Reports by Creamer Media in 2017 on the acquisition of Pinnacle OHS Holdings (July 17) and subsequently the acquisition of Quality Safety (October 17) by the Durban based BBF Safety Group, have raised some concerns amongst smaller role players in the consulting arena.
Sheqafrica.com asked Rudy Maritz to unpack the legality and validity of these kinds of transactions.
According to Maritz, it is common practice for two or more firm to join resources in order to save on operating expenses or increase market share. In the past, this often lead to market dominance and subsequent unfair competition. This is no longer the case, as South Africa has created a legal framework in the Competition Act to control any form of unfair competition.
“If we look at the case mentioned above, and without disclosing the value of each transaction, there are two categories in which this transaction can fall. The first being a “merger” and the second being an acquisition. The first is easier to explain so I will start with the “merger”.
A merger is the creation of a new entity by merging two existing entities. For example Company A, merges with Company B and together they form AB Corporation. In other words they both start trading under a new identity while the original identities stop to trade. One well known example is the Amalgamated Banks of SA, aka ABSA.
An acquisition is where one company acquires an interest in another, either as a controlling interest or a smaller interest. For the purposes of the Competition Act, only a controlling interest will be applicable.
The Act treats both mergers and acquisitions as “mergers” and Chapter 3 of the Competition Act deals specifically with merger control and states that a merger occurs when one or more firms directly or indirectly acquire or establish direct or indirect control over the whole or part of the business of another firm.
It all starts with the control of the other firm, and it can be directly, or indirectly, for instance, via a subsidiary firm. Likewise, the actual acquisition can also be done via a third party like a subsidiary. How the deal is structured is not prescribed and it can be done in any manner, including the lease of shares or even equipment or buildings (assets), which allows the control over the targeted firm by the acquiring firm(s).
The forms of control over a firm is set out in Section 12(2) of Chapter 3 of the Act, which for the purposes of this article, I am not expanding on.
Mergers & Acquisitions are divided into three categories; small, intermediate and large and is based on the value of the parties in the transaction.
In calculating this value, the Competition Commission has set a lower and higher threshold for both parties, the acquiring party(ies) and the targeted party(ies).
In the case of a small merger, the combined turnover or asset value of the acquiring firm (all firms if more than one) must be less than R600 million. The turnover or asset value of the targeted firm(s) may not be more than R100 million.
The same applies to an intermediate merger, but the value must be between R600 million and R6,6 billion for the acquiring firms and between R100 and R190 million for the targeted firm.
Any merger above these thresholds will be deemed a large merger.
In the case of a small merger the parties do not need to notify the Competition Commission of the merger and may proceed without approval, but Section 13(3) of the Act allows for the Commission to instruct the parties to notify them within 6 months after implementation if it believes the merge
(a) may substantially prevent or lessen competition; or
(b) cannot be justified on public interest grounds.
Notably this entitlement ito Section 13(3) falls away if not exercised within the said 6 month period.
This does however not prevent future investigations into the conduct of the merging parties.
Nothing prevents voluntary notification of small mergers.
In the case of intermediate and large mergers, notification is compulsory.
In all cases, except for small mergers, a certificate must be issued by the Commission within 20 business days reflecting its decision, or 40 business days if an extension of time is applicable, which can be:
- approval with conditions,
- prohibiting implementation if not yet implemented or
- declaring the merger as prohibited.
If the said period have lapsed, and the commission has not issued a certificate, it may be deemed as “approved”. This approval by default is however subject to Section 15 which allows the commission to revoke such an approval, irrespective of it not being formally approved.
In the cases mentioned above, there is very little doubt in my mind that the acquisition of Pinnacle OHS by the BBF group was below the lower threshold and even if it would have exceeded it, there is little possibility that any co-operation between the two parties would affect the pricing or competitive nature of the other for the purposes of the Competition Act.
As for the acquisition of Quality Safety, which is in a horizontal relationship with the acquiring firm, the merger was within the intermediary category and was approved without conditions by the Commission.
Other laws may apply, such as the Harmful Business Practices Act, the Companies Act etc, but that falls outside the scope of the concerns raised by Sheqafrica.com readers on the issue of mergers.
H&S currently experience healthy competition with a wide variety of choice in terms of price, quality of services and contiuity. I can understand why smaller firms raised the issue.
What is however interesting is that these type of transactions can easily be conducted without the competing H&S consulting firm taking any notice. Even if the Compcom published the merger for public comment, it is highly unlikely that the smaller firms would have seen it. They are normally too busy looking for safety file templates and samples of forms to notice anything else.