African mergers may face public interest hurdles

September 2016 | PROFESSIONAL INSIGHT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

Global investors are still identifying opportunities for investments in Africa, despite the uncertain global economic environment and the legal challenges associated with doing business on the continent.

Substantial African acquisitions so far in 2016 have included the acquisition by Orange of Dutch Bharti Airtel’s operations in Burkina Faso, the recently announced sell-down by Barclays of its shareholding in Barclays Africa, as well as the announcement in January 2016 that US oil major Chevron will sell 75 percent of its South African and Botswana business units. African energy sector investments remain buoyant; in particular, renewable energy projects in Zambia, Ethiopia, Mozambique, Chad, Tanzania and South Africa, continue to attract global investors. This positive trend is likely to continue, Chinese president Xi Jinping announced during the sixth Forum on China-Africa Cooperation (FOCAC) in December 2015 in Johannesburg that China would invest $60bn towards the development of the African continent.

However, regulatory hurdles continue to challenge dealmakers in Africa, particularly those wishing to execute substantial transactions quickly and cost-effectively. In particular, more than 16 African countries now have antitrust authorities who review mergers and can block deals if they determine that they may have anticompetitive effects in African markets. These include the South African Competition Commission (which has been in operation since 1999), the Fair Competition Commission of Tanzania (established in 2003) and the Zambian Competition and Consumer Protection Commission (previously the Zambia Competition Commission, established in 1997).

Merger control is also actively enforced by competition regulators in Namibia, Botswana, Swaziland, Mauritius, Kenya, Malawi and Morocco. Merger regulation is expected to come into effect in Mozambique soon. A new Pan-African competition authority, the COMESA Competition Commission, commenced operation in January 2013 and has jurisdiction to review mergers with an impact on the Comesa states (Burundi, Comoros, The Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe).

The East African Community is another regional African economic organisation that has enacted antitrust regulations, which will regulate competition in the Republic of Burundi, Kenya, Rwanda, United Republic of Tanzania, and the Republic of Uganda, although it is not yet fully operating.

Although it is still relatively uncommon for African competition regulators to block mergers, opposition to deals from customers, competitors, trade unions, government departments or even sector regulators can substantially delay transactions so badly that merging parties abandon them entirely. The recent decisions by South African mobile network operators Vodacom and MTN not to pursue restructured transactions with fixed line operators Neotel and Telkom, are good examples.

Importantly, many of these African competition authorities also have the authority to determine whether a proposed transaction will be in the ‘public interest’ as well as whether it will harm competition, including the regulators in South Africa, Kenya, Zambia, Tanzania and COMESA. Although it is rare for planned mergers to be blocked because of public interest concerns, disputes about appropriate conditions to address job losses, foreign ownership of national champions, impact on national security or media plurality can significantly delay the implementation of mergers. For example, it took global retailer Wal-Mart 18 months to get clearance for its planned acquisition of the Massmart retail stores in South Africa and Namibia. Sibanye’s proposed takeover of Rustenburg Platinum Mines from Anglo American Platinum (Amplats) as well as a bid for Aquarius Platinum, were recently placed in some doubt by a debate with the South African Competition Commission about whether any retrenchments should be permitted as a result of the mergers. Both transactions were eventually approved subject to conditions limiting the number of retrenchments in South Africa.

More recently, it took global brewing giant Anheuser-Busch InBev nearly seven months to gain clearance from the competition authorities in South Africa for its acquisition of iconic South African brewer SAB, notwithstanding that the proposed acquisition posed no real competition issues at all. Prior to the clearance of the proposed merger by the South African Competition Tribunal, the merging parties reached an extensive agreement with the South African government on a range of measures to support emerging South African farmers, as well as the local barley, maize and hops farming industry. The measures will also help to develop South African producers of glass bottles, cans and bottle crowns, as well as protect local craft brewers. The establishment of a R1bn fund to be spent over a five year period after the merger will go a long way toward assisting local brewers, over and above SABMiller’s existing projected spend on various black economic empowerment and transformation initiatives. However, the Tribunal still held a three day hearing and heard submissions on the proposed public interest impact of the merger and conditions required to address these impacts from the South African minister for economic development, the Black Business Forum, the SA SMME Forum, and the Tavern Owners Association as well as the Food and Allied Workers Union.

Extensive public interest conditions were also imposed by the South African Competition Tribunal in relation to the merger combining the bottling divisions of SAB and Coca-Cola and the operations of the Gutsche family, including that the merged entity maintain its total permanent levels for a period of three years from the date of approval of the deal; that the merging parties invest R800m to support enterprise development in the agriculture value chain, particularly to support and train historically disadvantaged developing farmers and small suppliers, and develop downstream distributors and retailers. They also undertook to support broad-based black economic empowerment, grant small retail outlets the ability to access Coca-Cola coolers and to maintain and grow the operations of Appletiser SA and its South African production operations.

These recent transactions in South Africa highlight the fact that global firms planning substantial mergers in South Africa and elsewhere on the continent may face substantial additional transactional costs and significant delays if they raise public interest concerns. Parties and their advisers need to assess the potential public interest impacts of their merger, as well as whether there may be an impact on competition in any relevant market. Adequate time to secure clearances from the competition authorities in South Africa and other African jurisdictions then needs to be built into the transaction timetable, and it may be advisable to engage proactively with interested parties like government, trade unions and local customers and suppliers, to formulate appropriate conditions to address public interest concerns.

Heather Irvine is a director at Falcon & Hume Inc. She can be contacted on +27 (0)10 594 5022 or by email: heather@fhinc.co.za.

Heather Irvine

Falcon & Hume Inc.