Post-script analysing property mergers
[9]. The facts of this merger have given us an opportunity to comment on a problematic feature of analysis in recent mergers in the
property sector that have come before us.
[10]. Acquiring parties in this industry have urged the Commission and the Tribunal, in the absence of a proper competitive analysis
of markets, to accept data obtained by the South African Property Association (‘SAPOA’) as a proxy. The Commission and
merging parties have of late used SAPOA data to perform two functions – to define geographic markets in which properties can
be said to compete, and secondly, to define the types of products that can be considered substitutes. Thus SAPOA divides commercial
retail property into four classes (P, A, B and C) and properties are not considered substitutes unless they are of the same class.
[11]. This merger has shown up the limitations of SAPOA’s data in both these respects. In its filing Growthpoint submitted that
its post merger share of Grade A commercial properties located in the Midrand node expressed as a percentage share of lettable grade
A commercial buildings in Midrand market would be 20,2 %.
Below is a table reflecting the parties market shares as well as the combined market shares in Grade A commercial properties located
in the Midrand node based on total rentable area for commercial use
Table2
| Party |
Gross Lettable Area |
Market Share % |
| Business Connexion |
20 846 |
7.6 |
Combined |
55 153 |
20.2 |
Total |
273 100 |
100 |
[12]. The Tribunal queried this as in a recent merger involving Growthpoint/Tresso Growthpoint alleged that its post merger market share was 33.48%. The explanation for this sudden dilution in market share unravelled
in a most unsatisfactory manner.
[13]. At the hearing, we were told that SAPOA data could not be relied on in this respect and the properties required further sub-
classification between office blocks and office parks. As what was being acquired in Midrand was an office park, it appears only
office parks were taken into account in the new statistic, hence the new and lower number in respect of market share. We were also
informed that Growthpoint had commissioned experts to plot commercial properties in Midrand and come up with a new set of data for
their holdings in Midrand. In terms of this data we were informed that Growthpoint’s share could be as low as 4%. It was not
entirely clear whether this was 4% of the new defined sub- market namely office parks or whether this was in terms of the hoary old
commercial class A. The Tribunal, somewhat perplexed by Growthpoint’s movement from 34% in the Growthpoint/Tresso merger to
20,2% in this filing, and now to 4%, asked the merging parties to file this new report for us to evaluate it. Rather than dispelling
the confusion created, the report added to it. Not only did it not serve as a source to advance the promised 4%, it comes up with
yet another market share figure, namely, 8 %. However, the relevant product market was not class A, or office parks but commercial
property in toto. Thus in one filing the product market had at one moment been alleged to be narrower than commercial grade A, and
then later shifted as wide as possible to include all commercial property, irrespective of class or specie.
[14]. That all these redefinitions have been self- serving to Growthpoint did not pass unnoticed. We would urge parties and the Commission
to be wary of using the SAPOA data, and to investigate a proper methodology for defining property markets in the future and to do
more by way of evaluation, of competitive effects than mouth the industry statistics. The fact that buildings may fall into what
SAPOA regards as a class for its own purposes, does not mean that consumers would not regard them as substitutes or even if not functional
substitutes that they would not exercise some constraint on the prices of another class.
[15]. Thus a consumer evaluating if they should lease commercial grade A office space may have regard to the prices for grade B in
considering whether the price differential is justified in the consumers mind by an increase in perceived value. Similar considerations
may influence a choice between an office park and an office block albeit they may have some different characteristics. Thus to seize
on a particular class of building or specie without regard to possible substitutes that may constrain pricing in that class may be
incorrect from an antitrust point of view.
[16]. The use of SAPOA’ s area nodes in this case has exposed similar deficiencies. SAPOA classifies urban areas into nodes,
or clusters of suburbs, adjacent to one another, which it believes tenants would consider interchangeable. When nodes are some distant
for one another they may serve as a useful proxy for screening out potential problems in evaluating the boundaries of geographic
markets. The problem with reliance on this data is when nodes are adjacent to one another. The Commission adopts the attitude that
because buildings are in different nodes, they are not in the same geographic antitrust markets. This does not follow. A building
on the outer edges of one node presumably would be considered a competitive substitute for another situated on the nearest boundary
of an adjacent node. They might even be across the road from one another, because SAPOA for whatever reason sought to establish its
line of delineation on that street. This is illustrated in this case where the Commission has regarded the building acquired from
Business Connexion in Faerie Glen, as not being in the same market as the building in Menlyn, despite their being in adjacent suburbs,
simply because SAPOA treats them as separate nodes.
[17]. Growthpoint in its filing acknowledges that nodes are not a satisfactory proxy for an antitrust market when its states that
because of chain of substitution effects, a relevant market may be broader than a single node. As a theoretical proposition, this may well hold true in some areas but again this approach is self-serving. A proper analysis may
need in some cases to approach the node more narrowly than the single node or to disregard the boundaries of nodes when properties
may be in adjacent nodes.
[18]. This is not to say that SAPOA statistics may not be useful as a filter to determine which cases require more analysis and which
raise no issues. We are mindful of not putting merging parties or the Commission to the burden in respect of minor matters. However
the filter, as this case has shown, has its flaws, and sole reliance on it in future cases may not be satisfactory; we caution all
concerned that we may send them back to do more homework if we are not satisfied with the analysis.
[19]. Commercial property mergers are a frequent feature of mergers that come before us and concentration levels would appear to be
on the increase, although this is not to suggest that they are in anyway alarming it does require the effort necessary to make a
proper evaluation of them.
Conclusion
[20].
Based on the above the transaction will not result in a substantial lessening or prevention of competition
in the identified markets and is accordingly approved unconditionally
___________________
07August 2006
Date
N Manoim
Tribunal Member
D Lewis and U Bhoola concur in the judgment of N Manoim.
Tribunal Researcher
: J Ngobeni
For the merging parties
:Ilse Gaigher and Zanele Mngadi Jowell Glyn and
Marais and Paul Coetser(Brink Cohen Le Roux)
For the Commission
:Mogale Mohlala and Edwina
Ramohlola
Mergers and Acquisitions
.RTF of original document