The Competition Commission has recommended that Pepkor’s plan to sell the Building Company to Cashbuild for R1bn be prohibited, arguing that the merger of the two hardware companies would create a dominant supplier of building material in SA.
Pepkor, owner of Ackermans and Incredible Connection, wanted to sell the Building Company so that it could focus on its core brands, which are consumer-facing, Pepkor CEO Leon Lourens previously told Business Day.
Most of the 13 Building Company brands, which include MacNeil, Cachet, BuCo and Citiwood, sell to construction and industrial businesses and do not service the average consumer.
The commission, however, has recommended the transaction not take place as it would create a dominant hardware and building material supplier in certain townships and peri-urban areas including Giyani, Alice, Sterkspruit, Acornhoek, Lethlabile and Thabazimbi.
The commission said a dominant company in these areas would be able to increase prices, as there would not be enough competition from other retailers to keep stores in check.
However, Small Talk Daily analyst Anthony Clark said Cashbuild management had told him it had gone through each area where it has stores with the commission and even agreed to sell or close down certain branches in some places to ensure they would not be the only hardware seller in some areas, if it bought the Building Company stores.
But the commission was not only concerned about a monopoly forming in some towns: it also said a merger would create SA’s largest hardware company, giving it too much buying power. This means it would be able to force plumbing, hardware or flooring suppliers to drop their prices or provide longer periods for payment.
The commission was concerned that smaller suppliers would have to negotiate with a very large construction buyers and may be forced to accept unfavourable trading terms. Such concerns were expressed by competitors to the commission.
The commission also said a very large hardware company could have the power to push rivals out of the market. It suggested all it would need to do in some areas was drop the prices of cement, a major seller, and other stores would not be able to compete. Cashbuild is already the largest reseller of cement onto buyers.
Because the merger would create the largest single retailer of building hardware in the country, the department of trade, industry and competition (DTI) made submissions on the deal.
The DTI required the two businesses to commit to “public interest” terms, which included supplier development and transformation opportunities, increasing employment and growing franchise opportunities for disadvantaged individuals.
The commission felt the companies’ commitments made to meet the public interest targets did not outweigh the problems that would be caused by a dominant hardware company.
The Competition Tribunal, which acts like a court in antitrust matters, will make the final decision on the sale and will hear submissions from the two firms and the commission.
Cashbuild previously said it wanted to buy the Building Company so it could grow its market, especially in areas it was underrepresented such as the Western Cape, Eastern Cape and KwaZulu-Natal.
It also said the purchase would help it better service building contractors and improve its profitability by helping increase its stock and suppliers.
Clark said that while he was shocked that the commission had recommended the deal be prohibited, some investors may be pleased
“If the deal doesn’t go through, the market may breathe a sigh of relief,” he said.
He said Cashbuild’s decision to buy a company with 13 brands that required significant restructuring was a tall order, and they would need to take on debt to finance the R1bn purchase price. He said that that could take a few years for Cashbuild to repay. Its purchase of P&L hardware in 2017 had not given it the desired returns, he said.
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