Wal-Mart deal changes the merger game

None of the parties (the government, unions and the merging parties) has indicated any desire to appeal against the judgment since it was published, yet there is still great uncertainty about public interest assessments for merger review purposes in future transactions.

One thing that has become clear is that review proceedings before competition authorities are set to become much more antagonistic, adversarial and interventionist.

This threatens to increase the cost of transactions, lengthen the time merging parties will spend before the competition authorities, and, in a worst-case scenario, make international investors think twice about acquiring an entity that could cost them more than they initially expected to spend, warn competition experts who spoke to Business Day.

The hearings before the Competition Tribunal over the Wal-Mart transaction have given companies thinking of doing deals in SA the best example of what the future could hold.

John Oxenham, a director at law firm Nortons Inc, says the game has changed completely post-Wal-Mart. "There are so many ramifications. One is really putting one's neck out when advising a client on the timing of a deal."

The Wal-Mart judgment that was delivered by the Competition Appeal Court on 9 March has opened the door for greater intervention during merger hearings, with the government and unions been given "explicit recognition for their role relating to public interest", he says.

Public interest has now become the primary assessment of a merger review in SA, and is no longer secondary to competition issues.

Merging parties will be well advised to not only engage with economists on competition matters, but other specialists such as labour experts in terms of public interest.

The aim of merger considerations, until now, was to determine whether the transaction was likely to substantially prevent or lessen competition, or otherwise to determine whether the merger could or could not be justified on substantial public interest grounds.

The unions, most notably the South African Commercial, Catering and Allied Workers Union (Saccawu), fought hard for the prohibition of the transaction, and tried just as hard to extend competition law into the realms of labour law.

The interventionist approach was already evident in the intermediate merger between Kansai Paints and Freeworld Coatings, where the Department of Trade and Industry asked for intervention status on public interest grounds.

Although the Competition Appeal Court has dismissed the government's application to review and set aside the tribunal's decision to conditionally approve the merger between Wal-Mart and SA's Massmart, the judgment clearly has tried to appease all sides.

"Therein lies the difficulty," says Oxenham, "because difficult cases should not make for bad law."

The appeal court, for example, upheld, in part, an appeal by Saccawu that 503 workers who had been retrenched by Massmart shortly before the merger were entitled to reinstatement. Oxenham says reinstatement of the workers has been done without a final test laid down on public interest consideration.

"That is where we could have knock-on effects," he says.

In many international transactions, there could be a rationalisation process with duplications in systems. The unions will have every reason to become involved.

If merging parties realise that they could land themselves in this murky terrain, they might rethink the transaction.

It is not yet clear whether all the parties have fully accepted the judgment, or, as requested by the Competition Appeal Court, are feverishly at work appointing experts to compile a report on the effect Wal-Mart's entrance will have on smaller suppliers.

This report will then be used by the court to carve out a more suitable remedy than the R100m supplier support fund suggested by the merging parties.

Source: Business Day