IN THE COMPETITION TRIBUNAL OF SOUTH AFRICA

Transcription

1 IN THE COMPETITION TRIBUNAL OF SOUTH AFRICA In the merger between: CC CASE NO.: 2011DEC0429 KENILWORTH RACING (PTY) LTD Primary Acquiring Firm AND GOLD CIRCLE (PTY) LTD Primary Target Firm CC CASE NO.: 2011DEC0427 In the merger between: THE THOROUGHBRED HORSERACING TRUST Primary Acquiring Firm AND KENILWORTH RACING (PTY) LTD Primary Target Firm WITNESS STATEMENT CHARLES SAVAGE Introduction 1 I am the Chief Executive Officer of Purple Capital Ltd ( PC ), and have

2 occupied this position since Prior to that, I was the Chief Executive Officer of Global Trader. 2 Purple Capital is a licensed financial services company which is listed on the JSE Limited. Purple Capital comprises two operating areas, trading and advisory. Global Trader and Powerbet cover the retail market, whilst Purple Capital Corporate Finance and Purple Capital Treasury service the institutional and corporate client base. 2.1 Global Trader is a full service broker that specializes in online derivatives trading for retail investors. 2.2 Purple Capital Corporate Finance provides advisory services in respect of mergers and acquisitions, capital raising, listings and delistings, BEE transactions and valuations. 2.3 Purple Capital Treasury provides treasury management solutions, with particular focus on foreign exchange, to a variety of corporate clients as well as providing foreign exchange travel solutions to retail customers. 2.4 Voltbet, operated by Powerbet, is an online sports betting platform. Voltbet trades under a bookmaker's licence issued by the Western Cape Gambling and Racing Board. Voltbet conducts business throughout South Africa with its bookmaker s licence. 2

3 GENERAL 3 The proposed transaction needs to be assessed in the context of an industry which is currently to a large extent controlled by the race-course operators, Phumelela and Gold Circle. These parties, and especially Phumelela (whose shareholding is itself dominated by industry stakeholders), are primarily responsible for the regulation, control, funding and operation of the horse-racing industry in South Africa. They are also involved at almost all levels of the industry, from the ownership of racecourses, fixtures, training facilities and event rights, to monopoly control of television rights through the Tellytrack channel, to very considerable influence over horse betting through control of the tote and commingling, and participation in bookmaking operations around South Africa. 4 Phumelela, and to a lesser extent Gold Circle, therefore has enormous influence over those who are dependent upon horse-racing for their wellbeing, including owners, breeders, trainers, grooms and others in the horse-racing industry, and also persons in related industries such as horse betting. 5 The degree of concentration in, and barriers to entry into, the horse-racing industry in South Africa are therefore already extremely high, and will be raised even higher if the present transaction is permitted to proceed, and Phumelela effectively acquires control of Gold Circle Western Cape. 6 From a horse-racing perspective, there has to date between effective competition between Phumelela, Gold Circle Western Cape and Gold 3

4 Circle KwaZulu-Natal. This is so notwithstanding that the latter two entities, previously wholly separate entities, are currently under a common ultimate shareholding structure. The competition between Gold Circle Western Cape and Gold Circle KwaZulu-Natal now appears to have reached a point where the two entities are no longer able to continue in the same shareholding structure, and they wish to secure complete independence from each other. 7 However, whilst this separation would itself be very positive for the future competitiveness of the South African horse racing industry, the second part of the proposed transaction entails Gold Circle Western Cape effectively being acquired by Phumelela. Thus, instead of an outcome which has the prospect of increasing competition in the South African horse racing industry, the proposed transaction will have the very opposite effect, namely to reduce the number of effective competitors from three to two, and permanently to entrench their dominance in the industry. 8 If, therefore, the proposed transaction is permitted to proceed, the prospects of any competition being introduced into the industry in the future will to all intents and purposes be nullified. 9 As regards horse betting, Phumelela has already exploited its control of the horse-racing industy and the tote in order to benefit its own operations at the expense of actual and potential downstream competitors. Examples of this are referred to below. Purple Capital apprehends that the incentive and ability of Phumelela to engage in such conduct will be heightened further as a result of the proposed transaction, especially in the Western 4

5 Cape. RACE-COURSE COMPETITION 10 Race-courses in South Africa compete with each other for horses and events. In particular, the decision by owners and trainers as to where to stable and race their horses is affected by the events and stakes offered by different racecourses around the country, as well as the facilities on offer. The greater the stakes, and the better the stabling and training facilities, offered by racecourses in different areas of South Africa, the greater the prospect of trainers and horses wishing to domicile their horses in those areas. 11 The quality of horses that a racecourse is able to attract to its races has a material impact on the the extent of interest and betting that it is able to attract from punters. It is therefore important for racecourses to provide the most attractive stakes and facilities that they can to owners and trainers, so as to attract the highest quality horses to their races, and thereby maximize attendance and betting revenue. 12 It should be borne in this regard that racecourse operators such as Phumelela and Gold Circle control the major stabling and training facilties in the areas of their respective racecourses. 13 The value of competition between provinces is reflected in the emergence of new and innovative changes to thoroughbred sales in the Western Cape, through the establishment of the commercially-operated Cape Thoroughbred Sales (CTS). The dominant sales organisation in South 5

6 Africa, Bloodstock SA (BSA), has historically sponsored a race in Gauteng for thorougbreds purchased from it in a Ready to Run Sale in that province. The prize money offered by BSA was R2 million. CTS recently established a similar offering in the Western Cape, matching the prize money offered by BSA. In response to this, BSA has now increased its own prize money to R2.5 million. As a result of this competition, there is more choice and better products and services for the buyers (owners) and sellers (breeders) of thoroughbred horses in South Africa. This was obviously a very positive outcome for owners and breeders. 14 The horse population in a region also affects the number of fixtures that can be offered. As a result, increased stakes also impact on other revenue sources such as direct racing revenue (attendance, entry fees, stabling fees and race sponsorships), fees earned through media rights (sold locally and internationally) and betting opportunities and turnover (for instance international commingling on SA racing events). 15 The premier racing areas (namely Gauteng, Kwazulu-Natal and the Western Cape) also have feature race seasons where particularly high stakes and sponsorships attract top horses which are domiciled in other parts of South Africa. The length and quality of the feature season similarly has an important impact on the racecourse revenue items outlined above. 16 Decisions regarding the period of race seasons and fixtures in the different racing areas are largely determined by a process of negotiation between Phumelela and Gold Circle. If Phumelela acquired control of Gold Circle s Western Cape operations, there would be a significant shift in the balance 6

7 of bargaining power in favour of Phumelela, and it would more easily be able to sway programming decisions to meet its own strategic interests. 17 The Western Cape is one the country s three premier racing venues with world-class events such as the J&B Met. However, to remain a premier racing venue, the Western Cape racing programme needs to ensure that its stakes and facilities remain competitive with the stakes and facilities offered in other parts of the country, such as Gauteng and KwaZulu-Natal. 18 This is one of the proposals that Purple Capital has made in its discussions with Gold Circle regarding both its Kwazulu-Natal and Western Cape operations. In terms of those proposals, Purple Capital would bring in investors and restructure the business along more commercial grounds but control would ultimately remain with Gold Circle and its stakeholders. The initial discussions between the parties were in respect of Gold Circle s operations in both the Western Cape and KwaZulu-Natal, but Purple Capital has indicated a willingness to structure separate deals for Gold Circle s operations in the two provinces. Indeed, as soon as Purple Capital learnt that Gold Circle Western Cape sought to separate and enter into its own arrangements with outside parties, I approached Gold Circle Western Cape to indicate Purple Capital s interest in making an offer to it. However, I was informed at the time by Mr Bloomberg of Gold Circle Western Cape that Purple Capital s approach was too late. 19 As a result, the proposed acquisition of Gold Circle Western Cape by Phumelela was not the product of an open, transparent or competitive process, nor is it the case that Phumelela is the only party interested in 7

8 investing in Gold Circle Western Cape. The reason given by Mr Bloomberg for not considering Purple Capital s approach is also questionable given that Purple Capital committed to make a formal proposal within six weeks, and the present proposed transaction was only signed off more than six months later. 20 Purple Capital believes that racing in the Western Cape (and Kwazulu- Natal for that matter) could be made considerably more attractive and competitive by increased investment in stakes and facilities. To that end, Purple Capital is currently engaged in commercial discussions with Gold Circle that, if successful, would see a consortium led by Purple Capital making a significant investment in stakes and infrastructure in Gold Circle over the next few years in order to increase the competitiveness of Western Cape and Kwazulu-Natal racing. HORSE BETTING 21 Horse betting in South Africa requires distinct bookmaking skills. In particular, it is necessary to have specialist insight into such matters as the track record and form of racehorses and knowledge regarding trainers and owners, which takes considerable time and experience to acquire. In addition, a bookmaker needs effective marketing in order to build its client base. 22 As a result, the barriers to entry into horse-race bookmaking in South Africa are high. Indicative of this is the fact that a large United Kingdom-based 8

9 bookmaker, Victor Chandler, entered the South African market but closed within a brief period after sustaining losses. 23 Horse betting in South Africa is less competitive than other forms of sportsbetting, and the margins are higher. Sports betting has a much greater international component than does horse betting, which ensures that the odds offered are highly competitive. 24 The odds in horserace bookmaking in South Africa are largely determined by large bookmakers such as Marshalls, Hollywood Bets and Betting World. Smaller bookmakers tend to follow the lead of the large bookmakers in the odds that they set. The odds available in respect of other forms of sports-betting are not taken into account in the setting of odds for horseracing in South Africa. 25 The odds available on the the tote do however impact on the odds provided by bookmakers (and vice versa). The more favourable the odds available on the tote, the more favourable are the odds that bookmakers must provide in order to retain the business of punters, and vice versa. 26 Phumelela and Gold Circle currently pool their individual tote pools nationally in terms of a commingling agreement. However, the current commingling agreement restricts the incentive of Gold Circle to develop its online platform and to compete more vigorously for online customers. This is because all online (and telebet) revenues derived from the national pool as a whole are divided according to a fixed formula and not according to the actual contribution of each individual tote. 9

10 27 If there were scope within the commingling arrangement for Gold Circle to operate as a host tote (earning the host tote fee) in respect of its own events, including new sports and horserace betting products, that would incentivise more product innovation by tote operators. 28 In general, Gold Circle could be more competitive in respect of its betting operations by investing more in its betting infrastructure and innovating more in terms of betting products. These are just some of the proposals Purple Capital has put forward to Gold Circle in respect of discussions around developing the business. 29 Apart from the fixed odds that they offer, bookmakers also offer the open bet. The open bet is a bet that is offered by bookmakers using the official tote dividend as the indicator of the payout. Phumelela is strongly opposed to the open bet on the grounds that it detracts from the size of the tote pool, and has taken active steps to prevent bookmakers from offering the open bet. 30 In contrast, Gold Circle appears more willing to engage with bookmakers in respect of the open bet and to incentivise them rather to place such bets directly on the tote. For example, Gold Circle proposed giving bookmakers a higher tote agency commission in return for placing bets directly on the tote, but I understand that that proposal was vetoed by Phumelela. 31 Phumelela has also required that Voltbet agree, as a condition for integrating its systems with the tote, not to accept the open bet. 32 Phumelela has also refused to entertain sponsorship proposals by Voltbet 10

11 for races at Phumelela racecourses, such as the Charity Turn Challenge. I can only assume that this is because of Voltbet s positioning to enter into the horse racing market (including both betting and race courses) in competition with Phumelela. 11