Simon Segal and Andy Brown
The chips are down for leading black empowerment companies in the wake of the stock market crash. There are fears that many will not be able to repay their loans because their stock prices have declined and they are being crippled by high interest rates.
Rate hikes could also cripple new deals because the price of money makes finance more and more difficult to come by.
Some R20-billion has been wiped off the value of the 28 black-controlled firms monitored by the BusinessMap consultancy in July, with their market capitalisation plummeting by nearly one- third from R67,8-billion to R48,3- billion.
Black firms seemed more likely to rise in the bull run – many recently outperformed the Johannesburg Stock Exchange (JSE) – but now they appear more likely to plunge further than some of the more established listed companies.
The overall record of black companies on the JSE indicates that their performance may have been premised on what now appear to have been unjustified expectations.
Among the black controlled firms, the steepest declines have been at Maxtel, Infiniti, and AM Moolla. Of the larger firms, Metlife is 58% off its peak, wiping R8,2-billion off its value – the largest value plunge on the BusinessMap table.
Johnnic and New Africa Investments Limited (Nail) are now capitalised above Metlife, but Nail is also 58% off its peak. The plunge in each of the main firms in the Real Africa group – African Life, Real Holdings and Real Investments – is about 50%.
The only black-controlled firm to hold up reasonably well is Harvest Securities.
The plunge has had a severe impact on the financing of many of the black economic empowerment deals, and some have now been left dangerously vulnerable. Typically, most prominent empowerment groups are extensively geared (they have high debts) against a few large investments. In many cases, these are on the currently shaky JSE.
Combined with the continuing high interest rates, it will now be increasingly difficult to service the debt on these investments and black ownership is in jeopardy.
The impact may not be felt immediately, but many of these deals will be open to scrutiny upon winding down of the funding structures. For example, the National Empowerment Consortium (NEC) has until 2001 to pay for its Johnnic shares. It bought them at R50,75, but they are now only worth R43,25c. Analysts believe that the share price would have to double at least for the NEC to pay off its debt to the financial institutions which underwrote the deal.
Some speculate that, as a result, many deals, such as the NEC’s acquisition of a stake in Johnnic, will have their black shareholding significantly reduced.
Much will depend on how the financiers will respond to proposals for the re- engineering and restructuring of various empowerment-related debt obligations.
If any lesson is learned from the JSE decline, it is that much of what we see as black economic empowerment stands on a vulnerable footing. The levels of gearing (debt) involved in the deals, as well as the investment strategies played out by all parties concerned, must be held to blame for some of these problems.
For black empowerment to succeed, ways of cushioning the negative impacts of the market through clearer investment strategies and mechanisms of investment must be found. Changes in lending also seem likely to prompt changes in empowerment financing strategies.
In the past year, financial institutions have moved away from the financial “discount” approach. With the high cost of money, it will now be even more difficult for empowerment groups to access finance.
The rigour with which financiers can now be expected to approach empowerment should be matched equally by efforts to develop new and innovative financing mechanisms aimed at encouraging a different, deeper brand of empowerment.
But realisation of this will likely depend more on global equity market considerations than on the merits of individual firms at home.
Meanwhile, those empowerment firms heavily exposed as a consequence of “betting” on the JSE via the use of preference shares to finance their activities will be waiting anxiously for the market to improve.