COMPETITION TRIBUNAL OF SOUTH AFRICA
Case no. : IM053Aug21
In the matter between:
ECP AFRICA FUND IV LLC First Applicant
ECP AFRICA FUND IV A LLC Second Applicant
BURGER KING (SOUTH AFRICA) RF PROPRIETARY
LIMITED
Third Applicant
GRAND FOODS MEAT PLANT PROPRIETARY
LIMITED
Fourth Applicant
And
COMPETITION COMMISSION OF SOUTH AFRICA
Respondent
In re: the intermediate merger between:
ECP AFRICA FUND IV LLC
ECP AFRICA FUND IV A LLC Primary Acquiring Firms
And
BURGER KING (SOUTH AFRICA) RF PROPRIETARY LIMITED
GRAND FOODS MEAT PLANT PROPRIETARY
LIMITED Primary Target Firms
Panel: Mondo Mazwai (Presiding Member)
Yasmin Carrim (Tribunal Member)
Fiona Tregenna (Tribunal Member)
2
INTRODUCTION
[1] On 17 September 2021, the Competition Tribunal approved , with conditions,
the proposed acquisition of Burger King (South Africa) RF (Pty) Ltd (“Burger
King”) and Grand Foods Meat Plant (Pty) Ltd (“Grand Foods Meat Plant”) by
ECP Africa Fund IV LLC and ECP Africa Fund IV A LLC (collectively, “ECP
Africa Funds”).
[2] The reasons for conditionally approving the proposed transaction follow.
Background
[3] On 4 March 2021, the Competition Commission (“Commission”) received
notice of an intermediate merger between the ECP Africa Funds, Burger King
and Grand Foods Meat Plant (the “merging parties”).
[4] On 1 June 2021 , having investigated the merger, the Commission issued a
Notice CC16 Prohibition of Merger in which it prohibited the merger for the
reason that the merger would negatively impact the public interest, in particular
the spread of ownership by historically disadvantaged persons (“HDPs”).
[5] After prohibition, the parties continued to negotiate with the Commission and
the Department of Trade, Industry and Competition (“dtic ”), which had filed an
intention to participate in terms of section 18(1) of the Competition Act 1 (“the
Act”) and participated in the merger investigation.
1 Act No 89 of 1998, as amended.
Heard on: 18 August 2021
Last submission received on: 17 September 2021
Order issued on: 17 September 2021
Reasons issued on:
29 November 2021
REASONS FOR DECISION
3
[6] On 6 July 2021, the merging parties informed the Tribunal of their negotiations,
indicating that they had not brought a Reconsideration Application in terms of
section 16(1)(a) of the Act read with Tribunal Rule2 32(1) (which requires such
application to be brought within 10 business days of the issue of the Notice of
Prohibition) in order to give the neg otiations with the Commission and dtic a
chance. They indicated that they would in due course file a reconsideration
application.
[7] On 3 August 2021, the merging parties approached the Tribunal seeking a
reconsideration of the Commission’ s merger prohibition (the “Request for
Consideration”). This application was made on the basis of a revised set of
proposed merger conditions (the “Revised Conditions”) argued to be an
improvement to the version that w as submitted to the Commission when it
made its prohibition decision.
[8] We afforded an opportunity to the Commission, and the dtic and SACTWU - as
parties who had participated in the Commission’s investigation - to indicate
whether the Revised Conditions addressed their concerns and to indicate their
views in that regard. The Commission indicated that it was satisfied with the
Revised Conditions. The dtic also indicated that it had no objections to the
Revised Conditions
. SACTWU sought clarity on certain employment issues as
discussed later.
[9] As indicated, the Revised Conditions were agreed to by all parties .
Accordingly, there was no need to hear any evidence during the hearing .
However, in the course of the hearing, the Tribunal sought to strengthen and
enhance the Revised Conditions and ultimately imposed a set of conditions
which satisfied its concerns as we discuss later.
[10] For completeness, we set out the background to the transaction and the
Commission’s findings.
2 Rules For The Conduct Of Proceedings In The Competition Tribunal (Published in Government
2 Rules For The Conduct Of Proceedings In The Competition Tribunal (Published in Government
Notice 2 in Government Gazette 22025 of 1 February 2001).
4
THE COMMISSION’S INVESTIGATION AND FINDINGS
[11] The proposed transaction involves the ECP Africa Funds’ acquisition of 95.78%
of Burger King’s issued share capital and 100% of the issued share capital of
Grand Foods Meat Plant from Grand Foods Propriety Limited (“Grand Foods”).
Post-merger, the balance of Burger King's shares will continue to be held by its
current minority, non-controlling shareholder Restaurant Brands International
Inc. (“Restaurant Brands”).3
The Parties and their activities
[12] The ECP Africa Funds are private equity funds registered in Mauritius. They
are controlled by ECP Manager IV LP (“ECP Manager IV”) - a limited liability
partnership registered in Delaware, USA that is not controlled by any individual
firm or entity.
. In South
Africa, ECP Africa Funds directly and indirectly control the following firms:
12.1
12.2
12.3
12.4
12.5
12.6
[13] The ECP Africa Funds were established to make investments in Africa. The
ECP Africa Funds may make investments, which include, without limitation,
investments directly in assets or in securities such as common or preferred
stock or any other securities or instruments including debt as a means to
achieve the overall objective of the funds. The investments may involve a
variety of transactions, including expansion financing, leveraged and
3 Restaurant Brands International Inc. is a US-Canadian multinational fast food holding company
formed in 2014 through the merger between Burger King USA and Canadian coffee shop and
restaurant chain Tim Hortons Inc.
5
unleveraged acquisitions, recapitalisations, restructurings, workouts and
similar situations.
[14]
[15]
[16] Pre-merger, Burger King is controlled as to 95.36% by Grand Foods
Investments 1 Proprietary Limited – which is wholly owned by Grand Foods,
which in turn is wholly owned by Grand Parade Investments (“GPI”) – and, as
to 4.64%, by Restaurant Brands. GPI is listed on the Johannesburg Stock
Exchange (“ JSE”), its top three shareholders are: Value Active PFP H4 Q1
Hedge Fund;4 Arakot Pty Ltd;5 and Midnight Storm Investments Pty Ltd. 6 GPI
is an empower ed company: 68.56% of its shareholding is held by HDPs; of
which 22.87% is held by black women.
4 As to 11.65%.
5 As to 10.06%.
6 As to 5.16%.
6
[17] Burger King holds the long-term master franchise license in respect of the
Burger King brand in South Africa and has the rights to develop and expand
the brand in the country's quick service restaurant market. “Burger King” is an
American multinational chain of fast-food restaurants. Through its various
franchise subsidiaries, Burger King currently operates more than 90 fast food
restaurants across South Africa.
[18] Grand Foods Meat Plant is also a wholly owned subsidiary of Grand Foods.
Grand Foods Meat Plant operates a meat plant in Cape Town, which
manufactures burger patties. Approximately % of this meat plant's output is
sold to Burger King to fulfil the requirements of Burger King ’s restaurants in
South Africa. The balance of the output is sold to
Rationale for the proposed transaction
[19] According to ECP Africa Funds, t he proposed transaction represents an
opportunity for it to invest in a high-growth target in line with its investment
strategy and group mandate.7
[20] From GPI’s perspective, over the last two years, it has undergone a process of
restructuring its business with the main aim of reducing the discount to its
intrinsic net asset value and unlocking value for shareholders. GPI's board has
decided that the best way to do this is through a controlled sale of assets. The
sa
le of GPI's interests in Burger King and Grand Foods Meat Plant is in line
with this value-unlock strategy.
Relevant Market
[2
1] The Commission considered the activities of the merging parties and found that
there is no horizontal overlap; as the ECP Africa Funds have interests in firms
7 Emerging Capital Partners is a private equity firm that seeks to generate capital appreciation and
foster transformative, sustainable growth by investing in African businesses.
7
that are active in the market for the procurement / payment services for cross-
border road transportation as well as various financial services; whereas
Burger King and Grand Foods Meat Plant are active in the quick service
restaurant market and the market for the manufacture and distribution of meat
products respectively. The Commission also found that the proposed
transaction does not result in any vertical overlaps.
[2
2] Nevertheless the Commission assessed the size of the market accretion that
the proposed transaction presents and found that Burger King is a small
competitor in the market for quick service restaurants. According to
Euromonitor, in 2018, Burger King's market share in South Africa was an
estimated % (measured by value). By comparison, KFC (being by far the
largest provider of fast food in South Africa), had a market share of
approximately %. The fast-food or quick service restaurant market is very
competitive with many competitors such as KFC, McDonalds, Nando’s, Wimpy,
Debonairs, Steers and Chicken Licken. These brands are all established in the
South African market and have been present in the country for much longer
than Burger King.
[23] The Commission therefore concluded that the proposed transaction was
unlikely to substantially prevent or lessen competition in any market.
Public Interest
[24] Concerns raised during the Commission’s investigation related to employment
(section 12A(3)(b)) and a greater spread of ownership (section 12A(3)(e)), both
o
f which were addressed through the agreed set of Revised Conditions.
8
Employment
[25] A substantial number of Grand Foods Meat Plant's employees are represented
by the Southern African Clothing and Textile Workers' Union ("SACTWU"). 8
The merging parties submitted that the proposed merger would not result in
any retrenchments.
[26] During the Commission’s investigation SACTWU had no concerns regarding
the merger. SACTWU submitted that:
“[w]e accept the commitments of the merger parties and will not oppose
this merger, if we discover that our members at Grand Foods Meat Plant
are faced with retrenchments subsequent to this merger, and if we deem
these retrenchments to be merger-related, we will not hesitate to
escalate the matter to the Competition Commission and Tribunal for
further investigation and action, if needs be.”9
[27] In light of this, the Commission concluded that the merger would have no
negative effect on employment. As we discuss later, during the Tribunal
proceedings, SACTWU raised concerns pertaining to potential job losses
resulting from the divestiture of the meat plant which was tendered as a
condition by the merging parties subsequent to the Commission prohibiting the
merger. At the time of SACTWU’s submissions to the Commission, the impact
of the divestiture on employment could not have been fully considered by
SACTWU.
Spread of Ownership
[28] The ECP Africa Funds have no ownership by HDPs and workers. Burger King
and the Grand Foods Meat Plant are ultimately controlled by GPI, an
empowerment entity with 68.56% of its shareholdings held by HDPs
of which
8 ECP Africa Funds do not directly employ any employees in South Africa. Burger King’s employees
are represented by an employee representative, who did not raise concerns with the merger.
9 See email from SACTWU to the Commission dated Wednesday 28 April 2021.
9
22.87% is held by black women. After the implementation of the proposed
transaction neither the ECP Africa Funds, Burger King nor the Grand Foods
Meat Plant will have ownership by HDPs and workers.
[29] During the Commission’s investigation, the dtic raised concern that the merger
would negatively affect Burger King’s Broad-Based Black Economic
Empowerment (“B-BBEE”) levels as a result of the reduction in its controlling
owner’s (GPI) shareholding. To remedy this concern, the dtic proposed that
the ECP should set-up an Employee Share Ownership Program ("ESOP")
valued at a minimum of 5% of the issued share capital of the Target Firms.
[30] During the Commission’s investigation, SACTWU had also sought clarity about
any plans the merging parties may have to set up workers trusts to benefit
employees in the Target Firms as part of the transaction. They also sought
details of the worker ownership thresholds being considered.
[31] The Commission applying section 12A(3)(e) which provides for “ the promotion
of a greater spread of ownership, in particular to increase the levels of
ownership by historically disadvantaged persons and workers in firms in the
market” concluded that “ the end result is that after the implementation of the
proposed transaction both the Acquiring and the Target Firms will have no
ownership by HDPs and workers.”
[32] The Commission submitted that section 12(1A) which requires the
Commission, when considering whether a merger is likely to substantially
prevent or lessen competition, makes it peremptory for the Commission to
consider whether the merger can or cannot be justified on substantial public
interest grounds regardless of the outcome of the competitive assessment.
According to the Commission, this means that even where a merger transaction
does not raise competition concerns, competition authorities are obliged to
determine whether or not the merger can be justified on substantial public
interest grounds.
10
[33] The Commission engaged the merging parties to propose remedies, especially
B-BBEE commitments, to alleviate the negative effect on th e public interest
concern.
[34] The merging parties submitted that any loss of empowerment credentials by
Burger King would not have a substantial adverse effect on the ability of SMME
or HDI firms to enter into or participate in or expand in the market as
contemplated in section 12A(3)(c). To the contrary, the merger parties
submitted that the proposed transaction would enable GPI to unlock value for
its shareholders (the majority of which are HDPs) and will allow the business to
reduce debt. The ESOP requirement, argued the merging parties, is likely to
have unintended consequences in that this may result in a situation where black
shareholders, who are looking to divest and unlock value as in the present
case, will be forced to accept major discounts as buyers will factor in the
economic effects of an ESOP requirement in the pricing of deals.
[35] The merging parties tendered some expansion commitments, stating that
Burger King is likely to benefit from aggressive investment resulting from the
proposed merger. The expansion commitments would have the following
benefits:
35.1 ECP Africa Funds undertook to procure the investment of no less than
R500,000,000 in aggregate capital expenditure by the end of 2026, to
be utilised towards the establishment of new Burger King stores in
South Africa.
35.2 The merging parties undertook to increase the number of Burger King
outlets in South Africa to at least 150 (from 90) by the end of 2026.
35.3 The merging parties undertook to increase the number of permanent
employees in South Africa by no less than 1,250 historically
disadvantaged individuals by the end of 2026.
11
35.4 The merging parties undertook to increase the total value of their
payroll and employee benefits in respect of all employees employed by
not less than R120,000,000 by the end of 2026.
[36] The Commission found however that the merger parties’ proposal did not
address the specific public interest concern (the elimination of Burger King’s
b
lack shareholding through GPI) resulting from the proposed merger. The
Commission noted that the commitment being offered was already contained
in Burger King’s own internal documents
10 which reflect ed plans to grow the
Burger King franchise independent of the merger . Therefore, the conditions
proposed by the merging parties were found not to generate substantial positive
public interest benefits that would not have materialised absent the merger.
[37] The Commission acknowledged that the merger will allow GPI to raise capital
and realise their investment. However, it was not clear if, absent the merger,
the options to raise capital for GPI would be significantly impeded as proposed
by the merging parties. The Commission noted that the merging parties’ board
minutes had considered other funding alternatives. 11 From this, the
Commission surmised that GPI is likely to still have other options to raise
capital.
[38] The Commission was not persuaded by the argument that there will be public
interest benefits to HDPs as they would realis e a return on investment since
this would be a private gain to the empowerment shareholders. The
Commission submitted that this should be balanced against an equally weighty
countervailing public interest to promo te a greater spread of ownership, in
particular to increase the levels of ownership by HDPs and workers in firms in
the market.
10 See Burger King Letter to the Commission dated 21 May 2021 and GPI Board of Directors Minutes
of a Meeting of the Board of Directors held on 3 February 2020.
11
12
[39] The Commission came to the view that the then proposed conditions did not
address the significant public interest concern resulting from the proposed
merger and prohibited the proposed transaction.
[40] It bears mention that the conditions set out above, remained in the Revised
Conditions presented to the Tribunal, with the improvements discussed further
below.12
THE HEARING
Condonation
[41] As indicated, the Commission issued a Notice of Prohibition on 1 June 2021.
The Request for Consideration was filed on 3 August 2021.
[42] Tribunal Rule 32(1) provides that a request for consideration of an intermediate
merger must be filed within 10 business days after the Commission issues its
merger decision.
[43] The Reconsideration Application was thus filed 34 business days outside the
Rule’s prescribed time limit.
[44] The merging parties submitted that the late filing was not occasioned by any
tardiness or willful disregard for the Tribunal Rules, rather negotiations were
being pursued in good faith with a view to facilitating the expeditious approval
of the proposed transaction. As indicated, the merging parties communicated
to the Tribunal prior to filing that they were in negotiations with the Commission
and the dtic.
12 We understand that an updated set of conditions (containing reference to the ESOP but without the
commitment relating to the meat plant disposal) were tendered to the Commission on the last day of
the Commission’s time period for making a decision. Therefore the Commission had not had an
opportunity to further engage the merging parties in this regard.
13
[45] The Commission did not oppose the merging parties’ application for
condonation.
[46] We condoned the late filing in terms of section 58(1)(c) which provides that the
Tribunal may condone, on good cause shown, any non-compliance of Tribunal
Rules or a time limit set out in the Act, since the merger parties had indicated
to the Tribunal their involvement in good faith negotiations with the result that
significant commitments to better the public interest had been agreed with the
Commission and the dtic.
The Revised Conditions
[47] At the hearing, the merging parties submitted that the Revised Conditions had
been materially amplified in multiple respects from the conditions initially
tendered to the Commission. Firstly, the conditions, proposed to the
Commission set out above in paragraph [35] were subject to prevailing
economic conditions in South Africa and the merger parties’ ability to cover their
operational expenses. The Revised Conditions which still contain the
commitments in [35] above, are not subject to these provisos, and are a firm
commitment.
[48] In addition, the Revised Conditions had been amplified beyond the expansion
commitments and, significantly, include a divestiture of the Grand Foods Meat
Plant, and the following:
48.1 Over a period of five years from the implementation date of the
proposed transaction, Burger King will achieve
for the Enterprise and Supplier Development (“ESD”) element
under its B-BEE scorecard.13
13 An ESD scorecard essentially measures compliance against three elements, namely (i) preferential
procurement; (ii) supplier development and (iii) enterprise development.
14
48.2 The merged entity shall establish an ESOP for an effective 5%
interest in Burger King.
48.3 ECP Africa Funds shall dispose of the meat plant to one or more
HDPs (the “Meat Plant Purchaser”). Attached to this, Burger King shall
conclude a direct or indirect long term supply agreement with the Grand
Foods Meat Plant and/or the Meat Plant Purchaser in terms of which
Burger King will continue to procure inputs from the meat plant for a
period of up to 15 years from the implementation date of the disposal
to the Meat Plant Purchaser.
[49] As mentioned earlier, SACTWU raised concerns regarding the impact on
employment resulting from the proposed disposal of the meat plant and
whether the retrenchments would be regarded as merger specific. Having been
provided access to relevant confidential information, SACTWU also raised
concerns regarding the meat supply agreement. The concern was that any
changes to the supply arrangements could negatively impact employees in
Grand Foods Meat Plant if the terms of supply to the HDP buyer of the meat
plant were less favorable to the current supply agreement between Burger King
and the Grand Foods Meat Plant.
[50] The merging parties have clarified that, currently, Burger King and the meat
plant are both entities within the GPI group; thus
. The merging parties undertook that subject to compliance
with Burger King’s Global Standards. 14 Burger King shall conclude a
14 "Global Standards" means the standards, specifications and procedures for Burger King
Restaurants issued, directed and amended by Burger King Global and/or its Affiliates from time to
time
15
supply agreement with the Grand Foods Meat Plant and/or the Meat
Plant Purchaser in terms of which B urger King will continue to procure inputs
from the meat plant
[51]
[52] The Tribunal was concerned that some of the Revised Conditions did not
contain sufficient detail to enable assessment and ensure effective monitoring.
For instance the Tribunal sought clarity regarding the mechanism of the ESOP,
including funding plans for the shares and the criteria for qualifying
beneficiaries.
[53] Subsequent to the hearing, the merging parties provided the foundational
principles of the ESOP which were agreed with the dtic and the Commission.
53.1
15
15 The Merging Parties’ Letter to the Tribunal dated 15 September 2021 (“15 September 2021 Letter”).
16
53.2
16
53.3 In order to understand the expansion commitments, the Tribunal
requested details of the historical situation in order firstly to understand
the plans for the opening of new Burger King outlets, and secondly for
purposes of monitoring the conditions . The merging parties provided
that the estimated cost for the roll out of one additional Burger King
outlet is currently between
Thus, the new
store roll out of at least 60 new Burger King outlets over the next five
years amounts to a capital expenditure of approximately R500 million
over five years.17
53.4 In order to further enable the Commission’s monitoring of the
conditions a base number of current employees was sought of the
merging parties who provided that the commitment to employ no less
than 1,250 additional historically disadvantaged individuals in South
Africa is off a base amount of employees. 18
53.5 Related to monitoring, the Panel also sought information on the
baseline value of the spend on payroll. Burger King clarified that it
currently spends on its payroll
bill. Thus, the commitment to increase the total value of all payroll and
employee benefits (by no less than R120 million) is off a base amount
of
16 That is employees that have been at Burger King for longer are given more participation units
based on an objective sliding scale irrespective of grade or level.
17 23 August 2021 Letter.
18
(Email from the Merging Parties to the Tribunal dated 17 September 2021.)
17
Conclusion
[54] In light of the above, we approved the transaction subject to a set of conditions
which in essence had been agreed by the parties, but which had been further
enhanced following the Tribunal hearing.
29 November 2021
Ms Mondo Mazwai
Date
Ms Yasmin Carrim and Prof Fiona Tregenna concurring.
Tribunal case managers:
Mpumelelo Tshabalala and Peter Kumbirai
For the Commission:
Bukhosibakhe Majenge , Tamara Paremoer,
Maya Swart, Temba Mahlangu, Songezo
Mabece and Namhla Pakade
For the Merging Parties:
Adv Jerome Wilson SC instructed by Richardt
van Rensburg, Mark Garden and Sazi Madlala of
ENS on behalf of the Acquiring Firms, and Susan
Meyer, Preanka Gounden and Gasant Orrie of
CDH on behalf of the Target Firms
For SACTWU
Simon Eppel
For the dtic: Tanya van Meelis and Mahomed Vawda