COMPETITION TRIBUNAL OF SOUTH AFRICA
Case No: LM002Apr23
In the matter between:
AFHCO Holdings Proprietary Limited Primary Acquiring Firm
and
Indluplace Properties Limited Primary Target Firm
[1] On 3 July 2023, the Competition Tribunal (“Tribunal”) unconditionally approved
the large merger whereby AFHCO Holdings Proprietary Limited (“AFHCO”)
intends to acquire 100% of the shares in Indluplace Properties Limited
("Indluplace”).
The Parties and their Activities
[2] The primary acquiring firm is AFHCO, which is wholly owned by SA Corporate
Real Estate Limited ("SACREL"). SACREL is a Real Estate Investment Trust
(“REIT”) listed on the Johannesburg Stock Exchange (“JSE”). The shares in
SACREL are widely dispersed and, as such, no single shareholder controls
SACREL.
Panel: J Wilson (Presiding Member)
AW Wessels (Tribunal Member)
T Vilakazi (Tribunal Member)
Heard on: 28 June 2023
Date of last submission: 03 July 2023
Order issued on: 03 July 2023
Reasons issued on: 26 July 2023
REASONS FOR DECISION
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[3] AFHCO and SACREL, and all the firms they directly and indirectly control, are
collectively referred to below as the “Acquiring Group". The Acquiring Group
holds a diversified property portfolio comprising industrial, retail and residential
buildings located primarily in the major metropolitan areas of South Africa with
a secondary node in Zambia.
[4] The primary target firm is Indluplace. Indluplace is a JSE-listed REIT which is
controlled by Fairvest Limited (“Fairvest”) with a shareholding of 56.8%. There
are various other non-controlling shareholders in Indluplace.
[5] Indluplace, together with all the firms it directly and indirectly controls, is
referred to below as the “Target Group”. The Target Group holds a diversified
property portfolio primarily located in Gauteng, with further limited exposure in
Mpumalanga and the Free State.
Transaction Description and Rationale
[6] In terms of the agreement entered into by AFHCO and Indluplace, AFHCO
intends to acquire 100% of the shares in Indluplace. Post-merger, AFHCO will
have sole control of Indluplace.
[7] The Acquiring Group submits that the proposed transaction will provide further
exposure for SACREL to the residential sector, and will also provide a sound fit
and additional scale for AFHCO.
[8] The Target Group submits that the proposed transaction presents the
shareholders of Indluplace with an opportunity to dispose of an investment they
regard as non-core at an attractive price.
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Competition Assessment
Relevant markets identified by the Commission
[9] Based on case precedent, the Competition Commission (“Commission”) found
that the property market can be broadly divided into categories based on the
nature and usage of the property, e.g., retail property, industrial property, office
property, residential property, and other property.
[10] In the present case, the Commission identified overlaps between the merging
parties’ activities in (i) the product market for rentable residential property, and
(ii) the product market for rentable retail property. In the latter regard, the
Commission identified overlaps in shopping centres with a Gross Lettable Area
(“GLA”) of below 30 000 m 2, which includes small/local convenience centres
(1000 – 5000 m 2), neighbourhood shopping centres (5000 – 12 000 m 2) and
community shopping centres (12 000 – 25 000 m 2) according to the
Independent Property Databank (“IPD”) retail property classification.
[11] As regards the relevant geographic market, the Commission, based on its
approach in previous matters, assessed (i) the market for rentable residential
property within an 8km radius of the Target Group’s properties, and (ii) the
market for rentable retail property within a 15km radius of the Target Group’s
properties.
Residential property market
[12] As regards the residential property market, the Commission found that the
proposed transaction would give rise to horizontal overlaps (within an 8km
radius) in the following areas: Johannesburg CBD (“JHB CBD”), Johannesburg
North (“JHB North”), Johannesburg East (“JHB East”), Johannesburg West
(“JHB West”), Pretoria West (“PTA West") and Pretoria North (“PTA North”).
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[13] The Commission found that (based on the number of rentable residential units)
the estimated market share of the merged entity, and market share accretion
brought about by the merger, in each of these areas is as follows:
Merged entity’s
market share
(%)
Market share
accretion
(%)
JHB CBD 17 7
JHB North 6 3
JHB South 4 1
JHB East 8 6
JHB West 3 2
PTA West 13 8
PTA North 10 6
[14] Accordingly, in the affected Johannesburg markets, the merged entity will have
a market share ranging from approximately 3% to 17%; and, in the affected
Pretoria markets, it will have market shares of approximately 10% and 13% -
with market share accretions ranging between 1% and 8%. The Commission
also found that, in all seven affected areas, the market is fragmented with
various alternative providers of residential properties.
[15] The Commission also considered a separate product market for student
accommodation and found that there is no geographical overlap between the
merging parties’ properties in this market.
[16] The Commission did not receive any concerns regarding the proposed merger
other than from A1 Capital (Pty) Ltd (“A1 Capital”), a competitor of the merging
parties. A1 Capital submitted that the merger will lead to increased
concentration and higher prices within the rentable residential property market
and the student accommodation market. A1 Capital also argued that the
merger will impact the ability of small- and medium-sized businesses ("SMEs”),
or firms controlled or owned by historically disadvantaged persons (“HDPs”), to
effectively enter, participate in or expand within, the market.
[17] The Commission investigated the concerns raised by A1 Capital, and found that
they were based on an inaccurate product market delineation (which combined
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general residential property and student accommodation) and also incorrect
market shares which were materially inconsistent with the information provided
by the merging parties and various other competitors. The Commission
therefore dismissed these concerns.
Retail property market
[18] As regards the market for rentable retail property, the Commission found that
the proposed transaction would give rise to horizontal overlaps (within a 15km
radius) between the merging parties in JHB CBD, JHB North, JHB East, and
PTA West.
[19] The Commission further found that (based on the combined GLA of all shopping
centres with a GLA of below 30 000 m 2) the estimated market share of the
merged entity, and market share accretion brought about by the merger, in each
of these areas is as follows:
Merged entity’s
market share
(%)
Market share
accretion
(%)
JHB CBD 21 3
JHB North 4 <1
JHB East 4 <1
PTA West 14 <2
[20] Accordingly, in the affected Johannesburg markets, the merged entity will have
a market share ranging from approximately 4% to 21%; and, in the affected
Pretoria market, a market share of approximately 14% – with low market share
accretions in each case. The Commission also found that, in all of the affected
areas, there are various alternative providers of comparable retail properties.
[21] The Commission did not receive any concerns from third parties regarding this
aspect of the proposed merger.
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[22] Based on the above analysis, the Commission concluded that the proposed
transaction is unlikely to give rise to any competition concerns in any relevant
market.
Tribunal assessment
[23] The Tribunal was satisfied with the Commission’s assessment in the residential
property market. However, the Tribunal requested further clarity regarding the
basis upon which the Commission had concluded that all shopping centres with
a GLA of below 30 000 m2 in the identified areas competed effectively with the
Target Group’s centres.
[24] It was also unclear to the Tribunal how the 15 km radius used by the
Commission had been applied in its analysis, as this should be applied by
reference to the location of each of the Target Group’s retail properties (rather
than, for example, by reference to the boundaries of a geographic area
containing the Target Group’s properties; or by reference to a particular point
in that geographic area). The Tribunal therefore requested the parties to
provide the specific distances between (i) each of the Target Group’s
properties, and (ii) each of the other properties regarded in the Commission’s
analysis as competing properties in the relevant areas.
[25] As regards the Tribunal’s first query, the Commission and the merging parties
submitted that centres of different sizes may constrain one another because
shoppers are more likely to take into account proximity and tenant mix than the
size of shopping centres when deciding which shopping centres to visit. They
accordingly submitted that all the shopping centres listed as competitors in all
the different geographic areas referred to above are likely to provide a
competitive constraint to the merging parties’ retail properties in those areas.
[26] As regards the Tribunal’s second query, the Commission indicated that it had
applied the 15 km radius in each of the identified areas by reference to a
particular point in each such area. However, the Commission and the merging
particular point in each such area. However, the Commission and the merging
parties also provided the Tribunal with further information reflecting the
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distances between each of the Target Group’s properties and each of the
properties that they regarded as competing properties in the identified areas.
[27] Based on the further information provided to the Tribunal regarding the size and
proximity of all the properties in the relevant retail property markets, it appears
that, however the product and geographic aspects of those markets are
defined, the proposed merger does not given rise to a substantial prevention or
lessening of competition. It is therefore unnecessary for us to conclude on the
specific parameters of the relevant retail property market(s) for purposes of this
matter.
[28] We note, however, that a more detailed assessment of the relevant market(s)
and dynamics may be required in future mergers in the retail property sector,
depending on the relevant facts. As the Tribunal noted in Twin City Trading/
Castle Gate,1 it cannot simply be assumed that different categories of shopping
centres within a particular radius of the target firm’s retail properties constitute
equally effective competitive constraints upon those properties. In order to
reach such a conclusion, the Commission would have to conduct a substantive
competition analysis of the shopping centres in question, including (for
example) factors such as (differences in) rental prices, size, characteristics,
tenant mix and the like.
[29] In addition, closer consideration may need to be given to the proximity of each
of the candidate competitor properties to each of the target firm’s properties.
Whilst it may (depending on the facts) be assumed that properties outside a
particular radius are unlikely to pose an effective competitive constraint on a
target property, it does not necessarily follow that all properties within that
radius impose a competitive constraint on the target property, or at least an
equally effective competitive constraint. This is particularly so where the
candidate competitor properties include different categories of shopping
candidate competitor properties include different categories of shopping
1 Twin City Trading 2 (Pty) Ltd and the commercial letting enterprise conducted by Castle Gate (Pty) Ltd
and the commercial letting enterprise conducted by the Club Retail Park (Pty) Ltd (LM004Apr23) at paras
28 and 29.
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centres to the target property (as discussed above). Ultimately, each case must
be determined on its own facts.
Public Interest
Effect on employment
[30] The merging parties submitted that (save for voluntary severance agreements
concluded with three highly skilled employees of the Target Group who are able
to find suitable alternative employment) the proposed merger will not result in
an adverse effect on employment.
[31] The merging parties expressly stated in this regard that there will not be any
retrenchments as a result of the proposed merger. Post-transaction, the
employees of the Target Group will either be absorbed as employees of
AFHCO on the same or similar terms as they are currently employed, or their
contracts will be transferred to a third-party employer who will employ them on
the same or similar terms as they are currently employed with the Target Group.
[32] The Commission engaged with the employee representatives of the Acquiring
Group’s and the Target Group’s employees, and they both confirmed that the
employees did not raise any concerns regarding the proposed merger.
[33] The Commission accordingly concluded that the proposed transaction does not
raise employment concerns. Based on the above facts, we agree with this
conclusion.
Effect on the spread of ownership
[34] The merging parties submitted that SACREL has an HDP shareholding of
29.1%. They explained that this shareholding percentage had been calculated
by Alternative Prosperity, a specialist firm with proprietary access to
membership information for large mandated shareholders (such as pension
funds) which invest in firms like SACREL, as this information is not publicly
available.
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[35] Indluplace does not have any HDP shareholding; however Fairvest, the
controlling shareholder of Indluplace with a shareholding of 56.8%, has an HDP
shareholding of 12.73%.
[36] On this basis, the Commission found that, as a result of the proposed
transaction, the effective HDP shareholding in the Target Group will increase
from approximately 7% to approximately 29%.
[37] A1 Capital submitted that, based on publicly available information, the proposed
transaction would result in a dilution of HDP ownership of the Target Group of
8.42%. The Commission investigated this complaint and found that the
information relied upon for this calculation was inaccurate, and that the HDP
ownership shares submitted by the merging parties reflected the correct
position.
[38] The Commission therefore concluded that the proposed transaction does not
raise any concerns from an HDP ownership perspective.
[39] Based on the information set out above, the Tribunal agrees with this
conclusion.
Other public interest concerns
[40] A1 Capital also submitted that the proposed merger will have adverse effects
on local communities, and on independent landlords and smaller residential
accommodation providers who will face increased difficulty in competing with
the merged entity. A1 Capital referred in this regard to various challenges it
faced as an HDP property owner in the market.
[41] The Commission investigated these complaints and found that they were
unsubstantiated and/or not merger-specific. The Commission furthermore
found that the Acquiring Group has various corporate social investment
programmes that benefit local communities. As regards the effect of the
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proposed merger on HDP property owners, the Commission found that there
was no evidence that the merger would materially impact on the ability of HDP
property owners to participate and compete in any relevant market.
[42] The Commission accordingly concluded that the proposed merger does not
raise any substantial public interest concerns. Based on the facts above, the
Tribunal agrees with this conclusion.
Conclusion
[43] The Tribunal concludes that the proposed transaction is unlikely to give rise to
any significantly negative competition or public interest effects, and therefore
approves the merger unconditionally.
26 July 2023
Adv Jerome Wilson SC Date
Mr Andreas Wessels and Dr Thando Vilakazi concurring
Tribunal Case Managers: Juliana Munyembate and Mpumelelo Tshabalala
For the Merger Parties: Albert Aukema, Andries Le Grange and Nelisiwe
Khumalo of CDH
For the Commission: Makati Seekane and Grashum Mutizwa
Signed by:Jerome Wilson
Signed at:2023-07-26 17:28:33 +02:00
Reason:Witnessing Jerome Wilson