Construction merger raises questions

The Competition Commission has approved, with conditions, the “mergers” — in the form of “economic alliances” — of Raubex, Stefanutti Stocks and Wilson Bayly Holmes-Ovcon (WBHO) and their respective groups of “emerging contractors”.

The parties are now busy refining what one of these conditions means in terms of industry competitiveness.

The three JSE-listed companies have told competition authorities that in order to achieve the objectives of their mergers, it is essential for them to have “material influence” over the direction, operation and competitiveness of the businesses of the emerging contractors.

But they say that the specific condition that prevents the flow of “competitively sensitive information” from one alliance to another “is restrictive and prejudicial” to their alliances.

The general conditions of their mergers relate to the “interaction” of the merging parties in relation to the R1.5bn “trust fund” provided for by seven big construction companies over 12 years.

Much of the activities of the mentoring firms will in part be funded by these contributions as part of a “voluntary settlement agreement” with the government over collusion in the industry in the years leading up to the 2010 Soccer World Cup.

The conditions also refer to the ongoing “monitoring” of the “alliances”.

The trust fund is in addition to the R1.46bn payable by 15 construction companies as part of competition penalties in an earlier “fast-track settlement” agreement that included all but one of the seven parties to the later “voluntary” agreement.

In respect of the trust fund, the commission wants alliance members to ensure that all information submitted to the fund is aggregated and that “necessary measures” are put in place to prevent the flow of competitively sensitive information from one alliance to another.

This is meant to stop any alliance member who is directly involved in tenders or pricing of construction projects from becoming a trustee.

The companies’ so-called mergers with emerging contractors are one of the two foundation stones for what some government ministers have called the “radical economic transformation” of the country’s construction and engineering sector.

In this regard, Raubex, Stefanutti and WBHO have agreed to mentor between two and three emerging construction contractors for a period of seven years.

The four other companies in the settlement agreement have opted to sell at least 40% of their equity to smaller construction companies that are more than 51% owned, managed and controlled by emerging contractors.

One of these companies, Murray & Roberts, has now exited civil engineering and general building services markets in SA, after selling the business to a black-owned consortium led by the Southern Palace Group for R314m — in part funded by Murray & Roberts itself.

For the mentoring companies, the terms of the settlement agreement state that the emerging contractors should acquire the “necessary skill, quality, status and quantity of work” to generate and sustain a cumulative combined annual turnover equal to at least 25% of the annual construction works revenue of the mentoring company. This is to be achieved within seven years. Seeing as this can be tens of billions of rand, it is a big ask.

Apparently, it is now up for debate whether the seven-year mentoring period should be stretched to 10 years to allow for the conditions to be met.

Critically, the settlement agreement also stipulates that the mentors must provide financial assistance to the emerging contractors “in the form of guarantees where necessary”, another huge ask.

Meanwhile, in terms of the public interest, the merging parties submit there will be no adverse effect on employment, as no duplications arise as a result of the mergers.

Rather, the affected construction companies will ensure that the transactions provide the emerging contractors with the support, skills and guidance to grow into “successful independent firms in the market”.

It is important to note that the settlement agreement was brokered by Economic Development Minister Ebrahim Patel, whose department strongly influences the Competition Commission.

It is also important to note that the four construction companies that have agreed to sell at least 40% of equity to emerging parties are equal contributors to the fund.

This means that the conditions placed on parties to the settlement agreement are not necessarily complementary.

It also raises questions over whether competition policy is further obstructing competition in the country’s construction and engineering industry.