SA signals ‘no’ to foreign investment

It went relatively unnoticed, but the Competition Commission’s decision this week to block the purchase of an SA business by a foreign company will again raise questions about whether SA really wants the foreign investment it claims to want, and whether our competition regulators really want to achieve a more competitive economy.

The commission prohibited the sale of Sasol’s cyanide business to Draslovka, a Czech company that is one of the world’s leading producers of cyanide. Gold miners need cyanide to get the gold out of the ore. The commission prohibited the deal on the basis that it would result in an increase in the price of cyanide postmerger. Its brief media release provided neither explanation nor evidence for this assertion, but it mentioned “concerned customers”, and as a backup ,it has blocked the deal on public interest grounds because of the harm it will apparently cause the local gold mining industry.

One has to wonder how many concerned customers there can possibly be, especially at the current high gold price, and it’s hard to imagine cyanide can be that substantial a component of miners’ input costs, dominated as they are by electricity and labour costs. Much more disturbing though is that even though the deal raises no concerns on strict competition grounds — essentially one monopoly selling to another — the commission has judged that the possibility of a price increase is reason enough for a no vote.

The SA cyanide business is vertically integrated into Sasol and splitting it out could see the price increase. But Draslovka has committed to put capital and innovative technology into the business, as well as cleaning up its environmental footprint and expanding its product lines, so customers — and the country — could be the beneficiaries.

Nor is it clear that Sasol won’t raise prices anyway if it can’t sell the cyanide business, which is not core to its operations. (In any event, a clearly exasperated Sasol said in a media release this week that the commission’s decision was “unexpected” because the parties had already engaged and agreed on the price issue with the commission earlier in the process, only to find it raised again at the last minute.)

No doubt this will all be aired in court at the Competition Tribunal in coming months. At R1.5bn, the Draslovka/Sasol deal is too small to be a “large merger”, so the commission itself does the deciding, but the parties are entitled to ask the tribunal to reconsider it. They surely will. Some sort of accord is bound to be reached that will satisfy the commission and its interventionist boss, trade, industry & competition minister Ebrahim Patel.

But it will take time and expensive lawyers. And it sends all the wrong signals to potential foreign investors, coming as it does after the recent Burger King episode — where the commission blocked the acquisition of Burger King by an offshore private equity group purely on black empowerment grounds, a decision that was later reversed. It’s also another deal that makes the regulatory environment increasingly murky and unpredictable and puts question marks over whether SA really wants the international exposure, expertise and product choice foreign investors can bring — whether, in effect, it incentivises stagnation as opposed to innovation.

True, public interest imperatives such as supporting local industry and black empowerment are part of our competition law, but it’s becoming harder to discern the balance. And in the end, if the competition authorities don’t make a priority of competitiveness, who will? It’s all particularly salient when SA is seeing a decent degree of interest from foreign multinationals in acquiring local big names. Heineken’s R40bn Distell deal tops the list, followed by Dubai-based DP World’s R12.7bn deal to buy out Imperial and the recent deal in which Luxembourg-based Ardagh group proposes to buy Consol Glass for R10bn. There are several smaller deals in the offing too. All must still run the gauntlet of competition regulation. This, usually involves offering Patel and commission goodies as conditions for the deal to be approved, including commitments to retain jobs, do black empowerment deals, invest in supplier development funds (and renewable energy), support local industrialists and small businesses, and so on. The amount foreign acquirers typically have to invest in the goodies adds to the purchase price, and some deals may not be worth the extra cost.

Lawyers also report that they spend plenty of time advising potential acquirers on whether deals can be structured such that they don’t constitute a change of control — so the competition authorities don’t have to be notified and can skip all the cumbersome and costly hurdles. Many potential acquirers come, look, and go somewhere else.

For now, with many JSElisted companies priced cheaply and many multinationals awash with cash, there’s more foreign interest than there has been for a while, particularly in SA companies with Africa-wide expertise (or those with unique footprints — such as cyanide for gold mining). But SA has struggled to attract foreign direct investment inflows on any sort of consistent basis over the past decade or more, and its weak growth outlook suggests it can’t rely on them in future.

Instead, SA has long relied on portfolio inflows — into its bond and equity markets — to balance the balance of payments. But foreign interest in SA’s bonds and equities is not what it used to be, and the latest round of market ructions is a stark reminder again of how volatile these flows can be and how vulnerable SA is to them. It should be going out of its way to make it easy for foreign direct investors to come in.

IF THE COMPETITION AUTHORITIES DON’T MAKE A PRIORITY OF COMPETITIVENESS, WHO WILL?