in wholesale distribution or pharmaceutical product supply. Finally, the Tribunal had to evaluate public interest considerations raised during the Commission’s and Minister’s engagement, including employment effects and undertakings relating to local procurement and pharmacy training support.

The dispute thus involved a combination of legal and economic assessment: the application of merger-control standards to accepted facts, evaluative judgments about competitive dynamics and foreclosure/coordination risks, and the appropriateness and sufficiency of conditions to mitigate identified risks.

4. Court’s Reasoning

The Tribunal approached the transaction as comprising two analytically distinct components and considered the Commission’s competition assessment alongside concerns raised during the hearing. A notable aspect of the Tribunal’s reasoning was that it treated the matter as effectively resolved by the settlement on conditions, and therefore focused on whether the agreed conditions adequately addressed the identified theories of harm, rather than engaging in an extended contest over market definition and market share measurement.

In relation to the Front-shop transaction, the Tribunal accepted the Commission’s framing that the relevant competitive context included the retail of Schedule 0 medicines and typical front-shop products. It accepted that the merged entity would continue to face competition from non-specialised retailers such as supermarkets and small independent stores. The Tribunal nonetheless raised concerns at the hearing about product overlap in Schedule 0 medicines, particularly where both the in-hospital pharmacy and the front-shop could supply the same low-schedule products. The Tribunal recorded the explanation that overlap would mainly arise in limited circumstances, such as where a doctor’s script prescribed a Schedule 0 medicine, and that customers could purchase such items from the shelf without necessarily filling the entire script at the pharmacy. On this factual foundation, the Tribunal treated the overlap as limited in prevalence and not a significant competition concern.

A further Front-shop concern addressed by the Tribunal related to the risk that Clicks, operating within the same premises, could become aware of Netcare’s competitively sensitive information, such as dispensing fees. The Tribunal accepted that the conditions included undertakings to preserve confidentiality of such information, and regarded those undertakings as addressing the concern. On that basis, it concluded that the Front-shop transaction would not result in a substantial prevention or lessening of competition.

In relation to the Medicross transaction, the Tribunal concurred with the Commission’s view that Clicks and Medicross Pharmacies were not close competitors in the manner that would materially lessen rivalry. It accepted the distinction between Clicks’ broader retail footprint and product range, compared to Medicross’ convenience-oriented location near doctors’ rooms. The Tribunal also accepted the Commission’s finding that, even on a conservative approach, competing pharmacies were present within a defined radius of each Medicross pharmacy, supporting the conclusion that sufficient competitive constraint remained post-merger.

The Tribunal further relied on the regulatory environment for scheduled medicines as a significant constraint on unilateral price increases. It accepted that scheduled pharmaceutical products supplied to the private sector were subject to Single Exit Price (SEP) regulations, that dispensing fees were capped by regulation and further constrained through medical aid scheme arrangements, and that logistics fees were also regulated. This regulatory framework was treated as reducing the merged entity’s ability to raise prices for scheduled products. For Schedule 0 products and front-shop items at Medicross pharmacies, the Tribunal considered that the competitive constraints were similar to those applicable to front-shop retail generally. It also recorded the merging parties’ submission that the Medicross acquisition could be welfare-enhancing due to Clicks’ wider range, pricing, and promotions, though its conclusion rested on the absence of a substantial lessening of competition.

On co-ordinated effects, the Tribunal addressed two contractual mechanisms that the Commission had identified as potentially facilitating coordination or restricting competition. First, it considered turnover-based rent clauses in the leases that could have enabled Netcare or Medicross to access disaggregated turnover information and potentially sensitive information. The Tribunal accepted that this concern was mitigated by a condition requiring the appointment of independent auditors who would have access to the required information to determine net monthly turnover, without disclosure of such information to Netcare or Medicross. The Tribunal regarded this as sufficient to address the coordination risk tied to information exchange.

Second, the Tribunal evaluated the clause in the sale agreements granting Clicks a right of first refusal in relation to any new Medicross and front-shop areas opened for a period of ten years, with an option to renew for a further ten years. The Commission’s concern, as recorded by the Tribunal, was that the rationale advanced by the merging parties did not justify the competitive harm of restricting third-party access to operating such businesses, especially given the clause’s duration. The Tribunal noted that, at the hearing, the merging parties undertook to reduce the period to three years from the approval date, aligning with the Commission’s recommendation. The Tribunal accepted that this agreed amendment mitigated the concern.

On vertical effects, the Tribunal adopted the Commission’s findings that no material concerns arose. Regarding UPD, it accepted that UPD lacked the ability to engage in input foreclosure given the presence of competing wholesalers with higher market shares, and that customer foreclosure concerns were weak because Medicross pharmacies were largely serviced by Netcare’s in-house distribution function and represented a small share of the retail market, such that other wholesalers were not dependent on them as customers. Regarding Unicorn, the Tribunal accepted that its market share was negligible and that it supplied only Clicks stores, undermining input foreclosure, while customer foreclosure remained unlikely given sourcing patterns and lack of dependency by other suppliers. The Tribunal therefore did not consider further ventilation necessary, finding nothing to contradict the Commission’s conclusions.

In the public interest analysis, the Tribunal recorded that eight employees would be relocated to the acquiring firm’s operations on the same terms and conditions. It further recorded that concerns had been raised by trade unions and by the Minister regarding potential retrenchments. The Tribunal accepted undertakings embodied in conditions that the merging parties would not retrench employees as a result of the transaction for five years post-implementation. It also recorded the Minister’s concerns regarding public interest impacts more broadly, and noted that the Minister elected not to make submissions to the Tribunal on the basis of undertakings that were incorporated into the conditions, namely commitments relating to maintaining local procurement levels through reasonable endeavours, and providing specified learnership and bursary opportunities in pharmacy over five years. The Tribunal observed that the Commission had not assessed these undertakings in depth due to timing, but did not object to their inclusion; the Tribunal incorporated them because the parties consented.

5. Outcome and Relief

The Tribunal concluded that the proposed transaction was unlikely to substantially prevent or lessen competition in any relevant market. It further concluded that any public interest issues, particularly those related to potential employment effects, would be mitigated by the agreed conditions.

The Tribunal therefore conditionally approved the merger. The conditions (as reflected in the Tribunal’s order referenced in the reasons) included measures addressing confidentiality and information exchange, the use of independent auditors for turnover-based rental calculations, the reduction of the right of first refusal period to three years, a moratorium on merger-related retrenchments for five years, and undertakings relating to local procurement and pharmacy training support (learnerships and bursaries).

No separate costs order is recorded in the reasons provided.

Cases Cited

No cases are cited in the reasons provided.

Legislation Cited

No specific statutes are expressly cited by name in the reasons provided. The reasons refer generally to legislative and regulatory requirements governing hospital institutional pharmacies, pharmaceutical licensing, and price-related controls including Single Exit Price (SEP) regulations, regulation of dispensing fees, and regulation of logistics fees.

Rules of Court Cited

No rules of court are cited in the reasons provided.

Held

The Competition Tribunal held that the acquisition by Clicks of (i) the Medicross pharmacy businesses and (ii) the front-shop components within Netcare hospital pharmacies was unlikely to substantially prevent or lessen competition. It held further that potential risks of coordination arising from turnover-based rental clauses and the duration of a right of first refusal were adequately addressed through conditions, including independent auditing arrangements and a reduced duration for the right of first refusal. It also held that identified public interest concerns—particularly the risk of retrenchments—were mitigated through agreed conditions, and the merger was accordingly approved subject to those conditions.

LEGAL PRINCIPLES

In merger assessment, the Tribunal applied the principle that approval turns on whether the transaction is likely to result in a substantial prevention or lessening of competition in any relevant market, taking into account both horizontal and vertical relationships as well as the realistic constraints faced by the merged entity post-merger.

The decision reflects the principle that information exchange mechanisms embedded in commercial arrangements ancillary to a merger (such as turnover-based rent clauses coupled with inspection rights) may create a risk of co-ordinated effects if they facilitate access to competitively sensitive information. That risk may be mitigated through structural safeguards, including the interposition of independent auditors to verify turnover while preventing disclosure of sensitive information to competitors or counterparties.

The reasoning also reflects the principle that contractual rights such as a right of first refusal, particularly where they may restrict third parties from accessing market opportunities, can raise competition concerns depending on their scope and duration. Such concerns may be mitigated by narrowing the duration to what is considered competitively acceptable in light of the transaction’s context.

Finally, the Tribunal applied the principle that merger approval must consider public interest impacts alongside competition effects, and that enforceable conditions and undertakings—such as commitments addressing employment security, local procurement, and training/skills development—may be imposed or accepted to mitigate identified public interest risks.

Clicks Retailers (Pty) Ltd v The retail business carried on by Netcare Pharmacies 2 (Pty) within Medicross Clinics and Another (LM055Jul16) [2016] ZACT 90; [2016] 2 CPLR 813 (CT) (9 December 2016)