Market Definition in Merger Enquiries – Lessons to Be Learnt from the Acquisition of Kaya FM by Primedia. Nicola Theron ([email protected])
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Trade, Competition & Applied Economics RESEARCH NOTE 17 FEBRUARY 2010 Market definition in merger enquiries – lessons to be learnt from the acquisition of Kaya FM by Primedia. Nicola Theron ([email protected]) In a previous research note – Number 12, June 2009 – we discussed alternative concentration measures for merger analysis by referring to the acquisition of Kaya FM by Primedia. In this note, we use the same case to consider important market definition issues. This specific merger provides a good case study of market definition issues as the transaction was considered twice by both the Competition Tribunal and the Competition Appeal Court (CAC). During July 2005, Primedia and Capricorn Capital Partners notified the Competition Commission of their intention to acquire the remaining assets of New Africa Investment Limited (NAIL). The only remaining NAIL asset, at that stage, was a 24.9% stake in the Gauteng radio station Kaya FM. Although the merger was initially cleared by the Competition Tribunal, an intervenor took the case on review (African Media Entertainment Limited (AME)). The CAC referred the transaction back to the Tribunal, who approved the merger for the second time. The decision was again taken on review by AME and it was only during late 2008 that the merger was finally approved by the CAC. This research note will focus on the manner in which the issue of market definition was handled during the successive stages of this merger. 1. Introduction as an important way to think about and (2) of the Competition Act. The CAC market definition issues. ruled that the Tribunal had to consider While the importance of defining markets whether the merger would substantially Merger analysis is primarily concerned with the assessment of market power. in competition economics and merger prevent or lessen competition and that Market power cannot be exercised in a procedures is not disputed here, one such an analysis requires the definition vacuum and it can only be examined in a may ask to what degree of specificity the of the relevant market. The CAC’s ruling market properly defined for competition relevant market should be defined. This referred to the Competition Tribunal’s purposes. The requirement to analyze question has both a legal and an economic first decision in which the Tribunal power in a particular market explains dimension. The main reason for the CAC’s approved the merger solely on the basis why the definition of the relevant market first decision (i.e. in its first judgment of of potential control post-merger. The remains an important step in merger 19 November 2007) to refer the matter Tribunal had concluded that the indirect analysis. The ‘small but significant non- back to the Competition Tribunal was the stake being acquired by Primedia would transitory increase in price’ (‘SSNIP’) test Tribunal’s failure, in its view, to consider not give Primedia the ability to control has been accepted in most jurisdictions the aspects listed under section 12A (1) Kaya FM either solely or jointly. The 1 Trade, Competition & Applied Economics RESEARCH NOTE 17 - FEBRUARY 2010 Tribunal had argued that control was economist? We will argue in this note the one side of the market for listeners the main issue and chose not deal with that in dynamic markets, especially those and on the other side for advertising other aspects of the merger explicitly, characterised by differentiated products, revenue. In this case the economists are such as market definition and the effects it is more prudent to analyse a variety all agreed that the competition problems in the relevant market. In the words of of potential markets than to define one that the merger might create are not to the Tribunal: “Given this conclusion, it is definitive market. be found in the market for listeners, since unnecessary for us to consider, whether, all are free- to- air and, hence, there is if it had acquired control, this would no danger that post merger the costs of lead to an anticompetitive outcome” 2 Market definition issues listening will increase or the supply of (2007:32). And also: “We wish to make airtime be reduced, but rather its effect it clear that although we heard extensive on advertising rates.” (2008:9) When analysing a potential merger, evidence on the merits we have come Two-sided markets have specific the economic enquiry starts with a to no conclusion on this, because we implications for the market definition consideration of the nature of the specific do not need to” (ibid). The CAC argued exercise, as market power is usually that, although the issue of control is product and also the characteristics diluted by the presence of different parties an important one, a merger enquiry of the market in which the product is on both sides of the market (for example, cannot end at that point: “But alone it is traded. Radio markets (and more broadly banks and retailers are both customers insufficient. The mandated enquiry had media markets) are generally regarded as of credit card companies). In the case to be undertaken within the broader so-called two-sided markets. In brief, a of the Kaya FM acquisition, this issue context of the market and the dynamics two-sided market is one where products was complicated further by the fact that within such a market” (2007:25). compete to match two distinct sets of this was only a partial acquisition2. This It seems therefore that the legal position customers, called the two “sides” of the aspect was important for analysing market regarding the need for market definition market. All media products (including power and control in the relevant market is clear, i.e. section 12A requires that radio, television and newspapers) and calculating concentration indices (see the market be defined for the purpose match advertisers on the one hand with Econex Research Note 12 for a discussion of assessing market power. The legal listeners / viewers / readers on the other of the MHHI concentration index). requirement for a market definition hand. Radio markets are a sub-set of The market for radio consists of the listener exercise leads to further economic media markets in general and all three market and the advertising market. The questions: should such a market groups of economists1 who appeared listener market is highly differentiated. be defined definitively (with exact in this matter accepted that these are Listener differentiation is a result of the boundaries) or can various versions of two-sided in nature. As stated by the regulated nature of South African radio the market definition be suggested by the Tribunal: “Radio stations compete on industry, as regulations create barriers 1. Econex was instructed by the merging parties, while Genesis Analytics appeared for AME and Johannesburg Economics for the Competition Commission. 2. In this merger transaction, Primedia and Capricorn were to acquire 100% of the remaining assets of NAIL (New Africa Investment Limited). As a result of this indirect acquisition of the 24.9% interest in KayaFM this merger became a notifiable merger. Although this merger would give Primedia the right to vote the full 24,9% , its economic interest in Kaya FM were to be less extensive, amounting to at most 18,17% of the station’s equity; the balance of the economic interest being held by another party, Capricorn. The merger therefore concerned the indirect acquisition by Primedia of a 24,9% equity stake in Kaya (over the management of which stake it will have a majority say) and a maximum indirect economic interest of 18,1% in Kaya. About ECONEX ECONEX is an economics consultancy that offers in-depth economic analysis covering competition economics, international trade, strategic analysis and regulatory work. The company was co-founded by Dr. Nicola Theron and Prof. Rachel Jafta in 2005. Both these economists have a wealth of consulting experience in the fields of competition- and trade economics. They also teach courses in competition economics and international trade at the University of Stellenbosch. Our newest director, Cobus Venter, who joined the company during 2008, is also a consultant economist at the Bureau for Economic Research (BER) in Stellenbosch. For more information on our services, as well as the economists and academic associates working at and with Econex, visit our website at www.econex.co.za. 2 Trade, Competition & Applied Economics RESEARCH NOTE 17 - FEBRUARY 2010 to entry into specific listener format: a substantial enquiry under section this matter, none of them emerged with licences are issued on the basis of radio 12(A) of the Act, it still chose not to a more probable version of the market stations serving differentiated markets3. define a market with exact boundaries. than the others. At best the economists The differentiated radio market in turn The Tribunal reasoned that due to the knocked holes into the more tenuous determines the nature of the advertisers complexities of the case, it was simply assumptions of their opponents, and so we that want to buy airtime from a specific not possible to come to a definitive can discount certain of the more border radio station. This means that both the position on the exact boundaries of the line theories of the relevant market, but listener and the advertising markets have relevant market. As mentioned above, we were still left with a middle ground, to be analysed, even if the potential the aspect of partial control was a further where consensus could not be found and monetary effects are only felt in the complicating factor. The Tribunal chose to on whose assumptions, wildly conflicting advertising market. analyse two of the scenarios proposed by notions of the extent of the concentration 5 A great deal of time and effort was O’Brien and Salop , i.e.