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COMPETITION TRIBUNAL OF SOUTH AFRICA
Case No: LM100Sep16
In the matter between:
FIDELITY SECURITY SERVICES (PTY) LTD Primary Acquiring Firm
and
ADT SECURITY (PTY) LTD Primary Target Firm
Panel : Norman Manoim (Presiding Member)
: AW Wessels (Tribunal Member)
: Andiswa Ndoni (Tribunal Member)
Heard on : 08 March 2017
Order Issued on : 08 March 2017
Reasons Issued on : 06 April 2017
Reasons for Decision (Public Version)
Conditional Approval
[1] On 08 March 2017 , the Competition Tribunal (“Tribunal”) conditionally approved the
proposed transaction between Fidelity Security Services (Pty) Ltd (“Fidelity”) and ADT
Security (Pty) Ltd (“ADT”).
[2] The reasons for approving the proposed transaction follow.
Background
[3] The Competition Commission (“Commission”) referred the proposed merger to the
Tribunal on 14 February 2017 . The Tribunal thereafter, in seeking clarification of
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certain issues, scheduled a pre-hearing for 22 February 2017. The Tribunal at this pre-
hearing posed a number of questions to and requested certain additional information
from both the Commission and the merging parties.
[4] The additional information req uested from the Commission related to the market for
the provision of monitoring and response security services in which both Fidelity and
ADT are active and included information to be obtained from commercial customers in
relation to various details of past tenders ; customer perspectives, specifically with
regards to the potential (post-merger) bundling of products/services and whether or
not it is important that a service provider has an established reputation; market shares
in a hypothetical national geographic market; as well as the status of an apparently
sought condition by the Commission requiring the merging parties to notify future
“small” mergers in terms of the Competition Act, Act 89 of 1998 as amended (“the Act”).
[5] The Tribunal further requested the following additional documents from the
Commission and the merging parties : any industry/market research in the past three
years that deals with the security industry sector; any other board minutes/packs other
than those already contained in the merger filing where either of the merging parties
discusses the proposed transaction; as well as Fidelity’s strategic plans.
Parties to the proposed transaction
Primary acquiring firm
[6] The primary acquiring firm is Fidelity, a firm incorporated in accordance with the laws
of the Republic of South Africa. Fidelity is a wholly owned subsidiary of Fidelity Security
Group (Pty) Ltd (“Fidelity Group”). Fidelity Group is not controlled by any single firm.1
[7] The Fidelity group is an integrated security solutions provider. Its key areas of business
include the provision of the following services and products:
alarm monitoring and armed response services;
1 For details of the shareholders of Fidelity, see Merger Record inter alia page 18.
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cash solutions which entail cash-in-transit services, cash handling devices and
cash processing services (collectively referred to as cash management
solutions);
guarding which includes the deployment of security officers that are trained in
all aspects of security discipline, integrated technology solutions including
alarm systems and panic buttons, as well as closed circuit television (“CCTV”)
systems, armed response services and investigations; and
electronic solutions which entail the provision of products and services which
provide innovative technological solutions to give clients the ability to protect
their customers and assets.
Primary target firm
[8] The primary target firm is ADT, a firm incorporated in accordance with the laws of the
Republic of South Africa. ADT is controlled by ADT South Africa Holdings Limited
(“ADT Holdings”). ADT Holdings is ultimately controlled by Tyco International Limited
(“Tyco”).
[9] ADT is a security solutions firm that operates across South Africa. It is organised into
three operating divisions, including a subscriber and a commercial business unit.
[10] ADT’s subscriber business unit offers armed response services; monitoring services
delivered via ADT’s monitoring centres; home protection, comprising the installation of
intruder alarms, access control, perimeter security, panic buttons, medical equipment,
smoke detection and community relations; home automation; and FindU, a mobile
device or application that enables ADT subscribers to be found in times of need, with
response backup.
[11] ADT’s commercial business unit provides monitoring and armed response services to
commercial customers.
[12] Tyco Retail Solutions primarily supplies electronic article surveillance and other
security equipment and services to retail stores.
[13] ADT Kusela , a separate legal entity , provides manned guarding for the unarmed
protection of property, tenants, employees and inventory and which can be
protection of property, tenants, employees and inventory and which can be
supplemented with ADT’s other offerings.
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Proposed transaction and rationale
[14] In terms of the Stock Purchase Agreement entered into by the merging parties Fidelity
intends to acquire all of the issued share capital of ADT from ADT Holdings. Post -
merger, ADT will be wholly owned by Fidelity.
[15] Fidelity submitted that it has been actively seeking a monitoring and response partner
and that ADT represents an attractive target. Fidelity hopes to grow the ADT business
inter alia by expanding a more pro-active offering into the underserviced areas of the
market.
[16] Tyco submitted that the transaction is as a result of an ongoing review of its businesses
with a view to redeploy capital to other parts of its portfolio. Fidelity furthermore brings
diversified experience and knowledge.
[17] The Commission noted that the proposed merger is likely to also be as a result of
certain amendments to the Private Security Industry Regulation, Act 2001. Section 20
of the amendment states that at least 51% of ownership and control must be exercised
by South African citizens. The Bill is yet to be signed into law by the President of the
Republic of South Africa. The Commission noted that the proposed merger appears to
be in reaction to this pending legislation.2
Impact on competition
[18] The Commission found that the merging parties are both active, in very broad terms,
in the South African private security sector. Fidelity is primarily active in the provision
of cash solutions , guarding services, as well as monitoring and response services.
ADT is primarily active in the provision of monitoring and response services, security
equipment and guarding services.
[19] The Commission concluded that there is a horizontal overlap between the activities of
the merging parties in the following three areas:
(i) the provision of monitoring and response services;
2 The Commission’s Report reflects that this view is shared by the Private Security Industry Regulator
of South Africa (“PSIRA”) and some of the trade unions that the Commission consulted with during the
investigation of this merger.
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(ii) the provision of guarding services; and
(iii) the sale and installation of security equipment.
The provision of monitoring and response services
[20] The Commission found that the provision of monitoring and response services
comprises certain key components. The first component being monitoring of alarm and
intruder detection systems at a monitoring centre. In the event that an alarm is
triggered, a signal is sent to the monitoring centre, where staff verify whether the alarm
is false or not. If the alarm is not found to be false, the matter is either reported to the
relevant resident owner or to the armed response personnel if both services are
acquired. Upon arriving at the scene of the alarm, the armed response officer will take
appropriate action as required.
[21] Monitoring and response services are typically provided to two groups of customers:
(i) households; and (ii) commercial customers.
[22] The Commission found that the required response ti me that a service provider will
have to react to an incident differs between private residences and commercial clients.
The Commission further found that in some instances the response company will have
dedicated vehicles to respond to a particular commerc ial business as compared to a
residential area wherein a single patrol vehicle may patrol around a neighbourhood
consisting of a number of individual customers.
[23] The merging parties acknowledged that large commercial customers may require
monitoring and response service providers to dedicate more resources to serving
them, for instance in terms of requiring more vehicles and/or armed response officers
to respond to an incident and/or that officers remain at the premises for a relatively
longer time period afterwards.3
[24] The above in our view suggests that the abovementioned customer groups’
requirements and barriers to market entry may significantly differ between th e
commercial and residential market segments.
commercial and residential market segments.
[25] The Commission also noted that it received varied responses from customers with
regards to their requirements of monitoring and response service providers.
3 Merging parties’ Joint Competitiveness Report, Merger Record page 69.
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[26] Although the Commission said that there could potentially be (narrower) separate
relevant product markets for the provision of monitoring and response services to (i)
residential customers; and (ii) commercial customers, it ultimately did not take a view
on this given that […]% of ADT’s revenue from monitoring and response services is
derived from residential customers, whereas the number is much lower at […]% for
Fidelity. The Commission therefore concluded that there is limited overlap between the
activities of the merging par ties when potential narrow relevant product markets are
considered for the provision of monitoring and response services to (i) residential
customers; and (ii) commercial customers.
[27] We also take no view in this case regarding the exact parameters of the relevant
product market for the provision of monitoring and response services, i.e. whether
there exists a broad product market for the provision of monitoring and response
services in general or whether there are separate, narrower relevant product markets
for the provision of monitoring and response services to different customer groups i.e.
to (i) residential customers; and (ii) commercial customers.
[28] From a geographic market perspective, the Commission found that the response time
of the service provide r is an important factor affecting the scope of the relevant
geographic market . This is echoed by the merging parties in their Joint
Competitiveness Report.4 The Commission submitted that to meet required response
times, service providers need to be on standby closer to the relevant territory or service
site. The Commission however also noted that certain (larger) commercial customers
require or prefer service providers with a national presence.
[29] With regards to the commercial market segment , t he Commission also considered
potential sub-contracting by service providers that have no presence in a particular
potential sub-contracting by service providers that have no presence in a particular
geographic area. The merging parties submitted that sub -contracting in the
commercial market segment suggests that there may be some aspects of competition
that take place “at a less granular geographic level”.5
[30] The Commission ultimately concluded that it cannot reach a definitive conclusion on
the exact scope of the relevant geographic market but said that this does not alter its
conclusion in this case.
4 See Merger Record, page 70.
5 See Merger Record, page 71.
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[31] The Tribunal also takes no view in this case regarding the exact scope of the relevant
geographic market for the provision of monitoring and response services, i.e. whether
the relevant geographic market is (i) national; (ii) regional (and the exact scope
thereof); or (iii) local (and the exact scope thereof).
[32] From an effects perspective, the Commission ultimately concluded that, regardless of
the precise market delineation, there is limited overlap between the activities of
merging parties in the provision of monitoring and response services and that Fidelity
is a very small player in th is area . The Commission therefore concluded that the
proposed transaction is unlikely to raise competition concerns in this market, however
defined.
[33] The Commission went on to state that entry barriers in this market are low given the
number of (small) firms currently operating within the monitoring and response space
and further concluded that customers have countervailing power.
[34] We, however, given the limited available information and evidence in this case on
certain issues are unable to come to any conclusions regarding the precise product
and geographic market delineat ion, as well as the level of barriers to entry in the
various potential product markets and any potential countervailing power of customers.
The market characteristics and dynamics of the market seem to be more complex and
nuanced than that alluded to by t he Commission. This however does not prevent us
from taking a decision on the likely competitive effects of the proposed transaction.
[35] In relation to entry barriers, we note that the Commission seems to have conflated
barriers to entry in the abovementioned two different market segments, i.e. the
potential product markets for the provision of monitoring and response services to (i)
residential; and (ii) commercial customers. Based on the limited available information
residential; and (ii) commercial customers. Based on the limited available information
in this case, entry barriers appear to be significantly higher in the commercial market
segment than in the residential segment. Customers contacted by the Commission as
part of our additional information request (see paragraph 4 above) indicated that from
their perspective track record and rep utation indeed are important criteria in the
consideration of a potential (new) service provider. 6 Certain of these commercial
customers furthermore indicated that they enter into specific service level agreements
with suppliers. The Commission could not provide details of the customers’
requirements as contained in the service level agreements.
6 See letter from Commission to the Tribunal dated 03 March 2017.
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[36] We also note that the Commission’s analysis of (potential new and past) entry and exit
was lacking, specifically in relation to the effectiveness of new entry by small (it
appears often micro -sized) players that service a very limited number of only
residential c ustomers in a specific street, n eighbourhood or other very l imited
geographic area. We seriously doubt if these very small entrants could service the
commercial market segment. Further information would also be required in future
cases in relation to how the different market participants in this market set prices, i.e.
at a local, regional or national level and if and how they react to new entry (by small
players).
[37] Furthermore, as indicated at the hearing, concrete examples of how customers have
exercised countervailing power in the past, if at all, would be requi red in future cases
before one could reach any conclusion on the presence and extent of any potential
customer countervailing power.
[38] Be that as it may, w e have no reason to disagree with the Com mission’s ultimate
conclusion that the proposed merger is unlikely to substantially prevent or lessen
competition in the provision of monitoring and response services. We base this on the
fact that Fidelity is a small player in the provision of monitoring and response services
and that there is no evidence that suggests that the merging parties are close
competitors in this market . We also note that n one of the customers of the merging
parties raised any concerns with the proposed merger.
The provision of guarding services
[39] The Commission found that the provision of guarding services primarily relates to the
guarding and securing of assets and property. This is done by trained guards who
typically patrol a certain defined area or stand guard at an entrance or other defined
area. These services are provided to a number of different indu stries including
residential and golf estates, shopping and retail centres, banks and financial
residential and golf estates, shopping and retail centres, banks and financial
institutions, casinos and gaming, commercial and industrial properties, government,
health and education, hospitality, oil and gas, ports and airports and any other area
where security is required such as sporting and social events.
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[40] With regards to the types of guards, t he Commission found that according to the
sectorial determinations7, guards are graded from A to E indicating their level of training
and specialisation. Grade A represents the highest level; these are guards who are
typically highly trained. For the remaining categories from B to E, the level of
responsibility and training reduces and grade E is the entry level consisting of guards
without extensive training or experience. The grade of the guards determines their cost
to be deployed. The merging parties provide guards at each grading level save for ADT
that does not have any grade E guards.
[41] The merging parties submitted that manned guarding ser vices are provided across a
spectrum of sophistication, ranging from (i) standard guarding services (which
generally involve just the presence of a security guard) to (ii) complex or advanced
services such as escorting mobile assets, event security and VIP protection.8
[42] The Commission noted that commercial and retail customers require higher graded
guards compared to residential customers. This is mainly due to the type of work done
in commercial settings such as shopping malls and office parks where security guards
are required inter alia to interact with customers. The Commission however did not in
this case conclude on the exact paramet ers of the relevant product market for the
provision of guarding services.
[43] We also take no view on the exact parameters of the relevant product market for the
provision of guarding services, i.e. whether a broad market exists for the provision of
all guarding services or whether there are narrower relevant product markets according
to specific types of (advanced) services provided or services provided to specific
customer groups.
[44] From a geographic market perspective, the Commission said that the information
gathered during its investigation suggests that the business model for the provision of
gathered during its investigation suggests that the business model for the provision of
guarding services entails transporting guards from a selected pick -up point to the
site/premises and security companies strive to strategical ly appoint guards closer to
relevant site. The Commission however again noted that certain commercial
customers prefer to utilise players with a national footprint. This would require large
7 The Commission in its Report refers to Amendment of Sectorial Determination 6: Private Security
Sector.
8 Merger Record, page 71.
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service providers that have employees all over the country. However, the Commission
noted that, at the same time, other firms are willing to utilise local firms.
[45] The Commission was of the view that the geographic scope of the market for the
provision of guarding services is local with an average radius 0 - 35 km. However, in
its competitive assessment of the proposed transaction the Commission considered
three regional markets given that while Fidelity is active nationally, ADT is currently
only active in three provinces namely, Gauteng, the Western Cape and KwaZulu-Natal.
The Commission further stated that the proposed merger is unlikely to pose any
adverse effects on competition in a broader geographic market than these regional
markets.
[46] The Tribunal takes no view in this case regarding the exact scope of the relevant
geographic market for the provision of guarding services, i.e. whether the relevant
geographic market is (i) national; (ii) regional (and the exact scope thereof); or (iii) local
(and the exact scope thereof).
[47] In terms of effects, based on its abovementioned regional approach, the Commission
found that the merging parties’ combined market share s in the provision of guarding
services in each of the aforementioned three provinces are below 10%. On this basis
the Commission concluded that the proposed transaction raises no sig nificant
competition concerns in relation to the provision of guarding services.
[48] We again note that there is insufficient information in this case to come to any
conclusions regarding the precise product and geographic market delineation, the level
of barriers to entry in the potential markets and any potential countervailing power of
customers. We however have no reason to doubt the Commission’s conclusion that
the proposed merger is unlikely to substantially prevent or lessen competition in the
provision of guarding services.
The sale and installation of security equipment
provision of guarding services.
The sale and installation of security equipment
[49] The Commission found that the sale and installation of security equipment entail
various devices and products that enhance the ability to secure assets or property.
This includes CCTV cameras, electric fencing, security gates, beams, intercoms and
keypads. The sophistication of the equipment varies according to the type of customer
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with commercial customers requiring highly advanced products. The security
equipment is manufactured by third parties and sold by ADT and Fidelity to their clients.
[50] The Commission further found that in most situations the equipment will be sold as
part of the monitoring and response service as the monitoring aspect is done inter alia
using beams that when triggered sound an alarm.
[51] The Commission was of the view that the relevant geographic market for the sale and
installation of security devices and equipment is national since such devices and
equipment can the transported across the country and the installation of most devices
and equipment requires lower levels of technical skills.
[52] Again there is no need for the Tribunal in this case to define the precise parameters of
either the relevant product or geographic markets.
[53] The merging parties provided national market share estimates for Fidelity and ADT in
the following equipment categories in which their activities overlap: (i) intruder
detection; (ii) access control; (iii) CCTV; and (iv) electric fencing. The merging parties
submitted that that neither party has a significant presence in any category of
equipment (i.e. combined national market shares of less than 10% in each category),
except for ADT’s national market share in the provision of intruder detection equipment
which is estimated at approximately [20-30]%; with Fidelity’s share estimated at less
than [0-10]%.
[54] The Commission found no competition concerns arising from the proposed transaction
in the market for the sale and installation of security equipment since the merged entity
will continue to be constrained by a number of other firms including ASP Security CC,
Compass Visual Security (Pty) Ltd, Elvey Security Technology (Pty) Ltd, STG Inc,
Security & Fire Projects (Pty) Ltd, Plessey (Pty) Ltd, C3 SS Shared Services (Pty) Ltd
and Engineered System Solutions (Pty) Ltd.
and Engineered System Solutions (Pty) Ltd.
[55] We concur with the Commission that, given the presence of a number of competitors
in this market, the proposed merger appears unlikely to substantially prevent or lessen
competition in the sale and installation of security equipment, regardless of the exact
market delineation.
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Bundling
[56] The Commission also considered the likelihood of bundling/conglomerate effects
arising as a result of the proposed merger. It engaged with customers who indicated
that the merger is unlikely to result in a change in the manner in which they source the
relevant services. The Commission concluded that the proposed transaction is unlikely
to create a platform for the merged entity to engage in tying an d/or bundling conduct
post-merger. We have no reason to disagree with this conclusion.
Proposed condition in relation to the notification of future “small’ mergers
[57] The Commission in its analysis of the proposed transaction also considered the history
of acquisitions in the security industry. It noted that Fidelity has undertaken a number
of acquisitions that can be classified as “small” mergers in terms of the Act, allegedly
including two acquisitions of players active in the provision of monitoring and response
services.
[58] The Commission further noted that i n addition to the non -notifiable “small” mergers
above, Fidelity also notified an intermediate merger to the Commission wherein it
acquired the CIT and the cash processing business of Protea Coin (Pty) Ltd.9
[59] The Commission further found that ADT on the other hand has had three mergers
wherein there was a partial acquisition of assets from Lobra CC t/a Specialised
Electronic lines in November 2013, SSG in August 2014 and Securitas in January
2016.
[60] Although the Commission found that th is proposed transaction was unlikely to result
in a substantial lessening or prevention of competition in any relevant market (primarily
because of the small market position of Fidelity in the provision of monitoring and
response services and the lack of closeness of competition between the merging
parties in that ar ea), it raised a concern in the context of the “ small” mergers
implemented by Fidelity in the past five years. As a result of this concern t he
implemented by Fidelity in the past five years. As a result of this concern t he
Commission stated that it would closely monitor Fidelity’s future acquisition strategy
and might require Fidelity to also notify future “small” mergers.
9 The Commission conditionally approved this merger on 23 December 2014. Following a consideration
application, the Tribunal conditionally approved the same tran saction on 6 May 2015 (Tribunal Case
Number: IM183Jan15).
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[61] After the Tribunal requested clarity from the Commission regarding its position on this,
it indicated that it was engaging with the merging parties with a view to approving the
proposed transaction subject to the notification of future “small” mergers in certain
markets where the activities of the merging parties overlap.
[62] The Commission ultimately recommended the abovementioned conditional approval.
Fidelity however argued that such a condition would be unfairly burdensome on the
merging parties and would unfairly disadvantage them in “small” merger transactions.
[63] At the hearing before the Tribunal, we asked questions relating to the rationale for the
Commission’s proposed condition, past “small” merger transactions that the merging
parties were involved in , as well as the merging parties’ strategy regarding future
growth.
[64] The Tribunal specifically noted that section 13(2) of the Act provides that a party to a
“small” merger may volu ntarily notify such merger at any time (as opposed to the
compulsory notification of a “small” merger in situations where the merging parties are
required by the Commission to notify in terms of section 13(3) of the Act), which does
not prohibit the implementation of the voluntarily notified merger - an exception to the
way that “intermediate” and “large”’ mergers are treated in the Act . This could
potentially mitigate certain of the merging parties’ concerns.10
[65] The Commission and the merging parties considered the above. Although the merging
parties disputed the need for any conditional approval, the Commission and the
merging parties, after certain interventions from the Tribunal, agreed on the wording of
a condition should the Tribunal decide that a conditional approval of the proposed
transaction is justified.
[66] After certain editorial changes to the ultimate condition recommended by the
Commission, we approved the proposed transaction subject to the following condition
Commission, we approved the proposed transaction subject to the following condition
in relation to the market for the provision of monitoring and response services:
(i) Fidelity undertakes, for a period of 36 months from the date of implementation of
the proposed transaction, voluntarily, to notify Small Mergers11 in terms of section
13(2) of the Act; and
10 Transcript, pages 26 to 28.
11 “Small Merger” means, for the purposes of the imposed conditions, a merger or proposed merger, in
the Security Services Market, involving a transferred firm, with a gross revenue or total assets of R[…]
or more, calculated in accordance with the applicable provisions of the Act and Regulations. “Security
Services Market” means the market for the provision of monitoring and response services.
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(ii) the above obligation will not in any way affect the notification requirements
provided for in the Act for transactions that meet the requirements of the Act for
merger notification.
[67] We note that the merging parties ’ own strategic documents clearly point to planned
future growth through acquisition strategies.12
[68] We further note that not all “small” mergers would have to be notified in terms of th e
above condition but only those that meet the threshold of a “small” merger in this
context, i.e. target firms with a the gross revenue or total assets of R[…] or more. The
condition is also limited to the monitoring and response services market and is thus
not applicable to all “small” mergers undertaken by the merging parties.
[69] We also note that the imposed condition has a limited duration of three years. Should
the Commission be concerned about the levels of concentration in the private security
sector in general, or certain markets in particular, it should monitor the acquisition
activities of the major players in this sector or in certain markets over a longer term.
[70] Given the merging parties’ past acquisitions and potential future transactions, the
merging parties’ growth strategy through acquisition s as revealed in the ir strategic
documents, as well as the fact that the merged entity will be the largest player in South
Africa in the provision of monitoring and response services , we conclude that the
imposed condition (which we have pointed out above is limited in duration and sets a
specific threshold for voluntary notification) is justified and proportional to the concern
of future creeping acquisition, i.e. the acquisition by the merged entity of small market
participants that do not meet the notification thresholds for “intermediate” or “ large”
mergers.
Public interest
[71] The merging parties confirmed that the proposed transaction will not have any
adverse impact on employment.13
adverse impact on employment.13
[72] The proposed transaction further raises no other public interest concerns.
12 Transcript, pages 24 and 25.
13 Merger Record inter alia pages 13 and 127.
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Conclusion
[73] In light of the above, we approve the proposed transaction conditionally. For ease of
reference the set of conditions that we have imposed is annexed hereto marked as
“Annexure A”.
[74] No public interest issues arise from the proposed transaction.
___________________ 20 April 2017
Mr AW Wessels DATE
Mr Norman Manoim and Ms Andiswa Ndoni concurring
Case Managers: Kameel Pancham and Karissa Moothoo Padayachie
For the merging parties: Adv. A. Subel instructed by Cliffe Dekker Hofmeyr on behalf of
the Acquiring Firm
Derek Lotter and Mpumelelo Tshabalala from Bowmans on
behalf of the Target Firm
For the Commission: Seabelo Molefe, Thabelo Masithulela and Hariprasad Govinda