Summary of Judgment

1. Introduction

These proceedings concerned a merger approval application before the Competition Tribunal of South Africa under case number LM269Mar19. The Tribunal was asked to determine whether a proposed transaction involving WBHO Construction (Pty) Ltd as the primary acquiring firm and Trencon Construction (Pty) Ltd as the primary target firm should be approved in terms of the competition legislation, and if so, whether approval should be subject to conditions.

The matter followed an investigation and recommendation process by the Competition Commission. The merger was heard on 17 July 2019, an order was issued on 19 July 2019, and the reasons for the decision were issued on 19 August 2019. The Tribunal ultimately conditionally approved the transaction.

The general subject-matter of the dispute was whether replacing one “emerging contractor” (Fikile Construction (Pty) Ltd) with Trencon within a previously established WBHO economic alliance would raise competition concerns (horizontal and vertical effects) or public interest concerns, and whether conditions were necessary to ensure the achievement and monitoring of claimed public interest benefits connected to the development of historically disadvantaged and BEE-owned construction firms.

2. Material Facts

WBHO Construction (Pty) Ltd is a wholly owned subsidiary of Wilson Bayly Holmes-Ovcon Limited (WBHO Group), a public company listed on the JSE. The Tribunal recorded that WBHO Group’s shares are widely held and that it is not directly or indirectly controlled by any single entity. WBHO operates as a large construction firm active across a broad range of construction services, including building and construction, roads and earthworks, and civil engineering.

Trencon Construction (Pty) Ltd is wholly owned by Mr Amarnath Singh and does not itself control any firm. Trencon is a diversified construction company that undertakes building construction (residential and non-residential) and civil engineering works, but does not undertake road works.

The transaction arose against the background of a prior arrangement described as the WBHO Alliance, formed through a settlement-related framework. The Tribunal recorded that WBHO had previously formed an economic alliance with several smaller construction companies (described collectively as “Emerging Contractors”), namely Fikile Construction (Pty) Ltd, Motheo Construction Group (Pty) Ltd, and Edwin Construction (Pty) Ltd, in a context linked to a Settlement Agreement concluded on 11 October 2016 between certain construction companies and the Government of the Republic of South Africa (represented by specified Ministers).

The material change effected by the present transaction was that Fikile would be replaced by Trencon as an Emerging Contractor within the WBHO Alliance. The merging parties’ stated intention was that, post-merger, the merging parties would operate as a single economic entity, namely the WBHO Alliance.

As to the reason for the replacement, WBHO’s position (corroborated by Fikile, after engagement by the Commission) was that WBHO’s views and those of Fikile’s management regarding Fikile’s business requirements were no longer aligned, and that the parties mutually agreed to terminate Fikile’s participation as an Emerging Contractor (and thus as a member of the WBHO Alliance). The Tribunal treated this corroboration as part of the factual setting for why the merger was pursued.

On competition effects, the Tribunal recorded the Commission’s identification of horizontal overlaps in civil engineering (other), general building (residential), and general building (non-residential). The Commission accepted market share estimates and found the merged entity’s average combined market share to be below 10% in each relevant market, with an insignificant accretion, and with notable rivals present (including Aveng and Murray & Roberts).

The Commission also identified a vertical relationship because WBHO manufactures mesh and rebar (upstream products) that are purchased by Trencon and others in downstream building markets. However, the Tribunal recorded that Trencon’s procurement from all suppliers amounted to 5.6% of WBHO’s total mesh and rebar sales, and that WBHO was only one of many manufacturers, which led the Commission to conclude that foreclosure was unlikely.

On public interest, the merging parties stated that no retrenchments would occur as a result of the transaction. The Commission considered negative employment effects unlikely, noting in particular that the parties’ businesses would not be integrated post-transaction and that there would be no rationalisation or duplication-related retrenchments attributable to the merger.

The Commission further accepted that the transaction would generate public interest benefits aligned with section 12A(3)(c) of the Competition Act, framed as facilitating the development of emerging, HDP-owned firms in the construction industry. The Commission considered it necessary to monitor attainment of these benefits and therefore required annual reporting to the Commission on projects undertaken as part of the WBHO Alliance, as well as a report upon termination of the alliance. The Tribunal approved the transaction subject to such conditions (recorded as attached in “Annexure A”).

3. Legal Issues

The central legal questions before the Tribunal were whether the proposed transaction was likely to substantially prevent or lessen competition in any relevant market, and whether the transaction raised public interest considerations requiring approval, prohibition, or conditional approval.

The dispute primarily concerned the application of law to fact. In particular, it required the application of merger assessment principles under the Competition Act to the Commission’s market definition and market share evidence (for horizontal effects), to the upstream/downstream supply relationship (for vertical effects and potential foreclosure), and to the asserted public interest outcomes (especially those relating to employment and the promotion of ownership/participation by historically disadvantaged persons).

To the extent that the Commission required reporting conditions, the matter also involved an evaluative judgment regarding whether conditions were appropriate to ensure that asserted public interest benefits were not merely asserted but capable of being tracked and assessed over time.

4. Court’s Reasoning

The Tribunal’s reasoning reflected the standard merger assessment framework, focusing first on whether the merger would materially harm competition in identified relevant markets, and then considering whether public interest factors supported approval and/or warranted conditions.

On the horizontal overlaps, the Tribunal accepted the Commission’s approach in identifying overlaps in civil engineering (other) and in residential and non-residential general building services. It further accepted the Commission’s reliance on the merging parties’ market share estimates, noting that the current transaction arose less than two years after the Commission’s initial investigation of the WBHO Alliance and that there was no stated reason to reject the estimates. The Tribunal accepted the Commission’s finding that the merged entity’s combined market shares would remain low (below 10%) and that the increment attributable to the transaction would be insignificant. The presence of identifiable and prominent competitors was treated as reinforcing the conclusion that the merged entity would be constrained by competitive alternatives and therefore would be unlikely to exercise market power.

On the vertical overlap, the Tribunal accepted the Commission’s identification of an upstream activity (WBHO’s manufacture/production of mesh and rebar) linked to downstream construction services in which Trencon participates. The Tribunal accepted the Commission’s foreclosure assessment, which rested on two principal factual considerations recorded in the reasons. First, Trencon’s purchases represented a small proportion of WBHO’s total mesh and rebar sales (5.6% when considering Trencon’s procurement from all suppliers relative to WBHO’s sales), and second, WBHO was one manufacturer among several in the market. On that basis, the Tribunal accepted the Commission’s conclusion that the transaction would not likely enable foreclosure of rivals or customers and therefore would not materially harm competition.

On public interest, the Tribunal accepted the merging parties’ submission that the transaction would not cause retrenchments and accepted the Commission’s reasoning that negative employment effects were unlikely because the businesses would not be integrated and no duplication-related rationalisation would follow. The Tribunal also accepted the Commission’s assessment that the WBHO Alliance model presented strong public interest benefits under the Act, particularly in developing smaller, black-owned construction companies so that they could scale and become more competitive.

The Tribunal also accepted the Commission’s view that the achievement of these public interest benefits should be monitored, and it endorsed the imposition of conditions requiring reporting to the Commission on projects undertaken through the alliance, on an annual basis and upon termination. This reflected an evaluative determination that conditional approval was appropriate to support oversight of the alliance’s outcomes in relation to public interest objectives.

5. Outcome and Relief

The Tribunal concluded that the proposed transaction was unlikely to substantially prevent or lessen competition in any relevant market. The Tribunal therefore approved the proposed transaction subject to conditions, with the conditions attached as “Annexure A” to the decision.

The Tribunal’s reasons recorded reporting-related conditions required by the Commission, including the obligation on the merging parties to submit annual reports to the Commission detailing projects undertaken as part of the WBHO Alliance and to provide a report upon termination of the alliance. The reasons provided do not record any separate or additional costs order.

Cases Cited

WBHO Construction and Fikile Construction and 2 Others (Competition Tribunal of South Africa) Case No: LM024Apr17

Legislation Cited

Competition Act 89 of 1998 (as amended), section 12A(3)(c)

Rules of Court Cited

No rules of court were cited in the reasons provided.

Held

The Competition Tribunal held that the replacement of Fikile Construction (Pty) Ltd with Trencon Construction (Pty) Ltd within the WBHO Alliance was unlikely to substantially prevent or lessen competition, given the low combined market shares, insignificant accretion, presence of significant competitors, and the absence of likely foreclosure effects in relation to mesh and rebar.

The Tribunal further held that the transaction presented substantial public interest benefits associated with the development of historically disadvantaged and BEE-owned construction firms, and that such benefits warranted monitoring. The transaction was therefore approved subject to conditions, including reporting obligations to the Competition Commission regarding projects undertaken within the WBHO Alliance.

LEGAL PRINCIPLES

Merger assessment under the Competition Act requires an evaluation of whether a proposed transaction is likely to substantially prevent or lessen competition in any relevant market, which includes examining horizontal overlaps (market shares, accretion, and competitive constraints from rivals) and vertical relationships (including the likelihood of foreclosure, assessed with reference to the significance of the parties’ upstream and downstream positions and the availability of alternative suppliers or customers).

In addition to competitive effects, merger control requires consideration of public interest factors, including those directed at promoting participation by historically disadvantaged persons and firms, as contemplated in section 12A(3)(c). Where public interest benefits are relied upon, the Tribunal may approve a merger conditionally, including by imposing monitoring and reporting obligations to enable oversight of whether claimed public interest outcomes are being pursued and achieved.