Summary of Judgment

1. Introduction

This matter concerned the approval of a large merger by the Competition Tribunal of South Africa. The proceedings were merger proceedings in which the Tribunal was required to determine whether the proposed transaction was likely to substantially prevent or lessen competition and whether it raised any public interest concerns, particularly relating to employment.

The acquiring firm was Lewis Stores (Pty) Ltd (“Lewis”), ultimately a wholly owned entity of Lewis Group Limited, a publicly listed company on the Johannesburg Stock Exchange. The target firm was United Office Furniture Outlets (Pty) Ltd (“UFO”), a furniture retailer with a footprint of 30 stores.

The Competition Commission investigated the transaction and delivered a recommendation. During the Commission’s process, the South African Commercial Catering and Allied Workers Union (“SACCAWU”) filed a notice of intention to participate and raised concerns about employment effects, specifically alleging that Lewis had undertaken retrenchments in the period preceding the merger in preparation for the acquisition. The Tribunal heard the matter on 10 January 2018, received final submissions on 11 January 2018, issued an order on 16 January 2018, and later furnished written reasons on 13 February 2018.

The dispute concerned (i) the competitive effects of the acquisition in the retail furniture market(s) and (ii) the public interest impact, with the principal public interest focus being employment and whether retrenchments were merger-related or whether merger-specific retrenchments might occur post-merger if the parties integrated operations.

2. Material Facts

Lewis Group operated as a retailer of furniture, appliances, and electronics, primarily servicing lower-middle income markets and with a substantial presence in rural areas across South Africa. Its sales model was predominantly supported by in-house credit facilities, supplemented by financial services offered through the group’s financial services arm. By contrast, UFO operated as a furniture retailer focused on a more luxury/value offering aimed at the upper consumer spectrum, with a footprint concentrated in primarily urban, affluent areas, and with sales that were cash-based.

The proposed transaction entailed Lewis acquiring the entire shareholding in UFO, resulting in UFO becoming a wholly owned and controlled entity of Lewis post-transaction. The merging parties’ stated intention was that Lewis would operate UFO as a separate business under its existing business model. Lewis advanced a rationale of achieving economies of scale, enabling entry into new market segments through a wider and more exclusive product range, and diversifying its offering by increasing its cash-to-credit sales ratio. The Commission’s investigation recorded that around 60% of Lewis’s sales were credit sales, while 100% of UFO’s sales were cash-based, and noted the parties’ differing geographic and customer profiles. The Commission concluded that the transaction was most likely driven by Lewis’s desire to diversify and increase its cash-to-credit ratio, particularly in the context of increased regulatory requirements affecting credit sales and a slowdown in sales volumes.

On competition, the Commission identified a horizontal overlap in the retail of household furniture. It assessed the merger on a national market basis “for the retail of furniture across all LSM brackets” and found that the post-merger entity would have an approximate share of 15% with an accretion of no more than 2%. It also assessed regional markets, similarly concluding that sufficient competitors remained to constrain the merged entity and that the transaction was unlikely to result in a substantial prevention or lessening of competition.

The material public interest facts focused on employment. The merging parties informed the Commission that no retrenchments were envisioned as a result of the proposed transaction. SACCAWU, however, alleged that Lewis had undertaken “various retrenchments” in the year prior to the merger, contending that these were undertaken to save costs so as to facilitate the acquisition and further contending that the employees retrenched belonged to categories unlikely to find employment within UFO’s post-merger structure.

It was common cause that retrenchments had occurred, and the parties’ account (accepted as part of the Commission’s assessment and then tested in the Tribunal proceedings) described four tranches. The first tranche began in December 2016 and affected drivers and porters, said to be motivated by overlap in functions between those categories. The second tranche began in February 2017 and affected general positions, attributed to store closures in areas affected by economic conditions and drought. The third tranche ran from May 2017 to September 2017 and affected debtor follow-up clerks and collectors, attributed to reduced credit approvals arising from stricter credit regulations. The fourth tranche occurred in October 2017 and affected general positions, described as arising from factors rendering Lewis’s staffing model unsustainable.

The key disputed factual question was whether these retrenchments—particularly those closest in time to merger discussions—were merger-specific. SACCAWU maintained that they were part of a plan to facilitate the acquisition, while Lewis maintained they were driven by trading conditions and operational considerations unrelated to the merger.

At the hearing, the Tribunal considered that resolving the dispute required an assessment of the timeline of the merger’s contemplation against the timeline of retrenchments. The merging parties initially could not provide a detailed timeline, but it was apparent that sale negotiations were initiated by UFO. To address the timeline more fully, the Tribunal stood the matter down for the filing of an affidavit by Lewis’s CEO, Mr Johan Enslin, and also considered an affidavit by Mr Rinus Oliphant, Lewis’s operations director responsible for retrenchment processes, together with an Excel document relating to complement and reductions.

Enslin stated that he was approached by a representative of UFO, Mr Wayne Brett, on or about 3 May 2017 to discuss a potential acquisition, and that this was a high-level, in-principle discussion. On this version, the first and second tranches of retrenchments pre-dated the merger’s contemplation and could not be merger-specific. In relation to the third tranche, Enslin indicated that although retrenchments began in May 2017, they had been contemplated in April 2017 following an assessment of a shrinking debtor book. The fourth tranche, initiated in October 2017, was said to have been contemplated in June 2017, which meant that it was conceivable that Lewis’s corporate structure was aware of a potential merger during that period; however, the documentation placed emphasis on store profitability criteria guiding retrenchment decisions.

Separately, looking forward rather than backward, the Commission expressed concern that integration of the businesses might occur post-merger despite the parties’ stated intention to keep UFO separate, and that such integration might result in the loss of at least 15 jobs. The merging parties tendered an undertaking to be made a condition: a two-year moratorium on merger-specific job losses from the implementation date.

3. Legal Issues

The Tribunal was required to determine, first, whether the proposed transaction was likely to substantially prevent or lessen competition in any relevant market. This required the application of competition-law standards to the market facts presented by the Commission’s investigation, including the existence of a horizontal overlap, market shares and accretion, and the competitive constraint from remaining competitors. The dispute in this part was principally an application of law to fact (and evaluative economic assessment), rather than a pure dispute of law.

Second, the Tribunal had to assess the merger under the public interest rubric, with employment being the salient consideration. This involved two related questions. One question was factual and inferential: whether Lewis’s historic retrenchments in the period preceding the merger were merger-related, as SACCAWU alleged, or attributable to other business reasons, as Lewis contended. This was treated as a fact-and-inference dispute assessed on the balance of probabilities. The second question was more predictive and evaluative: whether the merger might produce future merger-specific employment harm if integration occurred, and, if so, whether that risk should be addressed through conditions.

Third, the Tribunal had to decide whether the merger should be approved unconditionally or subject to conditions, and in particular whether it was appropriate to impose an employment-related condition tendered by the parties and accepted by the Commission. This required an evaluative judgment linked to the uncertainty around possible integration post-merger.

4. Court’s Reasoning

On competitive effects, the Tribunal accepted the Commission’s approach and conclusions. The Commission had identified the transaction as creating a horizontal overlap in retail furniture and assessed the merger on a national market basis “for the retail of furniture across all LSM brackets.” It found that the merged entity would have a post-merger share of approximately 15% with a small accretion (no more than 2%). The Commission further found that strong competitors would remain in the market and that the transaction was unlikely to result in a substantial lessening or prevention of competition. Although the Commission observed that the parties targeted different LSM brackets, it did not consider it necessary to analyse the transaction on that basis. The Tribunal stated that it found no reason to differ from the Commission’s findings, and similarly accepted that, even on narrower regional market assessments, sufficient competitive constraints would remain.

On public interest and employment, the Tribunal separated the inquiry into (i) allegations about past retrenchments and (ii) possible future employment effects. Regarding past retrenchments, the Tribunal treated SACCAWU’s submission as requiring a comparison of the timeline of retrenchments with the timeline of merger contemplation. A significant factual feature for the Tribunal was that negotiations were initiated by UFO, which the Tribunal regarded as undermining the theory that Lewis had been shedding jobs in preparation for a merger it did not seek to initiate.

The Tribunal nonetheless proceeded to address the timeline more fully by relying on the Enslin affidavit. On that timeline, serious consideration of the acquisition arose only around early May 2017 when UFO approached Lewis. The Tribunal then reasoned that the first and second tranches of retrenchments, having been initiated in December 2016 and February 2017 respectively, pre-dated the merger’s consideration and therefore could not be merger-specific. For the third tranche, although it commenced in May 2017, the Tribunal accepted the account that it had been contemplated already in April 2017, based on assessment of the debtor book and credit-related constraints, which placed its rationale outside the merger context.

The Tribunal acknowledged that the fourth tranche, contemplated in June 2017 and initiated in October 2017, temporally overlapped with a period in which Lewis might have been aware of the potential transaction. The Tribunal, however, did not treat temporal overlap as sufficient to infer merger-specificity. It placed weight on the documentation and account suggesting that retrenchment decisions were guided by store profitability criteria and were part of a considered process “divorced from the potential merger proceedings contemplated at the time.” On that basis, it concluded on a balance of probabilities that the retrenchments were not merger-related.

Turning to prospective effects on employment, the Tribunal considered the Commission’s concern that the parties might integrate their businesses post-merger, notwithstanding their stated intention to operate UFO separately and to retain UFO’s head office, warehouses, and entire staff complement, and to continue honouring outsourcing contracts. The Tribunal accepted that uncertainty remained about integration and the consequent possibility of job losses (the Commission’s estimate being at least 15 jobs). In that context, the Tribunal accepted the merging parties’ tender—also accepted by the Commission—to escalate their undertaking into a binding condition imposing a two-year moratorium on merger-specific job retrenchments from the implementation date. The Tribunal stated that it had no reason to dispute the imposition of the tendered condition in circumstances where it was not certain whether the parties would integrate post-merger.

5. Outcome and Relief

The Competition Tribunal approved the large merger between Lewis and UFO, finding that the transaction was unlikely to substantially prevent or lessen competition in any relevant market.

The merger was approved subject to conditions, namely a condition imposing a moratorium on merger-specific job retrenchments for a period of two years from the implementation date of the transaction.

The reasons do not record any separate or additional order as to costs.

Cases Cited

No decided cases were cited in the Tribunal’s written reasons.

Legislation Cited

No legislation was expressly cited in the Tribunal’s written reasons. The proceedings were merger proceedings before the Competition Tribunal in relation to a large merger under the competition-law framework.

Rules of Court Cited

No rules of court were expressly cited in the Tribunal’s written reasons.

Held

The Tribunal held that the proposed acquisition of UFO by Lewis was unlikely to substantially prevent or lessen competition, both on the national market assessment and on the Commission’s regional market considerations, and that there was no basis to depart from the Commission’s competition findings.

On public interest (employment), the Tribunal held that Lewis’s retrenchments in the period preceding the merger were, on a balance of probabilities, not merger-specific, particularly given the evidence on the timeline of merger discussions and the operational criteria underpinning retrenchment decisions.

The Tribunal further held that the potential public interest risk associated with future integration-related job losses was appropriately addressed by imposing a condition tendered by the merging parties and accepted by the Commission, namely a two-year moratorium on merger-specific retrenchments.

LEGAL PRINCIPLES

The Tribunal applied the principle that a merger may be approved where the evidence supports the conclusion that it is unlikely to lead to a substantial prevention or lessening of competition, including where market shares and accretion are modest and effective competitive constraints are expected to remain.

In addressing public interest concerns relating to employment, the Tribunal applied an evidentiary and inferential approach in which allegations that retrenchments were merger-related required scrutiny of timelines and the probable causal connection between the merger and the employment decisions. The Tribunal assessed merger-specificity of retrenchments on the balance of probabilities, treating temporal proximity as a relevant but not determinative consideration.

The Tribunal applied the principle that merger approval may be made conditional to address public interest risks, particularly where there is uncertainty about post-merger conduct (such as possible integration of operations) that could affect employment. It accepted that a moratorium on merger-specific retrenchments over a defined period can serve as an appropriate remedial condition to address that risk while permitting the transaction to proceed.