The move by the Competition Commission to formally block the sale of Burger King and Grand Foods meat plant to Pan-African private equity firm Emerging Capital Partners (ECP) because “the proposed merger cannot be justified on substantial public interest grounds”, is bad news for investment.
The commission prohibited the sale because the merger would significantly reduce the shareholding of historically disadvantaged persons (HDP) from more than 68% to 0%.
This “ground-breaking recommendation”, to prohibit the proposed sale by Grand Parade Investments of its investment in Burger King SA to a US private equity firm, will have severe consequences for the future of merger and acquisition transactions and investment in South Africa, say Robert Wilson and Shawn van der Meulen of Webber Wentzel attorneys.
They say the case also raises questions about whether competition law is the right tool to advance the country’s transformation agenda.
“The commission must also consider certain public interest factors when it assesses proposed mergers, besides considering the impact of the transaction on competition,” they said.
One of these factors is whether a merger “promotes a greater spread of ownership, in particular to increase the levels of ownership by historically disadvantaged persons in firms”. Several mergers have been approved in recent years subject to conditions aimed at increasing HDP ownership in firms.
Conditions for the sale
Grand Parade Investments and ECP engaged with the competition authorities and agreed on conditions to address the commission’s ownership concerns. They proposed conditions such as investing no less than R500 million in establishing new Burger King stores in South Africa and increasing the number of local permanent employees by no fewer than 1,250 historically disadvantaged people.
However, it seems that the commission is taking an uncompromising stance on HDP ownership reduction due to the sale although these conditions would have other positive public effects, Wilson and Van der Meulen say.
“Regardless of how well-meaning the commission’s objectives are, this decision may create uncertainty which could have a potential chilling effect on merger activity, including foreign direct investment, especially in transactions where B-BBEE shareholding is decreased for legitimate commercial considerations.”
They point out that the tangible results of the prohibition were evident when Grand Parade Investments’ shares crashed by 17% before closing 10% lower the day after the prohibition announcement.
“The commission’s approach will potentially make it difficult for exiting HDP shareholders to obtain real value for their interests. The commission is also likely to be encouraged to require significant positive commitments from merging parties to improve HDP and worker ownership levels.”
Wilson and Van der Meulen believe the unintended consequences may outweigh the positive benefits of adopting a hardline approach to specific public interest considerations.
“We hope that as this matter progresses, the tribunal will provide guidance on how the competition authorities should pursue their public interest mandate.”
They say merger parties require certainty on deal making and the authorities should not harm the very interests they are required to protect and arguably promote.
“A more nuanced approach is necessary to balance the interests of HDP shareholders wishing to realise a return on their investments with promoting the broader transformation of the economy and other positive public interest benefits, such as increased employment.”
Impact of this decision
Industry body, the Southern African Venture Capital and Private Equity Association (Savca) is also not impressed with the decision although it supports B-BBEE legislation and the transformation of the country.
“We are concerned about this ruling, given the impact of this precedent and the risks associated with South Africa’s ability to continue attracting foreign capital and its impact on the local private equity industry in the country,” says Savca director Sthembile Nkabinde.
She pointed out that Statistics SA announced this week for the third consecutive time that unemployment had increased to 32.6% in the first quarter of 2021.
”We cannot disregard the impact that investment make towards job creation and the economy, especially during a time when unemployment is at its highest and the effects of the Covid-19 pandemic are being felt across our country in the form of extreme hunger and poverty.”
Nkabinde says the decision has the unintended consequence of raising concerns for the international and local investment community, potentially setting a precedent for restrictions on investment activity and therefore deterring much needed investment capital.
“This compounds an existing perceived risk around policy certainty, value realisation, liquidity and exit when considering investment on the continent.”
Savca will engage with the commission, the Department of Trade, Industry and Competition and other relevant stakeholders to contribute to the dialogue of ensuring that South Africa is well positioned as an attractive investment destination, while affirming that transformation imperatives remain critical for an inclusive and sustainable South Africa.