COMPETITION TRIBUNAL OF SOUTH AFRICA
Case No: LM082Aug20
In the matter between:
K2020211444 (South Africa) (Pty) Ltd Primary Acquiring Firm
And
Barrie Cline Clothing (Pty) Ltd Primary Target Firm
Panel: Ms M Mazwai (Presiding Member)
Ms Y Carrim (Panel Member)
Prof Fiona Tregenna (Panel Member)
Last submission received on: 09 October 2020
Order Issued on: 09 October 2020
Reasons Issued on:
09 November 2020
REASONS FOR DECISION
Approval
[1] On 9 October 2020, the Tribunal approved , with Conditions, the proposed
transaction in which K2020211444 (South Africa) (Pty) Ltd (“K2020”) is to
acquire Barrie Cline Clothing (Pty) Ltd (Barrie Cline).
[2] The reasons for the conditional approval of the proposed transaction follow.
Parties to the transaction
Primary acquiring firm
[3] The primary acquiring firm is K2020, which is controlled by Truworths Limited
(“Truworths”). Truworths is a wholly owned subsidiary of Truworths
International Group Limited (“Truworths International Group”). In addition to
Truworths, Truworths International Group owns a number of companies inter
alia Young Designers Emporium (Pty) Ltd , Truworths Trading (Pty) Ltd and
Truworths UK Holdco 1 Ltd. K2020 does not control any firm.
[4] K2020 and all the firms directly and indirectly controlling it , will collectively be
referred to as “The Truworths Group”.
[5] K2020 is a special purpose vehicle which has no business activities. The
Truworths Group is an investment hol ding and management company that
invests in companies that are leading retailers of fashion clothing, footwear,
related merchandise, and homeware. It operates through approximately 728
stores in South Africa and 49 stores in the rest of Africa, and approximately 132
stores in the United Kingdom and Europe. The Truworths Group also has more
than 10 000 different line items which, inter alia include women, men and
children’s clothing ; accessories; footwear; homeware; cosmetics; and fine
jewellery.
Primary target firm
[6] The primary target firm is Barrie Cline. Barrie Cline is controlled by Mr. Barrie
Cline and Ms. Sharon Combrinck.
[7] Barrie Cline manufactures (through outsourced arrangements), and supplies
women’s outerwear apparel on an exclusive basis to Truworths from a central
head office and warehouse in Cape Town. Barrie Cline arranges for the
manufacture of lady’s outerwear app arel through outsourced arrangements
with cut, make and trim operators (“CMTs”). 1 Design houses, such as Barrie
Cline, provide CMTs with the design/garment specifications, tech packs,
fabrics, patterns, and stitching requirements, for the purposes of manufacturing.
Proposed transaction and rationale
Transaction
[8] The Truworths Group through, K2020, intends to acquire the business (assets
and liabilities) of Barrie Cline, as a going concern. Upon the implementation of
the proposed transaction, K2020 will exercise sole control over Barrie Cline.2
Rationale
[9] Truworths recognises that the proposed transaction presents it with an
opportunity to streamline its operations, and seamlessly integrate the design
function into its operations with little to no disruptions.
[10] The primary target firm submits that the propo sed transaction is motivated by
the advanced age of the directors and their desire to retire from professional
activities.
Impact on competition
[11] The Commission found a pre-existing vertical overlap between the activities of
the merging parties as Barrie Cline designs, manufactures (through outsourced
arrangements), and supplies women’s outerwear apparel on an exclusive basis
to Truworths from a central head office and warehouse in Cape Town.
[12] The Commission did not conduct an in -depth market definition for its vertical
assessment given that the proposed transaction is unlikely to have any
1 CMTs are factories that cut, make and trim fabrics into clothing.
2 In accordance with section 12(2)(a) of the Competition Act 89 of 1998, as amended (“Act”).
competition concerns but the Commission noted that the merging parties are
active in different levels of the apparel value chain.
[13] The Commission therefore considered the following markets in the vertical
analysis:
13.1 The upstream market for the design and manufacturing of apparel in
South Africa.
13.2 The downstream market for the retail of apparel in South Africa.
Input foreclosure
[14] In line with the European Commission , the Commission investigated whether
the merged entity will have the ability to substantially foreclose access to an
important input, whether it would have the incentive to do so and whether the
foreclosure strategy would have significant adverse effects on downstream
competition in that specific market.
[15] From an input foreclosure perspective, the Commission note d that the
Truworths Gro up is the only local customer of Barrie Cline for women’s
outerwear apparel and it does not provide women’s outerwear apparel to other
competitors of the Truworths Group. Considering this, the Commission f ound
that it is unlikely that competitors of the T ruworths Group would be foreclosed
from a supplier of women’s outerwear apparel as a result of the merger. As
such, the proposed transaction will not alter the structure of the market as Barrie
Cline will continue to provide women’s outerwear apparel to Truworths, as it did
pre-merger.
[16] When considering Barrie Cline’s ability to foreclose, the Commission noted that
the merging parties submitted that, based on the exclusive nature of the supply
arrangement between the merging parties , it is not easy to prov ide an
estimation of the market share size in the design and manufacturing of apparel
market. However, the merging parties estimate that Barrie Cline’s market share
is As such, the Commission is of the view that the merged entity
is unlikely to have the ability to foreclose any significant downstream competitor
of the Truworths Group as it is a relatively small player and did not provide any
women’s outerwear apparel to any third party in South Africa, pre-merger.
Customer foreclosure
[17] The Commission noted that the Truworths Group has an estimated market
share of less than 10 % in the downstream market for the retail of apparel in
South Africa and as such it does not have the ability to foreclose in any market
in South Africa. In addition, the Truworths Group does not account for a
substantial portion of the downstream retail of apparel market in South Africa.
Furthermore, the Commission noted that Barrie Cline does not have the
capacity to satisfy the Truworths Group’s apparel on its own given its negligible
market share as well as the low volumes procured by the Truworths Group from
it.
[18] The Commission noted that the Truworths Group purchases apparel from an
additional 61 design houses in South Africa . The Commission therefo re
highlighted the fact that the Truworths Group only procures a portion of its
apparel requirements from Barrie Cline, being women’s outerwear apparel in
particular, and procures the rest of its apparel requirements from other design
houses that compete w ith Barrie Cline. The Commission did not receive any
concerns from the Truworths Group’s other suppliers. The Commission further
noted that the merging parties confirmed that the Truworths Group will continue
to make use of other design houses that it cu rrently uses to satisfy its apparel
requirement in South Africa.
[19] The Commission is of the view that based on the above information, it is not
likely that any foreclosure concerns will arise as a result of the merger. We find
no reason to disagree.
Public Interest
[20] The Commission, in its investigation, engaged with the trade unions that were
representing the merging parties’ employees, as well as the Department of
Trade and Industry and Competition (“DTIC”). Their respective submissions are
addressed below.
Employment
[21] In terms of the proposed transaction the employees of Barrie Cline will be
transferred to Truworths in accordance with section 197 of the Labour Relations
Act. The merging parties provided an unequivocal undertaking that there would
be no retrenchments as a result of the proposed merger.3
[22] The South African Commercial, Catering and Allied Workers Union
(“SACCAWU”), which represented t he employees of the Truworths Group
submitted that the proposed transaction should be approved subject to a
condition that there will be no retrenchments for a period of three years.
[23] The Southern African Clothing and Textile Workers Union (“SACTWU”), which
represented the employees of Barrie Cline , required the parties to provide an
explicit and unequivocal commitment against job losses as a result of this
transaction and confirm that the Truworths Group would retain the same
number of jobs at Barrie Cline that were present pre-merger. Further, SACTWU
required that, in the event that retrenchments become necessary, the merging
parties should provide SACTWU with six months’ notice of the retrenchments.
[24] The merging parties, in response to SACCAWU and SACTWU submitted that
an absolute moratorium on retrenchments would n ot be possible given the
current economic circumstances. Further, the merging parties could not commit
to maintaining the number of jobs in the business pre- and post-merger. They
submitted that the merger is a job -saving merger as the directors of the target
firm are at an advanced age and would be retiring, which could lead to the
closure of the business and job losses.
[25] The merging parties anticipated limited job duplicatio ns due to their vertical
relationship and did not envisage merger specific job losses . Further, they
3 Recommendation page 23 para 53.
undertook not to retrench but indicated during the hearing that it was too soon
to assess the impact of the Covid -19 pandemic to provide a three -year
moratorium. They confirmed that the number of employees to be transferred is
163.
[26] In order to give effect to the unequivocal undertaking regarding merger-specific
retrenchments and taking into account the current economic climate, while also
protecting jobs, the merging parties agreed to a one-year moratorium on merger
related retrenchments.4 This was thereafter made a Condition for the merger’s
approval.
Small businesses, or firms controlled or owned by historically disadvantaged persons,
spread of ownership and Industrial sector and region
[27] SACTWU also sought clarity on whether the merging parties had considered
the prospect of worker ownership for Barrie Cline workers within the broader
Truworths Group post-merger.
[28] Regarding worker ownership within the Truworths Group, the Truworths Group
submitted that it operates a number of share ownership schemes within the
Group. Qualifying employees of Barrie Cline would be considered for these
schemes.
[29] The DTIC ’s initial concern regarding the proposed transaction was that the
merger parties had not adequately considered the public interest provisions
contained on sections 12A(3)(c) (the ability of small businesses, or firms
controlled or owned by historically disadvantaged persons to enter, participate
or expand in a market ) and 12A(3)(e) (the promotion of a greater spread of
ownership, particularly by historically disadvantaged persons and workers ) of
the Act.
[30] The merging parties submit ted that Barrie Cline outsources its manufacturing
4 Transcript page 32.
capabilities to at least 14 CMTs. More than 40% of these CMTs are owned by
historically disadvantaged persons. Post-merger, the Truworths Group intends
to continue to employ the services of all CMTs current ly used by Barrie Cline
and thus will protect small and medium sized businesses . Furthermore, the
proposed transaction is a substantial and long -term investment commitment
that may enable the rejuvenation of local manufacturing within the Republic of
South Africa.
[31] During the Commission’s investigation, the DTIC raised the concern that while
there is an exclusive relationship between the Truworths Group and Barrie
Cline, the Truworths Group also procures the services of other design houses,
and therefore this transaction may result in the foreclosure of those other design
houses that are contracting with the Truworths Group.
[32] In addressing this concern, the merging parties submitted that the acquisition
of Barrie Cline is principally motivated on insourcing a design and supply
function (that has for the last three decades been outsourced to Barrie Cline) in
order to protect the local supply industry. Furthermore, the proposed
transaction presents the Truworths Group with an opportunity to continue to
utilize a local supply source, streamline its operations, protect the longevity and
ensure the sustainability of this local supply source and the proposed
transaction is the only manner in which this local supply source can continue.
[33] The Commission found that the implementation of the proposed transaction is
unlikely to have a negative impact on small businesses, or firms controlled or
owned by historically disadvantaged persons and spread of ownership; neither
is it likely to have any negative effects on a particular industrial sector or region.
Conclusion
[34] In light of the above, we concluded that the proposed transaction is unlikely to
substantially prevent or lessen competition in the relevant markets. Further, the
substantially prevent or lessen competition in the relevant markets. Further, the
transaction does not raise any significant public interest concerns.
[35] Accordingly, we approved the transaction subject to the conditions attached to
the order.
09 November 2020
Ms Mondo Mazwai Date
Ms Yasmin Carrim and Prof Fiona Tregenna concurring.
Tribunal Case Managers:
C Mathonsi and M Tshabalala
For the Merging Parties: M Morrison and O Motshudi of Fullard Mayer
Morrison instructed by the merging parties
For the Commission: R Ncheche, R Maphwanya and A Mfuphi