Emerging Capital Partners (ECP), a private equity firm founded in the US, through an affiliate (ECP Africa Fund IV LLC and ECP Africa Fund IV A LLC), intended to acquire Burger King from Grand Parade Investments Limited (“Grand Parade”).   The subsidiaries of Grand Parade were to sell all the shares they held in Burger King South Africa (RF) Proprietary Limited (“BKSA”) and Grand Foods Meat Plant Proprietary Limited (Grand Foods Meat Plant).

ECP is one of the largest and oldest Africa-focused private equity firms. Its investors are a broad group of public and private investors, including the African Development Bank, the development finance institutions of the United States, France, and Germany and various South African and African pension funds.

As background, the Competition Amendment Act, which became effective in 2019, formally expanded recognised public-interest factors contained in Section 12A(3) of the Competition Act to include the “promotion of a greater spread of ownership, in particular to increase the levels of ownership by historically disadvantaged persons and workers in firms in the market”. Further, the public-interest element was elevated to a separate and self-standing assessment, which must be assessed as an integral part of the merger assessment.

The Competition Commission, in assessing the notification of this transaction, although finding that the proposed transaction would have no actual impact on competition, still prohibited it.  The Commission found that the target firms were ultimately controlled by an empowerment entity where historically disadvantaged persons (“HDPs”) held an ownership stake of more than 68%. ECP on the other hand had no ownership by HDPs. Thus, as a direct result of the proposed merger, the merged entity would have no ownership by HDPs.

The Commission was concerned that the proposed merger will have a substantial negative effect on the promotion of greater spread of ownership, in particular to increase the levels of ownership by historically disadvantaged persons in firms in the market as contemplated in section 12A(3)(e) of the Competition Act and could not justify the merger on significant public interest grounds.

The parties later submitted an application to the Competition Tribunal to reconsider the transaction, subject to certain conditions.  The Competition Tribunal approved the proposed transaction on 17 September 2021 subject to certain amended conditions, including that:

Burger King SA must, within 5 years of the effective date of the disposal:

• procure the investment of no less than R500,000,000 in capital expenditure;
• establish at least 60 new Burger King outlets in South Africa;
• increase the number of permanent employees in South Africa by at least 1250
  historically disadvantaged persons;
• increase the total value of all payroll and employee benefits in respect of the 1250
  employees by not less than R120,000,000;
• improve its rating for the Enterprise and Supplier Development element under its B-
  BBEE scorecard;
• establish an employee share ownership program for an effective 5%
  interest in BKSA;
• ECP Africa Fund to dispose of Grand Foods Meat Plant; and
• BKSA shall conclude a supply agreement with Grand Foods Meat Plant and/or the
  purchaser of Grand Foods Meat Plant.

There are various criticisms arising from the approval of the Merger.

This merger was the first case where the commission prohibited a merger purely based on the merger being found to result in adverse public interest outcomes. It has raised questions regarding how the competition authorities are likely to approach similar transactions in future, involving much needed foreign direct investment. It seems that the “ownership” aspect of public interest grounds, out of all the other grounds, is being focussed on as a key aspect in considering mergers, which could deter such investment where foreign entities may have no HDPs ownership.

HDP owned target firms themselves might be negatively impacted by the commission’s approach as the pool of potential buyers in such transactions would be limited if there has to be HDP ownership (and hence the full value for shareholders may not be realised if non-black owned firms are not able to successfully acquire the target’s business).

Further, the conditions eventually approved by the Commission are extremely onerous, including the high-cost conditions dictating investment, new employment and even new employment remuneration amounts. While the transaction may be going ahead, it is not inconceivable the ECP could have simply walked away and decisions such as these by the Commission could begin to have a chilling effect on the appetite of investors into South Africa.

Telephone: +27 31 570 537; Email: rishal.bipraj@gb.co.za