The recent decision of the Competition Commission to block the proposed acquisition of Burger King in South Africa by a US-based private equity firm has sparked intense debate in South Africa, and shows how focused the regulator is on promoting Black ownership.
In a landmark decision that sparked intense debate, the Competition Commission previously blocked the proposed acquisition of Burger King in South Africa by a US-based private equity firm on Public Interest grounds. At the time, the Competition Commission stated that the proposed takeover would reduce the shareholding of Burger king by historically disadvantaged persons.
In recent news, the Competition Commission has confirmed that subsequent talks between the merging parties and the Competition Commission have led to agreement on a revised bundle of Public Interest Commitments for the proposed transaction. While the Competition Commission is satisfied with these commitments, they still need to be finalised as conditions of the Competition Tribunal’s approval of the deal.
These developments reinforce that the Competition Commission views its Public Interest mandate as being very important. In addition, they show the emphasis that it places on transformation and how it views transformation holistically. The key elements of the revised package of commitments comprise:
- The establishment of an employee ownership structure (ESOP)
- The sale of a meat processing plant to black-owned company
- Local capital expenditure of R500m by 2026
- Job creation, with 1,250 additional historically disadvantaged individuals employed
- A R120m increase in employee benefits
Previously the owner of Burger King South Africa is the struggling Grand Parade Investments (GPI), an established Black empowerment investment holding company with holdings in the food and gaming sectors.
GPI has been looking to sell Burger King SA (as well as the Grand Foods Meat Plant, a supplier of burger patties) since February 2020, when it first announced the proposed sale.
After enduring an unfortunate 15% drop in the valuation of the two businesses due to the impact of the COVID-19 pandemic, Emerging Capital Partners (ECP) agreed to acquire the businesses for R616 million and sought approval of the Competition Commission for what is classified as an “intermediate merger.”
The Competition Commission is the South African regulatory body that evaluates mergers and investigates restrictive business practices and abuse of dominant positions. Its main role is to ensure that a proposed merger does not have a negative effect on competition.
When performing this analysis, the Competition Act requires the Competition Commission to assess the strength of competition in the relevant market and the probability that firms that remain in the market after the merger will behave competitively, considering any factor that is relevant to competition in that market.
What was the rationale behind the decisions made by the Competition Commission?
In announcing its decision to prohibit the transaction, the Competition Commission said that the transaction “is unlikely to result in a substantial prevention or lessening of competition in any relevant markets.”
However, the Competition Act not only requires the Competition Commission to determine whether a merger is likely to substantially prevent or lessen competition. If it appears that a transaction is likely to substantially prevent or lessen competition, then the Competition Commission must also determine (amongst other factors) whether the merger can or cannot be justified on substantial public interest grounds.
The Competition Act’s public interest grounds require the Competition Commission to consider the effect the merger will have on:
(i) a particular industrial sector or region;
(iii) the ability of small and medium businesses, or firms controlled or owned by historically disadvantaged persons (HDP), to effectively enter into, participate in or expand within the market;
(iv) the ability of national industries to compete in international markets; and
(v) the promotion of a greater spread of ownership, in particular to increase the levels of ownership by HDPs and workers in firms in the market.
What were the reasons behind the Burger King decision?
It is on the last of these public interest grounds that the Burger King SA deal has been blocked. The Competition Commission stated that the merger “would lead to a significant reduction in the shareholding of historically disadvantaged persons in the target firm.”
In its media statement, the Competition Commission recognised that the target companies are controlled by an empowerment entity wherein HDPs hold an ownership stake of more than 68%, whereas the acquirer has no ownership by HDPs and that the “merged entity will have no ownership by HDPs and workers”.
The Competition Commission’s concern is that the deal will have a “substantial negative effect on the promotion of greater spread of ownership, in particular to increase the levels of ownership by HDPs in firms in the market as contemplated in section 12A(3)(e) of the Competition Act”.
On this ground, the Competition Commission ruled that the proposed merger “cannot be justified on substantial public interest grounds”. The Competition Commission might not have the final say in this matter because the merging parties are entitled to appeal the decision before the Competition Tribunal, as this is an intermediate merger.
While the purpose of this article is not to comment on the merits of the Competition Commission’s decision, the ruling does bring to the fore the increasing importance that the Department of Trade, Industry and Competition (DTIC) and the Competition Authorities are placing on public interest considerations recently.
How does the Competition Commission's decision affect public interest?
The Burger King SA decision is not the only instance where public interest has played a major part in the decisions taken. Last year, the Competition Tribunal approved PepsiCo’s R23,6bn indirect acquisition of Pioneer Food Group subject to several public interest conditions.
In Pioneer Foods’ press statement, it reported that the acquisition was “the first major transaction in which the promotion of a greater spread of ownership in firms -- in particular, by workers and historically disadvantaged persons – is a central issue when assessing a proposed merger under the newly implemented provisions of the Competition Amendment Act.”
The following conditions were imposed:
(i) the implementation of a Broad-based black economic empowerment (BEE) ownership plan;
(ii) the establishment of a development fund;
(iii) a be no merger-related retrenchments for 5 years,
(iv) the creation of 500 direct and 2500 indirect employment opportunities over 5 years; (v) maximisation of local production;
(vi) a commitment to distribution agreements with HDP’s and SMME’s for 2 years.
In addition to these employment and supply chain-related conditions, the Competition Tribunal also required that PepsiCo’s SSA keep its tax domicile and headquarters in South Africa.
What conditions have been imposed on other acquisitions?
In the same year as the PepsiCo acquisition, the R5,4bn Milco/Clover deal was made subject to the following employment related conditions:
(i) no retrenchment of any South African employee (excluding 277 job losses on completion);
(ii) 550 new permanent positions in 5 years;
(iii) R5m set aside for training and R5m for relocation.
Regarding supply chain conditions, the Competition Authorities required a commitment to procure bulk juice concentrate from local suppliers.
One of the largest South African acquisitions in the past decade was ABInbev’s R1,713bn acquisition of SABMiller, which was made subject to a number of employment, supply chain and other conditions.
With regard to employment-related conditions, the Competition Authorities required that there be no retrenchments of South African employees because of the merger and that employment would be offered to anyone impacted by the termination of agreements. Supply chain conditions imposed were that:
(i) existing suppliers would continue to supply tin metal crowns as well as hops and malt; (ii) local production of beer and cider would be maximised; and
(iii) presiding supply agreements would continue on the same terms.
The competition-related condition was the sale of SABMiller’s stake in Distell and CCBA and refrigerator considerations for small beer products.
In 2015, the year prior to the ABInbev deal, SABMiller and Coca-Cola agreed to combine their non-alcoholic bottling operations in Southern and East Africa. The R33bn deal was subject to the following employment related conditions:
(i) total employment be maintained for 3 years post-closing;
(ii) limited retrenchments of up to 250 employees; and
(iii) employees affected by retrenchments be assisted at R20,000 per retrenchment.
While the primary focus of the Competition Authorities remains the combatting of restrictive business practices and abuse of dominance, the above examples show how focussed the regulator is on promoting Black ownership, retention and creation of employment opportunities, supply chain localisation and building Black businesses.
The Competition Commission and Black ownership
Along with the Burger King SA deal, the Competition Commission’s focus on promoting Black ownership - and particularly ownership by Black employees - has also been highlighted recently in a Practice Note published by the DTIC.
Published on 18 May 2021, the Practice Note aims to respond to “existing interpretative misalignment” on how discretionary Collective Enterprises (such as broad-based ownership schemes and employee share ownership plans or workers trusts) should be treated and measured in terms of South Africa’s BEE legislation. The main points of the Practice Note are summarised in this article.
We remarked at the time that the Minister confirmed in the Practice Note that the implementation of BEE legislation should ensure broad and meaningful participation of black people in the South African economy.
The Minister regards an ideal BEE ownership transaction as one that empowers black people, black women, black designated groups, black participants in employee share ownership plans (ESOP), broad-based ownership scheme (BBOS) and co-operatives.
Along with such groups, the Minister added that such a transaction should further empower entrepreneurs and investors, SMMEs and suppliers, employees, communities as well as other marginalised groups.
Although it is not always possible for all these groups to be empowered in a single BEE transaction, we note that the Minister expressly calls for both broad participation (e.g. through black participants in an ESOP, BBOS and Co-operatives) and active or operational participation (e.g. by entrepreneurs and investors).
The Practice Note also allowed the Minister to clarify that evergreen ESOPs, which provide ongoing benefits to a large proportion or all the current and future black workers of a company, also satisfy the ownership provisions under the BEE Codes.
The importance of evergreen ESOPs as a policy tool for broad-based empowerment is underscored in the Practice Note, as is the added benefit that ESOPs can contribute to improved industrial relations.
Companies are entitled to structure ESOPs that provide that employees can only participate as beneficiaries of the ESOP for as long as they remain employed by the company. This provides greater certainty for companies wishing to implement ESOPs.
How will this decision affect other South African businesses?
Considering the above, should your company be considering an acquisition of a South African company, then it is vital to develop a strategy for the public interest factors on which the Competition Commission is likely to base its decision. To this end, gaining an in-depth understanding of the BEE ownership landscape is crucial. Of particular importance is understanding the ins and outs of ESOPs.
Transcend Capital has a wealth of experience in designing and implementing robust and sustainable ESOP solutions. We have advised on several large listed and unlisted ESOPs that are not only regulatory compliant but make employees real owners.
Transcend Capital has designed ESOPs for Anglo American, Kumba, Dimension Data, Edcon and Babcock. In addition, Transcend Capital has extensive experience in structuring value-adding, sustainable transactions for multinational businesses.
We would welcome a discussion with you on the practical implications that arise from the Burger King SA deal and the Minister’s Practice Note. Please don’t hesitate to get in touch with us to arrange a call.
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Transcend Capital provides you with the expertise you need to develop and communicate a tailored BEE Ownership Strategy that is sustainable and makes business sense. Should you require more information on this offering, please do not hesitate to get in touch with us to arrange a call.