Discussions
Massmart – Wal-Mart merger (finally) approved
JB Cronjé, tralac Researcher, discusses the approval of the Massmart – Wal-Mart merger
At the end of last week the South African Competition Appeal Court approved the Massmart – Wal-Mart merger subject to conditions. The process started in September 2010 when Wal-Mart made an offer to acquire 51% of Massmart’s ordinary share capital at a total transaction value of R16.5 billion. At the time, Massmart employed 27 000 employees in 14 countries in Sub-Saharan Africa and operated 288 stores through a variety of wholesale and retail formats each focused on high-volume, low-margin, low-cost distribution. Wal-Mart on the other hand is the world’s largest retailer, but this transaction is its first cross-border acquisition in Africa.
The transaction was notified to South Africa’s Competition Commission which recommended its approval without conditions. However, trade unions and government opposed the deal before the Competition Tribunal. On 31 May 2011 the Tribunal approved the merger subject to the voluntary conditions offered by the parties. The Tribunal found that the merger did not prevent or lessen competition in any of the markets in which Massmart operated. However, it did raise certain public interest concerns which could, according to the Tribunal, be adequately remedied by the abovementioned undertakings submitted by the merging parties. The undertakings which were made part of the order granted by the Tribunal include:
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No retrenchments resulting from operational requirements, in South Africa, for 2 years;
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Preference to the re-employment of 503 retrenched employees;
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Honouring existing labour agreements and not challenge SACCAWU’s (the trade union’s) position for 3 years;
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Establishing a R100 million programme aimed at the development of local South African suppliers, including Small, Medium and Micro enterprises (SMMEs). In addition, establishing a training programme to train local South African suppliers on how to do business with the merging entity and with Wal-Mart.
The trade union appealed to overturn the merger and three government departments (Trade and Industry, Economic Development, and Agriculture, Forestry and Fisheries) brought a review against the proceedings before the Tribunal to the Competition Appeal Court. The entire dispute turned on whether the merger can or cannot be justified on public interest grounds.
The Court dismissed the application to review and set aside the Competition Tribunal’s approval of the merger. The Court held that there was insufficient evidence to conclude that the public interest concerns, in particular, the merger’s effect on employment and small and medium size enterprises could provide the disapproval of the merger. It ruled partly in favour of the trade union and ordered the reinstatement of the 503 workers because their retrenchment was sufficiently linked to the merger but rejected their application for Massmart to become subject to a closed shop agreement and collective bargaining to reduce the comparative advantage enjoyed by the employer from the present set of labour agreements spread across its divisions.
Major concerns were raised by the applicants regarding Wal-Mart’s global procurement network and how its logistical capabilities might increase imports into South Africa. They contended that the merger would result in a procurement shift away from local towards foreign low cost Asian producers, which would in turn result in job losses, closure of small and medium size businesses and a concomitant impediment upon the development of local business. The government motivated for “a baseline proportion for domestic procurement as a percentage of total procurement” alternatively, for a baseline level of domestic procurement (in Rand value). SACCAWU on the other hand, proposed an increase the amount in supply development to at least R 500 million and to target the fund to specific sectors or industries. It also proposed “that the merged firm be prevented from spending less than its current procurement on a Rand value basis for a specific period of time”.
Last year, the Tribunal ruled against the proposals for the setting of procurement conditions since these would be impermissible under South Africa’s international trade obligations. This would also have created unjustified symmetry; where the merger entity would be subjected to conditions while its rivals are free to procure globally. The Tribunal found the proposed R100 million programme for local business development to be an appropriate and proportional “investment remedy”. Wal-Mart also announced in June 2011 plans to expand sourcing, mostly from local manufacturers, to approximately R60 billion of addition food and fast moving consumer goods purchases.
However, the Court held that the development fund proposal was inadequately interrogated “as to precisely how the programme would be implemented and the consequences for dealing with the potential difficulties which may be encountered by local manufacturers, the effects on employment and the ability of small and medium sized businesses to operate within a competitive global environment”.
As a result, the Court commissioned a study by three experts (representing the trade union, government and the merging parties) to produce a report within 3 months as to precisely how the programme would be implemented and canvass the best mechanism by which South African small and medium sized suppliers can participate in Wal-Mart’s global value chain training programmes. This also includes a possible increase in the size of the R100 million supplier development fund to an amount that is closer to the R500 million originally demanded by the unions. The Court will then formulate the conditions by which the development fund will operate.
In reaction to the judgment, Business Unity South Africa, urged the finalisation of “the rules and regulations affecting all forms of investment and acquisitions” to ensure a harmonised, consistent and transparent approach for assessing the balance of public interest in complex investments. It therefore urged the finalisation of the “draft National Treasury document on cross-border investment rules” to provide legal certainty and predictability for foreign investment to take place. One of the many lessons that could be derived from this entire episode is that the government’s uncertain response to the controversial merger generated unnecessary and ill afforded investment uncertainty.
Source:
The Minister of Economic Development and Others v Wal-Mart Stores Inc and Others. Available: http://www.comptrib.co.za/cases/appeal/retrieve_case/1386