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[2018] ZACT 80
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WBHO Construction (Pty) Ltd v Fikile Construction (Pty) Ltd and Others (LM024Apr17) [2018] ZACT 80; [2018] 1 CPLR 350 (CT) (22 March 2018)
COMPETITION TRIBUNAL OF SOUTH
AFRICA
Case No: LM024Apr17
In the matter between:
WBHO
Construction (Pty) Ltd
Primary
Acquiring Firm
and
Fikile
Construction (Pty) Ltd
Edwin
Construction (Pty) Ltd
Motheo
Construction Group (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 WBHO
Construction (Ply) Ltd and Fikile Construction (Ply) Ltd, Edwin
Construction (Pty) Ltd and Motheo Construction Group (Pty) Ltd.
[2]
The
reasons for approving the proposed transaction follow.
Parties
to proposed transaction
Primary
acquiring firm
[3]
The
primary acquiring firm is WBHO Construction (Pty) Ltd ("WBHO), a
company duly incorporated in accordance with the laws
of the Republic
of South Africa. WBHO is a wholly owned subsidiary of Wilson Bayly
Holmes-Ovcon Limited ("WBHO Group"),
which is a public
company listed on the Johannesburg Stock Exchange. Its shares are
widely held and it is not directly or indirectly
controlled by any
single entity.
[4]
WBHO
is a large construction company with a broad spectrum of expertise in
respect of all sectors of the construction industry.
WBHO controls a
number of companies in South Africa and around Africa. WBHO mainly
operates through the following divisions:
a.
Building and Construction - WBHO is
involved in the building of
inter
alia
office and commercial
buildings, hospitals, shopping centers, residential developments and
golf estates, hotels and resorts, casinos
and stadiums.
b.
Roads and Earthworks - WBHO provides
large-scale public and private projects across various
infrastructural applications such as
inter
alia
road construction and
rehabilitation, bridges and structures, freeways and airports,
harbours and railways.
c.
Civil Engineering - WBHO provides civil
engineering services in a number of sectors including mining, energy,
water, and effluent
treatment and silos and towers.
Primary target firms
[5]
The primary target firms are Fikile
Construction (Ply) Ltd ("Fikile"), Motheo Construction
Group (Pty) Ltd ("Motheo"),
and Edwin Construction (Ply)
Ltd ("Edwin") 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]
Fikile
is controlled by the RT Ndlovu Testamentary Trust, which holds the
majority of Fikile's issued share capital. According to
the B-BBEE
certificate of Fikile, the entirety of Fikile's issued share capital
is held by HDPs. Fikile does not directly or indirectly
control any
firm.
[7]
Fikile
has its main focus in building works where it specialises in the
building of multi story residential and social housing
as well
as commercial property. Fikile also has a civil engineering division
which it is in the process of upscaling.
[8]
Motheo
is not controlled by any single firm. The majority of the directors
of Motheo are HDPs and include black women. Motheo controls
Motheo
Infrastructure Contractor (Pty) Ltd.
[9]
Motheo
offers a wide range of services in the construction industry
including general building, with a focus on social housing.
Motheo is
also active in the civil engineering sector, focusing on road
construction and rehabilitation, structural concrete construction,
mining infrastructure, bulk earthworks, factory infrastructure and
water treatment works. On a limited and selected basis, Motheo
also
provides certain Turnkey solutions such as overall project management
and property development.
[10] Edwin
has three shareholders, the largest being WBHO with 49%. Until June
2017, Edwin was controlled
by WBHO as to 57%. Edwin does not directly
or indirectly control any firm.
[11]
Edwin is a multi-disciplinary
construction company which provides a range of products and services
in the construction industry.
Edwin is a civil engineering contractor
which supplies services and operations in the construction of roads
and highways, bridges
and interchanges, as well as dams and
earthworks sectors.
Proposed
transaction and rationale
[12]
The
proposed transaction entails the formation of economic alliances
between WBHO and the respective Emerging Contractors.
[13]
The
merging parties submitted that it was intended that post-merger, the
merging parties will operate as a single economic entity
(i.e. the
WBHO Alliance).
[14] These
alliances are the result of a settlement agreement concluded between
a number of Construction
Companies
[1]
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").
[15] WBHO
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 WBHO will
acquire material influence
over the direction, operation and
competitiveness of the business of the Emerging Contractor. The WBHO
Alliance, therefore gives
rise to a merger in terms of section
12(2)(g) of the Competition Act, no. 89 of 1998 ("the Act”).
[16] The
mentoring and development that WBHO 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 WBHO during the
relevant period (7
years extendable to 10 years).
[17]
It
is worth noting that if WBHO does not meet that turnover obligation
within the relevant period, WBHO would incur substantial
penalties in
addition to the possibility of the Government instituting civil
proceedings against WBHO for previously having colluded
on certain
Government projects. If WBHO fails to pay the penalty, it may even be
blacklisted and disqualified from being awarded
contracts from public
enterprises for up to 12 months.
[18]
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
WBHO in consultation with the Black Business Council.
[19] 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.
[20] The
Commission noted that WBHO currently holds 49% in Edwin and has the
ability to appoint 40% of the
board of directors of Edwin. The
Commission was concerned with the fact that one of the directors
appointed to the board of Edwin
by WBHO, also holds an executive
position as the Managing Director of WBHO's Road and Earthworks
division. The Commission was of
the view that this may dilute the
public interest benefits linked to ensuring that the Emerging
Contractors are empowered to compete
against the construction
company, by creating dependency on WBHO's managerial influence.
[21]
However, the Commission accepted that
the appointments preceded the Settlement Agreement as WBHO has
historically had shareholding
in Edwin. Further, the Commission noted
that WBHO has elected to work with three Emerging Contractors, which
will serve to ensure
that the public interest benefit linked to the
mentorship are at the very least achieved through the other Emerging
Contractors
in which WBHO will not have a shareholding.
[22]
The primary acquiring firm's rationale
for the transaction was that pursuant to the Settlement Agreement,
WBHO had undertaken to
the Government that it would increase
investment, promote innovation and create entrepreneurial
opportunities in the construction
industry, particularly for small·
to ·medium sized enterprises. In terms of those commitments,
WBHO 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 WBHO for this purpose.
[23] 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
[24]
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.
[25] The
Commission found that the proposed transaction will result in a
post-merger market shares of less
than 15% with minimal accretions in
all markets (less than 5%). 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
concludes 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.
[26]
Further, the Commission identified a vertical overlap, in that WBHO
manufactures/produces some upstream
products used by the Emerging
Contractors.
[2]
[27]
The Commission found that the proposed
transaction is unlikely to result in any input or customer
foreclosure as the Emerging Contractors,
individually and
collectively, are not significant buyers of the upstream products
produced by WBHO. With combined market shares
in the downstream
markets of less than 5%, the Emerging Contractors do not account for
a sufficient portion of market demand so
as to give rise to a
possibility of substantial foreclosure.
[28]
Further, the Emerging Contractors' total
procurement of the respective upstream products equated to less than
10% of WBHO's total
sales of said products. Additionally, WBHO is
just one in many manufacturers of these products. Therefore the
Commission found
there is no likelihood of foreclosure as a result of
the proposed transaction.
Public
interest
Employment
and public interest benefits
[29]
The merging parties submitted that there
will be no adverse effect on employment, as no duplications arise 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.
[30]
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.
[31]
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 WBHO. 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 WBHO
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.
[32]
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 WBHO
Alliance.
[33]
The
Commission was also concerned about the possibility of unfair
treatment of the Emerging Contractors within the WBHO 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 WBHO may
focus all its
resources and training on one of the Emerging Contractors and
achieving the target through that one Emerging Contractor
while the
other receives no assistance and sees no growth.
[34] 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 WBHO to the fullest.
[35]
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 WBHO to work with both Emerging Contractors in
a fair and equal manner
as opposed to the converse.
[36] 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
[37] 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.
[38]
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.
[39]
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.
[40]
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.
[41]
In respect of the Fund, the Commission
required that the alliance members ensure that all information
submitted to the Fund is 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.
[42] The
Commission further required that the people selected by the
Construction Companies for the mentorship
and development of the
Emerging Contractors should not be appointed as Trustees to represent
them on the Fund.
[43]
The merging parties submitted that such
a condition would be restrictive and prejudicial to the alliances as
it:
a.
Precluded all key executives and
personnel of WBHO 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
WBHO executives are likely to participate
in, and have oversight over the development and mentoring activities;
and
b.
This 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.
[44]
The
Commission remained of the view that having the same people
responsible for the monitoring and development, while sitting as
Trustees increases the likelihood of coordination between the
construction companies.
[45]
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]
[46]
The
Commission indicated that the intention 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]
[47] 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]
[48] With
regard 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
[49] In
light of 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
"Annexure A".
Ms
Yasmin Carrlm
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]
Aveng (Africa) (Pty) Ltd (" Avcng''), Basil Read Holdings (Pty)
Ltd (" Basil Read"), Group Five Construction Limited
("
Group Five"), Murray and Roberts Limited ("Murray and
Roberts"), Raubex (Pty) Ltd, Stcfanutti Stocks (Pty)
Ltd
("Stefanutti") and WBHO Construction (" WBHO" ).
[2]
Road surfacing, bitumen, mesh and rebar.
[3]
Transcript page 86, lines 1-3.
[4]
Transcript page 59, lines 6-9.
[5]
Transcript page 58, lines 13-1 4 & page 59, lines 1-9.
[6]
Transcript page 66, lines 6-12.
[7]
Transcript page 98, line 1-10.