Business Venture Investments 790 (Pty) Ltd and Afrox Healthcare Limited (105/LM/Dec05) [2005] ZACT 28 (9 May 2005)

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Business Venture Investments 790 (Pty) Ltd and Afrox Healthcare Limited (105/LM/Dec05) [2005] ZACT 28 (9 May 2005)

.RTF of original document

REPUBLIC OF SOUTH AFRICA

Case No.: 105/LM/Dec04

In the large merger between:

Business Venture Investments 790 (Pty) Ltd Primary Acquiring Firm

and

Afrox Healthcare Limited Primary Target Firm

Reasons for Decision

Conditional Approval

1. The Competition Tribunal issued a Merger Clearance Certificate on 02 March 2005 approving with conditions the proposed merger between Business Venture Investments No. 790 (Pty) Ltd (“Bidco”) and Afrox Healthcare Limited (“Ahealth”).

2. Our order reads as follows:

The merger is approved in terms of section 16(2)(b) of the Act subject to the following conditions:

A. ELIMINATION OF CROSS- HOLDINGS

1. Regarding the interest of Mvelaphanda Capital (Pty) Ltd and Management of Mvelaphanda Capital (Pty) Ltd (collectively referred to as “Mvelaphanda”) in Tshwane Private Hospitals (Pty) Ltd (“Tshwane Private Hospitals”):

1.1

Mvelaphanda must dispose of its entire shareholding in Tshwane Private Hospitals within three months from date of this order or such longer period as the competition authorities may take to approve the merger notified to it regarding that disposal.

1.2

All directors of Mvelaphanda on the boards of Curamed Holdings Limited and Tshwane Private Hospitals must resign from the latter two boards, within one month of the date of this order.

1.3

Dr Jackie Mphafudi, who is a director on the board of Medi-Clinic and also a director of Mvelaphanda, must resign from the board of Medi-Clinic within one month of the date of this order.

Regarding the Industrial Development Corporation’s (“IDC”) interest in the Clinix Healthcare Group Limited (“Clinix”), provided the IDC acquires a shareholding in Bidco:

2.1

The IDC must dispose of its entire direct or indirect shareholding in Clinix within six months from the date on which it acquires shares in Bidco.

2.2

Any employee of the IDC, who is a director on the board of Clinix, must resign within one week of the date on which the IDC concludes the agreements necessary to give effect to the divestiture contemplated in 2.1.

B. RESTRICTIONS ON SALES OF EQUITY

For a period of 3 years from the date of this order –

1.1.

If any shareholder in Bidco or the Company sells equity in Bidco or the Company to Medi-Clinic or to Netcare then that sale must be notified to the Competition Commission as a large merger;

1.2.

If RMB acquires additional equity in the Company, directly or indirectly, so that its total effective equity in the Company is in excess of 25%, then the transaction, which raises the equity above that level (“additional equity transaction”), must be notified to the Competition Commission as a large merger.

1.3.

Provided that the condition in paragraph B 1.2 –

1.3.1

Only applies for so long as First Rand Limited or any company controlled by it, holds in excess of 45% of the equity in Discovery Health Limited;

1.3.2

Does not apply if RMB disposes of the equity that gave rise to the additional equity transaction within 3 months of the date that it was acquired, and provided further that it gives notice to the Commission at the time it acquires the additional equity and at the time when it disposes of it.

For the purpose of this order –

2.1 “the Company” means Ahealth Limited or any company into which the

present business of Ahealth may be transferred;

2.2 “Bidco” means Business Venture Investments No. 790 (Pty) Limited;

2.3 “equity” depending on the context, means the issued share capital of the

Company or Bidco, or an indirect interest in the share capital of the Company;

2.4 “Netcare” means Network Healthcare Holdings Limited or any company

controlled by it;

2.5 “Medi Clinic” means Medi-Clinic Corporation Limited or any company

controlled by it;

2.6 “RMB” means RMB Private Equity (Pty) Ltd, RMB Ventures (Pty) Ltd

and FirstRand Bank Limited (acting through its Rand Merchant Bank

Division) and or First Rand Limited, and includes any other company
controlled by them.

C. A Merger Clearance Certificate be issued in terms of Competition Tribunal rule 35(5)(a).

3. The reasons for conditionally approving the merger are set out below.

The Transaction

4. In terms of this transaction, all of the shares in Ahealth are to be acquired by Bidco, a shelf company created for purposes of the acquisition of Ahealth. In terms of the new transaction, the shareholding of the buying entity, Bidco, is as follows:

Business Venture Investments No. 813 (Pty) Ltd (“BEECo”) (comprising Brimstone and Mvelaphanda in equal shares) shall hold a 50.2% interest in Bidco;

African Oxygen Limited (“AOL”) as to 20.1%;

Rand Merchant Bank Equity (Pty) Ltd (“RMB”) as to 10.1%;

Old Mutual Life Assurance Company (South Africa) (“OMLACSA”) as to 10.1%;

Industrial Development Corporation South Africa Ltd (“IDC”) as to 4.5%; and

Ahealth Management (“Management”) as to 5%.

5. The structure of the proposed transaction envisages that BEECo, AOL, RMB, and OMLACSA will jointly control Bidco. Upon conclusion of the transaction the structure and shareholding of Bidco and Ahealth post-merger will be as follows:

Mvelaphanda (50%)

Brimstone (50%)

IDC (4.5%)
BEECo (50.2%)

Management (5%)
OMLACSA (10.1%)

AOL (20.1%)
RMB (10.1%)

Bidco (100%)

Ahealth

6. As will be explained below, we are as yet not certain whether the IDC has already taken up its 4.5% equity stake in Bidco. In addition, it is noteworthy that the merging parties anticipate that “Doctors and BEE Groupings” will be introduced into the Bidco shareholding structure at some point in the future.

The Merging Parties

The primary acquiring firms

7. The primary acquiring firm is Bidco, a newly formed private company created solely for purposes of this acquisition. As noted Bidco is controlled by BEECo (an empowerment company which is in turn controlled by Mvelaphanda Strategic Investments (Pty) Ltd (“Mvelaphanda”) and Brimstone Investment Corporation Limited (“Brimstone”)), AOL, RMB and OMLACSA. As already noted, there was, at the time of writing, no clarification as to the IDC’s role, that is, as to whether it had taken up an equity share in the company and signed the shareholders’ agreement. We have, however, imposed a condition on the IDC which is, in turn, conditional upon the IDC having actually taken up an equity stake in the target company. For the purposes of this analysis then we treat the IDC as one of the primary acquiring firms.

8. Mvelaphandais a wholly owned subsidiary of Mvelaphanda Holdings (Pty) Ltd (“Mvelaphanda Holdings”). Mvelaphanda Holdings is a leading black-owned investment holding company established in 1998. Mvelaphanda Holdings has major investments in a diverse range of sectors. However, only Mvelaphanda’s subsidiaries involved in the healthcare industry are relevant for purposes of this analysis.

9. In the healthcare industry, Mvelaphanda holds, through Mvelaphanda Capital (Pty) Ltd, an interest of 32% in Tshwane Private Hospital (Pty) Ltd (“Tshwane Private Hospital”). Tshwane Private Hospital is controlled by Medi-Clinic (which holds 51% of the shares therein). Tshwane Private Hospital in turn holds 63% of the shares in Curamed Holdings Limited (“Curamed”), which owns 6 hospitals in Pretoria. These interests have led the Commission to recommend the imposition of a condition on the approval of the transaction. This recommendation has been accepted by the Tribunal and the merging parties.

10. Brimstone a BEE investment holding company. It too has investments in a wide range of sectors. Its only interest in healthcare is its 26.04% interest in the Scientific Group (Pty) Ltd (“the Scientific Group”). The Scientific Group is a company that distributes medical and pharmaceutical equipment.

11. RMB is a subsidiary of FirstRand Limited (“FirstRand”). FirstRand is a large group of companies in the financial services sector. Of principal relevance here is its controlling interest in Discovery Holdings Limited (“Discovery Holdings”). FirstRand holds approximately 65,6% of the issued shares in Discovery Holdings. Discovery Holdings is a specialist insurance company that finances and manages healthcare and other related risks. Discovery Holdings itself operates 4 main businesses, viz. Discovery Health, a South African medical aid scheme administrator; Discovery Life (South African life insurance products); Destiny Health (US based healthcare products); and PruHealth, which is UK based healthcare products. The vertical issues implicit in the FirstRand group’s involvement in a large hospital grouping and a large healthcare-focused financial institutions accounts for a further condition imposed on this transaction.

12. The FirstRand group, through its various subsidiaries, also holds:

♣         100% of Momentum Holdings.
♣         A 40% interest in Magna Medical Holdings (Pty) Limited, which in turn holds approximately 5% of the shares in Alliance Pharmaceuticals Limited (“Alliance”), which markets and distributes cosmetics, toiletries, and pharmaceutical products.
♣         A 70% interest in Surgitech (Pty) Limited, a company that imports and distributes disposable medical devices.
♣         A 30% interest in Eternity Private Health (Pty) Limited, a medical aid administrator.
♣         An effective 76% interest in Medicor PBM (Pty) Limited, which provides pharmaceutical benefit management services.

13. OMLACSA a wholly owned subsidiary of Old Mutual South Africa Limited (“OMSA”) and is a registered long-term insurer. OMLACSA is primarily involved in all classes of life assurance and retirement funding in South Africa. It has minority shareholdings, and no board representation, in Netcare (1.591%), Medi-Clinic (0.148%), FirstRand (2.373%), and AOL (4.947%). OMLACSA also controls:

♣         Old Mutual Healthcare (Pty) Limited (“OMHC”) which provides administration services, risk management services which include pharmacy benefit management, hospital benefit management, oncology management, etc). It further provides a health management program;
♣         Old Mutual Health Insurance Limited (“OMHL”) which provides short-term health insurance products under two policies, viz. Accident and Health; and Miscellaneous;
♣         Managedchoice (Pty) Ltd, a pharmaceutical management company;

14. The IDC a state-owned national development finance institution (“DFI”) mandated to promote, through its financing activities, economic growth, industrial development and economic empowerment. It provides loan and equity financing to a vast array of sectors including healthcare. Of relevance are its:

♣         28.5% interest in Carecross Health (Pty) Limited which offers, through a national network of Carecross Health service providers, the delivery of primary healthcare to medical schemes, employer groups, managed healthcare companies and the state.
♣         effective 30.1% in Clinix Healthcare Group Limited (“Clinix”) which owns a number of hospitals, viz. Clinix Selby Park Hospital, Lesedi Private Hospital, Clinix Private Hospital Sebokeng, Clinix Private Hospital Soweto, and Clinix Private Hospital Vosloorus. We were informed that the IDC in fact controls Clinix by virtue of it being entitled to appoint four (4) of the fourteen (14) directors, which include the Chairman who has a second and casting vote. This horizontal relationship underlies a further condition recommended by the Commission and imposed by the Tribunal.
♣         49.9% interest in Biomox Pharmaceuticals (Pty) Ltd – this is a pharmaceutical firm currently doing research and development of new products, specialising in mineral, vitamin and amino acid combinations.

15. As indicated above, AOL Ahealth, and holds approximately 69% of the issued share capital of Ahealth with the balance of the shares held by a wide variety of minority shareholders. AOL is primarily involved in the industrial gas business. Its controlling shareholder is, BOC Group plc, British multinational supplier of industrial gases.

The primary target firm

16. The primary target firm is Ahealth public company listed on the JSE Securities Exchange. Ahealth is controlled by AOL, which holds approximately 69% of the issued share capital of Ahealth. The remaining shares in Ahealth are held by a wide variety of minority shareholders. Ahealth is principally active in the private healthcare market.