Why is the Burger King merger decision so significant?
What has happened since the prohibition?
What is the impact of this decision on future mergers?
This article answers some of the key questions on the future of mergers and acquisitions (M&A) transactions in the aftermath of the recent Burger King merger.
Why is the Burger King merger decision so significant?
On 1 June 2021, the Competition Commission (the Commission) decided to prohibit the proposal of ECP Africa (a US private equity fund) to acquire Burger King South Africa RF Pty Ltd (BKSA) and Grand Foods Meat Plant Pty Ltd (Grand Foods) from Grand Parade Investments Ltd (GPI). Although the transaction was ultimately approved by the Competition Tribunal after the merger parties reached an agreement with the Commission, the Commission's groundbreaking decision to prohibit the proposed sale will have long-lasting consequences for future M&A transactions in South Africa.
The Commission found that the merger would significantly reduce the shareholding of historically disadvantaged persons (HDPs) in GPI, from more than 68% to 0%. The Commission's reasoning was significant; their decision focused on absolute ownership levels as the sole basis for the prohibition. This was the first time in 20 years that a merger was prohibited on public interest grounds alone.
This is also the first time that the Commission publicly interpreted section 12(3)(e) of the Competition Act (introduced by the Competition Amendment Act 2018). This new provision deals with the promotion of a greater spread of ownership, particularly to increase the levels of ownership by HDPs and workers of firms in the market.
What has happened since the prohibition?
According to interviews with the Commission, although the merger parties proposed conditions to the Commission before its prohibition, these were put forward too late in the proceedings. After the prohibition, and an overwhelmingly negative reaction from industry stakeholders, it appears that the Commission was willing to engage with the merger parties and the minister of trade, industry and competition (the minister) to reignite discussions regarding the proposed conditions. Since the transaction was an intermediate merger, the revised conditions still had to be put before the Competition Tribunal for its approval, and the merger parties still had to formally challenge the Commission's initial prohibition.
A hearing was set down for consideration of the transaction at the Competition Tribunal and new proposed conditions were put forward. It is understood that those conditions were not contested and were agreed between the Commission, the merger parties and the minister.
This led to several new conditions. In terms of the expansion commitment, the merger parties committed to investments in South Africa of up to 500 million rand, which includes:
- increasing the number of Burger King outlets from 90 to at least 150;
- committing to hire an additional 1,250 HDPs as permanent employees;
- increasing the payroll value; and
- increasing employee benefits by an amount of at least 120 million rand.
Moreover, several supply commitments have been made. BKSA committed to improving its rating for the enterprise and supplier development element under its Broad-Based Black Economic Empowerment (B-BBEE) scorecard, which relates to empowering black-owned and smaller enterprises. In addition, BKSA will establish an employee share ownership programme that will entitle workers to a 5% stake in the company. Lastly, in terms of the divestiture commitment, ECP has agreed to dispose of the Grand Foods meat plant. The transaction must be notified to the Commission for consideration, even if it is classified as a small merger.
Among other obligations, BKSA must conclude a supply agreement with the meat plant or the meat plant purchaser in terms of how it will continue to procure inputs from the meat plant.
As part of the package of revised conditions, the Commission has moved away from focusing purely on the absolute reduction in the B-BBEE ownership levels in order to adopt a more holistic approach. This accords with the South African case law in decisions such as:
- Walmart v Massmart;
- The Association of Mine Workers v Competition Tribunal; and
- Metropolitan v Momentum.
In such cases, the Competition Tribunal and the Competition Appeal Court emphatically laid down the principle that a balanced approach must be taken when assessing public interest factors. For example, if ownership levels are reduced, this could potentially be outweighed and justified by other public interest considerations.
Although the Competition Tribunal's full written decision on the Burger King merger is yet to be published, a similarly balanced approach is expected to be adopted, given that there are no disagreements among the parties in terms of the above commitments.
What is the impact of this decision on future mergers?
The manner in which the Commission tackled this decision, and its subsequent statements in the press, has created uncertainty around how transactions with similar public interest issues will be assessed in the future. There is little guidance as to how the Commission will interpret and weigh up the ownership provision in future, in particular if absolute ownership and/or empowerment shareholder levels must be maintained.
Parties involved in transactions in South Africa should adopt a proactive approach and make realistic assessments of what type of commitments may be required if potential public interest or competition law issues are anticipated. The Burger King merger indicates that authorities will take a more holistic approach and that some degree of flexibility may be possible. For example, if one public-interest element is negatively affected, it could be outweighed by other positive public-interest outcomes. The decision also ties in with proposed amendments to the merger filing forms in South Africa, which will require a greater level of detail as regards the effect of mergers on each public interest consideration listed in the Competition Act.
For further information on this topic please contact Daryl Dingley at Webber Wentzel by telephone (+27 11 5305 000) or email ([email protected]). The Webber Wentzel website can be accessed at www.webberwentzel.com.