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[2018] ZACT 75
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Stefanutti Stocks (Pty) Ltd v Ax.sys Projects (Pty) Ltd and Another (LM069Jun17) [2018] ZACT 75; [2018] 1 CPLR 334 (CT) (22 March 2018)
COMPETITION
TRIBUNAL OF SOUTH AFRICA
Case
No: LM069Jun17
In the matter between:
Stefanutti
Stocks (Pty) Ltd
Primary
Acquiring Firm
and
Ax.sys
Projects (Pty) Ltd
TN Molefe Construction (Pty)
Ltd
Primary Target
Firms
Panel
: Yasmin Carrim (Presiding Member)
: AW Wessels (Tribunal Member)
: Medi Mokuena (Tribunal Member)
Heard
on
:
14 February 2018
Last
Submission Received : 19 February 2018
Order
Issued on :
21 February 2018
Reasons
Issued on
: 22 March 2018
Reasons
for Decision
Approval
[1]
On
21 February 2018, the Competition Tribunal ("Tribunal")
conditionally approved the proposed transaction between Stefanutti
Stocks (Pty) Ltd and Axsys Projects (Pty) Ltd and, TN Molefe
Construction (Pty) Ltd.
[2]
The
reasons for approving the proposed transaction follow.
Parties
to proposed transaction
Primary
acquiring firm
[3]
The
primary acquiring firm is Stefanutti Stocks (Pty) Ltd ("Stefanutti"),
a company incorporated in accordance with the
laws of the Republic of
South Africa. Stefanutti is controlled by Stefanutti Stocks Holdings
Limited ("Stefanutti Holdings"),
which is a public company
listed on the Johannesburg Stock Exchange. Stefanutti Holdings'
shares are widely held and it is not
directly or indirectly
controlled by any single entity.
[4]
Stefanutti
operates through the following divisions:
a.
Roads, pipelines and mining
services - this unit deals with the construction of all levels of
transport infrastructure.
b.
Building - this unit provides
infrastructure such as healthcare facilities, transport nodes,
warehousing, retail and parkade developments,
residential, commercial
buildings and unit operates throughout South Africa and Southern
Africa (including Namibia and Mozambique).
c.
Mechanical and Electrical - this
unit undertakes structural, mechanical, electrical, instrumentation
and piping engineering construction
works.
d.
Structure - this unit offers
foundation, concrete and marine construction capabilities spanning
the full spectrum of public and
industrial infrastructure delivery.
e.
Stefanutti also operates in the
United Arab Emirates, where its associate undertakes interior
fit-out, refurbishment and general
construction projects.
Primary
target firm
[5]
The
primary target firms are TN Molefe Construction (Pty) Ltd ("TN
Molefe") and Axsys Projects (Ply) Ltd ("Axsys")
-
collectively referred to as the Emerging Contractors. The Emerging
Contractors are all smaller construction companies that are
more than
51% owned and controlled by historically disadvantaged persons
("HDPs").
[6]
TN
Molefe is a wholly-owned subsidiary of the MC Share Trust, which is
ultimately controlled by an HDP.
[1]
[7]
TN
Molefe specialises in civil engineering works, including the
construction and regravelling of roads, bulk earthworks, pavement
rehabilitation and upgrading, storm water infrastructure and
maintenance, construction management and refurbishment of waste water
treatment plants. TN Molefe also specialises in Turnkey projects
where it designs the projects in-house.
[8]
Axsys
is a newly incorporated company established for purposes of the
proposed transaction and is controlled by Spanseem Projects
(Ply)
Ltd, which in turn is a wholly owned subsidiary of the APC Trust. The
APC trust's sole beneficiary is an HDP.
[9]
Axsys
undertakes structural, civils,
roads, earthworks and building construction projects across South
Africa and its services extend
to the petrochemical, mining water and
heavy industry sectors.
Proposed
transaction and rationale
[10] The
proposed transaction entails the formation of economic alliances
between Stefanutti and the respective
Emerging Contractors.
[11]
The
merging parties submitted that it is intended that post-merger, the
merging parties will operate as a single economic entity
(i.e. the
Stefanutti Alliance).
[12]
These
alliances are the result of a settlement agreement concluded between
a number of Construction Companies
[2]
and the Government of the Republic of South Africa (as represented by
the Ministers of Rural Development and Land Reform, Economic
Development, Public Works and Transport) on 11 October 2016 ("the
Settlement Agreement").
[13]
Stefanutti submitted that in order to achieve the objects of the
Settlement Agreement, it was essential
for them and their respective
Emerging Contractors to establish an alliance pursuant to which
Stefanutti will acquire material
influence over the direction,
operation and competitiveness of the business of the Emerging
Contractor. The Stefanutti Alliance,
therefore gives rise to a merger
in terms of section 12(2)(g) of the Competition Act, no. 89 of 1998
("the Act").
[14] The
mentoring and development that Stefanutti has chosen to embark on,
requires that the Emerging Contractors
identified should acquire the
necessary skill, quality and status as well as the quantity of work
to generate and sustain a cumulative
combined annual turnover equal
to at least 25% of the annual construction works turnover of
Stefanutti during the relevant period
(7 years extendable to 10
years).
[15]
It
is worth noting that if Stefanutti does not meet that turnover
obligation within the relevant period, Stefanutti would incur
substantial penalties in addition to the possibility of the
Government instituting civil proceedings against Stefanutti for
previously
having colluded on certain Government projects. If
Stefanutti fails to pay the penalty, it may even be blacklisted and
disqualified
from being awarded contracts from public enterprises for
up to 12 months.
[16]
The
Settlement Agreement prescribes that the development of the Emerging
Contractors will be undertaken in terms of a formalized
development
and mentorship program proposed by Stefanutti in consultation with
the Black Business Council.
[17]
As
per the Settlement Agreement, the proposed transaction is due to
terminate after a maximum period of 10 years from the date of
its
implementation. Following the termination, the alliance members are
expected to return to their original positions where they
will no
longer operate as a single economic entity; they will be expected to
be completely independent and vigorously compete with
each other. The
Commission acknowledged that the parties may by mutual agreement,
choose to terminate the alliance prior to the
lapse of the 10 year
period.
[18]
The
Commission noted that Stefanutti had acquired 20% of the share
capital in Axsys, which confer certain minority rights upon
Stefanutti. These rights include the recruitment and appointment of
executives and the determination of salaries for executives,
determination and payment of bonuses to employees as well as the
approval of budgets and business plans. The merging parties submitted
that they have made the same offer to TN Molefe, who have declined,
but the offer remains on the table for acceptance should TN
Molefe
wish to do so.
[19]
TN
Molefe indicated that it was concerned about the possibility of being
treated unfairly because of the relationship between Stefanutti
and
Axsys. With this in mind the Commission resorted to imposing a
condition relating to the fair and non-discriminatory allocation
of
work to the Emerging Contractors, this is elaborated on in the public
interest section below.
[20]
The
primary acquiring firm's rationale for the transaction was that
pursuant to the Settlement Agreement, Stefanutti had undertaken
to
the Government that it will increase investment, promote innovation
and create entrepreneurial opportunities in the construction
industry, particularly for small-to-medium sized enterprises. In
terms of those commitments, Stefanutti was required to identify
enterprises which it would mentor and develop and obtain such
competition authority approval as is required to pursue those
initiatives.
The Emerging Contractors are the HOP firms identified by
Stefanutti for this purpose.
[21]
The
primary target firm's rationale was that the program will (i) provide
them with extensive support and access to skills and expertise
to
enable them to take on more projects of a large scale; and (ii) allow
them to over time acquire a greater share of the construction
industry and compete more effectively.
Impact
on competition
[22]
The Commission identified horizontal overlaps in the following
markets:
a.
The provision of services for
civil engineering: road;
b.
The provision of services for
civil engineering: other;
c.
The provision of services for
general building: residential; and
d.
The provision of services for
general building: non-residential.
[23]
The Commission found that the proposed
transaction will result in a post-merger market share of less than 5%
with minimal accretions
in all markets. The Commission also
identified a number of prominent rivals in the relevant markets such
as Aveng, Group Five and
Murray & Roberts among many other
construction companies. The Commission concluded that the merged
entity is unlikely to exercise
market power given the presence of
several viable alternatives who will be able to discipline the merged
entity.
[24]
The
Commission concluded that there is no vertical overlap as Stefanutti
produces various inputs for its own operations exclusively
on a
project specific basis. Accordingly the transaction does not give
rise to any foreclosure concerns.
Public
interest
Employment
and public interest benefits
[25]
The
merging parties submitted that there will be no adverse effect on
employment, as no duplications arose as result of the mergers.
Rather
the Construction Companies will ensure that the transactions provide
the Emerging Contractors with the support, skills and
guidance to
grow into successful independent firms in the market. As a result
employees will need to be sourced and the target
firms will create
quality jobs and entrepreneurial opportunities in the industry. The
Commission found there to be no likelihood
of duplications or
rationalisations
as a
result
of the proposed transactions.
[26]
The
merging parties submitted that in line with section 12A(3)(c) the
proposed transactions result in public interest benefits as
it
enables the Emerging Contractors (BEE and Historically Disadvantaged
firms) to become competitive. The merging parties outline
the
following benefits:
a.
It will improve the development
of skills among HDPs in critical areas in the industry;
b.
It encourages participation and
ownership of SMEs and enterprises managed and owned by HDPs; and
c.
It provides for demonstrable and
measurable expansion opportunities in the construction industry which
promotes competition, innovation
and growth in the market.
[27] The
Commission agreed with this and found that the proposed transaction
raises strong public interest
benefits in terms of the Act. The
proposed transaction ensures that small black-owned construction
companies are able to grow their
businesses to hopefully one day be
able to compete directly with firms such as Stefanutti. Regarding the
current level of transformation
in the construction industry, the
Commission found that most black-owned construction companies operate
in the lower levels of
the market (smaller projects). The Stefanutti
alliance therefore presents an opportunity for the black-owned
businesses to be developed
into large and more competitive firms in
line with the objectives of section 12A(3)(c) of the Act.
[28]
The
Commission was of the view that it is necessary to monitor the
performance of the alliances in their attainment of these public
interest benefits. The Commission therefore required the merging
parties to provide a report to the Commission on all the projects
the
merging parties would have participated in as part of the Stefanutti
Alliance.
[29]
The
Commission was also concerned about the possibility of unfair
treatment of the Emerging Contractors within the Stefanutti Alliance,
given the disparity in size of the Emerging Contractors. The
Commission was concerned that since the Settlement Agreement was
silent on the apportionment of the 25% target and does not specify
how the work is to be allocated, there may be a risk that Stefanutti
might focus all its resources and training on one of the Emerging
Contractors and achieving the target through that one Emerging
Contractor rather than spreading the work across both.
[30]
The
Commission engaged the Emerging Contractors regarding this concern,
who indicated that the value of the alliance is in the skills
and
development that is on offer, the Emerging Contractors plan to
exploit the opportunity and learn from Stefanutti to the fullest.
[31]
Further,
the Emerging Contractors provided that they are largely specialized
in different areas of the construction sectors, which
suggests that
there will not be reason to trade-off working with one Emerging
Contractor for another. The Commission concludes
that there is more
incentive for Stefanutti to work with both Emerging Contractors in a
fair and equal manner as opposed to the
converse.
[32]
The Tribunal addressed this concern by
suggesting that the Commission's condition relating to this issue be
reworded to say that
the Emerging Contractors are to be treated
equally, in order to prevent any bias to one or the other in the
allocation of work.
[3]
The merging parties and the Commission had no objection to this
amendment.
The
Fund
[33]
The
Settlement Agreement made provision for the establishment of a Fund,
the objective of which will be the development and enhancement
of the
Construction Industry and in particular, transformation objectives.
[34]
The
Trustees of the Fund will comprise of representatives of all of the
Construction Companies who are party to the Settlement Agreement,
as
well as representatives of the Government, as appointed by the
relevant government departments.
[35]
The
Commission was of the view that further measures were required to
ensure that the Fund is not used as an information sharing
platform
by the construction companies.
[36]
The
Commission was of the view that all the economic alliances should put
into place the necessary safeguards to ensure that competitively
sensitive information does not flow from one economic alliance to
other construction companies through the Fund.
[37]
In
respect of the Fund, the Commission required that the alliance
members ensure that all information submitted to the Fund be
aggregated, and the members must ensure that the necessary measures
are put in place to prevent the flow of competitively sensitive
information from one alliance to another through the Fund or any
other medium.
[38] The
Commission further required that the people selected by the
Construction Companies for the mentorship
and development of the
Emerging Contractors not be the same people appointed as Trustees on
the Fund.
[39]
The
merging parties submitted that such a condition was restrictive and
prejudicial to the alliances as it:
a.
Precluded all key executives and
personnel of Stefanutti from being trustees on the Fund. The merging
parties submitted that although
only one person may primarily be
appointed with overall responsibility for the day to day and ongoing
mentoring and development
of the Emerging Contractors, various
secondees will be involved in operational and other development and
mentoring activities and
Stefanutti executives are likely to
participate in, and have oversight over the development and mentoring
activities; and
b.
This would have precluded persons
from being trustees of the Fund who, through their general enterprise
development activities and
their activities and their involvement
with the Emerging Contractors, have the best knowledge and expertise
of what development,
transformation and other initiatives are
required by the industry, being the principal objective of the Fund.
The merging parties
submitted that the restriction is therefore
detrimental both to the objective so the Fund and to the Alliance
Construction Company's
interests at the Fund.
[40]
The
Commission remained of the view that having the same people
responsible for the monitoring and development, while sitting as
Trustees increased the likelihood of coordination between the
construction companies.
[41]
The
merging parties re-iterated before the Tribunal that this condition
was extremely broad, restrictive and unnecessary.
[4]
The merging parties maintained that other conditions placed upon them
were sufficient to address any information sharing concerns.
[5]
[42] The
Commission submitted that the objective of the proposed condition was
not to exclude everyone affected
by the mentorship activities but
rather just particular individuals with intimate knowledge of the
mentorship program as they felt
that kind of engagement could create
a platform for the sharing of competitively sensitive information.
[6]
[43] The
Tribunal shared the Commission's concern regarding the potential for
the Trust Fund to be used
as a platform for information sharing and
ultimately approved this transaction subject to the reworded
condition In this regard,
so as to afford the merging parties more
flexibility in who they could appoint but also protect the
Commission's concern. In this
regard the parties were asked to engage
with each other so as to preclude operational people from being
appointed as Trustees.
[7]
[44] With
regards to monitoring of the alliances, the merging parties must
submit reports annually detailing
the projects they have worked on
during the joint venture. Further they must provide a report upon
termination of the alliance.
Conclusion
[45] In
light or the above, we concluded that the proposed transaction is
unlikely to substantially prevent
or lessen competition in any
relevant market. Accordingly, we approved the proposed transaction
subject to conditions. For convenience
the set of conditions are
attached, marked as
"Annexure A" .
Ms
Yasmin Carrim
Mr
AW Wessels and Mrs Medi Mokuena concurring
22 March 2018
DATE
Case
Manager:
Kameel Pancham
For
the Merging Parties: Paul
Coetser and Paul Cleland from Werksmans Attorneys
For
the Commission:
Busisiwe Ntshingila and Ratshidaho Maphwanya
[1]
[2]
Aveng (Africa) (Pty) Ltd ("Aveng''), Basil Read Holdings (Pty)
Ltd ("Basil Read"), Group Five Construction Limited
("Group Five"), Murray and Roberts Limited ("Murray
and Roberts"), Raubex (Ply) Ltd, Stefanutti Stocks (
Pty) Ltd
(" Stefanutti" ) and WBHO Construct ion (" WBHO").
[3]
Transcript page 86, lines 1-3.
[4]
Transcript page 59, lines 6-9.
[5]
Transcript page 58, lines 13-14 & page 59, lines 1-9.
[6]
Transcript page 66, lines 6-12.
[7]
Transcript page 98, line 1-10.