Competition Commission decision on Burger King ‘sends shocking message to potential investors’
AN UNPRECEDENTED decision by the Competition Commission to block a transaction by Grand Parade Investments Limited (GPI) to dispose of its investment in Burger King South Africa to a US private equity firm has South Africa’s corporate and investment community up in arms.
Corporate and black economic empowerment players were left aghast last week after the commission last week prohibited the sale by Grand Parade of its investment in Burger King (South Africa) to a US private equity firm for an estimated R500 million.
The commission raised concerns about the deal raising “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.”
The only open avenue now was the Competition Tribunal, which may or may not confirm the commission’s decision.
Sithembile Nkabinde, a founder and chief executive at The Southern African Venture Capital and Private Equity Association (Savca) said the decision could have unintended consequences for South Africa’s Foreign Direct Investment (FDI) since a balanced approach was required to assure potential investors about the country’s investment climate, which included policy certainity.
Grand Parade Investments, which is 68 percent black owned, had a
majority of shareholders approving the deal which would have seen the unlocking of value for shareholders who wanted to either lock their investments in or opt out.
Nkabinde said while Savca was fully supportive of B-BBEE legislation and transformation of the country, as well as the health of the economy, it was concerned about this ruling given the impact of this precedent and the risks associated with South Africa’s ability to continue attracting foreign capital and its impact on the local private equity industry in the country.
She said the opportunity cost of the investment could have gone a long way in capital expenditure, increased roll-out of Burger King outlets and job creation, including opportunities for its other black-owned suppliers.
“The ripple effect would have been astounding,” she said, adding that the decision had the unintended consequence of raising concerns for both the international and local investment community, potentially setting a precedent for restrictions on investment activity and thus deterring much needed investment capital.
“This compounds an existing perceived risk around policy certainty, value realisation, liquidity and exit when considering investment on the continent,” she said.
Robert Wilson and Shawn van der Meulen at law firm Webber Wentzel said the commission appears to have taken an uncompromising stance on HDP ownership reduction due to the merger. Merger parties have typically engaged with the competition authorities and agreed on conditions to address the commission’s ownership concerns.
In this merger, the parties proposed conditions such as investing no less than R500 million towards establishing new Burger King stores in South Africa and increasing the number of permanent employees employed by it in South Africa and more outlets.
“However well-meaning the commission’s objectives, this decision may create uncertainty which could have a potential chilling effect on merger activity, including foreign direct investment, especially in transactions where B-BBEE shareholding is decreased for legitimate commercial considerations," the dfirm said.
It said the tangible results of the prohibition were seen when, the day after the prohibition announcement, Grand Parade Investments’ shares ended 1.5 percent lower at R2.65 at the JSE on Friday.