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COMPETITION TRIBUNAL OF SOUTH AFRICA
Case no: LM121Nov21
Net1 Applied Technologies South Africa (Pty) Ltd (Primary Acquiring Firm)
and
Ovobix (RF) (Pty) Ltd and Luxiano 227 (Pty) Ltd (Primary Target Firms)
Heard on: 03 March 2022
Last Submission: 07 March 2022
Order Issued on: 09 March 2022
Reasons Issued on: 07 April 2022
REASONS FOR DECISION
1. On 09 March 2022, the Competition Tribunal (“Tribunal”) conditionally approved a large
merger in terms of which Net1 Applied Technologies South Africa Proprietary Limited
(“Net1 SA”) intends to acquire Ovobix (RF) Proprietary Limited ("Ovobix") and Luxanio 227
Proprietary Limited ("Luxanio"). Upon implementation of the proposed transaction, Net1
SA will control Ovobix and Luxanio.
2. The proposed transaction essentially involves the acquisition of the entities owning and
operating the business of Cash Connect Management Solutions (Pty) Ltd (“CCMS ”) and
K202111477132 (South Africa) (Pty) Ltd (“K2021") and their subsidiaries. Ovobix and
Luxanio each have a shareholding in CCMS and K2021.
3. The primary acquiring firm is Net1 SA . Net1 SA is wholly controlled by Net 1 UEPS
Technologies, Inc. (“Net1 UEPS”). Net1 UEPS is a United States company and is not
controlled by any single firm. In addition to Net1 SA, Net1 UEPS controls a number of firms
in South Africa. Net1 UEPS and all its subsidiaries (including Net1 SA) will collectively be
referred to as the Acquiring Group.
4. The Acquiring Group, through its subsidiaries, provide s payment solutions, transaction
processing services and financial technology across industries. In South Africa, Net1 SA
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is active in the provision of low -cost financial services to underserviced consumers and
payment processing. Relevant to the competition assessment of the proposed transaction
are the activities of the Acquiring Group in relation to the sale of prepaid airtime and
electricity, provision of billing payments, POS solutions (devices and software) and Value
Added Services (VAS) solutions.
5. The primary target firms are Ovobix and Luxanio (collectively referred to as the “Target
Firms”). Ovobix, Luxanio and all firms directly or indirectly controlled by Ovobix will
collectively be referred to as the Target Group.
6. Ovobix and Luxanio are investment holding companies, holding shares in CCMS and
K2021. Save for their shareholding in CCMS and K2021, Ovobix and Luxanio do not carry
out any other business activities in South Africa or elsewhere. In South Africa, the Target
Group, through CCMS, provides services in the following general areas:
(i) Cash (automated cash management) through its "Cash Connect" division;
(ii) Lending (access capital in 24 hours) through its "Capital Connect" division;
(iii) Card (card payment solutions) through its "Card Connect" and "Kazang Pay"
divisions; and
(iv) VAS (prepaid and value added services) through its "Kazang Connect" division.
7. K2021 controls K202063969 (South Africa) (Pty) Ltd (“K2020"). K2020 provides unsecured
short-term business loans to the South African retail sector.
Competition assessment
8. The Competition Commission (“Commission”) found that the proposed transaction results
in both horizontal and vertical overlaps. The Commission also found that the merging
parties offer complementary services.
Horizontal overlap
9. The horizontal overlap occurs in that both the Acquiring Group and the Target Group
(through Kazang Connect) are active in the provision of a range of VAS solutions. These
services include:
(i) the supply of prepaid airtime;
(ii) the supply of prepaid electricity; and
(iii) bill payments.
(ii) the supply of prepaid electricity; and
(iii) bill payments.
10. In the markets for the sale of (i) prepaid airtime and data; and (ii) electricity , the
Commission found that the proposed transaction is unlikely to substantially prevent or
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lessen competition given inter alia the combined relatively low national market shares of
the merging parties in these markets.
11. With respect to the market for the provision of bill payments, the Commission found that
the merged entity will have a significant national market share. However, the Commission
concluded that the proposed merger is unlikely to alter the structure of th is market given
the insignificant market share accretion of less than 1% as a result of the proposed
transaction. Further, the merging parties will continue to face constraints from a number
of other players such as Blue Label, Flash, Cigicell, CellAir and RA Cellular. In addition,
the Commission found that in this market, the merg ing parties target different customer
groups as the Target Firms f ocus more on informal retailers and the Acquiring Group
focuses on the formal retailer.
Vertical overlap
12. The vertical overlap occurs in that the Acquiring Group, via Net1 Universal Electronic, is a
supplier of POS terminals with integrated software. On the other hand, the Target Firms,
through Card Connect and Kazang, purchases POS devices from third parties and
supplies these to its customers for the processing of card payments and the integration of
VAS.
13. The Acquiring Group is active in the upstream market for the supply of POS devices (that
is, hardware and integrated software, and repair services). The Target Firms, through
CCMS, buys POS devices for distribution to its customers. Currently, the Target Firms
(CCMS) imports all its POS hardware and software and rents them to its customers (mainly
SMEs) so they are able to accept debit cards. The Target Group does not purchase POS
devices from the Acquiring Group. Furthermore, the Acquiring Group currently only has
one customer of POS hardware and software.
14. The Commission found that the merg ing parties will have a combined national market
share of less than 10% in the market for the provision of POS devices.
share of less than 10% in the market for the provision of POS devices.
15. The Commission concluded that the proposed transaction is unlikely to result in any
significant input foreclosure concerns as the Acquiring Group will continue to face
competition from the major banks in the supply of POS. In addition, given that Kazang/Card
Connect represents less than 10% of POS devices, Kazang competitors will have access
to several other POS suppliers such as YOCO, iKhokha and JustPos, including the major
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banks. Furthermore, the Acquiring Group does not supply POS to any competitors of the
Target Group.
16. The Commission further found that the proposed transaction is unlikely to result in any
customer foreclosure concerns as the Target Group does not procure POS from any
supplier in South Africa. The Target Firms import all its POS devices directly from firms
located outside of South Africa. In addition, the Target Group is a small player in the
distribution of POS devices in South Africa with a less than 10 % market share in the
distribution of POS devices.
Complimentary services
17. The complementarity between the activities of the merging parties occurs in that the
Acquiring Group (through EasyPay) provides a card payment processing facility. That is,
EasyPay provides switching services that enable all transactions to be collated and
reconciled daily for clearing and settlement by the banks.
18. The Target Firms (through Kazang) are active as authorised aggregator, in that they act
as an agent and aggregate these transactions together and send them to a bank . The
bank settles Kazang, which in turn settles th e individual merchants. The aggregation
services offered by Kazang are mainly offered to informal retailers and it is necessary to
aggregate these transactions across different merchants in order to make the provision of
card payment services to the customer base viable. The merging parties can therefore
potentially bundle their offering, i.e., the EasyPay card payment processing facility with the
aggregation services offered by Kazang.
19. Given the complementarity of the merging parties payment processing services, the
Commission also assessed if the proposed transaction would result in anticompetitive
portfolio effects. The Commission assessed whether the merging parties will have the
ability and incentive to bundle merchant acquiring services p rovided by Kazang Connect
with the issuing processing services provided by the Acquiring Group.
with the issuing processing services provided by the Acquiring Group.
20. As indicated above, t he Commission found that the Target Group ( through Kazang
Connect) has a market share of less than 10% in the provision of POS devices and
competes with the South African banks . The Commission noted that it does not have
market shares relating to the provision of card payment processing facility and switching
services but noted that the Acquiring Group competes with the South African banks such
as First National Bank, Standard Bank South Africa, Capitec, ABSA Limited and Nedbank
Limited.
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21. The Commission concluded that the merged entity will not have the market power post-
merger to engage in an anticompetitive tying and bundling strategy. The Commission
further noted that the POS services market is dominated by the large banks with extensive
resources compared to the Target Group. Further, the Commission was of the view that
the merged entity will not have an incentive to engage in an exclusionary bundling strategy
because there is no incentive on either of the merging parties to restrict the interoperability
of its card issuing or acceptance.
22. The Commission ultimately concluded that the proposed transaction is unlikely to result in
any competition concerns. We have no reason to disagree with the Commission
conclusion.
Public Interest
Employment
23. The merging parties confirmed that no retrenchments will arise as a result of the proposed
transaction.
24. 45 retrenchments however took place at Net1 SA in 2020 , of which 26 were forced
retrenchments. The Commission could not find any evidence to suggest that the
retrenchments implemented by Net1 SA in the past year, were in any way linked to the
proposed transaction. Documents provided by the parties indicated that the retrenchments
were triggered by the financial performance of Net1 SA. Therefore, the Commission was
of the view that the pre-merger retrenchments were as a result of operational reasons and
unlikely to be merger specific.
25. Considering the current economic climate and the unemployment rate in South Africa, the
Commission engaged the merging parties about imposing a condition obligating the
merging parties to give preference to the retrenched employees1 when vacancies become
available, provided that the employees have the requisite qualifications, skills, know-how
or experience for the vacancy. This commitment will apply for a period of 24 (twenty-four)
months after the implementation of the proposed transaction. The merging parties agreed
months after the implementation of the proposed transaction. The merging parties agreed
1 In terms of the imposed conditions, retrenched employees mean the 26 (twenty-six) employees of the
Acquiring Group who were retrenched in the 12 (twelve) months prior to notification of the merger and
any employees of the Acquiring Group who are retrenched as a result of the process commenced in
January 2022 to close sub -economic points of presence and rationalise roles within Net1 SA’s
Consumer Financial Services business, and who have not subsequently been rehired by the Acquiring
Group.
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to the latter employment-related condition, and it was included in the Tribunal’s imposed
conditions.
Spread of ownership
26. The Acquiring Group has 1.95% B -BBEE shareholding. This arises from the mandated
investments managed by Value Capital Partners ("VCP"), representing 21.8% of the
shareholding in Net1 SA's holding company, Net1 Inc.
27. The Target Group currently has a 3.57% indirect B-BBEE ownership. This comes from Old
Mutual’s own BEE shareholding (and is thus indirect and through institutional
shareholding).
28. Given the above, the Commission found that the proposed transaction will result in a
dilution of B-BBEE shareholding by 1.62% and concluded that the proposed transaction
does not promote a greater spread of ownership by historically disadvantaged persons
(HDPs) and workers in firms in the market as contemplated under section 12A(3)(e) of the
Competition Act. Consequently, the Commission invited the merging parties to make
submissions on conditions which can address the reduction in ownership by HDPs
occasioned by the proposed transaction.
29. In response to the Commission’s request, Net1 SA proposed to introduce a programme to
facilitate participation and ownership by workers in the business, together with
contributions to develop its supply chain and relevant communities, within its financial
constraints.
30. A set of conditions were proposed by the Commission and the merging parties regarding
the establishment of an employee share ownership scheme (ESOP). The Tribunal sought
clarity and further details from the parties regarding certain aspects of the tendered
conditions relating to the ESOP, including issues such as the level of shareholding
allocation in Net1 Inc. to the ESOP, what costs, if any, there will be to the
employees/beneficiaries regarding the ESOP, the funding arrangement, the criteria to be
applied for qualification as beneficiary and any exclusions that may apply, benefits that the
applied for qualification as beneficiary and any exclusions that may apply, benefits that the
beneficiaries will be entitled to, representation of employees and consultation processes.
31. The Tribunal further invited the parties to revisit the proposed ESOP conditions and
enhance them where necessary to provide more clarity in terms of the above
considerations. The Tribunal also posed questions at the hearing to the parties relating to
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the ESOP, its design principles and future consultation with the Commission regarding the
design principles.
32. The merging parties subsequently enhanced the tendered ESOP-related conditions in
certain respects . These amended ESOP-related conditions were acceptable to the
Tribunal after motivation by the merging parties and the Commission.
33. We approved the proposed transaction subject to the following set of c onditions relating
to the establishment of an ESOP for the benefit of workers:
(i) By the end of 36 (thirty-six) months from the implementation date of the proposed
transaction, Net1 Inc shall establish an ESOP for the benefit of workers of the merged
entity to receive shareholding in Net1 Inc equal in value to at least 3% (three percent)
of the issued shares in Net1 Inc as at the implementation date of the proposed
transaction, in accordance with the design principles set out in Annexure B to the
imposed conditions. Workers mean employees as defined in the Labour Relations
Act, and in the context of ownership, refers to ownership of a broad base of workers.
(ii) If, within 24 (twenty -four) months of the implementation date of the proposed
transaction, Net1 Inc generates a positive net profit for 3 (three) consecutive quarters
(as reported in its Form 10 -Q filings to the Securities and Exchange Commission in
the United States), the ESOP to be established by the end of the abovementioned
period, shall receive shareholding in Net1 Inc equal in value to at least 5% (five
percent) of the issued shares in Net1 Inc as at the implementation date of the
proposed transaction, in accordance with the design principles set out in Annexure B
to the imposed conditions.
(iii) Prior to the establishment of the ESOP, the Acquiring Group shall consult with the
Commission on the principles which it proposes to apply in the ESOP (in addition to
the principles contained in Annexure B to the imposed conditions). Such consultation
the principles contained in Annexure B to the imposed conditions). Such consultation
shall involve meaningful engagement with the Commission on ensuring the ESOP
structure is established in accordance with objectives underlying the design principles
in Annexure B to the imposed conditions.
(iv) If there is a material dispute between the Commission and the merging parties
regarding whether the final ESOP design will meet the objectives underlying the
design principles in Annexure B to the imposed conditions, then the Commission and
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/ or the Acquir ing Group may apply to the Tribunal to seek clarity on the
implementation of the order.
34. Annexure B to the imposed conditions deal s with the ESOP design principles, including
the ESOP ’s structure, funding, cost to workers, governance, duration, participants,
participation benefits and approvals required. These design principles as contained in
Annexure B to the conditions provide inter alia:
(i) All workers of the merged entity as at the ESOP establishment date who are not part
of existing equity ownership and long -term incentive schemes at that date will be
beneficiaries of the ESOP;
(ii) Beneficiaries will be entitled to: (i) dividends to the extent that they are declared by
Net1 Inc and in terms of an applicable trickle dividend to the ESOP; and (ii) capital
growth/upside due to the vesting of the ESOP after 7 (seven) years;
(iii) The ESOP shall be at no cost to the participants (the workers of the merged entity).
For the avoidance of doubt, no cash outlay will be required to participate in the ESOP;
(iv) The funding will entail notional vendor financing or a similar funding arrangement and
other facilitation by Net1 Inc. The terms of the vendor financing will provide for a fixed
trickle dividend rate, meaning that a portion of any dividends declared by Net1 Inc in
respect of the shareholding of the ESOP trust will flow to the beneficiaries of the trust
and the other portion will be utilised to service the vendor financing; and
(v) A b alanced composition of Board of Trustees, including 1 (one) appointed by the
merged entity, and 1 (one) appointed by workers and 1 (one) independent . The
independent trustee will be recommended and appointed by the workers, subject to
the candidate being acceptable to the merged entity.
35. The above ESOP-related conditions address the greater spread of ownership issue.
Development initiatives
36. The merging parties furthermore made commitments to supplier and enterprise
36. The merging parties furthermore made commitments to supplier and enterprise
development initiatives and socio -economic development investments. In terms of the
imposed conditions Net1 Inc will make a combined contribution equivalent to R12 million
(twelve million Rands) in Net1 Inc's current financial year, to supplier and enterprise
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development initiatives, together with socio -economic development investments. The se
contributions will include:
(i) R6 million (six million Rands) in supplier development contributions, involving
providing working capital solutions, operating expenses support, and extending multi-
year contracts where viable, to support the financial viability of, and potential job
creation by, HDP owned SME suppliers to the merged entity;
(ii) R3 million (three million Rands) in enterprise development contributions, involving
operating expenses support and technical support to HDP owned SMEs that have the
potential to graduate into the merged entity supply chain, or that can participate within
the broader value chain in which the merged entity operates; and
(iii) R3 million (three million Rands) in socio -economic development contributions,
targeting the upliftment of the communities which the merged entity serves, and in
particular to facilitate the provision of resources necessary to enable dignity, such as
safe drinking water, and facilities for the disabled.
Other public interest
37. The proposed transaction raises no other public interest concerns.
Conclusion
38. We conclude that the proposed transaction is unlikely to substantially prevent or lessen
competition in any relevant market. The proposed transaction has been approved subject
to the abovementioned public interest conditions which collectively address any potential
public interest concerns. The imposed conditions are annexed hereto as Annexure “A”
and Annexure “B” (Design Principles of the ESOP).
07 April 2022
Mr Andreas Wessels Date
Ms Yasmin Carrim and Dr. Liberty Mncube concurring
Tribunal Case Manager: Kameel Pancham
For the Merging Parties: Lara Granville of Cliffe Dekker Hofmeyr Inc.
For the Commission: Themba Mahlangu and Zintle Siyo