MASEDI TLHONG: Competition Appeal Court’s tough call on Vodacom-Maziv

On October 29 last year the Competition Tribunal dropped a bombshell by prohibiting the Vodacom-Maziv merger, leaving us with more questions than answers. 

The tribunal then promised reasons “in due course”, a wait that stretched five months until March 28 this year.  

Aggrieved by this, Vodacom filed a notice of appeal, and so did the trade, industry & competition ministry — albeit for different reasons.

Given the absence of reasons, the parties were to supplement the appeal once the reasons were provided by the Competition Tribunal. It is from these reasons that we will know what exactly the basis and/or grounds of appeal will be.

The Competition Tribunal delineated about eight points of dispute: the true rationale of the proposed transaction (including the issue of so-called co-control) and the merger parties’ post-merger incentives; the relevant product market; relevant counterfactuals including competition; the horizontal effects of the proposed transaction; portfolio effects, specifically post-merger bundling concerns; vertical foreclosure; the adequacy and effectiveness of the merger parties’ proposed mostly behavioural (and one structural divestiture) conditions; and the public interest effects of the proposed transaction, including the merger-specificity of the effects.  

The purpose of this article is to discuss some (not all) of the contentious issues that are likely to take centre stage at the Competition Appeals Court when it provides the parties an audience from July 22-24.

One of the first major points of contention is likely to be about market definition, as the Tribunal found that there exist two separate markets for dark/lit fibre and “that these products/services do not place significant competitive constraints on each other”.

The merging parties will likely argue that the Competition Tribunal’s definition is too narrow and did not take into account the technological convergences in this market.

They may further argue that the Tribunal overstated the market dominance by stating that the merger will result in the merging parties controlling critical infrastructure, a highly contentious point given the fact that competition in this market has recently seen new entrants such as Rain, Metrofibre, Liquid telecoms and others.

The tribunal’s counterfactual theory hinges on Vodacom suddenly morphing into a fibre gladiator, but given the merging parties’ stated rationale for the transaction this is a point that will have to be carefully scrutinised.

For instance, one may ask what is the return on investment in this market, and is it such that Vodacom would be able to compete independently? If no, it is likely that the tribunal got it wrong.

The Tribunal dismissed the behavioural conditions proposed by the merging parties, holding that “the behavioural remedies are highly technical and cumbersome in nature, and in our assessment they will not be effective in addressing the vertical competition concerns.”

The tribunal’s foundational basis for this conclusion will see the spotlight being shone on it, as it sounds like a “prohibit first, regulate later” kind of approach.

The minister’s intervention in these proceedings is facilitated by two distinct but related sections of the Competition Act, first in terms of section 18(1), which permits him to make representations on any public interest grounds referred to in section 12A(3), and his participation in the merger proceedings before the Competition Appeal Court is facilitated by section 17(1)(c).

The minister’s participation in the proceedings is therefore limited to those grounds that raise public interest concerns.  For instance, the parties made an undertaking that they will create 10,000 direct or indirect employment opportunities through the introduction of an internet retailer distribution model for services in lower income areas and R14bn into SA through the proposed transaction. 

The tribunal was indifferent to these claims, in that among others a significant portion of this amount relates to assets of Vodacom that will be transferred to Maziv in terms of the deal.

The tribunal held that the implications for the public arising from this proposed merger are far-reaching in that they flow well beyond just the telecommunications sector itself, since the end-customers that require access to affordable data/internet services, and the medium and longer term future costs of these services, affect the millions of SA consumers and all sectors of the economy that make use of such services.

Despite holding that the implications for the public arising from this proposed transaction are far reaching, it still shrugged these off as not merger specific. Furthermore, the tribunal held that the public interest benefits are “substantially lower than claimed”, and to counter this the minister will need to have quantifiable evidence of merger specificity.

The minister will have an uphill battle trying to convince the Competition Appeal Court that the benefits are indeed merger specific and that these benefits would not have resulted in the absence of this proposed merger.

The tribunal appears to have taken a cautious approach. Will the Competition Appeal Court reward this approach? Either way, it must choose between static markets and a dynamic economy. The tribunal picked its side. Now, the ball is in the Competition Appeal Court’s court.

• Tlhong is competition law director at TGR Attorneys.