Competition Commission is against Cashbuild’s bid for TBC

DUDU RAMELA: In a bid to broaden its geographical footprint, Cashbuild on August 4 announced its intention to acquire Pepkor’s The Building Company at a cost price of R1 billion. This, however, has been put down by the Competition Commission. The Cashbuild group has some 318 stores in Africa and 228 in South Africa. The Building Company, on the other hand, owns and controls about 48 trading firms in South Africa. Let’s help you make sense of all of this.

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Now we speak to Chris Gilmour, an independent analyst. Chris, thank you very much for joining us this evening. Perhaps this is just a recommendation at the moment, but let’s look at the reasons behind the commission’s concerns. It doesn’t have a case.

CHRIS GILMOUR: Dudu, good evening. Yes, it probably does have a case – and that relates really to concentration of power. Now, although in your preamble you mentioned only 48 stores in Buco and over 300 in Cashbuild, Cashbuild is the largest retailer of DIY goods in the country and Buco is the second largest. So, if they allowed this to go ahead, the concentration of power would be quite enormous, particularly in certain geographical areas where they would have no competition at all. And the detail I must admit I haven’t looked at; I didn’t actually even recognise them, they are so obscure. But nevertheless there would be such a concentration of power that it would [such an amount of] …… [1:44] cashflow if it so desired to raise prices pretty much indiscriminately. And I think that’s where the Competition Commission’s concern lies mainly.

DUDU RAMELA: You speak of a concentration of power. Fair enough. But given that there are only four retailers that have a national footprint in the country where this space is concerned, is it really their fault – that is, Cashbuild’s?

CHRIS GILMOUR: Oh no, not at all. I can understand why Cashbuild wants to do it – because trying to get any kind of growth in an economy that is languishing the way the South African economy is languishing is incredibly difficult; you can only really do it by acquisition. So you’re quite right. If you look at the main DIY retailers, you’re talking about Cashbuild, you’re talking about Buco, you’re talking about Builders Warehouse, and really Build it in the Spar Group. The problem is when you have four of them making up pretty much 100%, that exercise excludes all the number of independents in the country, and there would be plenty of those. What proportion exactly they would make up I don’t know.

Nevertheless, as you rightly say, it’s certainly not their fault. However, the way the Competition Commission does its work, it’s looking at it purely from the point of view of a concentration of power – and that’s the way it’s done it. Look, it’s not over and done yet. This thing still has to go to the Competition Tribunal for the final recommendation, and it may result in Cashbuild still be being able to do it.

However, if Cashbuild is allowed to go ahead with this, there will be all sorts of safeguards put in place. It would have to maybe sell off stores here and there. It would have to make sure that it didn’t retrench people, blah, blah, blah. Whenever this type of thing happens, the Competition Commission usually insists on having very stringent safeguards put in place.

DUDU RAMELA: When we look at the rest of the players I guess it is a money game. What then needs to be done to boost the industry as a whole? To have four players servicing an entire country doesn’t make sense to the lay person.

CHRIS GILMOUR: If you go and look at the number of independents – and I’m thinking here of the number of Mica stores, and I’m sure you’ve seen those signs around the country; there are plenty of those. There may be many hundreds if not thousands of them. These are independent individuals, a kind of franchise-type operation.

Look, the other thing we’ve got to remember, of course, is that at this point in time with the pandemic a lot of people have taken the opportunity to beautify and make their homes much more efficient, because they’re working from home. The DIY industry has had a huge boost, so I can understand again why Cashbuild wants to do this type of thing, because it wants to acquire other businesses in this market. Bear in mind also that Buco – this is a kind of Steinhoff legacy, and things like Timber City are in the portfolio from a historical basis – may want to get much more focused on what it is doing. So I think there’s definitely a ‘willing buyer, willing seller’ type of thing. It just doesn’t seem to be that the Competition Commission quite likes the way it’s panning out. How this can get resolved I’m not entirely sure.

DUDU RAMELA: That was going to be my next question. Perhaps let’s look at this. The importance of bodies like the Competition Commission, especially when we look at this particular case, what does that tell us?

CHRIS GILMOUR: It’s very good in the sense that it means that there is a regulatory body looking at these potential mergers, and deciding whether in fact it’s good for the consumer in terms of keeping competition going. In the bad old days – and I’m trying to think of the lady’s name – Trudi Makhaya, economic advisor to President Ramaphosa, used to be on the Competition Commission. I remember talking to her years ago and she said, “You’ve no idea how much collusion takes place in the corporate world”. She was absolutely right. It’s disgusting.

I’m not suggesting for a moment that this is taking place with any of these companies. But I think this has been the case. And the Competition Commission over the years has provided an incredibly valuable service in keeping things as competitive as possible. Sometimes we look at it and think: can this really be required? But the Competition Commission goes about it very diligently, and I think it is a very necessary thing to try and keep the market place as competitive as it possibly can be.

DUDU RAMELA: Absolutely. Unfortunately we’ll have to leave it there for this evening. Chris, always a pleasure chatting to you, and thank you very much for helping us make sense of all of that. Chris Gilmour is an independent analyst talking to us about Cashbuild’s intention to acquire The Building Company.