The Editor

Business Day

31st October 2017


Re: Feature: More than Just Business by Ann Crotty


Generally I don’t respond to articles about HCI. Persistent unbalanced criticism without ever being allowed to offer an explanation despite request, does however occasionally demand reply.


Worse of course is when the issues on which one is attacked are subjudice and one has to keep one eyes focused on one’s litigation no matter how provocative the article. Unfortunately the KWV saga will have to wait for progress in the courts.


On the Competition matter however the granting of the Competition Appeal Court judgment this week does allow one to reply without fear of undermining a court case which is in progress.


Ann Crotty has it that it was somehow wrongful for us to challenge what we saw as an unbearably obstructive ruling from the Competition Tribunal. She suggested my wily character may even allow us to win that litigation (which happily we have since done) but that it is not nice and certainly sits badly next to claims of trying to be a good corporate citizen.


The background to the matter is as follows:


We successfully applied to the Competition authorities for permission to merge with Johnnic a few years ago including the right to become the joint controlling shareholder of Tsogo.


Sometime later SABM decided to dispose of its stake in Tsogo leaving us as the party in sole control. Tsogo took the opportunity to buy back some of its shares, concentrating our holding from 42% to 47%. In the circumstances HCI decided to consolidate Tsogo’s earnings into its accounts. Out of deference to the Competition authorities and in order to ensure we were free to increase our stake to above 50%, HCI applied a second time to the Competition authorities for permission, this time asking for sole control.


At the time of so applying we were the majority owners of two other gaming businesses, Vukani and Galaxy Bingo. All this was well known to the authorities and was disclosed in that application. Again the authorities approved our right to take full control of Tsogo.


In December 2016 we announced our intention, subject to due diligence, written agreement and regulatory approvals, to restructure our gaming businesses into a single corporation. This was no merger. We already had sole control of each of them with the permission of the Competition authorities.


Over a few months the due diligence was completed, the agreement of sale was signed and the many regulatory requirements for a related party transaction in a listed environment were complied with, including obtaining external opinions that the terms of the transaction were fair and reasonable, and allowing shareholders to vote on the matter by special resolution requiring 75% approval in a vote where HCI was precluded from voting as it was the related party.


The transaction has the smallest effect on HCI. Before it we owned 52% of Vukani and Galaxy Bingo and 47,5% of Tsogo. After the transaction we will own about 50,5% of all three.


We were not able to approach the Competition authorities prior to the signing of the sale agreement but immediately it was signed we notified them of the transaction and the fact that we believed it did not require any further approval by the Competition authorities since they had already approved it.


Actually our group had just done a very similar transaction in the Hospitality Property Fund. There Tsogo had applied for permission to merge the Fund into Tsogo and had been granted permission to take control of it. Subsequently it restructured several of its hotel properties by transferring them into the Fund. Out of an abundance of caution it applied for an opinion from the authorities, for which there is provision in the legislation, confirming no further approvals were necessary by the Competition authorities. In due course this was provided.


Again out of an abundance of caution HCI applied for such an opinion from the Competition authorities. There are time limits for them to provide such an opinion and we were months ahead of the date by which it was required. To our utter amazement, having extended the maximum period allowed for a decision, they provided an opinion which said we could not rely on previous approvals as we had taken too long to implement same and the manner in which we were acquiring a majority share in Tsogo was different from that previously contemplated by the authorities.


There were no time limits attached to the previous approvals nor were any limits placed on how we might achieve our majority stake.


We applied to the Tribunal for relief but without success and ultimately were driven to the Competition Appeal Court for a ruling that effectively says once the authorities have approved a merger one is free to implement it without haste in ones’ own good time and in the most efficient manner one choses, without having to revert to the authorities on the detail. Their responsibility was to decide whether there is any reason why HCI should not take control of the assets involved. If they had ruled there is no problem, the authorities don’t get the right to reverse their previous approval.


What floodgates is Ann talking about?


This has nothing to do with defiance on our part. It simply is to do with the fact that we are entitled to implement our merger at this stage and are not obliged to go through more hoops.


In all fairness I say we jumped through a LOT of hoops to do a fairly simple transaction, spending millions of Rand and providing months and months of work for an army of professional and regulatory personnel. It has taken a full year to implement. This is certainly no example of it being easy to do business in South Africa!


Given the judgement I would hope the FM and Ann might wish us well with a transaction supported by a huge majority of the shareholders of both companies and having a zero effect on competition, instead of whining on behalf of nobody in particular.



Johnny Copelyn