Commission prohibits acquisition between ECP Africa Fund, Burger King South Africa and Grand Foods
2 June 2021
The Competition Commission has prohibited a proposed transaction whereby ECP Africa, a private equity fund intended to acquire Burger King (South Africa) and Grand Foods Meat Plant (Pty) Ltd (Grand Foods) from Grand Parade Investments. The Commission found that the merger would lead to a significant reduction in the shareholding of historically disadvantaged persons in the target firm, from more than 68% to 0% as a result of the merger.
ECP Africa, the Acquiring Firm, is constituted by ECP Africa Fund IV LLC, ECP Africa Fund IV A LLC and ECP Africa Fund IV A LLC (ECP Funds IV). Burger King (South Africa) (BKSA) is an American multinational chain of fast-food restaurants. Through its various franchise subsidiaries, BKSA operates more than 90 fast food restaurants across South Africa.
Grand Foods Meat Plant (Pty) Ltd (Grand Foods) primarily supplies BKSA with burger patties. Grand Parade Investments (“GPI”) is an empowerment entity listed on the Johannesburg Stock Exchange.
The Commission found that the proposed transaction is unlikely to result in a substantial prevention or lessening of competition in any relevant markets. With respect to public interest considerations, the Commission found that the Target Firms are ultimately controlled by an empowerment entity wherein historically disadvantaged persons have (HDPs) hold an ownership stake of more than 68%. The Acquiring Firms have no ownership by HDPs. Thus, as a direct result of the proposed merger, the merged entity will have no ownership by HDPs and workers.
The Commission is therefore 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. Thus, the proposed merger cannot be justified on substantial public interest grounds.
The Commission has therefore concluded that the proposed transaction has raised significant public interest concerns in that it has a substantial negative effect on the promotion of a greater spread of ownership, in particular the levels of ownership by historically disadvantaged persons and workers in firms in the market.
Competition Commission decision
Shareholders are referred to the Company’s various announcements regarding the proposed transaction in which the Company’s wholly-owned subsidiaries, Grand Foods Investments 1 Proprietary Limited and Grand Foods Proprietary Limited, will sell all of the shares they hold in Burger King South Africa (RF) Proprietary Limited and Grand Foods Meat Plant Proprietary Limited, respectively, (“Disposal” or “Proposed Transaction”) to an affiliate of ECP Africa Fund IV LLC and ECP Africa Fund IV A LLC (“ECP”).
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 (AfDB), the development finance institutions of the United States (DFC), France (Proparco) and Germany (DEG), and various South African and African pension funds.
The Company distributed a circular to shareholders on 12 March 2021, detailing the Disposal (“Circular”) and 99% of shareholders approved the Disposal at the general meeting held on Thursday, 15 April 2021.
As stated in the Circular, the Disposal is subject to the approval of the Competition Authorities (namely the Competition Commission (“Commission”)), Competition Tribunal or Competition Appeal Court, as the case may be) on conditions acceptable to ECP.
On 1 June 2021, the Commission advised the parties that, despite finding that the Proposed Transaction is unlikely to have any impact on competition, it has prohibited the Proposed Transaction on public interest grounds in terms of the Competition Act (“Act”).
In the reasoning provided, the Commission confirmed that it considered the effect of the Proposed Transaction on public interest and found that the merger will have no negative effect on employment. However, the Commission stated that it is of the view that the merger has a substantial negative effect on the promotion of a greater spread of ownership as contemplated in section 12A(3)(e) of the Act, given that inter alia the target firm is controlled by GPI, an empowerment entity with 68.56% of its shareholdings held by Historically Disadvantaged Persons (“HDP”), and that the end result is that, after the implementation of the Proposed Transaction, both the acquiring and the target firms will have no ownership by HDPs and workers.
In order to address the public interest concerns raised by the Commission, the parties had proposed the following conditions to the merger:
"By the end of 2026:
the acquiring firms shall procure the investment of no less than R500 million in aggregate capital expenditure, which will be utilised towards the establishment of new Burger King® stores in South Africa;
the merged entity will increase the number of Burger King® outlets in South Africa
to at least 150;
the merged entity will increase the number of permanent employees employed by it in South Africa by no less than 1,250 HDPs;
the merged entity will increase the total value of all payroll and employee benefits in respect of all employees employed by the merged entity by no less than R120 million; and
subject to supply on reasonable commercial terms, the merged entity will increase its procurement of products and/or services from B-BBEE accredited suppliers in South Africa from approximately R665 million during the twelve months preceding the merger to an aggregate value of at least R930 million per year.
Within 24 months of the implementation date, the merged entity shall allocate an effective interest of 5% of the shares in the merged entity for an appropriate B-BBEE ownership structure".
In addition, GPI highlighted that the sale of Burger King South Africa and Grand Foods Meat Plant would result in a foreign direct investment into South Africa and payment of up to R498m to GPI, a JSE listed entity with a majority HDP shareholding, which would unlock significant value and allow GPI to pay down debt and resume dividends to its shareholders.
Notwithstanding the above, the Commission found that Proposed Transaction cannot be justified on substantial public interest grounds in viewa of the fact that it does not promote the greater spread of ownership, in particular to increase the levels of ownership by historically disadvantaged persons and workers in firms in the market.
Given the above, GPI and ECP are considering their options and shareholders will be advised of their decision in due course.
Issued by Siyabulela Makunga on behalf of The Competition Commission of South Africa, 2 June 2021
