The proposed acquisition of Warbler Holdings (Pty) Ltd together with its subsidiaries IT4Africa (Pty) Ltd, Goldtech (Pty) Ltd, Healthwest Africa (Pty) Ltd and Solid Logistics (Pty) Ltd by Bluehearts (Pty) Ltd has stirred controversy and sent shivers in the retail market, with objection from different quarters. Sefalana Group drew first blood on Monday presenting arguments supporting their rejection of the transaction by the Competition Authority. Below, we reproduce their reasons and a response from Ramachandran Ottapathu, the sole Director of Bluehearts (Pty) Ltd.
Conflict of interest arising from common ownership
• Bluehearts (Pty) Ltd is solely owned by Mr Ramachandran Ottapathu. The acquisition would give Mr Ottapathu control over the affairs of IT4 Africa (Pty) Ltd, Goldtech (Pty) Ltd, Healthwest Africa (Pty) Ltd and Solid logistics (Pty) Ltd (“the Targets”) and therefore its dealings with its customers.
• Mr Ottapathu is the Chief Executive Officer of the Choppies group which holds a dominant position in the Fast Moving Consumer Goods sector in Botswana and is therefore a direct competitor to Sefalana. This group under the direction of Mr Ottapathu would be able to procure products such as electronic equipment from the Targets which in turn would be owned and controlled by Mr Ottapathu.
• Mr Ottapathu has a significant personal ownership stake in the Choppies group. This along with his position as CEO of the Choppies group gives him the ability to significantly influence the affairs of that Group and its dealings with its suppliers.
• Sefalana currently procures a wide range of products from the Targets and has done so for a number of years. These include brands such as Samsung and Hisense. Sefalana has a Samsung Store in Store department in two of its stores where a large range of Samsung products are sold in our flagship store and is supplied by the Targets. We have built up a strong relationship with our supplier (the Targets) and our customer base who has become accustomed to Sefalana offering a wide range of electronic products at competitive prices.
• The common control conflict which would arise from the proposed transaction would enable Mr Ottapathu to offer Choppies better and preferential deals on products currently sourced from the Targets by Sefalana.
• Such structure would also enable Mr Ottapathu to gain personally from both the supply of the products (by the Targets) perspective and also the sourcing of the products (by Choppies). This could potentially be at the expense of the shareholders of Choppies who rely on Executive Management to ensure strong Governance structure is in place that fosters fair, transparent and equitable trading and transacting. There would be significant risk of breach in this regard.
• The proposed transaction and therefore the implied ownership structure would also result in conflict of interest in as far as Mr Ottapathu would need to ensure that neither his own company nor Choppies would be advantaged or disadvantaged at any point in time as a result of this conflict. We would argue that being able to achieve this effectively is impossible.
• Such structure would manifest a monopolistic position over time and would not allow Sefalana and Choppies to compete on a fair and level playing field.
Access to sensitive competitor information
• In the event that the Propose Transaction is allowed to be completed, Mr Ottapathu would be a supplier to our Group, and would therefore have access to, and influence over the pricing offered to us. Mr Ottapathu would have access to the promotional calendar, and would be privy to the items that are being promoted, the cost of the items that are being sold to us and the discounts applied.
• Access to this information will enable Mr Ottapathu to unfairly counter the promotional activity in our outlets by running promotions in his Choppies at preferential terms.
• We are of the view that we could be prejudiced on pricing as it would not be improbable that preferential offers are directed to the businesses in which he has common stake.
• The same argument would apply in times of short supply where available product would be directed to his businesses in priority to ours.
• It is not uncommon for large discounts to be applied to products that are being discontinued to make way for new models. We believe that these may not be passed on to us or that the best deals would be passed on to Choppies.
• It is important for retailers to be seen as the trendsetters and to have the latest product lines available for their customers. We are of the view that new product launches will not be done fairly and that these will be channeled into the businesses where Mr Ottapathu has a stake in priority to his competitors.
• One of the target businesses is the sole supplier of Hisense products in Botswana, and we are therefore not able to purchase this product from another source within Botswana. We would therefore be at the mercy of a dominant shareholder of a competitor business. This may result in us having to discontinue the sale of these products in our stores. This would naturally result in the need to reduce overheads currently dedicated to the sale of these products in our stores. The largest overhead in this regard would be payroll costs.
Anti – competitiveness
• Our competitiveness in the market is largely determined by our ability to source products at the best prices so that we can offer a wide range of products at market related prices to our customers. We belive that our largest competitor will not allow us to do this effectively and this would compromise our position in the market.
• We have consistently worked with our suppliers to grow and develop their brands in our businesses for our mutual benefit. As noted above, we have two Samsung Shop in Shop concept stores in our business and have strived to grow the brand and its presence over the years. We have grown a client base around our offerings in our outlets and believe the Proposed Transaction will severely affect our ability to remain competitive in this sector and may unfairly advantage our largest competitor who is already a dominant player in the market.
Ottapathu's response to Sefalana
• The whole literature is based on assumptions and presumptions and fear, not based on any facts on the ground.
• Choppies do not sell any electronics or household equipment. I cannot just start selling these products in Choppies just because I am a shareholder in both companies.
• Refer to Choppies annual reports it clearly states that Choppies is a mass grocery retailer that itself clearly states its objectives.
• There is no exclusive contract in any of these companies and many retailers are bringing these products at better prices from other sources this also confirmed by Mr Kampmann in the hearing that all these products can be sourced cheaper from outside .
• These are multi national brands with properly structured pricing and margins there is no room for maneuvering in this category.