Stefanutti Stocks And TN Molefe Construction

The judgment

The court's own file

wd compettiontetbun COMPETITION TRIBUNAL OF SOUTH AFRICA Case No: LM019Apri7 In the matter between: Raubex (Pty) Ltd Primary Acquiring Firm and Umso Construction (Pty) Ltd Enza Construction (Pty) Ltd Primary Target Firms Pane! Yasmin Carrim (Presiding Member) .W Wessels (Tribunal Member) ledi Mokuena (Tribunal Member) 14 February 2018 : 49 February 2018 1 February 2018 2 March 2018 Heard on Last Submission Receive’ Order Issued on Reasons Issued on Reasons for Decision Approval

[1]On 21 February 2018, the Competition Tribunal ("Tribunal") conditionally approved the proposed transaction between Raubex (Pty) Ltd and Umso Construction (Pty) Ltd and, Enza Construction (Pty) Ltd.

[2]The reasons for approving the proposed transaction follow. Parties to proposed transaction Primary acquiring firm (3)

[4]5) The primary acquiring firm is Raubex (Pty) Ltd ("Raubex”), a company duly incorporated in accordance with the laws of the Republic of South Africa. Raubex is a wholly-owned subsidiary of the Raubex Group Limited ("Raubex Group"). The Raubex Group is a public company, listed on the Johannesburg Stock Exchange. Its shares are widely held and it is not directly or indirectly controlled by any single entity. The Raubex Group controls a number of companies in South Africa and around Africa, Raubex operates through the following divisions: a. Infrastructure — Raubex provides civil engineering services in water, electrical, ns infrastructure, Raubex provides affordablemining and_telecommuni housing infrastructure and mine housing infrastructure, as well as services in the commercial buildings space such as building of hospitals and clinics, prisons and schools. b. Roads — Raubex provides road construction services as well as road rehabilitation and maintenance services. Raubex provides services in all construction disciplines, including earthworks, concrete structures, surfacing and road marking. c. Materials - Raubex supplies inter alia aggregates, asphalt, bitumen, material beneficiation services and plant hire used in mining, road construction and general building markets. Primary target firm 10) ita 8) The primary target firms are Umso Construction (Pty) Lid (‘Umso") and Enza ‘Construction (Pty) Ltd (“Enza”) — collectively referred to as the Emerging Contractors. ‘The Emerging Contractors are ali smaller construction companies that are more than 51% owned and controlled by historically disadvantaged persons (“HDPs"). Umso's shares are widely dispersed and it is not controlled by any firm. According to the latest 8-BBEE certificate in relation to Umso, 78.29% of its shareholding is held by black individuals Umso provides general civil engineering services, but is primarily involved in the construction of roads, water and sewer reticulation, concrete structures, bridges and 19)

[10]box culverts. Umso's core business is the construction and rehabilitation of roads. It also builds bridges and undertakes large earthworks projects, including earth dams, industrial platforms and landfills. Enza is a wholly-owned subsidiary of Crowie Holdings (Pty) Ltd (“Crowie Holdings”), whose shares are widely held by a number of family trusts, the beneficiaries of which are HOPS. According to the latest B-BBEE certificate in relation to Enza, 99.27% of its shareholding is held by black individuals. Enza is predominantly involved in the building sector and its areasof expertise include residential buildings, institutional accommodation, hospitals, commercial offices and industrial and retail buildings. Through its Special Projects Division, Enza focuses on participation in less conventional projects such as major joint ventures on large, complex projects, PPP projects and turnkey solutions. Proposed transaction and rationale (11) 12) (13) 14) ' Aveng (Africa) (Pty) Ltd (“Aveng”), Basil Read Holdings (Pry) Ltd (" Limited (“Group Five Stocks (Pty) Ltd ("Stefanutti”) and WBHO Construct ‘The proposed transaction entails the formation of economic alliances between Raubex and the respective Emerging Contractors. ‘The merging parties submit that it is intended that post-merger, the merging parlies will operate as a single economic entity (ie. the Raubex Alliance). ‘These alliances are the result of a settlement agreement concluded between a number ‘of Construction Companies’ and the Government of the Republic of South Africa (as represented by the Ministers of Rural Development and Land Reform, Economic Development, Public Works and Transport) on 11 October 2016 ("the Settlement Agreement’). Raubex submits that in order to achieve the objects of the Settlement Agreement, it is essential for them and their respective Emerging Contractors to establish an alliance pursuant to which Raubex will acquire material influence over the direction, operation and competitiveness of the business of the Emerging Contractor. The Raubex Alliance, therefore gives rise to a merger in terms of section 12(2Xg) of the Competition Act, no. 89 of 1998 ("the Act”). I Read”), Group Five Construction ), Murray and Roberts Limited (“Murray and Roberts"), Raubex (Pty) Ltd, Stefanuti ('WBHO"). (15) (16) (17)

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[20]‘The mentoring and development that Raubex has chosen to embark on, requires that the Emerging Contractors identified should acquire the necessary skill, quality and status 2s well as the quantity of work to generate and sustain a cumulative combined annual turnover equal to at least 25% of the annual construction works turnover of Raubex during the relevant period (7 years extendable to 10 years). It is worth noting that if Raubex does not meet that turnover obligation within the relevant period, Raubex would incur substantial penalties in addition to the possibility of the Government instituting civil proceedings against Raubex for previously having colluded on certain Government projects. If Raubex fails to pay the penalty, it may even be blacklisted and disqualified from being awarded contracts from public enterprises for up to 12 months. The Settlement Agreement prescribes that the development of the Emerging Contractors will be undertaken in terms of a formalized development and mentorship program proposed by Raubex in consultation with the Black Business Council. As per the Settlement Agreement, the proposed transaction is due to terminate after a maximum period of 10 years from the date of its implementation. Following the termination, the alliance members are expected to return to their original positions where they will no longer operate as a single economic entity; they will be expected to be completely independent and vigorously compete with each other. The Commission acknowledged that the parties may by mutual agreement, choose to terminate the alliance prior to the lapse of the 10 year period. The primary acquiring firm's rationale for the transaction is that pursuant to the Settlement Agreement, Raubex has undertaken to the Government that it will increase investment, promote innovation and create entrepreneurial opportunities in the construction industry, particularly for small-to-medium sized enterprises. In terms of those commitments, Raubex was required to identify enterprises which it would mentor and develop and obtain such competition authority approval as is required to pursue those initiatives. The Emerging Contractors are the HDP firms identified by Raubex for this purpose. ‘The primary target firm's rationale is that the program will (i) provide them with extensive support and access to skills and expertise to enable them to take on more projects of a large scale; and (ii) allow them to over time acquire a greater share of the construction industry and compete more effectively. Impact on competition (21) (22) (23)

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[25]‘The Commission identified horizontal overlaps in the following markets: a. The provision of services for civil engineering: road; b. The provision of services for civil engineering: other; c. The provision of services for general building: residential; and d. The provision of services for general building: non-residential ‘The Commission found that the proposed transaction will result in post-merger market shares of less than 10% with minimal accretions in all markets (less than 5%). The Commission also identified a number of prominent rivals in the relevant markets such as Aveng, Group Five and Murray & Roberts among many other construction companies. The Commission concludes that the merged entity is unlikely to exercise. market power given the presence of several viable alternatives who will be able to. discipline the merged entity. Further, the Commission identified a vertical overlap, in that Raubex manufactures/produces some upstream products used by the Emerging Contractors.? ‘The Commission found that the proposed transaction is unlikely to result in any input ‘or customer foreclosure as the Emerging Contractors, individually and collectively, are not significant buyers of the upstream products produced by Raubex. With combined market shares in the downstream markets of less than 3%, the Emerging Contractors do not account for a sufficient portion of market demand so as to give rise to a possibility of substantial foreclosure. Further, the Emerging Contractors’ total procurement of the respective upstream products equates to less than 1% of Raubex’s total salesof said products. Additionally, Raubex is just one in many manufacturers of these products. Therefore, the ‘Commission found there is no likelihood of foreclosure as a result of the proposed transaction. Public interest Employment and public interest benefits (26) (27) (28)

[29]‘The merging parties submitted that there will be no adverse effect on employment, as no duplications arise as result of the mergers. Rather the Construction Companies will ensure that the transactions provide the Emerging Contractors with the support, skills ‘and guidance to grow into successful independent firms in the market. As a result jobs and entrepreneurial opportunities in the industry. The Commission found there to be no likelihood of duplications or rationalisations as a result of the proposed transactions. employees will need to be sourced and the target firms will create qu: The merging parties submitted that in line with section 12A(3)(c) of the Act, the proposed transactions result in public interest benefits as it enables the Emerging Contractors (BEE and Historically Disadvantaged firms) to become competitive. The merging parties outline the following benefits: a. It will improve the development of skills among HDPs in critical areas in the industry; b. Itencourages participation and ownership of SMEs and enterprises managed and ‘owned by HDPs; and ©. It provides for demonstrable and measurable expansion opportunities in the construction industry which promotes competition, innovation and growth in the market. The Commission agreed with this and found that the proposed transaction raises strong public interest benefits in terms of the Act. The proposed transaction ensures, that small black-owned construction companies are able to grow their businesses to hopefully one day be able to compete directly with firms such as Raubex. Regarding the current level of transformation in the construction industry, the Commission found that most black-owned construction companies operate in the lower levels of the market (smaller projects). The Raubex alliance therefore presents an opportunity for the black-owned businesses to be developed into large and more competitive firms in line with the objectives of section 12A(3)(c) of the Act. ‘The Commission was of the view that it is necessary to monitor the performance of the alliances in their attainment of these public interest benefits. The Commission therefore required the merging parties to provide a report to the Commission on all the projects the merging parties would have participated in as part of the Raubex Alliance. (30)

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[32](33) The Commission was also concerned about the possibility of unfair treatment of the Emerging Contractors within the Raubex Alliance, given the disparity in size of the Emerging Contractors. The Commission was concerned that since the Settlement ‘Agreement was silent on the apportionment of the 25% target and does not specify how the work is to be allocated, there may be a risk that Raubex may focus all its resources and training on one of the Emerging Contractors and achieving the target through that Emerging Contractor rather than spreading the work across both. The Commission engaged the Emerging Contractors regarding this concern, who indicated that the value of the alliance is in the skills and development that is on offer, the Emerging Contractors plan to exploit the opportunity and lear from Raubex to the fullest. Further, the Emerging Contractors provided that they are largely specialized in different areas of the construction sectors, which suggests that there will not be reason to trade-off working with one Emerging Contractor for another. The Commission concludes that there is more incentive for Raubex to work with both Emerging Contractors in a fair and equal manner as opposed to the converse. The Tribunal addressed this concern by suggesting that the Commission's condition relating to this issue be reworded to say that the Emerging Contractors are to be treated equally, in order to prevent any bias to one or the other in the allocation of work.? The merging parties and the Commission had no objection to this amendment. The Fund

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[36]The Settlement Agreement made provision for the establishment of a Fund, the objective of which will be the development and enhancement of the Construction Industry and in particular, transformation objectives. The Trustees of the Fund will comprise of representatives of all of the Construction Companies who are party to the Settlement Agreement, as well as representatives of the Government, as appointed by the relevant government departments. ‘The Commission was of the view that further measures were required to ensure that the Fund is not used as an information sharing platform by the construction companies. Transcript page 86, lines 1-3, (37) (38) (39) (40) (41) ‘The Commission was of the view that all the economic alliances should put into place the necessary safeguards to ensure that competitively sensitive information does not flow from one economic alliance to other construction companies through the Fund. In respect of the Fund, the Commission required that the alliance members ensure that all information submitted to the Fund is aggregated, and the members must ensure that the necessary measures are put in place to prevent the flow of competitively sensitive information from one alliance to another through the Fund or any other medium. ‘The Commission further required that the people selected by the Construction ‘Company for the mentorship and development of the Emerging Contractors not be appointed as Trustees to represent them on the Fund. ‘The merging parties submitted that such a condition would be restrictive and prejudicial to the alliances as it: a. Precludes all key executives and personnel of Raubex from being trustees on the Fund, The merging parties submitted that although only one person may primarily be appointed with overall responsibilty for the day to day and ongoing mentoring and development of the Emerging Contractors, various secondees will be involved in operational and other development and mentoring activities and Raubex’s executives are likely to participate in, and have oversight over the development and mentoring activities; and b. This would preclude persons from being trustees of the Fund who, through their general enterprise development activities and their activities and their involvement with the Emerging Contractors, have the best knowledge and expertise of what development, transformation and other initiatives are required by the industry, being the principal objective of the Fund. The merging parties submitted that the restriction is therefore detrimental both to the objective so the Fund and to the Alliance Construction Company's interests at the Fund. ‘The Commission remained of the view that having the same people responsible for the monitoring and development while sitting as Trustees increased the likelihood of coordination between the construction companies. (42) (43) (44) (45) ‘The merging parties re-iterated before the Tribunal that this condition was extremely broad, restrictive and unnecessary.‘ The merging parties maintained that other conditions placed upon them were sufficient to address any information sharing concerns. ‘The Commission submitted the objective of the proposed condition was notfo exclude everyone affected by the mentorship activities but rather just particular individuals with intimate knowledge of the mentorship program as they fell thal kind of engagement could create a platform for the sharing of competitively sensitive information.* ‘The Tribunal Commission's concern regarding the potential for the Trust Fund to be used indicated that it understood the as a platform for information sharing and uitimately approved this transaction subject to the reworded condition in this regard, s0 as to afford the merging parties more flexibiliy in who they could appoint but also protect the Commission's concer. In this regard the parties were asked to engage with each other so as to preclude operational people from being appointed as Trustees.” With regards to monitoring of the alliances, the merging parties must submit reports. annually detailing the projects they have worked on during the joint venture, Further they must provide a report upon termination of the alliance. Conclusion (46) In light of the above, we concluded that the proposed transaction is unlikely to substantially prevent or lessen competition in any relevant market. Accordingly, we approved the proposed transaction subject to conditions. For convenience the set of conditions are attached, marked as “Annexure A”. Cains Ms Yasmin Carrim DATE, Mr AW Wessels and Mrs Medi Mokuena concurring “Transcript page 59, lines 6.9. 2 Transcript page 58, Transcript page 66, Transcript page 98, ines 13-14 & page 59, lines 1-9. Case Manager: For the Merging Parties: For the Commission: Kameel Pancham Paul Coetser and Paul Cleland from Werksmans Attorneys Busisiwe Ntshingila and Ratshidaho Maphwanya 10