Walmart/Massmart hearing continues

Latest Massmart/Walmart merger update - Summary

RETAILER NEWS

May 13th 2011, 07:43

What follows is a summary of the proceedings on the 12th of May. 

• The merger hearing resumed at 10h00 on 12 May 2011 with the conclusion of the cross-examination of Kenneth Jacobs, the Chair of the University of California Berkeley Center for Labor Research and Education, by Advocate Gauntlett SC for the merger parties.

• Jacobs was then re-examined by Advocate Kennedy SC, counsel for SACCAWU. The purpose of the questions posed by Kennedy was to clarify responses given by Jacobs to the earlier cross-examination questions posed by counsel for the merger parties.

• The first witness called by SACTWU was Etienne Vlok, the Director of the SA Labour Research Institute, the research wing of SACTWU.

• Vlok’s cross-examination commenced with questions from Advocate Gauntlett SC for the merger parties. The broad themes explored by Gauntlett covered the following subjects –

o SACTWU’s view as to the effect of the proposed merger on the South African manufacturing and retail industries, with a particular focus on textiles and clothing;

o SACTWU’s view as to the effect of the proposed merger on employment within the South African manufacturing and retail industries, with a particular focus on textiles and clothing;

o the Tribunal’s decision in the 2005 acquisition by Edcon of Topics, in which SACTWU (represented by Vlok and Ebrahim Patel) proposed that procurement targets be imposed on Edcon. In its decision, the Tribunal held that “a condition such as this could not be imposed on a single company in the clothing retail sector. Were we to impose a ceiling on Edcon’s international purchases, this would advantage Edcon’s competitors who would be free to import without restraint”, and “SACTWU’s concerns about cheaper imports cannot be cured by the imposition of a merger condition on a single firm. It is a sector- wide, phenomenon and must be addressed at that aggregated level with the appropriate instruments”;

o an exploration of the conditions proposed by Vlok that may, in his view, alleviate the concerns of SACTWU around employment security, employment conditions, job quality, job creation and the like; and

o the manner in which the conditions proposed by SACTWU were impacted upon by South Africa’s international trade commitments in terms of its WTO and GATT obligations (to mention a few), as well as bilateral trade agreements (for instance, as between South Africa and the United States, or South Africa and China).

• Vlok was then re-examined by Advocate McNally SC, counsel for SACTWU. The purpose of the questions posed by McNally was to clarify responses given Volk to the earlier cross-examination questions posed by counsel for the merger parties. This included an exploration of which conditions proposed by SACTWU were most important to it. According to Vlok, SACTWU’s primary focus was on achieving local procurement targets.

• The Competition Tribunal then called its first witness, Gerhard Ackerman from Shoprite-Checkers. Various questions were put to Ackerman by the Chairman of the Tribunal, Norman Manoim, with a focus on the following broad themes –

o Shoprite’s views as to the entry of Wal-Mart into South Africa;

o an exploration of Shoprite’s procurement and sourcing practices and the likely impact of the proposed merger on such practices; and

o various statements made by Shoprite in the media regarding the proposed transaction

• Ackerman’s cross-examination commenced with questions from Advocate McNally SC for SACTWU. McNally pursued with Ackerman various themes, including the proposition that, post the merger, Massmart would employ cross-subsidisation strategies (presumably from GM sales) to achieve lower food prices.

• Advocate Bhana SC, for the Government Departments, then cross-examined Ackerman. Bhana explored with Ackerman various themes, including the extent to which Shoprite was prepared to increase its imports in order to remain competitive as against Wal-Mart.

• Advocate Wilson, for the merger parties, then cross-examined Ackerman. Wilson questioned Ackerman around various themes, including Shoprite’s sourcing strategies and the extent to which a varied supplier base (including both local and international suppliers) was important to maintain security of supply.

• The departure of Ackerman from the witness box marked the end of the factual evidence in the merger hearing. The first expert witness called was Simon Baker. Baker is an expert economist, mandated by the merger parties to present his views as to the economic impact of the proposed merger in South Africa.

• Baker’s evidence-in-chief was lead through Advocate Unterhalter SC, for the merger parties, and explored the following broad topics –

o the absence of traditional competition law concerns arising from the proposed merger;

o the substantial consumer benefits attributable to the proposed merger (including lower prices and faster and more extensive roll-out of new stores);

o an assessment of first-order employment effects of the proposed merger, as well as the likely impact of Wal-Mart’s entry into South Africa on wages in the retail and manufacturing sectors;

o procurement, including an analysis of the determinants of the procurement mix, and the distinction between direct and indirect imports;

o the high-level synergy analysis undertaken by Wal-Mart; and

o a criticism of the various iterations of local procurement targets proposed as conditions to the approval of the proposed merger including (i) the bureaucracy and expense resulting from the administration of such conditions for Massmart, suppliers and the Competition Commission; (ii) the likely prospect that they will be ineffective and rapidly overtaken by events, including the incentive on suppliers to overstate local content; (iii) the anti-competitive nature of such conditions as they will prevent Massmart from responding to events as it would have done absent the merger; and (iv) the possible introduction of material risk to the commercial viability of the acquisition as a consequence of the proposed conditions.

• Baker was then cross-examined by Advocate Bhana SC for the Government Departments. The purpose of the questions posed by Bhana was to test the reliability of the economic analysis performed by Baker, and the conclusions arrived at by him.

• Bhana did not complete his cross-examination of Baker. It is expected that day 5 of the hearing (13 May 2011) will commence with a resumption of the cross-examination of Baker by Bhana. Thereafter, the economic expert for the Government Departments, James Hodge from Genesis Analytics, will be called to give evidence.

• For more information as to the nature of the evidence presented by Jacobs, Vlok and Baker, you can access non-confidential versions of their respective witness statements at www.comptrib.co.za. The witness statements submitted by the other participants in the merger hearing referred to above may also be located at this website.