Total South Africa’s equity partnership — the last black empowerment deal involving the “big five” oil companies —marks a milestone, but poses new questions for the liquid fuels industry.
In a move coinciding with the unveiling of its new logo on Monday, Total announced the acquisition of a 25% stake by the Total South Africa Consortium (Tosaco), in a transaction believed to be worth R900-million.
Tosaco comprises 12 groups of empowerment players, including Amafutha International Company, Capital Oil, the Disability Empowerment Concerns Trust, Lekoane African Energy, SouthBase Investment Holding and Umnotho weSizwe Investment Holdings.
Key players in the consortium range across the black intellectual elite and include well-known black business personalities. They include Penta Publications CEO Pearl Mashabela, Denel chairperson Danisa Baloyi, poet Duma ka Ndlovu, Sowetan editor-in-chief Aggrey Klaaste, photographer Alf Khumalo, Herdbuoys founder and African Merchant Bank deputy chairperson Peter Vundla, Unisa vice-chancellor Barney Pityana and businessmen Letepe Maisela and Sam Mosikili. The face of the consortium is Zamani Jali, SouthBase chairperson.
One of its members, Mavuso Msimang, is a director of more than 10 companies, including Grintek, Massmart Holdings, the KwaZulu-Natal Airport Initiative and Tiso Capital. Former Diamond Board chairperson Gibson Thula is listed as a director of no fewer than 40 concerns spanning the leisure industry, casinos and outsourced state pension payouts.
Asked whether the deal fulfilled the requirements of “broad-based empowerment”, Total business development manager Morakile Shuenyane said the disability trust represented 6 000 beneficiaries. Other consortium members also had trusts as shareholders.
Criteria for the inclusion of members included their business track record and their “consciousness” about community development and social responsibility, Shuenyane said.
Total joins Engen, Shell, BP and Caltex in having fulfilled, or almost fulfilled, the ownership target of the sector’s empowerment charter. Adopted in November 2000, the charter requires 25% black ownership by 2010 across all operational areas.
Colin McClelland, director of the South African Petroleum Industry Association, welcomed the deal, which had taken a year to engineer, while noting the major challenges ahead.
“The [petroleum] industry is a leader in transformation,” he said. “When we adopted the charter in 2000, some said it was not the way to go. Now other sectors are doing it.”
Minister of Minerals and Energy Affairs Phumzile Mlambo-Ngcuka praised the industry as “new and open” when the South African Petroleum Industry Association presented its annual report last month. McClelland underscored as major challenges human resources development and affirmative procurement.
There are chronic skills shortages across the industry, particularly in specialised areas. Shell SA has undertaken to move blacks into 70% of senior management posts by 2005. On procurement, McClelland noted the powerlessness of the industry. “In some areas of supply, there are no empowerment players.” The only solution was to press suppliers to absorb more blacks or help set up new entrants.
Given the value of the industry — R12-billion at the time of adopting the charter — funding is a critical challenge of empowerment.
Chris Morris, a director at transaction adviser PricewaterhouseCoopers, noted that the Total deal incorporated a device to limit risk. Many of the early empowerment deals foundered when anticipated revenue flows, needed to repay debt, did not materialise.
Morris said Tosaco had paid the purchase price up-front with the help of Nedbank.
Debt would be settled from operations, with Tosaco effectively controlling 200-million litres of fuel a year. It will have 100% economic interest — that is, right to operating cash flow —in a new company called Total Commercial Services (TCS), in which it will own 75,1% of the equity.
The company will be involved in all areas of the value chain, procuring crude oil and transferring it to the Sasolburg Natref refinery, which Total co-owns with Sasol. TCS will then be a wholesale distributor of refined products.
Over 10 years the consortium will settle with the lenders and convert its stake into ordinary shares. Total will provide its long-term contracts and technical support. Eventually TCS will be integrated back into Total, with Tosaco holding a quarter.
The biggest risk McClelland foresees to cash flows required to pay back loans are margins and future investments. Margins are determined as the difference between crude oil prices and product prices, and are regulated by the Ministry of Minerals and Energy Affairs.
As for investments, the biggest challenge is the drive for clean fuel. South Africa has committed itself to total elimination of leaded petrol by 2006 and to lowering the sulphur content in diesel from 0,3% to 0,05% on a weighted basis. This will require a R10-billion investment by the industry.
When it reviews empowerment deals in liquid fuels, the ministry will have to decide how important it is for empowerment partners to be based inside operations.
In the case of the “big five”, the partners are integrated into the businesses and sit on their boards. However, Sasol offers strategic support and holds 20% of Exel, a separate entity. Next year it will compete with Exel when the latter enters the retail market.
The decision by the “big five” to have empowerment partners buy into established companies was propelled by the economics of the sector.
Previous empowerment initiatives based on multiple small concerns were found to be unviable. The structure of the industry is one of rising long-term costs where size matters and the most viable option is a few large entities.
This partly explains why Afric Oil, formed by Caltex, and Bambanani, formed by Highveld Petroleum, were not viable. Afric Oil was bought by Worldwide Africa Investment Holdings, which has since acquired 20% of Engen. Bambanani became Tepco after being purchased by Thebe Investments. Thebe then bought 25% of Shell Marketing SA.
A deal without a third party was that involving BP Southern Africa. In August 2001 the Mineworkers Investment Company (MIC) acquired 17,5% of the British outfit, while a further 7,5% was acquired by the Women’s Development Bank Investment Holdings.
Keeshan Pillay, MIC’s executive director, said the London parent, BP plc, carried the deal on its balance sheet on favourable terms “to avoid value leakage through interest costs”. Pillay added that in paying off the loan the MIC “would like to see a bit of cash”. This was because it was wholly owned by the Mineworkers Investment Trust, to which it repatriates returns on investments. The parties agreed to a five-year lock-in clause to avert the temptation to exit in order to extract value.
The consortium has three seats on the BP board and chairs its transformation committee.
The empowerment players also hold 25% of BP Commercial and Industrial, the wholesale arm of the operation.