COMPETITION TRIBUNAL OF SOUTH AFRICA
Case No: LM165Jan22
In the matter between:
Digital Titan (Pty) Ltd Primary Acquiring Firm
and
TDE Investments (Pty) Ltd
Primary Target Firm
Introduction
[1] On 20 July 2022, the Tribunal conditionally approved the large merger in which
Digital Titan (Pty) Ltd (“Digital Titan”) will indirectly purchase a majority of the
issued share capital of TDE Investments (Pty) Ltd (“TDE”) which will give it a
majority shareholding in Teraco Data Environment (Pty) Ltd (“Teraco”) and its
subsidiaries.
[2] TDE’s direct and indirect South Africa n subsidiaries include Teraco. Following
the implementation of the proposed transaction, Digital Titan will acquire control
over TDE.
Primary acquiring firm
[3] Digital Titan is incorporated in accordance with the laws of South Africa 1 and is
ultimately controlled by Digital Realty Trust Inc., through its controlling interest in
Digital Realty Trust L.P. (collectively, “Digital Realty”).
1 Digital Titan does not control (directly or indirectly) any firm and does not conduct any activities
in South Africa.
Panel : Y Carrim (Presiding Member)
: I Valodia (Tribunal Member)
: T Vilakazi (Tribunal Member)
Heard on : 20 July 2022
Order issued on : 20 July 2022
Reasons issued on : 18 August 2022
REASONS FOR DECISION
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[4] Digital Realty owns, acquires, develops and operates data centres and is focused
on providing data centre colocation2 and interconnection solutions3 to customers
across a variety of industries, ranging from cloud and information technology
services; communications and social networking; financial services;
manufacturing; energy; and healthcare and consumer products.
Primary target firm
[5] TDE is a company incorporated in accordance with the company laws of the
Republic of South Africa and is jointly controlled by Springlux Midco S.a.r.l and
Berkshire Partners LLC.
[6] TDE, through its subsidiary, Teraco is a provider of data centre services. Through
its seven data centres , l ocated in Johannesburg , Durban, and Cape Town,
Teraco provides data centre space to customers who wish to retain control over
their own infrastructure, but which may lack the facilities to house them; rentable
floor/cabinet space; and all auxiliary infrastructure services such as monitor ing
power, cooling, humidity security, ancillary building systems and limited non -
technical support.
[7] TDE is not owned or controlled by any historically disadvantaged persons
(“HDPs”). However, of relevance to the proposed transaction is that TDE
indirectly controls Teraco which has some of its shareholding held by a B-BBEE
entity,
Background
[8] On 13 April 2022, the Competition Commission (“Commission”) referred the
proposed transaction between Digital Titan and TDE to the Tribunal and
recommended that the proposed transaction be approved subject to certain
public interest conditions. However, on 28 April 2022 Africa Data Centres SA
Development (Pty) Limited (“ADC”) filed an intervention application seeking to
2 Colocation refers to several aspects of this type of data centre. First, the fact that servers and
other equipment from many different companies are ‘co-located’ in one data centre. It also refers
to the concept that a company can have their equipment located in multiple places. They may
have servers, for example, in three or four different co-location data centres.
3 Interconnection solu tions are physical network connection between two parties. The cross -
connect is enabled by the installation of patch cord(s) between ports of the respective parties’
interconnection panels.
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participate in the large merger proceedings before the Tribunal in terms of section
53 of the Competition Act, 89 of 1998, as amended (“the Act”).
[9] ADC competes directly with Teraco for colocation services, including data centre
services, energy, cross -connects and remote hands services. ADC also
competes with Teraco in the public peering market. In this regard, ADC partners
with the South African community internet exchange (“INX -ZA”) to provide
peering to its clients at its facilities, while Teraco offers public peering through its
subsidiary, NAP Africa.
[10] The Tribunal , after hearing ADC's intervention application, granted it limited
participation rights on some of the grounds it had advanced in support of its
intervention on 17 May 2022 .4 ADC appealed t his decision to the Co mpetition
Appeal Court (“CAC”) seeking to expand its scope of participation but was
unsuccessful.5
[11] The parties had agreed to a timetable for the filing of papers in the merger
proceedings, but these proceedings were interrupted during the discovery stage
by way of a section 45 application brought by TDE against ADC on 14 June 2022
and an application to compel by the merging parties against ADC on 3 July 2022.
[12] On 11 July 2022 , ADC and the merging parties came to an agreement on
proposed conditions which addressed the issues raised by ADC (“the access
condition”). ADC formally withdrew its opposition to the merger, on the basis that
the merger would be approved subject to the access conditions.
[13] The merger was heard in chambers by the panel and was approved on the
conditions agreed between ADC and the merging parties and those proposed by
the Commission. The reasons for this decision follow.
Competition Assessment
Market definition: relevant product market
[14] Although both Digital Realty and Teraco provide data centre services, Digital
Realty is not active and does not own any data centres in South Africa.
Realty is not active and does not own any data centres in South Africa.
4 See Tribunal Case No. LM165Jan22/INT016Apr22 for intervention application reasons.
5 200/CAC/May22 at para 28.
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[15] In its investigation, the Commission considered the likely effects of the proposed
transaction in relation to the provision of data centre services in South Africa. The
Commission was guided by international and local jurisprudence 6, however, the
Commission did not find it necessary to conclude on the relevant product market
but considered the effects of the proposed transaction in the market for the
provision of colocation/off-site or outsourced data centre services, in line with the
Tribunal’s decision in the ADC / Samrand Data Centre7 matter.
[16] Based on the above, the Tribunal assessed the impact of the proposed
transaction on the market for the provision of colocation/off -site or outsourced
data centre services.
Relevant geographic market
[17] Teraco’s data centre facilities are situated in metropolitan areas in Johannesburg,
Durban, and Cape Town. Digital Realty has no presence in South Africa.
[18] It was noted in the ADC / Samrand Data Centre matter, that although data centres
are largely located in metropolitan areas where customers are headq uartered,
any data centre can service a much broader region. This is because data centres
are connected to various networks and are positioned to offer services throughout
the country. Therefore, the Tribunal accepted the Commission’s view that the
relevant geographic market for the provision of data centre services is national.
[19] Given the lack of geographic overlap between the activities of the merging parties
in South Africa, the Commission was of the view that it is not necessary to take
a definitive view on the geographic market as Digital Realty is not active and does
not own any data centres in South Africa.
[20] Based on the above, the Tribunal assessed the competition effects of the
proposed transaction in the national market.
6 Data centres are designed to house servers and network equipment. Data centres provide a
6 Data centres are designed to house servers and network equipment. Data centres provide a
highly reliable, secure environment with redundant mechanical, cooling, electrical power systems
and network communication connection connections.
7 Tribunal Case No. LM169Mar20. The Tribunal accepted the Commission’s view that although a
data centre is ideal for companies that need a dedicated system , of late, more and more
companies are moving into the cloud instead of owning their own data centres to cut back on the
cost of running their own centralized networks and servers.
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Market shares
[21] The merging parties submitted that Teraco has approximately in the national
market for the provision of data centre services. Teraco will continue to face
competition from other firms such as ADC, Internet Solutions, Telkom, Vodacom
and MTN in the market.
[22] There is no accretion in market share as a result of the proposed transaction in
South Africa because Digital Realty is not active in South Africa.
[23] The Commission relied on the market share estimates from the merging parties
because there were no rea dily available independent sources of industry
information on the market shares for the provision of data centre services market.
[24] Market participants contacted by the Commission confirmed that they were
unable to provide estimates of the total size of the data centre services in South
Africa due a lack of publicly available information . However, they acknowledged
that there are alternative players in the market that will continue to constrain the
merged entity post-merger.
[25] Having considered the above in assessing the proposed transaction, the Tribunal
concluded that it is unlikely that the proposed merger will result in a substantial
prevention or lessening of competition in any relevant market.
ADC’s theories of harm
[26] The Commission's investigation involved extensive engagements with the
merging parties, customers, competitors, and other stakeholders. Other than
ADC, no third party raised any concerns with the proposed transaction.
[27] ADC was concerned about the impact of the proposed transaction on competition
post-merger and alleged that the current market dominance of TDE in South
Africa (coupled with the dominance currently enjoyed by NAP Africa in the
internet exchange ecosystem), will create a highly dominan t player and an
uncompetitive environment.
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[28] ADC also submitted that the proposed transaction would bring about several
significant network effects which would make it impossible for the ADC to
compete effectively for large hyperscale customers and undermine their broader
offering to the rest of the market.
[29] As far as NAP Africa is concerned, ADC submitted that NAP Africa’s dominant
position in the internet exchange point (“IXP”) market has the effect of attracting
customers to TDE’s data centres an d creating barrier s to entry for other data
centres which do not have access to NAP Africa. ADC further alleged that
although NAP Africa does permit remote connections to the IXP, without the
customer having to have a colocation service with TDE, this service may be
revoked under the new ownership since remote peering is at the discretion of
TDE.
[30] In addition, ADC submit ted that the proposed transaction will not promote a
greater spread of ownership by HDPs but will result in a foreign offshore entity
acquiring a majority interest in a South African-based firm.
[31] To remedy its concerns, ADC proposed conditions to the effect of the divestiture
of NAP Africa ; as an alternative to the divestiture of NAP Africa, a behavioural
condition requiring NAP Africa to allow connectivity to other data centres in
perpetuity; and the divestiture of up to three existing TDE collocation centres and
some of the land owned by TDE in Cape Town and Johannesburg to smaller
South African majority-owned players having a market share of less than 10%.
[32] The merging parties argued that the concerns raised by ADC were baseless and
motivated by self-interest. They submitted that the proposed transaction does not
raise any competition concerns in the market for the provision of data centre
services, given that Digital Realty is not active in South Africa, and accordingly
there is no horizontal overlap or vertical relationship between the merger parties’
activities in South Africa.
activities in South Africa.
[33] The merging parties also submitted that Teraco operates in a highly dynamic and
innovative market in South Africa, where it is required to compete against strong
competitors including larger firms within the telecommunication sector. Teraco’s
competitors, such as ADC, operate significant telecoms networks and have the
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resources and capabilities to invest in new products and services in order to be
competitive in the provision of data centre services.
[34] With respect to IXPs, the merging parties submit ted that NAP Africa is open to
everyone that wishes to connect, even if such party is not a customer of Teraco’s
colocation services. Competitors of Teraco, within the telecoms sector have
unrestricted access to NAP Africa. The merging parties further submitted that
NAP Africa is entirely voluntary f or Teraco’s customers, and no customer is
compelled to connect with NAP Africa.
[35] During its investigation, the Commission did not find any evidence to support the
concerns raised by ADC given the number of alternatives in the market for the
provision of data centre services in South Africa. Based on the market shares
estimates, the Commission found that the merged entity will continue to face
competition from numerous competing firms such as ADC, MTN, Telecom Egypt,
Telkom and Dimension Data, amongst others. Therefore, t he Commission
concluded that ADC's concerns were not substantiated.
[36] After hearing ADC’s intervention application, the Tribunal allowed ADC to
intervene in the merger proceedings in respect of two of the theories of harm it
had namely, (i) the network-effect theory of harm; and (ii) the foreclosure theory
of harm given that ADC.8
[37] Subsequent to the CAC’s dismiss al of ADC’s appeal, the merging parties and
ADC tendered the access condition which provided that TDE will not restrict or
prevent any third-party provider of co-location data centres, including ADC, from
connecting to, and peering at NAP Africa located at TDE’s data centres; restrict
or prevent the customers of any third -party provider o f co-location data centre
services, including ADC, from remote peering at NAP Africa, facilitated by the
third-party provider of co-location data centres; restrict or prevent any third-party
third-party provider of co-location data centres; restrict or prevent any third-party
providers of co -location data centres, capable of peering or facilitating remote
peering at NAP Africa, from marketing these services to its customers and
potential customers, provided that such marketing is reasonable and proportional
and clearly states that the third-party provider of co -location data centres offers
“Remote Peering at NAP Africa Internet Exchange”; or prevent a third -party
8 See Tribunal Case No. LM165Jan22/INT016Apr22 for intervention application reasons.
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provider of co -location data centres and/or a remote peering customer from
connecting to and peering or remote peering, as applicable, at NAP Africa.
[38] The Tribunal conclude d that the competition concerns raised by ADC were
adequately addressed by these conditions.
Public Interest
Effect on employment
[39] The merging parties submitted that the proposed transaction will not have any
effect on employment given that Digital Realty is not active in South Africa and
does not have any employees in South Africa.
[40] The employees of TDE are not represented by any tr ade union but their
representative confirmed that the employees did not raise any employment
concerns.9
[41] Accordingly, the proposed transaction is unlikely to raise employment concerns.
Effect on the spread of ownership
[42] Post-merger, TDE (and Teraco) will be owned and controlled by Digital Realty
which has no HDP shareholder.
[43] The merging parties submitted that the proposed transaction will not have any
negative impact on the greater spread of ownership by HDPs post -merger and
although Digital Realty is not active in South Africa, and therefore does not have
black empowerment credentials, the merging parties entered into the proposed
transaction on the basis that
[44] As t here will be no reduction in HDP ownership because of the proposed
transaction, the merging parties were of the view that conditions regarding
9 Email from Radia Bhamjee dated 4 February 2022, page 919 of merger record.
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ownership are not warranted in this matter. However, the merging parties were
willing to tender a condition to
[45] Further, the merging parties were willing t o
[46] Having considered the above, the Tribunal found that the proposed remedies
would ensure that the target firm remains empowered post -merger,
[47] The proposed transaction raises no other public interest concerns.
Conclusion
[48] For the reasons set out above, we concluded that access condition addresses
the network-effect and foreclosure concerns by ADC. We are satisfied that the
proposed transaction is unlikely to substantially prevent or lessen competition in
any relevant market.
[49] Furthermore, the public interest condition will
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[50] In order to give effect to the above, the Tribunal approved the transaction on the
conditions attached as “Annexure A” hereto.
18 August 2022
Ms Yasmin Carrim
Date
Professor Imraan Valodia and Dr. Thando Vilakazi concurring
Tribunal Case Manager: Juliana Munyembate
For the Merging Parties: Derek Lotter, Maryanne Angumuthoo and Tshidi
Vilakazi of Bowmans and Jocelyn Katz, Aidan
Scallan and Hayley Lyle of ENSAfrica
For the Commission: Thabelo Masithulela and Zanele Hadebe