Last week the Competition Commission barred the sale of a company on the grounds that the black empowerment stake of the firm being sold would be reduced to zero. The Commission turned down the deal purely on the grounds that the empowerment holding in the company would be eliminated.
This was a bad decision for black empowerment, foreign investment, jobs, the company that wanted to sell, sound regulation, our markets, the economy, and the country. Apart from that, it showed up the narrow manner in which the government is intent on counting the extent of black empowerment and the lengths to which it prepared to go to push ideology.
In April, Grand Parade Investments, a Johannesburg Stock Exchange-listed empowerment vehicle with investments in food, gaming and manufacturing asked permission from the Competition Commission to sell its holding in Burger King to Emerging Capital Partners (ECP), a private equity firm with a focus on Africa.
The Commission quashed the deal. It found that the proposed deal would not have negative effects on employment or competition. But it did find that the deal, ‘would lead to significant reduction in the shareholding of historically disadvantaged persons in the target firm, from more than 68 percent to 0 percent.’
The Commission found that the acquiring firm had no ownership by historically disadvantaged persons. While the way of counting this may be in line with the law, it is hardly the case that this is necessarily in line with reality. ECP investors are, albeit in a broader and more international sense, empowered, as they include the African Development Bank and various South African and African pension funds. Development finance institutions from the US, France, and Germany are also behind the fund. Should the stake of the African Development Bank and local pension funds not be allowed to count toward fulfilling empowerment criteria?
Should have been warmly welcomed
This sort of buyer with a long-term outlook, commitment to expansion, job creation, and empowerment should have been warmly welcomed. ECP has a mandate to invest in South Africa and other African countries. The deal could have been a pathway to more investment in our country.
And if the law allowed the greater public good to be taken into account, the Competition Commission would have done well to look at the commitments from ECP. By the end of 2026, ECP made a commitment to invest R500 million in at least 150 new Burger King outlets, create 1 250 new jobs for historically disadvantaged people, and increase payroll and employee benefits by no less than R20 million. It also promised to increase procurement of products and services from Broad-Based Black Empowerment Entities to an eventual value of R930 million. And within two years ECP said it would allocate five percent of the shares in the new company to a broad-based empowerment structure.
What is there not to like in all of this?
Now that the deal is off, we can forget about the new outlets, jobs, and business for empowered groups.
The empowerment shareholders in Grand Parade would have had their stake in the merged entity reduced, but they would have been paid out and for a time, at least held cash. Holding cash should reasonably be counted towards holding a stake in the economy, the empowerment goal. After a while, the bought-out black empowerment people might have searched for ways of diversifying their portfolios and some might have invested in property and local equities. That means, with this transaction many would have made a gain, been better off, and might have invested in assets of their choice.
Competition Commission decrees
But the Competition Commission decrees that because they are black, they cannot sell their stakes, other than to other empowerment interests. This is a vast disservice to empowerment as it prevents black interests from realising the values of their investment, as the set of possible of buyers is narrowed to empowerment interests.
Grand Parade is also being prevented from making a deal which would have allowed the company to realise greater shareholder value and reduce debt.
A chilling message
The decision sends a chilling message to foreign investors looking at possible acquisitions in South Africa. It narrows down acquisition targets to companies that have few or no empowerment interests. Investors should now be very worried about the overreach of regulatory authorities in South Africa. Through all of this the Competition Commission has also reduced the liquidity of the stock market. Investors like markets where they know there is a high chance that they can get in and get out of an investment with fair ease.
The origins of the Commission’s decision lie in the amendment to the Competition Act passed in 2018, less than a year after Minister Ebrahim Patel took over the Trade, Industry, and Competition portfolio. He was behind the amendment, which gives the Minister vastly expanded powers and elevates the importance of public interest grounds in competition law enforcement. This is not part of the Competition legislation in, for example, the US or Europe. South Africa is unique in having an empowerment provision. Patel was one of the key forces behind the amendment.
Although the Competition Act requires the authorities to take into account public interest considerations, it does not require them to turn down a deal on these grounds. One option might have been to have given Grand Parade a year or two to bring in new empowerment partners. But clearly the Commission wanted to send a tough message. Whether Patel was involved in the decision is not known. What is known is that the amendment allows him to access firms’ confidential information for purposes of participating in mergers and, in practice, every filing to the Commission goes to the Minister for him to decide whether or not he will intervene.
Even if there are solid grounds to challenge the decision, immense damage will have been done to South Africa’s status as an investment destination.
Grand Parade could appeal the decision before the Competition Tribunal and, if not successful, take it to the Competition Appeal Court. If there is a Constitutional dimension to the case, it could eventually find its way to the Constitutional Court. This is clearly not what the potential buyer, ECP, would have wanted. It would take a long time and it would force plans to be put on hold and add greater expense. If there is an appeal, it would show that trying to do business in South Africa can be very difficult.
Last week President Cyril Ramaphosa said broad-based black empowerment policies are to be reviewed to ensure that what is intended in law takes place. But he did not mention any specific empowerment policies that he believes should be reconsidered. The public interest provision in the Competition Act is one such piece of legislation that needs urgent review or, at the least, for companies to be given time to take on new empowerment partners. The easier it is to invest in a country, the more funds will flow in. This is a basic rule.
The views of the writer are not necessarily the views of the Daily Friend or the IRR
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