The Competition Tribunal (“Tribunal”) has approved the international transaction between European brewer, Heineken, and South African alcohol producer, Distell, subject to competition and public interest-related conditions that enhance and tighten proposed remedies tendered by the merging parties, and recommended by the Competition Commission (“Commission”).
In terms of the merger the Heineken Group, through Sunside Acquisitions (Pty) Ltd (“Newco”), intends to acquire a controlling interest in NBL Investment Holdings Limited (“NIH”) and the flavoured alcoholic beverages (“FABs”), wine, and spirits operations of Distell Group Holdings Limited (“Distell”) in South Africa, Namibia and select markets across sub-Saharan Africa. The new company arising from the merger, Newco, will comprise Heineken and most of Distell’s assets and will remain incorporated and headquartered in South Africa. Newco will also remain a tax resident of South Africa.
Tribunal processes and procedural aspects of the merger
On 9 September 2022, the Commission referred this large merger to the Tribunal for conditional approval. The Tribunal held a pre-hearing on 26 September 2022 whereby interested third parties, that had raised competition and/or public interest concerns during the Commission’s merger investigation, indicated their intention to intervene. The South African Breweries (Pty) Ltd (“SAB”), the Casual Workers Advice Office (“CWAO”) and the Women on Farms Project (“WFP”) applied for and were granted intervenor status in October 2022. The Department of Trade, Industry and Competition (“dtic”); the National Union of Metalworkers of South Africa; the Inqubelaphambili Trade Union; the Food and Allied Workers Union; and the National Union of Food Beverage Wine Spirits and Allied Workers (who have automatic participation rights in terms of the Competition Act) also participated in the Tribunal proceedings. Discovery took place and witness statements were filed during October–December 2022.
The Tribunal heard evidence from several factual witnesses as well as economic experts over five days in January 2023. The Tribunal furthermore requested clarifications and additional information from the merger parties during the hearing, the last of which was provided on 22 February 2023. A complex set of revised remedies were tendered by the merging parties to address the competition and public interest-related concerns following submissions of the Commission, the dtic, unions, CWAO, WFP and SAB at the hearing. Following the above, and considering the transaction in its totality, the Tribunal approved the proposed transaction subject to merger conditions enhanced by the Tribunal.
Synopsis of conditions
To remedy the competition concerns of the proposed transaction in the cider market in South Africa, where the merger would have resulted in a consolidation of the Strongbow brand with the Savanna brand and Hunters brand, the conditions imposed by the Tribunal require Heineken to divest of its local Strongbow business and brand to a licensee. This licensee must have a majority shareholding by historically disadvantaged persons (“HDPs”).
The public interest related conditions imposed involve, among others, the establishment of an employee share ownership plan (“ESOP”) that introduces shareholding, voting rights and Board representation for employees. Employment commitments to reduce the number of potential retrenchments in South Africa have also been included in the remedy. Furthermore, the conditions include enterprise, supplier development and other conditions aimed at promoting Broad-Based Black Economic Empowerment (“B-BBEE”).
Further, the conditions address allegations relating to human rights abuses such as the abuse of workers and sexual harassment raised by witnesses during the Tribunal hearing and provide for, among others, an investigation into the allegations, an audit of working conditions on farms and commitments to human rights standards for workers including, for example, the provision of adequate sanitation facilities in the vineyards for workers.
Heineken owns Strongbow which competes with Savanna and Hunters which are owned by Distell. To address this product overlap resulting from the merger in the cider and broader FABs market and the associated anti-competitive effects, the merger conditions provide that Heineken must, within a certain period, divest its Strongbow business in South Africa to an independent licensee that is majority owned by HDPs. The divestiture will take the form of a perpetual, royalty-free licence by Heineken Group to an independent licensee to exclusively produce, market, distribute and sell the Strongbow brand in South Africa, Botswana, ESwatini, Lesotho, and Namibia.
The Strongbow business comprises the “STRONGBOW” trademarks for South Africa, Namibia, Botswana, Lesotho and Eswatini, all marketing and other materials relating to the brand held by Heineken SA, and
obligations on Heineken SA to support the licensee with sales knowledge transfer and assistance for the re-contracting of distributor and client contracts (if and when required by the licensee).
The Commission will monitor the divestiture to ensure that the Strongbow business is divested with the aim to maintain the ability of the business and the Strongbow brand to compete in the market going forward. Among others, the Strongbow licence holder will have to be approved by the Commission and the licence acquisition must be notified to the Commission. In addition, if Heineken is unable to implement the divestiture within a specified period it will appoint an independent trustee approved by the Commission, to divest the Strongbow business.
The licence holder will, to the extent required, benefit from certain “transitional services” or support services
The conditions also provide remedies to address certain concerns regarding the exchange of competitively sensitive information between Newco, Heineken and the licensee given that Newco will compete with the licensee after the merger.
PUBLIC INTEREST CONDITIONS
New capital investment and production commitments
Cumulative capital expenditure – Newco shall spend a cumulative capital expenditure of R10 billion over a period of 5 (five) years to maintain or grow the aggregate productive capacity of the current proprietary production and manufacturing operations of the merger parties in South Africa together with their productive capacity.
New greenfield brewery – In addition to the above capital expenditure, Newco shall invest an amount of R3.8 billion to plan, develop, construct and commission a new greenfield brewery in South Africa within five years of the closing date of the transaction.
New greenfield maltery – Newco shall also procure that it or suitably qualified and experienced third parties shall invest an amount of R1.7 billion in South Africa to develop, construct and commission a greenfield maltery in South Africa within five years of the closing date.
It will further maximise the procurement of services and input materials from small and medium-sized businesses (“SMEs”) and HDPs in South Africa.
Enterprise and supplier development, localisation and growth
- Local procurement and HDP business procurement – For five years, Newco will maintain a local procurement benchmark ratio of key inputs from local suppliers, producers and farmers; endeavour to increase local procurement and decrease its imports of finished products. It will also maintain the merging parties’ existing ratio of procurement from HDPs in South Africa.
- Supplier development fund – Newco shall establish a new, ringfenced supplier development fund and contribute R400 million over five years to that fund for investment in SMEs and HDP-controlled suppliers to Newco. It will support HDPs and emerging farmers, Black women-owned and controlled businesses and female HDPs who are outsourced, temporary or seasonal farm workers. A consultative Board comprising representatives of Newco, the unions and the dtic shall be established to consult and make recommendations regarding the fund.
- Localisation and growth fund – In addition, Newco will support the South African Government’s economic recovery plan by contributing R200 million over five years to a ringfenced Localisation and Growth Fund with the objective to support further localisation initiatives that will drive future economic growth in South Africa and advance the inclusion and expansion of HDPs and SMEs in the market.
- Tavern transformation programme – Newco shall invest R175 million (incremental to the planned expenditure by Distell and Heineken SA prior to entering into the proposed transaction) over a five- year period to support around 1 000 tavern owners to create safe, responsible and sustainable businesses with a positive impact for consumers and society. This financial investment will improve facilities and convert them into multi-occasion outlets supporting moderate consumption; introduce non-alcoholic alternatives to support responsible consumption; and ensure that alcohol is not consumed by or sold to under-age individuals at taverns.
- Innovation, research and development hub – Newco commits to establishing an Innovation, Research and Development Hub for the Africa region based in South Africa. It will focus on, among others, the development of new business opportunities for the region.
- Export promotion – To ensure that the merger has a positive impact on the ability of national industries to compete in international markets, Heineken SA will make Newco an export hub in South Africa for Newco’s products supplied to ten markets in Africa beyond South Africa and, Namibia and Kenya, thereby benefiting production and procurement in South Africa.
Transformation and ownership – employee share ownership plan (“ESOP”)
The merger parties must establish a new evergreen/perpetual ESOP within three months after the closing date. The ESOP will hold a fully voting shareholding of approximately 6% in SA Co, the company that will own and control the combined South African businesses of Newco post-merger. This equates to a value of approximately R3.5 billion for the benefit of the South African Employees of SA Co (a majority of which shall always be HDPs).
This introduces shareholding for the South African employees, voting rights and Board representation for beneficiaries of the ESOP. Employees of the merging parties, who will be transferred to Capevin pursuant to the Distell restructuring implemented as part of the merger, will benefit from the ESOP and not lose any benefits of the ESOP by virtue of the transfer to Capevin.
The ESOP must be structured in accordance with B-BBEE Codes and incorporate the principles as outlined in the conditions. These include, among others, that all employees be treated equally in terms of voting and economic participation with no differentiation across employee grades; that no upfront contribution will be required from employees to participate in the ESOP; that a fixed trickle dividend of a specified percentage be paid on an annual basis; that the ESOP will be entitled to appoint one person to the board of directors of SA Co; and that the costs of establishing and administering the ESOP and implementing the acquisition of the SA Co shareholding will not be borne by the ESOP but by SA Co/Newco.
The merger parties cannot retrench any employees other than the maximum number of 166 combined employees of Heineken SA and Distell. The number of retrenchments envisaged initially by the merger parties was 230 but was reduced to 166 following evidence heard by the Tribunal, including from unions.
The potential maximum number of retrenchments can only involve employees who are above Heineken SA’s employment grade level 9 and Distell’s Paterson employee grade level C3. Furthermore, no unskilled workers or employees of the merger parties whose roles involve working on production lines within the production operations (including machine technicians) can be retrenched as a result of the proposed transaction. Newco must also put in place suitable and appropriate measures to mitigate the consequences of any potential retrenchments by doing the following:
- offer potentially affected employees (i) voluntary separation arrangements; (ii) early retirement packages; and (iii) transfers to other reasonable alternative positions, to limit the need for involuntary retrenchments;
- provide funding to re-skill any affected employees in an amount of R40 000 per retrenched affected employee;
- provide counselling and guidance on applying for alternative employment; and
- for a period of three years following their retrenchment, offer any affected employees preferential consideration for re-employment by Newco or its subsidiaries subject to final agreement on terms and conditions of employment.
Maintaining the headcount
Newco must maintain the total aggregate number of all employees of the merger parties in South Africa, as at the merger approval date, for five years after the transaction closing date. The conditions provide that Newco must replace the number of retrenched affected employees within six months of the retrenchment in order to maintain the aggregate employee headcount. Newco must also endeavour to replace the number of any affected employees, who were employed on a permanent basis or on a fixed-term contract, with permanent employees.
Newco will adopt a policy of paying fair wages to its employees and those of its subsidiaries and will conduct an internal assessment to ensure no employees are paid below the Newco fair wage level. In line with specified procedures in the conditions, Newco will also work with outside service providers (“OSPs”) that supply employment services to Newco to ensure that OSPs meet their obligations of paying their employees a fair wage necessary to constitute a living wage in South Africa.
Regarding workers employed or contracted on farms and cooperatives supplying inputs to Newco, it will work with all direct sourcing farms and cooperatives to share best practice and benefits of paying a fair wage necessary to constitute a living wage in South Africa. It will also update all sourcing agreements, stipulating the expectation that direct sourcing farms and cooperatives strive to pay labour employed directly or indirectly a fair wage necessary to constitute a living wage in South Africa.
Safe and dignified work
During the Tribunal hearing, witnesses representing the CWAO and WFP alleged ill-treatment and sexual harassment of temporary and seasonal farm workers and other outsourced workers.
The merger conditions stipulate that within three months of the merger closing date, Newco will investigate the allegations raised by witnesses before the Tribunal. Among other conditions, Newco will on an ongoing basis, work with Distell farms and all direct sourcing farms and cooperatives to understand, avoid and address risks associated with human rights; and update all sourcing agreements to reflect a commitment to human rights standards, including providing for adequate sanitation facilities in the vineyards for workers, protection of farm workers from highly hazardous pesticides, adequate personal protective equipment (“PPE”) and safe transportation.
Any other complaints against other OSPs’ treatment of temporary workers must also be investigated when raised. In line with policy and industry standards, appropriate action must be taken proportionate to the findings, which may include disciplinary measures against an implicated person, termination of supply agreements and victim support.
Newco must also, within three months of the merger closing date, provide the Commission with a list of farms it directly and indirectly sources from and, within six months, audit the working conditions of all permanent employees, non-employee workers employed by OSPs (who deliver labour-based services on these sites) and any other temporary or seasonal workers, where applicable, on farms wholly owned by Distell to assess working conditions against legal requirements and international standards.
The audit will cover fair wages, reasonable working hours, a safe and dignified working environment, and health and safety standards and will include a representative sample of other farms which directly or indirectly supply products to Newco. The audits will also be conducted in partnership with a highly respected and independent third-party organisation accredited by the Association for Professional Social Compliance Auditors. Newco will publish its findings and recommendations on its website and will also provide the findings and recommendations to the Commission.
In addition, Newco will assist and work with its OSPs to educate outsourced, seasonal and temporary workers on their rights and will establish and promote an anonymous communication line for reporting any instances of wrongdoing. Newco commits to taking action to rectify any non-compliance, deficiencies or abuses in respect of payment of fair wages, working conditions and/or respect for workers’ human rights.