Tribunal statement on the conditional approval of the merger between Wal-mart Stores Inc. and Massmart Holdings Limited – 31 May 2011
The Competition Tribunal has today approved the merger between Wal-Mart Stores Inc. of the United States (“Walmart”) and South African retailer Massmart Holdings Limited (“Massmart”), subject to conditions which are contained in the attached annexure.
The merging parties had initially argued for unconditional approval of the merger, a position initially supported by the Competition Commission. Opposed to this view were three government departments, Economic Development, Trade and Industry and Agriculture, Forestry and Fisheries, who had proposed that the merger be approved, but subject to conditions to protect the public interest. Also intervening were the South African Commercial, Catering and Allied Workers’ Union (“SACCAWU”) which is recognised by Massmart, the South African Clothing & Textile Workers’ Union (“SACTWU”), other unions organising workers in industries which sell products into the retail sector and their federation Congress of South African Trade Unions (“COSATU”). The unions had proposed that the merger be approved subject to a wide range of public interest conditions, but that if this was not possible, that the merger should be prohibited.
The evidence that the Tribunal considered differed in important respects from that considered by the Competition Commission during its earlier investigative process. In our proceedings we have had the benefit of further discovery of documents at the instance of the government departments’ team, and the testimony and examination of witnesses brought by the intervenors.
This explains why the Commission changed its recommendation in argument at the end of the hearing, from one of unconditional approval to one with suggested conditions to meet the retrenchment dispute and the concerns over collective bargaining rights. We commend the Commission for not taking a static approach to the proceedings, but we believe that the undertakings furnished by the merging parties largely address the Commission’s concerns.
The Tribunal process has also been instrumental in raising issues of concern that, as we consider more fully below, the merging parties have seen fit to react to by making certain undertakings, albeit that they do not concede that they were legally obliged to do so. We appreciate the testimony of witnesses and experts put up by all the parties in these proceedings.
It is common cause that this merger raises no competition concerns. Walmart does not compete with Massmart in South Africa and its only presence in the country is a small procurement arm that sources local products for its stores globally. The merging parties contend that the merger will indeed be good for competition by bringing lower prices and additional choice to South African consumers. We accept that this is a likely outcome of the merger based on Walmart’s history in bringing about lower prices. However the extent of this consumer benefit is by no means clear – Walmart itself has not been able to put a number to this claim, only that it is likely.
Given our highly concentrated retail market, the strengthening of Massmart, which is in some product categories only a number four or five size retailer, measured in terms of sales, is likely to benefit consumers by strengthening rivalry and improving choice.
This merger will also likely have certain losers. Walmart’s proposed entry into areas presently under served by large retailers may displace certain small businesses and in others, reduce the market share of some of the major retailers. That is an inevitable consequence of the competitive process.
We are however required by the Act not to be indifferent to certain public interest concerns caused by a merger, if they are substantial. The purpose of public interest concerns is not to protect firms from losing out to market forces, but to protect a substantial public interest. However the Act does limit our ability to remedy public interest concerns in two ways. First, the Act recognises only a limited set of public interest concerns as specified in the Act. Second, the public interest concerns must be merger specific. Expressed in less technical language, unless the merger is the cause of the public interest concerns, we have no remit to do anything about them. Our job in merger control is not to make the world a better place, only to prevent it becoming worse as a result of a transaction. This narrow construction of our jurisdiction has not always been appreciated by some of the intervenors who have sought remedies whose ambition lies beyond our purpose. It is not our task to determine whether those ambitions are legitimate public policy goals; only whether they lie within our powers.
On the final day of this hearing the merging parties offered certain undertakings to the Tribunal which they agreed might be imposed as conditions for the approval of the merger. These undertakings were made to address certain labour and local procurement concerns raised by intervening parties during the course of the hearing process. The merging parties made it clear that in their view the undertakings were not required legally in order for the merger to be approved, but were offered to meet adverse perceptions about the effect of the merger on the public interest.
Given that the merging parties have tendered certain conditions, our task in assessing the merger has changed in emphasis.
The Tribunal will thus take the approach that it must examine if the undertakings adequately remedy the merger specific public interests concerns raised, on the assumption that they have been established, and provided that their remit is within our jurisdiction. We have come to the conclusion that they are adequate.
One of the concerns raised by the intervenors relates to the effect of the merger on employment. The effect on employment may not be confined to the jobs of those employed by the merged firm – it may extend to those not employed by the firm, but whose jobs may be threatened as a result of the merger. Further, employment concerns may not only relate to jobs lost, but also, as we will explain in our reasons, an adverse effect on conditions of employment. The remit of how far we can go in addressing these concerns is controversial and we will address this in our reasons. On the assumption that the merger will have certain adverse affects on employment and conditions of employment, we have examined whether the undertakings adequately remedy them.
Whilst Walmart’s expansion plans suggest that retrenchments of the existing workforce are unlikely and that increased employment is more likely, the parties have given an undertaking that there will be no retrenchments at Massmart for two years for merger specific reasons. Although the undertaking is diluted by a redeployment exception, we find that as post merger retrenchments are not likely, the undertaking is adequate.
A hotly contested issue during the merger was whether certain retrenchments that took place in June 2010 affecting certain Massmart employees were merger specific. Whilst the retrenchments coincided with the commencement of the merger negotiations there is no conclusive evidence that it was the cause. Despite this the merging parties agreed during the proceedings to make an undertaking that they will give preference to re-employing these retrenched workers if vacancies arise and to recognise past seniority for this purpose.
A major concern articulated by the union intervenors was that the merger would likely lead to a diminution of their collective bargaining rights. The undertaking to honour collective bargaining rights presently enjoyed addresses this concern. It goes further in undertaking not to challenge the status of SACCAWU as the largest representative of workers in its divisions and invites us to determine the appropriate period for which this condition should hold. We have determined that it should operate for three years.
Finally the parties offered an undertaking to address the local procurement concern raised by the intervenors. Intervenors were concerned that as a result of Walmart’s global purchasing powers, which dwarf those of Massmart, the merged firm would be able to source cheaper imports and hence switch some of Massmart’s procurement away from local manufacturers to imports, with adverse effects on those employed in these sectors. No specific figure could be given to this apprehended substitution by the intervenors, and the merging parties have contested this, alleging that at worst local importers would be replaced by direct imports and that there would not be a significant decrease in net procurement from local manufacturers. Again this concern is the subject of indeterminate evidence from either side. However, even if the concern is valid, the undertaking for an investment remedy as suggested by the merging parties is in our view appropriate, proportional and enforceable. It avoids concerns that the conditions suggested by some intervenors to impose a form of quota of mandatory domestic purchases on the merged entity, could violate the country’s trade obligations, be anti-competitive or be incapable of practical implementation.
Furthermore the investment undertaking is a more positive response to the procurement concern. Instead of insulating local industry from international competition for a period, it seeks to make local industry more competitive to meet international competition. Whilst at a macroeconomic level the remedy is modest, at the level of a single firm commitment it is not. Expenditure of R 100 million over a three year period is significant. Further the remedy seeks to engage those very critics of Walmart in the decision making process over the disbursement of the funds, including representatives of small, medium and micro enterprises (“SMMEs”).
We note that the conditions have met some, but not all, the intervenors’ expectations of what conditions should be imposed. We will explain in our reasons why some of these expectations are misplaced.
Because the undertakings are made as conditions for the approval of the merger they are enforceable. Non-adherence can lead to serious consequences for the merged firm, including the risk that the merger could be undone. This illustrates that the parties view the undertakings as a serious commitment and not a public relations gesture.
For this reason we have decided to approve the merger subject to the undertakings made by the parties becoming conditions for the approval.
Reasons for the decision will be released on or before 29 June 2011.