Tribunal approves acquisition of Autozone Holdings by Ethos Private Equity
The Competition Tribunal unconditionally approved a large merger involving the acquisition of control of the business of Autozone Holdings (Autozone) by Ethos Private Equity (Ethos) on behalf of certain funds advised by it (Ethos Fund VI).
Autozone is a wholesale and retail distributor of a wide range of aftermarket automotive spare parts in South Africa. Its customers include franchisees, independent stores, workshops, fleets and outlets such as engineering shops and chain stores.
Ethos Fund VI is a private equity investment fund consisting of local and foreign investors and is advised by Ethos. Ethos is a private equity firm which, through various private equity funds, makes investments on behalf of investors. Ethos advised funds typically acquire controlling or significant minority interests in a company, and then work with the company's management to develop financial and operating strategies that will improve the company's performance. Ethos Fund VI in particular, invests in medium to large sized companies throughout South Africa and sub-Saharan Africa across various industries. Its current portfolio companies Kevro Holdings, RTT Holdings and WACO International Holdings. Other funds currently being advised by Ethos are Ethos Fund V and the Ethos Technology Fund.
The transaction entails the acquisition of control of the entire business of Autozone Holdings and its subsidiaries by Ethos Fund VI. The other non-controlling shareholders will be the Autozone management and a new Black Economic Empowerment (BEE) shareholder.
The Competition Commission found that there was a horizontal overlap between the activities of Autozone and one of Ethos Fund V's controlled portfolio investment companies, Tiger Automotive Investments (TiAuto) regarding the wholesale and retail of non-original equipment manufacturer aftermarket automotive parts. However, the Commission found that the relevant markets were fragmented with several players capable of restraining the merged entity, such as Midas, Goldwagen and Sparepro. Furthermore, a separate merger application involving Ethos Fund V disposing of its shareholding in TiAuto had been approved by the Tribunal on 12 December 2014, thus removing any horizontal overlap between Autozone and TiAuto. Therefore, the Commission concluded that the proposed transaction would not result in any substantial prevention or lessening of competition in the relevant markets.
The Commission raised concerns over the post-merger BEE shareholding in Autozone, as its current BEE shareholder would be exiting the business. The Commission thus proposed to the Tribunal that the merger parties undertake that they would maintain a BEE shareholding post-merger that should not fall below a level four rating. At the Tribunal hearing, the merger parties objected to the proposed undertaking for a number of reasons including that the undertaking might prevent the exiting BEE shareholder from realising value from its investment and that it was ultra vires section 12A(3)(c) of the Competition Act. Section 12A(3)(c) requires the Commission or the Tribunal to consider the effect of a merger on "the ability of small businesses or firms controlled or owned by historically disadvantaged persons to become competitive." The Tribunal agreed with the main objections raised by the merger parties and held that the transaction did not justify the imposition of an undertaking or condition pursuant to section 12A(3)(c). The Tribunal therefore unconditionally approved the merger.