Tribunal approves Vitol and Engen merger which sees billions invested in SA

The Competition Tribunal (“Tribunal”) has approved the proposed merger wherein Vitol Emerald Bidco (Pty) Ltd (“Vitol”) intends to acquire Engen Ltd (“Engen”), subject to a set of competition and public interest conditions.

The Tribunal’s order follows a hearing in March 2024 during which it heard submissions from the Competition Commission (“Commission”); the merging parties; the Department of Trade, Industry and Competition (“the dtic”); Sasol South Africa (“Sasol”); Astron Energy South Africa (“Astron Energy”); the National Union of Metalworkers of South Africa (“NUMSA”); and the Chemical, Energy, Paper Printing, Wood and Allied Workers Union (“CEPPWAWU”). Following the hearing, the Tribunal requested additional submissions from the Commission, the merging parties, Sasol and Astron Energy.

Vitol Group is an independent energy marketing and trading company. It supplies and distributes crude oil, petroleum products and natural gas globally. In South Africa, through its subsidiary, it is engaged in the importation of crude oil and the wholesale supply of refined petroleum products to major oil marketing companies and independent wholesalers/resellers. Of relevance to the merger is that Vitol Group jointly controls the Burgan Cape Terminal, a storage and distribution facility in Cape Town.

Engen Group is an African-based energy group focused on the supply, distribution and marketing of petroleum products including, among others, petrol, diesel, lubricants and chemicals. In South Africa, it imports, supplies, and distributes refined petroleum products to the retail market. Of relevance to the transaction is that the Engen Group owns and leases storage facilities in Durban and Cape Town.

The Tribunal’s reasons for its decision will be issued in due course.

The Commission, which assesses large mergers and makes a recommendation to the Tribunal for a decision, found that the proposed merger raised various competition concerns:

• Customer foreclosure, as the Engen Group is a significant customer for locally refined petroleum products. They procure refined petroleum products from local refineries that include Astron Energy’s Cape Town refinery and Sasol’s Natref and Secunda refineries;
• The merging parties’ significant storage tank capacity in Cape Town and Durban together with Vitol Group's import capabilities, raising concerns that the merger may lead to locally refined petroleum products being displaced by imports, which would have a negative impact on the petrochemical industry and the remaining local refineries; and
• Potential information exchange concerns relating to the liquefied petroleum gas (“LPG”) market.

The Commission also found that the proposed merger raised public interest concerns, in particular the effect of the transaction on the promotion of a greater spread of ownership and the effect of the transaction on employment.

The Tribunal, after considering all of the submissions, has approved the transaction subject to both competition and public interest conditions. In summary, the conditions include:

Competition

Procurement from local refineries

Conditions are imposed in relation to procurement from Sasol and Astron Energy to addresses the customer foreclosure concern and the effect of the merger on the South African petrochemical industry.

Sasol - Engen and companies under its control will procure certain products from Sasol's Natref and Secunda refineries pursuant to a supply contract containing terms set out in the conditions. These terms include issues such as certain minimum procurement volumes, the contract term, pricing principles, and dispute resolution provisions.

Astron Energy - Engen will enter into a supply contract with Astron Energy in terms of which Engen will procure from Astron certain products produced by Astron Energy's Cape Town refinery on the terms and conditions set out in the conditions. The conditions relate to issues such as certain minimum procurement volumes, the contract term, pricing principles, and dispute resolution provisions.

Public interest

Transformation and ownership: ESOP

Within 6 months after the closing date of the transaction (the date on which the proposed transaction is implemented), Vitol shall ensure that Engen establishes a new evergreen/perpetual ESOP that will hold a fully voting shareholding of 5% in Engen Petroleum, which will be issued at a discount.

Within 5 years after the closing date, Vitol shall ensure the increase in direct B-BBEE ownership in Engen Petroleum by increasing the ESOP's 5% shareholding to 7%.

Within 7 years after the closing date, Vitol will facilitate the increase in direct B-BBEE ownership in Engen Petroleum by increasing the ESOP’s shareholding to 9%.

The ESOP shall be structured in accordance with the B-BBEE Codes and incorporate the following principles:

• The beneficiaries of the ESOP will be all full-time Employees of Engen Petroleum below senior management employed in South Africa;
• The majority of the qualifying employees will be black persons;
• Equal allocation (all qualifying employees treated equally in terms of voting and economic participation with no differentiation across Employee grades);
• The funding of the ESOP shall be fully facilitated through a notional vendor funding mechanism with a subsidised funding rate at a certain percentage of the South African prime lending rate;
• No upfront contribution will be required from employees to participate in the ESOP;
• A trickle dividend shall be paid to the ESOP on an annual basis comprising: (i) a minimum cash amount, escalated annually, for a 5-year period, on the anniversary of the commencement date of the ESOP at the inflation rate as published on the SARB's website www.resbank.gov.za from time to time, which shall be paid irrespective of Engen Petroleum's profit position; plus (ii) an amount (in addition to the cash amount) equal to a certain percentage of the ESOP's remaining dividend allocation over and above the cash amount, which amount is subject to the annual operational performance and profit generation of Engen Petroleum;
• The costs of establishing and administering the ESOP will be for Engen Petroleum; and
• The board of trustees of the ESOP shall consist of nine persons, appointed in the following manner: (i) the board of directors of Engen Petroleum shall appoint three trustees who are employees of Engen Petroleum; (ii) the beneficiaries of the ESOP shall appoint four trustees who are employees of Engen Petroleum; and (iii) the company trustees and the employee trustees shall select two independent trustees in a specified manner.

Employment

Headcount maintained: For a period of four years following the closing date, Vitol shall ensure that the total aggregate number of employees of Engen and its relevant subsidiaries and Vivo South Africa shall not fall below a determined headcount number.

No merger-specific retrenchments: Vivo and its subsidiaries shall not at any stage retrench any of its employees in South Africa as a result of the proposed transaction; and Vitol shall ensure that Engen and its subsidiaries shall not at any stage retrench any employees as a result of the proposed transaction.

If Vitol and its subsidiaries or Engen and its subsidiaries retrench any employee at any time from the approval date until the expiry of a period of three years from the closing date, the retrenchment will be presumed to be as a result of the proposed transaction, unless the employer can demonstrate otherwise.

Capital investment commitments

Engen shall, amongst several other commitments, spend a large amount of cumulative capital expenditure to maintain and grow Engen's operations in South Africa to ensure a modern and efficient business in South Africa.

Enterprise and supplier development, localisation and growth

To support local HDPs in South Africa, Engen will at least maintain its HDP Procurement Benchmark Ratio (Engen's total local procurement of goods and services from HDPs as per its B-BBEE Scorecard for non-fuel products) in respect of total local procurement from HDPs in South Africa. It will further use all reasonable endeavours to increase the HDP Procurement Benchmark Ratio and procurement of goods and services from SMEs.

Local procurement

Engen shall not decrease the current proportionate levels of expenditure on South African goods and services - not including fuels, lubricants and chemicals (i.e. products not originating from the refineries).

Procurement in South Africa and the promotion of South African exports

Vivo Energy shall increase its pan-African procurement of South African products and services, up to a specified value per annum.

Vivo Energy also undertakes that should it be contacted in writing by South African citizen owned companies that manufacture fast moving consumer goods in South Africa and wish to export such products to one or more African countries in which Vivo has a retail service station network, Vivo will make reasonable efforts to introduce such companies to a reasonable number of the owners of retail service stations in its network.

Other conditions

Engen will remain incorporated and headquartered in South Africa and remain a tax resident of South Africa.

Vitol will ensure a safe and dignified work environment for all employees in compliance with statutory health and safety standards.

A non-confidential version of the conditions will be available in due course.

Issued by:

Gillian de Gouveia, Communications Manager

On behalf of the Competition Tribunal of South Africa

Cell: +27 (0) 82 410 1195

E-Mail: GillianD@comptrib.co.za

Twitter: @comptrib