Ivor Powell
Shareholder agreements for the consortium that the South African Telecommunications Authority (Satra) has recommended for the third cellular license could make a mockery of the bid’s claims to promote black empowerment.
Analysis of the agreements and founding documentation submitted by the Cell C consortium in support of its bid shows that the bid’s South African – and in particular black empowerment – shareholders are likely to get the short end of the stick if the government endorses Satra’s recommendation.
The agreements show that the South African partners in the bid face the prospect of being bought out of the lucrative licence – for just one rand.
The Satra recommendation, which has already been mired in controversy, has yet to be vetted by the government, and is likely to come under attack in the next week as rival bidders lodge formal complaints against the decision or take Satra to court.
An endorsement of Satra’s decision could raise serious questions over the government’s frequently reiterated commitment to promote black interests through the awarding of the third cellular licence.
Satra’s recommendation – after 10 days of adjudication last month -flew in the face of advice contained in two independent expert reports, both commissioned by Satra. The two reports, by Afcent/CLC, a consultancy, and BDO Spencer Steward, a firm of chartered accountants, both found serious flaws in the company structure of the Cell C licence application, and both placed the consortium only third after rival bidders NextCom and Telia Telenor. The reports were commissioned at a combined cost of more than R3-million.
Both reports drew attention to the likelihood that South African shareholding in the Cell C consortium stood to be drastically diluted. They also highlighted the fact that South African and empowerment shareholders would largely be excluded from decision making in a board dominated by Saudi nominees.
Satra’s adjudication – as set out in a report submitted to the Minister of Broadcasting and Telecommunications Ivy Matsepe-Casaburri – contradicted the views expressed by the consultants in nearly every particular. According to the Satra report, the council’s decision was guided by the fact that Cell C’s “empowerment structure guarantees the non- dilution of the BEE (Black Economic Empowerment) component below 40%.”
But a reading of the company’s documents suggests that, far from guaranteeing the empowerment shareholding, the Middle Eastern backers of Cell C have secured shareholder agreements whereby South African shareholders could be out in the cold after 18 months.
Cell C chair Zwelakhe Man-kazana this week downplayed suggestions that the agreement could allow the Saudis to hijack the bid, claiming confidential submissions to Satra that secured the future of South African participation in the multibillion-rand deal.
Cell C is a joint venture between the Saudi-backed (though Lebanese owned) Saudi Oger, which has 60%, and CellSAf, a consortium of South African interests with 40%.
However, the South African shareholding has been entirely funded by bank loans underwritten by Saudi Oger. And according to the shareholders’ agreement, unless the South African shareholders are able to pay back those loans after 18 months, the bank guarantees lapse, and Saudi Oger, as the guarantor, would have to make good on the debts.
According to financial consultants BDO, the likelihood that the company would be generating sufficient revenue after 18 months to realise the high road scenario is, at best, remote. BDO also notes that, according to Cell C’s own projections “from 2000 to 2005 the company is technically insolvent, its net liabilities exceeding its assets”.
At this point, the shareholders agreement specifies the South African shareholders could list a proportion of their shareholding on the stock exchange, in order to make good on their debt to Saudi Oger. At least this is the theory. In fact, this listing of shares could only be realised with the consent of Saudi Oger – as a rider to clause 12.4 of the shareholders agreement makes clear.
This specifies that “if Saudi Oger is of the opinion that the listing, referred to in clause 12.4, will not be possible … then Saudi Oger will be entitled to secure its release from those guarantees by paying the banks the full amount owing to them by CellSAf at that time …”
Thereafter, the document continues, a trust would be created which “will have the right to acquire from CellSAf all its shares in and claims against Holdco (Cell C’s holding company), for a purchase consideration of R1.”
Next, Saudi Oger will seek partners “previously disadvantaged by unfair discrimination” to replace CellSAf shareholders. Failing this, other South African “entities” will be identified, in consultation with Satra, to buy the shares.
What this means is that any South African-registered company (whether foreign owned or not) could be eligible to pick up the CellSAf share – subject only to consultation with Satra. This could leave the cellular operator almost wholly owned by foreign interests – in violation of the government’s insistence on South African and empowerment participation.
Mankazana denied, in an interview this week, that the trust provision could lead to the dilution of South African interests. “Confidential documentation guarantees that shares will remain in black hands,” he said, but declined to divulge any details of how these provisions would operate.
Mankazana claimed that in the confidential, tranche of Cell C’s submission there were provisions allowing for other ways of redeeming black empowerment loans, and ensuring the survival of South African partners. Again he declined to elaborate.
Satra’s consultants also noted the relatively marginal position of South African shareholders, even within the initial 18 month period. In Clause 22.1 of the shareholders agreement, a specification is made that effectively prevents local stakeholders from ever being in the majority in executive decision making. The clause registers an agreement that only one of the six directors appointed by CellSAf need be present at board meetings to constitute a quorum – as long as the “majority of the quorum so present shall be directors appointed by OTM [the operating arm of Saudi Oger].”
This control is further reinforced by the fact that with his position as chair Mankazana – the board’s only representative of the formerly disadvantaged sectors of South African society – does not carry the right of veto, wheras the Saudi-appointed chief executive officer does.
Mankazana declined to comment on the sections of the shareholders agreement on the grounds that they should not have been in the Mail & Guardian’s possession. “We presented our corporate governance plans to Satra. I won’t go into specific clauses.”
A similar corporate marginalisation carries down to the 33 empowerment interests included in the bid. Of these, only eight hold sufficient stock in the company (5%) to even qualify for representation on the board. Among these are women’s groups as well as consortia of the disabled. Satra commented approvingly on the “range of empowerment groups” with an interest in the applicant.
Satra gave Cell C the thumbs-up after protracted conflict over the selection procedure for the multibillion rand bid, which included the eleventh hour recusal of Satra chair Nape Maepa from the adjudication process. Maepa, who had been targeted for a remote conflict of interest that he had declared, said he did not want to be part of a process that was biased towards certain bidders – a veiled reference to the alleged links between two other Satra councillors and bidders, including Cell C.