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Wal-Mart Wins South African Lawsuit Contesting Massmart Deal

A South African appeal court endorsed Wal-Mart Stores Inc. (WMT)’s purchase of a controlling stake in Massmart Holdings Ltd., a deal the government challenged on the grounds it may cause jobs cuts and hurt local manufacturers.

Judge Dennis Davis, president of the Competition Appeal Court, handed down the decision at a hearing in Cape Town today.

“The evidence indicated that consumers will indeed benefit from lower prices and that these lower prices may, in turn, generate greater job creation than the job losses that may result,” Davis said. “There was insufficient evidence to conclude that the detrimental effects of the merger would outweigh the clear benefits to consumers.”

Three government ministries and a retail workers’ union contested a May 31 decision by South Africa’s Competition Tribunal that authorized Wal-Mart to buy a 51 percent stake in Johannesburg-based Massmart, South Africa’s biggest food and general-goods wholesaler. Approval was subject to the companies promising to refrain from firing employees for two years and setting up a 100 million-rand ($13.3 million) fund to assist local suppliers and manufacturers.

Legitimate Concerns

The court, which heard the case in October, ordered that three experts should recommend to the appeal court the mandate and conditions of the fund. The panel must conclude its work within three months.

The study must determine “the best means by which South African small- and medium-sized suppliers could participate in Wal-Mart’s global value chain,” Davis said. “There were legitimate concerns about the effect of the merger on small producers and therefore consequent effects on employment.”

Wal-Mart, the world’s largest retailer, paid 16.5 billion rand in mid-2011 for the stake in Massmart. The Bentonville, Arkansas-based company said on June 26 that it would create 15,000 jobs in South Africa in five years and spend about 60 billion rand more on food or consumer goods in the same period, most of which would go to local suppliers.

The government welcomed the court’s approach, saying its concerns had been recognized and could be addressed by the study. There was scope for different conditions to be imposed on the takeover, it said.

Procedurally Flawed

“There is an innovative and quite interesting way forward on this matter,” Economic Development Minister Ebrahim Patel told reporters in Cape Town. “The conditions that are applied must ensure that we don’t have job losses in the supply chain. That’s the focus for us. The size of the fund, the nature of any other commitments that Wal-Mart is prepared to make, are simply the tools to get to an outcome.”

At a hearing in October, the ministries called on the court to refer the takeover back to the Competition Tribunal, arguing that its hearings were procedurally flawed and failed to take account of the potentially negative economic effects.

“It was reasonable for the government to think carefully about this sort of deal,” Stephen Carrott, a retail analyst at Macquarie First South Securities in Johannesburg, said by phone. “The decision allows the company to move forward assuming this is the end of it.”

The court also ordered Massmart to reinstate 503 workers who were fired before the transaction.

‘Respectfully Disagree’

The South African Catering and Allied Workers’ Union welcomed the workers reinstatement and the decision to set up the panel, spokesman Mike Abrahams told reporters.

While Wal-Mart and Massmart “respectfully disagree” with the court on a link between the job cuts and the transaction, the process to rehire the workers has started, Massmart spokesman Brian Leroni said at the court.

“Wal-Mart and Massmart welcome the ruling,” he said. “All three arms of the competition authority have now endorsed the merger. The process has been rigorous. We welcome the idea of a study as a good way to help us understand how to deploy these funds.”

Massmart shares rose 0.2 percent to 172.92 rand at the close in Johannesburg, giving the company a market value of 37.3 billion rand. The shares have gained 23 percent over the past 12 months.

South African Trade and Industry Minister Rob Davies denied that the government’s decision to challenge the takeover in court may deter foreign investment.

“The issues that have arisen are specific to this transaction,” he told reporters. “This is not a general statement about our position on foreign investment. We continue to work with foreign investors. We have a much more open regime as far as foreign investment is concerned than many other comparable countries.”

The case is South Africa Commercial, Catering and Allied Workers Union v. Wal-Mart Stores Inc. and Massmart Holdings Ltd. (MSM), 111/CAC/Jul11.

To contact the reporters on this story: Mike Cohen in Cape Town at mcohen21@bloomberg.net; Robert Brand at rbrand9@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net

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