The decision has had a substantial and negative effect on public interest in conflict with the Competition Act.
This column was first published in Business Day.
The decision by the Competition Commission last week to block the sale of Burger King by Grand Parade Investments is incomprehensible. It has severely damaged SA’s reputation as an attractive destination for foreign investment; it has damaged the ability of black-owned firms to realise their investments; and it has harmed the advancement of BEE broadly by introducing a new and unexpected cost for firms that have high levels of black ownership.
The facts are these: Grand Parade Investments, a 69% black-owned JSE-listed firm that was founded with R28m raised from 10,000 historically disadvantaged South Africans, wants to sell Burger King (SA) to Emerging Capital Partners (ECP), a private equity firm. ECP is an Africa-focused firm with investments across the continent, headquartered in the US. The commission blocked the deal because it “would lead to a significant reduction in the shareholding of historically disadvantaged persons in the target firm, from more than 68% to 0% as a result of the merger”.
The next day, the share price of Grand Parade plunged 17% before closing 10% down.
The commission said it had blocked the transaction on the grounds of section 12A(3)(e) of the Competition Act. This requires the commission to consider the effect that the merger will have on “The promotion of a greater spread of ownership, in particular to increase the levels of ownership by historically disadvantaged persons … in the market”.
I quote you the specific paragraph, so I can also tell you that the commission did not mention three other paragraphs of 12A(3), including the effect on “employment” (paragraph b), “the ability of small and medium businesses or firms controlled or owned by historically disadvantaged persons to effectively enter into and participate in or expand within the market” (c), and “the ability of national industries to compete in international markets” (d). On all three of these, the decision flies in the face of the requirements of the act.
Let me explain why.
First, ECP had proposed contributing R500m of new capital to the business to invest in new stores creating 1,250 jobs (so the prohibition conflicts with paragraph b). Second, the fast-foods industry is one where international private equity provides a common exit strategy for entrepreneurs. For example, in 2016 McDonalds was sold to MSA Holdings, based in the United Arab Emirates, by Cyril Ramaphosa before he became president.
Grand Parade may have been inspired by that to have invested in Burger King. But in future, any black entrepreneur will have to think twice given that their BEE status will compromise a potential exit in future, given that firms with low BEE levels will have a comparatively smoother route to an eventual sale. The decision conflicts with paragraph c in that it makes it harder for black entrepreneurs to enter the market.
Finally, the decision is a major blow to foreign direct investment as it signals to foreign buyers that they cannot buy firms that have high levels of black ownership. Because FDI is a critical factor in linking the SA economy to international markets, this harms the public interest in paragraph d.
Then, let us get to paragraph e.
On this one, too, the commission has got it wrong. The 10% fall in the share price evaporated R85m of black wealth. That capital would have been invested in “increasing the levels of black ownership in the market” had the commission acted otherwise. By maximising the amount that exiting black shareholders can receive, you are creating capital in the hands of black people to invest in the market. The prohibition therefore damages the spread of ownership of black people in the economy.
Had Burger King been sold by a non-BEE vendor, it would have realised the full value of the asset (and be worth R85m more), which it could then have reinvested. So the commission’s decision systematically biases ownership across the market against greater diversity and inclusion of black people, in conflict with the requirement of paragraph e.
The decision should rightly be challenged in the courts. The Competition Tribunal, as law firm Webber Wentzel pointed out in a note on the decision, has already said the commission must apply considerable caution when the interests of black investors who support the transaction are directly affected.
The decision has already added significant concerns for other proposed deals such as Dutch brewer Heineken’s proposed purchase of Distell and the acquisition battle for 41% black-owned IT firm Adapt IT, one of the bidders for which is Canadian. These illustrate the point — the cost of deals has gone up, particularly for black vendors, while much-needed foreign investment has been directly threatened.
The commission has defended itself saying it is merely “applying the law”. Well, no, I don’t think it is. In fact, I think on a more thorough interrogation of the economic impact of its decision it becomes clear that it has had a substantial and negative impact on the public interest in conflict with the Competition Act.
• Theobald is chair of research-led consulting house Intellidex.