Trade, industry & competition minister Ebrahim Patel’s active approach to merger regulation may loom large for corporate dealmakers. But it rated just a sentence in the president’s state of the nation address (Sona) last week. “Competition merger agreements have provided for more fuel to be refined locally and more food to be bought from local farmers,” said the president, before going on to talk about hemp and cannabis.
Time was when one might have asked what local food or fuel production could possibly have to do with the competition authorities. But in SA nobody really asks that any more. Since Patel took over as the minister in charge of competition more than a dozen years ago he has made ever more use of the merger provisions in the legislation to drive industrial policy and broader political objectives. And he has given himself ever more power to do so, broadening the scope of the public interest criteria and cementing the minister’s right to intervene.
This is less controversial than it used to be. One thing that’s changed is that SA isn’t as much of an exception as it used to be in its efforts to use mergers to pursue national interests. The latest M&A survey by global law firm Herbert Smith Freehills (HSF) has a chapter subtitled: “Are regulatory regimes being misappropriated by politics?” It points to the fact that foreign direct investment screening regimes have been expanded recently and more have been adopted. It’s a trend driven by economic conditions and heightened geopolitical tensions. And, says the firm, national security is the focus of much of the new screening, including in a new piece of UK legislation in 2022.
However, national security is often ill-defined and elides into the national interest more broadly. SA never implemented the national security merger controls included in Patel’s 2018 amendments to the competition legislation. But in a world of growing economic protectionism, SA’s obsession with using mergers to promote public interest aims such as localisation, employment, and empowerment — regardless of any competition concerns — isn’t so unfamiliar .
And when HSF says one of the biggest challenges now is the time it takes from the announcement to the closing of the deal, because of all the regulatory hurdles, that is a familiar problem here too. The Heineken-Distell merger only recently went to public hearings at the Competition Tribunal, for example, more than a year after it was announced. As the time to close deals has stretched out, the costs and the risks have risen. Companies have to take that into account if and when they launch an offer. And in SA they have to take into account the cost of meeting the public interest conditions that will have to be negotiated.
For the other thing that has changed, gradually at first, then more rapidly since Patel toughened up the legislation five years ago, is that the implicit rules of the game have become quite explicit. A decade ago deals such as Walmart buying Massmart took forever and elicited angry lawyer noises when Patel intervened to push his causes. Now it’s standard stuff. In a big acquisition, particularly if it’s a foreign company buying, the parties now go off to see Patel and make him a public interest offer even before they approach the competition authorities. The lawyers, investment bankers and economists advising on the deal will know that he expects certain boxes to be ticked; so does the Competition Commission.
Employment must be maintained, even improved, though it’s usually OK to rationalise at managerial level. An offer to localise supply chains and support small businesses is part of the deal. Better still, offer to invest big time in new local production — which apart from anything gives the president something to say in the Sona, referring perhaps to Pepsico’s acquisition of Pioneer Foods and Glencore’s acquisition of Caltex SA, now Astron, whose upgraded Cape Town refinery will soon reopen. Empowerment commitments are also essential. Employee share ownership deals are now popular with Patel. And lately the demand is that the company’s level of black ownership must be increased, not just maintained.
FTI Consulting’s Nicola Theron talks about “the gifts you have to give”. Former Competition Appeal Court judge president Dennis Davis has called it rent-seeking. Theron notes companies need to factor in that they will need deep pockets, especially for the black empowerment or employee share ownership deals; the investments can be big money too, such as the R10bn Heineken has committed to invest as a condition of buying Distell. But the company would often have planned to invest much of that anyway if the target company was that attractive.
For the most part, corporate SA seems to have learnt to live with all this — as long as it’s predictable. It has to be part of the planning of a deal, says RMB corporate finance head Krishna Nagar: “We have to find a way to navigate that not only provides expansion for the business but also helps government act on its broader objectives”.
A big concern is whether the regulatory complexity drives away deals, especially incoming foreign investment deals. Nagar says not — if a foreign buyer really wants a business that will add to an African strategy, they will make concessions, and there is a robust pipeline of deals coming down the line. Some of the lawyers are more cautious, since we simply don’t see the deals that go to Kenya instead of SA, for instance, or the ones structured sub-optimally just so they can avoid competition scrutiny. Nor do we see the consolidation that might be desirable in a tough economy, but might not even be worth trying with the regulators.
However, the bigger concern is surely Patel himself. He is credited with being an excellent negotiator. And he is driven by ideology. Agree with it or not, but there are no questions about his integrity or his commitment to the cause. The trouble is that he has amassed a lot of power for the minister over competition regulation in general and mergers in particular. In different hands, the rent-seeking or gift giving could be a lot more dangerous.
Patel’s is not one of the names mentioned in all the cabinet reshuffle rumour-mongering this time. But he surely can’t stay there forever. Corporate SA should tread with caution; so too should the president.
• Joffe is editor-at-large.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.