Changes to antitrust rules to lower cost of corporate deals

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JIMMY MOYAHA: The Department of Trade, Industry and Competition [dtic] is looking to propose [higher] thresholds for the reporting of deals to antitrust authorities.

We’re going to be taking a look at this in a bit more detail and seeing if we can make sense of it with our resident M&A expert, the chief executive for corporate and advisory at Deal Leaders International, Andrew Bahlmann. He joins me on the line now to see what we make of these developments.

Andrew, always lovely having you on the show. Thanks so much for taking the time.

Let’s start perhaps with an overview of what is currently the norm in the dealmaking space and in the reporting space – what are the thresholds and how long have they been in place?

ANDREW BAHLMANN: Hi Jimmy, thanks very much for having me.

Essentially the current thresholds that are in place,  I understand they’ve been in place since about September, October 2017 …

You basically have an intermediate merger. So that’s really your medium-sized deals. And the way they’re tackle it is they look at the combined turnover or assets of both the acquiring and the target firm, and that’s currently set at R600 million or more. And then the target asset that is being acquired is R100 million or more.

Then if you look at what they call a large merger, obviously then you look at the combined turnover in assets of R6.6 billion or more, and the target turnover of the asset that’s being acquired is R190 million or more.

So those have been in place for a long time.

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As I said, that been going on for nine years. So it is so long overdue that these proposed changes are coming onto the radar. So let’s hope they progress to something further than theory.

JIMMY MOYAHA: Andrew, take us through what the new proposals are. And perhaps we can also get into the importance of reviewing these numbers on a regular basis. You mentioned that it has been quite some time since these numbers have been reviewed. Take us through what the new proposals are and their importance .

ANDREW BAHLMANN: Absolutely. The proposed changes, if I go back to the intermediate mergers, currently, as I mentioned, the combined turnover of an asset was sitting at R600 million.

They’re now looking at moving that up to R1 billion. And then the target firm’s turnover and assets is moving from R100 million up to R175 million. So big jumps on both of those.

And then under the large merger side, as I mentioned, the combined turnover currently R6.6 billion – they want to move that to R9.5 billion. And then the target company’s turnover [or] assets is moving from R190 million to R280 million.

So I think the changes are overdue because it’s hard enough obviously getting these deals across the line – particularly when you’re looking at international capital, the time that it’s taking because the thresholds were so low; the Competition Commission [CompCom] was just overwhelmed with a lot of transactions.

So I’m hoping that these can clear the decks because, again, it’s going to be the bulk of, you know – there are going to be larger volumes in that smaller space.

So hopefully that extra R400 million is a threshold on the combined value, and a 75% uplift on the target is going to free up a lot of capacity to hopefully get these deals through, because I think where you feel it – and we had it recently, when you’re working on large mergers or transactions, they’re very, very complex.

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And yes, they may sit with different teams within the Competition Commission, but it’s still based on capacity. So they’re more seamless. They can make the process more relevant to larger, more complex deals.

I think again, it starts taking red tape out of the mix because any investor – and we have it all the time – a reputation, globally, that it’s not easy to do deals in South Africa. And this is one of the reasons for it.

So I’m hoping if it does come through that we’ll see a little bit of relief from the international investor community.

JIMMY MOYAHA: Andrew, take us through some of the practical implications this will have. You touch on the fact that it will hopefully remove red tape. It will allow for a smoother execution of deals, but perhaps take us through some of the actual practical implications of these higher thresholds in an average deal.

ANDREW BAHLMANN: Absolutely. If you play out a traditional deal, obviously you go through the due diligence process.

You find … legals, you get everything in place, and essentially you’ve got to get to a point where you can submit the nature of the transaction underpinned by signed legal agreements to the CompCom for review and ideally approval.

But in order to do that submission, there’s a whole lot of additional work that you’ve got to do post all this other deal work to get it ready for Competition Commission submission.

So there’s a big piece of work around that that has to be done.

And almost your business case has to be put forward now with a different ‘customer’ being the CompCom. And you’ve now got to sell that in.

And there could be queries that could be backwards and forwards and that’s often where these delays take place.

So if you can remove that chunk out of it, one, it’s going to take probably two or three months potentially out of the mix.

So there’s a significant impact on completion timelines and hopefully it takes a lot of noise out of the system for the CompCom. So it’s really around time and complexity. And you know, a lot of deals are pretty straightforward. They’re not all overly complex, so it’s just a lot of extra work [having to to take the deal to the CompCom].

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Also, for the parties, the buyers and the sellers, I think there’s a lot of cost involved with these submissions to the Competition Commission as well as managing them.

So both financial time and hopeful probability of success is all going to improve through these change thresholds.

JIMMY MOYAHA: Andrew, let’s take a look at South Africa’s deal volume in particular. I mean this is obviously aimed at encouraging more of these sorts of transactions to take place. And over the last year, maybe two years, you and I have caught up on many a deal that has come the way of South African businesses, whether locally or internationally.

Do you think that the South African M&A landscape is geared to attract more investment, given how good some of our companies could potentially be valued? And could this kind of intervention be a catalyst towards that investment?

ANDREW BAHLMANN: Yeah, definitely. Look, I’m very bullish about the outlook. I think, you know, we’ve said it for a long time when you and I have spoken risk is all relative to what’s happening in the rest of the world. And I think we’re in a pretty good place now.

So, yes, I think it always starts with when acquirers are looking at investment opportunities, they look at the opportunity, the actual target, and then they look at the industry and they obviously look at the geographic landscape and then the red tape that underpins all of that.

So if you can look at a large portion of the red tape now potentially being removed, it starts fundamentally changing your deal execution risk, if you like, because I think that’s the one thing.

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And I think also what’s happened, one was time and all of those types of things and the other thing was really around CompCom staying in its lane around BEE requirements and all of those things.

So I think that the sentiment and the message from a change like this will be really, really positive because it demonstrates government’s intention.

You know, we’re speaking about it for years about removing red tape and these things. So yes, I do I do think it’s going to make it more attractive because, you know, there’s red tape everywhere.

And even in other African investment destinations, there’s red tape and there’s a move to now reduce that and make it more seamless and efficient.

I think it just adds another quiver in our bow to attract more capital.

JIMMY MOYAHA: Attracting more capital and removing red tape is what opens up the economy and opens up the investment landscape, particularly when it relates to mergers, acquisitions, takeovers, buyouts and corporate transactions.

We’ll see if these proposals go ahead and, if they do, we’ll see what impact they would potentially have on the transactional landscape of South African businesses.

For now, we’ll leave this conversation. On that note, thanks so much to the chief executive for corporate and advisory at Deal Leaders International, Andrew Bahlmann, for joining us to reflect on the dtic’s latest proposal to potentially adjust thresholds for M&A deals.

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