---

COMPETITION TRIBUNAL

REPUBLIC OF SOUTH AFRICA

Case No.: 12/LM/Mar05

In the large merger between:

Hosken Consolidated Investments Ltd Primary Acquiring Firm

and

Fabvest Investment Holdings (Pty) Ltd Primary Target Firm

REASONS FOR DECISION

Approval

[1] The Competition Tribunal issued a Merger Clearance Certificate on 16 May 2005 approving the proposed merger between the abovementioned parties in terms of section 16(2)(a). The reasons for the approval of the merger appear below.

The Parties

[2] The primary acquiring firm is Hosken Consolidated Investments Ltd (“HCI”), a public investment holding company listed on the JSE. Its largest shareholder is SACTWU which holds 45.3% of the issued share capital in HCI. None of its shareholders either directly or indirectly controls HCI. HCI has a number of subsidiaries some of which are relevant for purposes of this transaction.¹ Flaghigh Investments (Pty) Ltd (“Flaghigh”), Tangney Investments (Pty) Ltd and Nactu (Pty) Ltd (“Nactu”) collectively hold 32.06% of the issued share capital in Tsogo Investment Holdings (“TIH”).²

[3] The primary target firm is Fabvest Investment Holdings Ltd (“Fabvest”), which is controlled by the Fabcos Trust (“Fabcos Trust”) (as to 90.125%). Fabvest currently controls (directly or indirectly)³ Fabcos Investment Holdings (“FIH”) (as to 75%)⁴, Censor SA (of which 95% of the issued share capital is held by FIH⁵), Anchor Yeast (Pty) Ltd (of which 95% is held by Censor SA), Established Investments (Pty) Ltd (of

which 55% is held by Fabvest⁶). FIH holds 38% non-controlling stake in TIH.⁷

[4] Below is an organogram which outlines the Fabcos shareholdings:

Fabcos Trust

90.1%

Fabvest Investment Holdings Ltd

55% 75%

Fabcos Investment Holdings Ltd

Johnnic Holdings Ltd

Established Investments (Pty) Ltd

25% (50%)

100% 100% 38%

National Cereal Holdings (Pty) Ltd

Censor SA

Tsogo Investment Holding Company

Fabfoods(100%) - Dormant

Fabtravel (100%) - Dormant

Fabao Investments (75%) - Dormant

Future Break (44%) – In liquidation

100% 51%

National Cereal Investment (Pty) Ltd

Tsogo Sun Holdings (Pty) Ltd

100%

Premier Foods Ltd

[5] The structure of TIH’s subsidiaries is as follows:

51% 49%

Tsogo Sun Gaming

Southern Sun Hotels

100% 100%

60% 100% 100% 100% 100%

The transaction

[6] The proposed transaction entails HCI acquiring 90% of the issued share capital of Fabvest from the Fabcos Trust. The remaining 10% will be acquired through section 440K of the Companies Act.⁸ Post-merger, it is envisaged that HCI will own and control 100% of the issued share capital of Fabvest. This will further entitle HCI to indirectly control TIH.⁹ It is through this transaction that HCI acquires the gambling and hotel activities of Fabvest.¹⁰

Rationale for the transaction

[7] HCI labels the present deal / investment in the hotel and casino industries as a lucrative one as South Africa continues to grow as a tourist destination of choice. HCI sees the deal as a continuation of its strategy to increase its stake in the Tsogo group. Fabcos Trust seeks to dispose of its stake in Fabcos to realise its investment in the hotel and casino industry (Tsogo group) so that it might concentrate on its core investment in Premier Foods and its subsidiaries.¹¹

Activities of the parties

[8] HCI is an investment holding company which has interests - through its subsidiaries - in 4 sectors, out of which only gambling seems relevant for purposes of our analysis. HCI is involved in the gambling market through limited pay-out machines (“LPM’s”) and casinos. As already pointed out, HCI has a 96% interest in Vukani, a route operator of LPM’s. Vukani is currently operating in Mpumalanga and Western Cape provinces. We are told that although Vukani has also been awarded licences to operate these LMP’s in Kwazulu-Natal (“KZN”) and the Eastern Cape, it has as yet not commenced operations in these 2 provinces. Again, HCI has a 32% non-controlling stake in TIH, which owns 51% of, and controls, Tsogo Sun Holdings (“TSH”). TSH (which owns a 100% shareholding in Tsogo Sun Gaming and Southern Sun Hotels) holds 5 casino licences in SA, viz., Suncoast Casino & Entertainment World; the Ridge Casino & Entertainment Resort (Witbank); Hemingway’s Casino & Hotel (East London); Montecasino (Fourways – JHB); and Emnotweni Casino (Nelspruit); and Suncoast Casino & Entertainment (Durban) (60%).¹²

[9] FIH was formed in 1997 to steer the commercial affairs of the Fabcos Trust. It was incorporated in 1995 as a special purpose vehicle specifically formed for purposes of acquiring shares and obtaining ownership stakes in corporate entities for the benefit and on behalf of the Fabcos members. The parties indicated that it was intended, after the establishment of Fabvest in 1997, that FIH would be ring-fenced

to hold only the Fabcos Trust’s casino interests.

[10] TIH is described as a a broad based BEE entity whose shareholding benefits organized black owned businesses, labour movements and women groups. TIH has a joint venture company, Tsogo Sun with the SAB Miller. Both TIH and SAB Miller own a 51% and 49% shares in Tsogo Sun respectively.

[11] Tsogo Sun Gaming is a casino operating entity. It has 5 casino licenses operating in various geographic areas as described above.

Product overlap

[12] It is evident from the above that the only product overlap between the parties relates to their respective interests in the gaming industry. As already articulated, HCI and Fabvest have a common interest in the casino market through their indirect shareholding in TIH. However, HCI is also involved in the provision of LPM’s. According to the Commission, the National Gambling Act - which regulates the South African gambling market (with the NGB being a statutorily established body to serve as the watchdog to oversee gambling activities in SA) – differentiates between casinos and LPM’s, and therefore separates the activities of casinos and LPM’s. Both the Commission and the merging parties contended that casinos and LPM’s constitutes separate product markets hence no product overlap exist between HCI and Fabvest with respect to LPM’s.

[13] Insofar as the casino market is concerned, the Commission and the merging parties submitted that the post-merger market structure will remain unchanged as the transaction would only result in HCI acquiring shares in Fabvest to gain control of TIH. The Commission did not foresee any competition concerns arising post-merger – no matter how the geographic market is defined.¹³

Market shares

[14] Below is a table (provided by the parties) reflecting the market share data relating to the gaming industry in which Tsogo Sun Gaming operates at provincial level.¹⁴

Gauteng

Casino	Licence holder	Market shares (%)
Caesars	Peermont Global	27
Carnival City Casino	Sun International	17
Emerald Casino resort	London Clubs	5
Gold Reef City	Gold Reef	21
Montecasino	Tsogo Sun	30

Mpumalanga

Casino	Licence holder	Market shares (%)
Champions Casino	Tsogo Sun	41
Emnotweni Casinos	Tsogo Sun	39
Graceland Hotel and Casino	Peermont Global	20

Kwazulu-Natal

Casino	Licence holder	Market shares (%)
Golden Horse Casino	Gold Reef	10
Monte Vista Casino and Resort	Balele Leisure	4
Sibaya Casino and Entertainment	Sun International	34
Suncoast Casino and Entertainment	Tsogo Sun	48
Tusk Umfolozi Casino	Tusk	4

Eastern Cape

Casino	Licence holder	Market shares (%)
The Boardwalk and Wild Coast Sun	Sun International	79
Hemingway Casino	Tsogo Sun	21

Competition Evaluation

[15] The parties contended that HCI already holds an investment interest in TIH and would merely be increasing its stake to an effective controlling interest through this deal. They further argued that as there would be no market overlap therefore the merger would not have impact on the gambling industry. They, however, admitted that barriers to entry are high as significant capital expenditure is required in order to establish the infrastructure and to acquire the equipment and machinery required for a new casino entrant to operate. Further to this, the Gambling Act and the various provincial gambling boards strictly regulate the casino industry. It was argued that because of this strict regulation countervailing power in this industry is very high. We were told that entry into the gaming industry was regulated through the old national Gambling Act 33 of 1996, which provided for the granting of a maximum of 40 licences, distributed across each of the 9 new provinces. With the introduction of the New Gambling Act – it was argued – the Minister of Trade & Industry (“the Minister”) is empowered to determine the maximum number of licences awarded from time to time with due regard to the criteria set out in the legislation.¹⁵ It appears the criteria require the Minister to balance the competing considerations of a competitive marketplace, BEE, and the incidence and consequences of over-stimulation of gambling. In such process, the Minister may also consult with the Competition Commission.¹⁶ The Commission contended that the proposed transaction would not result in any change in the current market structure.

Conclusion

[16] There were no public interest issues. In the Tribunal’s view, the transaction will not prevent or lessen competition substantially.

_____________ 30 May 2005

David Lewis Date

Concurring: Urmilla Bhoola and Medi Mokuena

For the merging parties: Robert Appelbaum and Nina Malan (Sonneberg Hoffman Galombik Attorneys)

For the Commission: Hardin Ratshisusu (Mergers & Acquisitions Division)

---