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Massmart Holdings Limited and Moresport Limited (62/LM/Jul05) [2006] ZACT 40 (12 May 2006)
.RTF of original document
COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case No: 62/LM/Jul05
In the large merger between:
Massmart Holdings Limited
Acquiring Firm
And
Moresport Limited Target Firm
Reasons for Decision [NON-CONFIDENTIAL]
________________________________________________________________
PROHIBITION
1.
On 10 April 2006 the Competition Tribunal prohibited the merger between Massmart Holdings Limited and Moresport Limited in terms of
section 16(2)(c) read with Rule 35(5) of the Competition Act. The reasons for this decision appear below.
THE PARTIES
2.
The primary acquiring firm is Massmart Holdings Limited (“Massmart”), a public company listed on the JSE. Though it is not controlled by any one group, the major shareholders
of Massmart are:
-
Old Mutual Group
14.22%
-
Public Investment Commission
5.42%
-
Participants of the Massmart Holdings Share Trust
5.18%
3.
Massmart controls and operates various divisions, grouped as follows:
Massmart Holdings
Massdiscounters
Masswarehouse
Masscash
Massbuild
Game
Dion
Makro
Shield
Furnex
CBW
Jumbo
Builders Warehouse
Federated Timbers
Servistar
De la Ray’s
4.
Massmart is described by the merging parties as a high volume, low margin retailer of food, liquor and general merchandise. General
merchandise encompasses a disparate array of products including office supplies, DIY equipment, hi-tech products, household appliances,
sporting and recreational goods and categories of clothing.
5.
While Massmart controls a number of chain stores across and retails a range of products, the relevant divisions for purposes of this
transaction are its Masstores namely Makro, Game and Dion through which it retails a range of sports and recreational goods
6.
Massmart’s rapid growth as a national retailer is to large extent due to a number of acquisitions it has made over the last
18 years.. Sporting and recreational goods, which are sold through its Masstores (Makro, Game and Dion) chain, account for nearly R675million
of the group’s annual turnover. Over the last decade the Massmart Group has become a significant national chain of sports and
recreational goods with a credible and material offering in sports and outdoor merchandise.
7.
The primary target firm is Moresport Limited (“Moresport”), a private company controlled by Vestacor Limited (“Vestacor)(28.8%), Nedcor Investments Limited (“Nedcor”)
(28.8%) and by a management consortium (40%).
8.
Moresport sells sports and recreational goods through three branded chain stores:
-
Sportsmans Warehouse (SWH), the flagship store of the Moresport Group. It focuses on general sports and recreational apparel, footwear
and equipment, with a large offering of functional sports equipment.
-
Outdoor Warehouse (OWH), which offers a range of sport and recreational apparel, footwear and equipment; and
-
Sports Shoe World (SSW), which sells sports and recreational footwear.
9.
Moresport, over time, has also expanded its operations through a strategy of acquisition and growth. It had its origins in the Moregro
Group, when it founded TotalSports in the mid-1980s. TotalSports grew to a size of 70-80 stores over a period of 10 years. Subsequently,
it went through an acquisition and restructuring process. It bought Logan’s Sportsmans Warehouse and Sports Shoe World in 1996.
In 1998, Vestacor bought into the Moregro group and the structure was dismantled, with TotalSports being sold off, Outdoor Warehouse
being injected and the entity being listed as Moresport. In 1999, Moresport purchased the Pro Shop and sold TotalSports the following
year to the Foschini group. In 2000 the company de-listed and the Pro Shop was sold off in November 2003. Today the company consists
of the three chains, SWH, OWH and SSW, which together form South Africa’s largest and most dominant sports retail business.
The Merger Transaction and Rationale
10.
In terms of the sale of shares agreement Massmart would acquire sole control of Moresport by acquiring 84,12% of the shares and issued
share capital of Moresport, presently held by Nedcor Investments Limited, Vestacor Limited, Gerald Burken Rubenstein, Kevin Graham
Hodgson, Elizabeth Antoinette Haarburger, Roy William Ansel.
11.
The remaining shares, which comprise approximately 15,88% of the issued share capital in Moresport, will remain vested in the following
parties: Hodgson as to 7,42%, Haarburger as to 4,77%, Ansel 1,69% and Rubenstein as to 2% of the entire shares.
12.
The stated rationale for the transaction is Massmart’s intention to expand its business operations and increase its participation
in the sports retail market. The parties submit that post merger the incumbent management of Moresport will be retained. Moresport
has indicated that some of its shareholders wish to realise their investments in the company and its management is eager to expand
its business operations beyond its current parameters.
History of Proceedings
13.
The Commission’s recommendation was filed on 14 October 2005. The matter was heard on the following dates: 30 January –
3 February, 20 February, 28 February, 6-7 March and 27 March 2006.
14.
The following witnesses were led by the merging parties –
14.1.
Mr Mark Lamberti, the Chief Executive Officer of Massmart;
14.2.
Mr Kevin Hodgson, the Managing Director of Moresport; and
14.3.
Mr James Hodge, an expert from Genesis-Analytics.
15.
The following witnesses were summoned by the Commission-
15.1.
Mr William Keet;
15.2.
Mr Paul Stone;
15.3.
Mr William Keet;
15.4.
Mr Leroy Reynolds;
15.5.
Mr Trevor Burger;
15.6.
Mr Rhys Hughes; and
15.7.
Mr Peter Reeves.
16.
In the course of the proceedings, the merging parties submitted that they were not relying on an efficiency defence in the event that
the Tribunal found that there was a substantial lessening of competition. The merging parties also submitted that they sought an
outright approval or a prohibition from the Tribunal and did not seek a conditional approval.
Background to the sports and recreational industry
17.
The merging parties are both involved in the retailing of sports and recreational goods. Sports and recreational goods are considered
to be discretionary goods, sought by people who wish to participate in such activities. These goods would include apparel, footwear
and equipment utilised in a number of indoor and outdoor sporting and exercise activities such as tennis, cricket, rugby, hockey,
running, swimming, cycling, hiking, camping and mountain climbing, table tennis and general exercise.
18.
Consumers of sports and recreational goods are generally categorised as having some disposable income and a certain level of education.
Children, in particular school children, are seen as important consumers in this industry (or rather the parents of school children)
because they are likely to be involved in a number of sporting activities at school and may graduate in time to a more sophisticated
level of, and therefore more expensive, product
19.
The sports and recreational market is not segmented along LSM levels. However products in each sports category could be distinguished
along entry, middle and prime levels. Entry-level products are directed at those sporting or outdoor consumers who are involved in the activity for purely recreational, leisure or social aspirations.
The product quality and price levels are lower, since consumers at these levels are not so discerning and merely want a functional
product. Mid level products are directed at consumers who regularly participate in a particular discipline. Product quality and price is higher than entry level,
but not to the same degree as the next level of product. Prime or premium level products are typically of a higher quality, and are aimed at those consumers involved in the particular activity at an intense, competitive
and professional level.
20.
