In a recent conditionally approved large merger in South Africa, large food retailer Spar will have to divest of its 20% interest in Capital Land Asset Management (Pty) Limited (CLAM). CLAM is a manager responsible for the day-to-day management of a property fund, that would also include the management of the shopping centres acquired by Synergy Income Fund Limited (Synergy) in this merger.
The conditions agreed to by the merger parties, are that Synergy is to procure the sale of the CLAM interest by Spar and must ensure that Spar thereafter does not again acquire any influence in respect of the disposed CLAM shareholding. In addition, in two to four years' time upon renewal of the leases of Spar franchisees (who are all anchor tenants in five of the targeted shopping malls situated in two small towns in Limpopo, the suburb of Bellville in the Western Cape and in Hammanskraal near Pretoria) Synergy would negotiate in good faith with Spar and its franchisees to have the exclusivity terms in those leases removed.
The conditions were considered to alleviate the Commission's foreclosure and public interest concerns that small competitors of Spar, namely part-line shops, such as butcheries, greengrocers and bakeries (typically small businesses) and superettes, would be excluded from these shopping malls by the relationship between CLAM, Spar and Synergy, and Spar's incentive to prefer its own franchisees through exclusivity provisions in the Spar franchisees' leases in those shopping centres.
This is not the first time the issue was raised in recent Synergy transactions.
Earlier in the year the Commission published its conditional approvals of two other acquisitions by Synergy, being a Kwa-Mashu neighbourhood shopping centre and a mall near the Hartebeespoort dam. At that stage the acquisition of the seven malls subject of the large merger above were also in the offing and must have been taken account as a further relevant fact in the various merger analyses. It is apparent from these notices that the Commission's concerns were not only rooted in the exclusivity provisions in the leases of the Spar franchisees, but also based on the CLAM shareholders agreement which allowed minority shareholder Spar to appoint a director to the fund manager.
Post-merger, CLAM would also manage these newly acquired shopping centres. In these two smaller mergers, the Commission addressed similar foreclosure and public interest issue by again imposing the condition to negotiate the removal of the limiting term in the leases. In addition, the resignation of the Spar director from the board of CLAM was required.
In summary, through the various conditions attached to the acquisition by Synergy of nine shopping malls throughout the country, the Commission has attained the removal of exclusivity terms in supermarket leases and also removed influence by a supermarket over the property manager and thus the continued preference of Spar associated firms.
The effect of exclusivity provisions in supermarket leases was one of the issues investigated by the Commission in the so-called retail investigation of more than a year ago. In sum, the Commission's concern was that competitors of the supermarkets (especially SMME's and independent supermarkets) were being foreclosed from malls for a long time, having established effective lease periods of between 10 to 40 years. In some cases, the Commission said, agreed restrictions on product ranges and size of trading areas also translated to a barrier to new entry into a shopping centre. In reaching these preliminary conclusions, the Commission disregarded arguments that some safeguards are required for the risk and cost of investment in malls, and for an attractive tenant mix essential for a successful shopping centre. At this point in time the investigation has not culminated in a final decision by the Commission.
The Commission's approach to the mentioned Synergy mergers can be considered as an implementation of the Commission's preliminary finding in the retail investigation that restraints have no place in shopping mall leases. But it may also be that the particular relationship between Spar, Synergy and CLAM fuelled the approach by the Commission in these mergers and that the issues were very case specific. Now that Spar must divest from CLAM, the structural link between it and the asset manager of the shopping malls in which Spar franchisees are tenants, falls away, and with it the possible influence Spar had on CLA's business, which could have motivated the preference for Spar franchises in the particular malls managed by CLAM.
There are two interesting aspects arising from these cases. First, it will be interesting to see what the competition approach will be to exclusive supermarket centre leases in the next acquisition of a mall by Synergy as the Spar influence over CLAM business will have been removed. If the exclusivity provisions in the leases remain a cause for concern in the future mergers analyses involving Synergy, it can be expected that the Commission will take a similar stance against of exclusive anchor tenancies in shopping centre acquisitions by other firms. And in that way the Commission could engineer compliance with its views per the retail investigation without resorting to more costly and time-consuming litigation.
This leads to the second point that the conditions devised in the Synergy mergers involve and affect pre-existing contractual rights of tenants that are not parties to these mergers. Conceivably these tenants could render the conditions ineffective by sticking to their lease terms upon renewal as they would be entitled to contractually, despite valiant and good faith efforts on the part of Synergy. Of course, the tenants would have to consider the possible consequence that the Commission may very well, given its factual findings in the Synergy mergers that the prospects of competitors to the Spar franchisee anchor tenants to flourish are snookered by the exclusionary lease terms, initiate and refer a complaint against recalcitrant tenants for obstructing competition.
Written by Petra Krusche, Director, Competition practice, Cliffe Dekker Hofmeyr