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Economy

Why regulator stopped Tuskys bid to acquire rival Ukwala

Ukwala Supermarket branch on Tom Mboya Street in Nairobi, branded with Tuskys signage in December. Photo/Salaton Njau
Ukwala Supermarket branch on Tom Mboya Street in Nairobi, branded with Tuskys signage in December. Photo/Salaton Njau 

Retail chain Tuskys Supermarkets’ takeover of rival Ukwala Supermarkets has been stopped and the two companies fined Sh5.3 million for engaging in restrictive trade practices.
The Competition Authority of Kenya (CAK) found that Tuskys, which is Kenya’s second-largest retail chain, broke the law when it struck a deal to manage Ukwala’s stores in April last year thereby interfering with workings of a free market.

“Preliminary investigation established that the arrangement amounted to a horizontal restrictive practice to the extent that it allowed Tuskys to set the prices and other trading terms of a competitor in addition to managing the three Ukwala stores, in terms of marketing and management systems,” the authority said.

Tuskys has until the end of the month to terminate the deal — meaning the retailer must end its control of Ukwala’s Ronald Ngala, Jogoo Road and Tom Mboya branches in Nairobi, including a reversal of the change of branding of the units.

Tuskys had initially taken charge of the Ukwala stores as part of a due diligence exercise that was to culminate in the acquisition of the entire business for Sh200 million.

The competition watchdog says it was not notified of the transaction until December 2013 and that since the two firms are in the same line of business, the takeover deal amounted to “horizontal restrictive trade practice.”

“The two businesses now have until June 30 to terminate the partnership,” said Lizz Ntonjira, the head of communications and external affairs at the CAK.

“Tuskys had invested in the three outlets and we thought it wise to give them enough time to get their house in order,” Ms Ntonjira said, adding that telling them to end the deal immediately would have meant closing down the outlets.

Tuskys, however, got a lifeline in the authority’s finding that it can apply afresh to acquire the Ukwala business.

Tuskys got into a takeover agreement with its rival seeking to consolidate its Nairobi business.

The two retail chains signed an agreement allowing Tuskys to acquire Ukwala’s stock, set commodity prices and even take over payment of staff in the three branches during the trial period.

Ukwala’s management also gave Tuskys permission to implement staff re-organisation and rebranding of the facilities, including the receipts issued at the central business district outlets.

The management teams of both retail chains consistently declined to comment on the matter.

On Tuesday, Anil Dhingra, the managing director of Ukwala Supermarkets, said he was not privy to the transaction when asked for a comment.

People familiar with the transaction, however, told the Business Daily that Tuskys had in fact “absorbed permanent staff and let go of the temporary workers in the three branches.”

The CAK said it was only informed of the transaction last December, forcing it to immediately initiate investigations into Tuskys’ alleged acquisition of over 50 per cent of Ukwala.

The watchdog also investigated whether Tuskys’ dealings with Ukwala would change control of the targeted retail chain, including powers to stop or determine board decisions of the acquired rival.

The law empowers the competition watchdog to cancel such transactions, have the directors jailed for five years or order payment of a fine not exceeding Sh10 million.

The authority can also impose a financial penalty equivalent of 10 per cent of the firm’s sales during the period in question.

Tuskys and Ukwala avoided the penalties with a plea to the authority that they were merely conducting due diligence with the aim of eventually buying out the business.

Tuskys contested media reports that a takeover plan had been agreed, insisting that this was to happen upon discovery that Ukwala was a viable business to invest in.

The regulator did not buy the argument and ruled that the arrangement was in breach of the Competitions Act.

In reaching the decision to fine the two retailers Sh5.3 million, the authority said it considered that the irregularities only occurred in three branches for a period of nine months – April to December.

The CAK also said it had chosen a negotiated settlement of the matter to avoid a lengthy litigation process.

The Sh5.3 million amounts to 0.1 per cent of the turnover of the three stores over the period of breach.

“The authority further took consideration of the need to incentivise acceptance by the firms of the new competition regime and settlement with the authority rather than lengthy litigation, which may derail its focus of working for more competitive outcomes within the shortest time,” said the CAK.

The competition watchdog said that had the two retailers failed to cooperate, and opted to fight it out in court, they  risked paying a Sh53 million fine.

Until the recent change in the law, market malpractices in Kenya attracted a maximum fine of Sh200,000 or a jail term of up to three years, a light sentence for firms whose annual turnovers are in excess of Sh1 billion.

Tuskys, which has about 50 branches nationwide, reported sales of Sh25.2 billion in 2012, making it the second-largest retailer after Nakumatt.

Players in the market reckon that Tuskys’ bid for Ukwala’s business is informed by the need to consolidate its market share ahead of rivals.

This need has gathered pace over the past two years with cash-rich foreign firms indicating that they are keen on entering the Kenyan retail market that is attracting heavy investments.

South Africa’s Massmart is expected to enter the Kenyan market before December next year with its own unit after talks to buy a majority stake in Naivas collapsed.

Nakumatt, the market leader, has been considering selling a significant stake to a foreign investor to help support its expansion across East Africa and was recently given the go-ahead to buy out three Shoprite stores in Tanzania.

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