Murray & Roberts: A game of cat and mouse.



25-07-2019
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Daily Maverick
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The Competition Commission has recommended to the Competition Tribunal that the proposed acquisition of Murray & Roberts by Aton be prohibited. While there is some way to go before there is finality, the recommendation is a sign that a new chapter could be opening in SA’s merger and acquisition space. One where big is certainly not better.

Investors in Murray & Roberts are holding their collective breaths while they wait to see whether Aton, the German investment company that is hell-bent on acquiring control of it will pursue the acquisition following the recommendation by the Competition Commission that the merger be prohibited.

Aton has not yet indicated whether it will contest the recommendation, but should it decide to do so, a pre-hearing conference will be convened by the Competition Tribunal within 10 business days of the recommendation published late on Friday 19 July. At such time a timetable will be established for a merger hearing, after which the Competition Tribunal will either prohibit the merger or approve it with or without conditions.

Having come this far it seems unlikely that Aton will walk away. The company has been stalking Murray & Roberts (M&R) since acquiring shares in 2015 and launching an outright bid for control in March 2018. It holds about 45% of the issued shares and recently extended the long stop date on its mandatory offer to all Murray & Roberts shareholders to the end of September, pending a decision from the competition authorities.

While most people tend to think of M&R as a construction company, this part of the business was sold in 2017. It is now a mining and engineering services company with three core areas of focus: underground mining which turned over R8-billion in the 2018 financial year (June year-end) and earned operating profit of R471-million. Of this, 37% of revenues were earned in SA, with the balance earned in the US, Asia, Oceana and the rest of Africa.

The second bit is an oil and gas business (Clough) that is largely Australian and turned over R8.5 billion with profits of R209-million; and third, a smaller power and water business that is largely underpinned by its ongoing work at Medupi and Kusile power plants and which turned over R4.8-billion in 2018, earning R134-million in profit.

M&R plans to grow all of these divisions globally.

The only area where there is a competitive overlap in South Africa is in the business of underground mining. Aton owns a business called Redpath, which is head-quartered in Canada. It has an operation in SA and like M&R offers underground construction, shaft sinking, mine contracting and mine development, among other services. It employs about 450 people, far less than the 10,000 employed by M&R in South Africa – though this is across all of its businesses.

The Competition Commission is concerned that the merge of these mining businesses will be anti-competitive.

“The merging parties are close competitors and … this transaction will, for both parties, result in the removal of their closest and strongest competitor,” the statement from the Commission read.

There are concerns, it added, that the “merger will potentially create a company that has such size and scale that it has the financial wherewithal to throttle competition”.

“Will it throttle competition to the extent that other companies cannot compete?” questions Ahmore Burger-Smidt, a director of Werksmans Advisory Services.

“How does one balance the desperate need for foreign investment and economic growth with our competition policy?

“Underground mining is a skill-intensive business, sold to clients that are global in nature. This is not an environment in which small entrepreneurs necessarily need to be protected, but one in which efficiency and innovation needs to be encouraged.”

The management of M&R remains intractably opposed to the merger, which is hostile in nature, and dismisses suggestions by Aton/Redpath that the company can bring “best in class” technology to the party and help M&R unlock future growth.

While the commissioners would have considered these arguments, Burger-Smidt, wonders whether the development of an African, and possibly global champion, would not be in South Africa’s better interests?

“Long gone are days when it is easy to mine underground. We need to do things better, innovative technology and know-how is required and this comes at a cost.”

However, the Commission adds in its statement that “the merger will create a company that potentially has the financial muscle to buy projects or to discount projects to such an extent that other companies cannot compete”.

There are measures in SA’s competition legislation to take care of this.

“Buying projects sounds like corruption, and discounting sounds like predatory pricing – the competition amendment legislation has bolstered the regulator’s ability to take on this type of anti-competitive behaviour,” she says.

However, SA’s competition authorities don’t look at mergers in terms of competition issues alone. Public interest issues, such as job retention, have an equal bearing on the decision.

In this case, the commission was not impressed by Aton’s commitment that it would create sufficient growth that the several thousand M&R employees working on the Medupi and Kusile projects would be retained and redeployed once these contracts are complete.

“The commitment by Aton in relation to the preservation of jobs after the expiry of the Kusile and Medupi projects is not tantamount to saving jobs or the creation of new employment opportunities,” it said.

“M&R has not indicated any difficulties in retaining its current employees in the future. Even if the commission were to find that there is a chance of M&R not being able to retain employees, the commitment would amount to job preservation which the commission generally expects from an acquirer who is acquiring another firm with a view of saving it.”

“In the past job preservation was a key consideration for the authorities,” says Rosalind Lake, a director at Norton Rose Fulbright specialising in competition and consumer law.

“But in this case the commitment to preserve jobs was not enough. It would appear that the commission looks at transactions with a view to transformation and an inclusive economy. We can see this narrative coming through market enquiries and merger considerations.”

An interesting change to the Competition Amendment Act, certain provisions of which came into force in July 2019, is that if the Competition Tribunal approves the merger, the commission can appeal the decision. Previously only the merging parties could appeal a decision.

“A new page has been turned in our competition policy, and it is not necessarily one that is in favour of business,” adds Jenny Finnigan, a partner with Shepstone & Wylie Attorneys.

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