Mixed feelings on staffing merger
The proposed acquisition of South African staffing firm Kelly Group by rival Adcorp Holdings could be an opportunity for small players in the sector, but others worry the merger of the two biggest players could distort competition.
"This is not good from a market concentration point of view. It may lead to pricing and tender issues," says Primeserv Group CEO Merrick Abel.
Mr Abel says that although it is hard to predict the effect of this transaction on the industry, it is likely to cause price pressures in the short term. The combined group could leverage its scale to lower prices, which would hurt its smaller rivals.
Adcorp is the biggest player in the labour broking industry. Kelly is the second biggest in terms of market capitalisation. Analysts often look at these two to gauge the health of the staffing services industry.
But Workforce CEO Lawrence Diamond believes the tie-up could be an opportunity for smaller firms, as client companies generally prefer to use more than one service provider, so as to reduce the risk associated with relying on a single supplier. This means Adcorp and Kelly will be considered as one entity once the merger has gone through, which could help improve the fortunes of these smaller counters who have struggled to grow as listed entities.
The deal has been approved by Kelly’s shareholders and now awaits regulatory approvals. Adcorp is offering R2.50 a share for the 71% of Kelly it does not own after acquiring a 29% stake from Coronation Fund Managers in April.
Kelly CEO Gareth Tindall says the parties do not expect hurdles with competition authorities because there will be no retrenchments after the merger. Further, the two firms do not directly compete — Kelly mainly does white collar recruitment while Adcorp is heavy on blue collar staffing.
The merger is part of the consolidation of the labour broking industry, which is driven by economic factors and a changing regulatory environment.
"Macro economic conditions are placing financial pressure on smaller players who do not have the resources to service large clients during challenging economic times," says Mr Abel. The increasing regulation and administrative burden is forcing clients to look to larger service providers to ensure compliance.
Though the Congress of South African Trade Unions lost its bid to have labour brokers banned, the tightening of labour laws has been burdensome to small players. Compliance costs have resulted in several small providers having to shut down.
About 1,300 labour broking firms have reportedly shut down since 2010. Listed entities have also felt the pressure, as shown in the lacklustre performance of their shares.
The consolidation is expected to continue for five to 10 years, which means this may not be the last big merger in the industry.
"There’s still a level of fragmentation in the industry," says Mr Diamond.
Mr Abel says consolidation will require Primeserv to implement a growth strategy based on both organic and acquisitive activity so as to remain a significant player in the industry.
He admits that his group has underperformed as a listed counter over the past few years due to regulatory uncertainty, compounded by the difficult operating environment of its temporary employment service (TES) business.
Mr Abel says the tightening of labour regulations is both good and bad.
"Depending on the levels of enforcement, it may drive (out) unscrupulous and noncompliant providers from the market, thereby levelling the playing fields," says Mr Abel.
"It will have an impact on direct employment, with clients seeking to convert components of their permanent and in-house temporary labour force to outside full-service TES providers such as Primeserv in order to lessen the burdens and risks associated with managing staff within the new framework."
But it may lead to an overall reduction in employment with negative consequences for employees and ultimately the socioeconomic environment as a whole, says Mr Abel.