Black Economic Empowerment (BEE) is entering a new era. The ANC government, having internalised the criticism that ‘enrichment’ is a more appropriate term for the first phase of the process that promised a redistribution of wealth and a redress of apartheid’s economic imbalances, now wants an inclusive form of capitalism.
Evidence of government’s fresh position is apparent in two documents: the Broad-Based Black Economic Empowerment Bill (soon to become an Act), and a curt 34-pager entitled ‘South Africa’s Economic Transformation: A Strategy for Broad-Based Black Economic Empowerment’ (or simply ‘the strategy document’). A key objective of both is that the use of special purpose vehicles – whereby a black consortium uses borrowed cash to acquire shares in a listed company and, assuming the price rises, sells part of the stake to service the debt – be phased out.
Leading empowerment consultant Mannie Hirsch says of the lingering fallout from BEE’s early stages: ‘We’re trying to build capitalists out of people who don’t have capital.” For its part, the strategy document concedes that the flaw in the financing method was revealed in the market volatility of 1997, which left many new black business owners highly indebted. The document also states that while these deals ‘provided empowerment with a high profile and brought forth a new generation of business leaders,” there was ‘limited success in bringing about a substantial increase in the number of black people owning, controlling and managing significant and important parts of the economy.”
The problem is addressed in the strategy document’s ‘scorecard’. If government manages to close the gap between the policy and its implementation, Hirsch says, private sector companies will soon be measured on whether (and how) black equity ownership benefits a constituency beyond the individuals involved.
Importantly, media’s place in this policy is under the spotlight: while it looks unlikely that government will call for a charter similar to the mining industry’s, media is identified in the strategy document as a ‘priority sector”. Further, media company New Africa Investments Limited (Nail), established in 1993 with a10 percent equity stake in financial services giant Sanlam, is held up in the document to illustrate first phase BEE’s ‘problematic corporate structures.”
The question, then, is the extent to which some of South Africa’s high profile media corporates differ from Nail. Looking to those entities that, like Nail, promote their own empowerment credentials, and looking in the same neighbourhood as Nail (listed entities with broadcast assets as a primary source of revenue), the evident examples are Primedia and its shareholders the Mineworkers Investment Company (MIC); Kagiso Media and shareholders Kagiso Trust; and – although a delisting is imminent – e.tv and shareholders Hosken Consolidated Investments (HCI).
As financial news website Moneyweb puts it, Primedia chairman Paul Nkuna is a ‘committed socialist” who has lost none of his 1980s militancy. A former schoolteacher, miner and unionist, Nkuna comes to the Primedia board through MIC’s 19,5 percent equity stake in the company. Kuben Pillay, chief executive of Primedia’s Adco division, has a similar unionist history. .
‘MIC came in very much during phase one [of BEE],” says Pillay, pre-empting the question of the investment company’s history and objectives. ‘It was specifically set up to capture the broad-based model of empowerment, so it’s not as if it’s something that came about as a consequence of phase one.”
Pillay asserts that in 1995 MIC entered the same space as listed media entities Nail and Rail (Real Africa Investments Limited), and was established as an alternative to these models, which were primarily driving opportunities for black entrepreneurs.
Nkuna, clarifying the circumstances that led to MIC’s establishment, points out that in the mid ’90s there were two major problems facing the National Union of Mineworkers (NUM). Firstly, he says, the union’s constituency were amongst the lowest paid in the country (better compensated, only, than domestic and farm workers), so there were minimal resources to assist family members with things like university tuition fees. ‘Secondly,” says Nkuna, ‘we had a situation where the workforce was being retrenched. We knew for a fact that they wouldn’t be employed in other industries, and we had to begin to retrain them to do something other than mining.”
To address these issues, the NUM founded the Mineworkers Investment Trust in June 1995 and pledged R3 million from its surplus cash pile as the initial funding. MIC, 100 percent owned by the trust, was incorporated at the same time to generate sustainable revenue for social programmes that would reduce illiteracy and reskill miners in the event of redundancy.
The uniqueness of the model, says Pillay, is that ‘it wasn’t driven by a number of entrepreneurs taking equity interests in empowerment for themselves.”
‘There are no individual shareholders in MIC,” he stresses.
As for MIC’s interest in media, Pillay points out that in 1995 the investment company was Primedia’s empowerment partner in the bids for old SABC radio stations Highveld and Kfm. At the height of the market boom in early 1997 – after MIC had taken an equity stake in Primedia’s radio assets – its net asset value sat at over R1 billion. The decision to cash in some of its investment assets enabled MIC to acquire shares in the top-level listed Primedia vehicle, in 2000.
According to Nkuna and Pillay, this last point substantially differentiates MIC from the first phase empowerment groups that utilised special purpose vehicles to fund share purchases. To date, MIC has put down R100 million of its own funds for its 19,5 percent shareholding of Primedia’s ‘ordinary’ listed shares.
Although Pillay volunteers the information that MIC’s joint control of the Primedia voting pool is, at 35 percent, substantially lower than its equity interest, he says: ‘There is a premium to be paid for BEE investment in your company, and you recognise that premium through leverage in terms of voting interests.”
Nkuna adds a fundamental point: ‘The fact that we have [joint] voting rights does not make us feel we can relax and not do anything. We have started working towards increasing our economic interest to gradually come to a level where it actually matches our voting interest.”
Kagiso Media’s empowerment story is similar in content to Primedia/MIC’s, although, as Kuben Pillay readily admits, it is even closer to the broad-based BEE ideal. With stakes in East Coast Radio, Jacaranda, Ofm and radio sales house Radmark, Kagiso Media is 44,5 percent owned by Kagiso Trust Investments.
The Kagiso Trust, established in 1985 as a non-governmental organisation to channel funds from the European Community into the anti-apartheid movement, had to become self-sustainable with the onset of transformation, and so Kagiso Trust Investments was formed in the early ’90s. Since 1986, the Kagiso Trust has injected more than R1 billion of grant funds into development projects in training, health, education, small business and agriculture.
Roger Jardine, Kagiso Media’s CEO, says it’s ‘important to remember that the trust was created before the company.” Although Kagiso Media is the only listed entity in the Kagiso group (amongst a number of financial services companies), Jardine says ‘special purpose vehicles were not used, so the company has no debt.”
In terms of the broader structure, Kagiso Trust Investments is 55,43 percent owned by the Kagiso Trust. In turn, the majority of the owners of the Kagiso Trust are people in South Africa’s rural areas, the remainder being held by social programmes and development projects. Bringing that down to Kagiso Media’s empowered equity interests, around 24 percent of the entity’s direct shareholders are the rural poor and various socio-economic initiatives.
But it looks as if the company with the largest empowered equity interest in the broadcast media space could soon be e.tv, at the time of writing 50,1 percent owned by HCI. CEO of HCI Johnny Copelyn says that when a claw-back offer to minorities lapses following the company’s proposed delisting, its share in e.tv will rise to 66 percent. ‘All minorities have indicated a complete lack of desire to fund that [right],” Copelyn states.
The South African Clothing and Textile Workers Union (Sactwu) owns 46 percent of HCI through its investment arm Sactwu Investments. As with MIC, Sactwu Investments is 100 percent owned by a trust and there are no individual shareholders. The trustees, like the managers of the investment arm, are all associated with the union and over the last six years Sactwu Investments has availed R20 million per annum towards its health and education social welfare programmes.
Sactwu Investments was formed in 1993 with start-up capital of R2 million coming from the union memberships’ surplus funds. ‘We were fortunate that we started the investment company early enough, when things were still going northwards,” says Copelyn, a founder member. ‘We were in the lucky position of building some real value based on debt, and in retrospect we were sufficiently prudent to get rid of the debt in time. With HCI, with no voting pools or N-share structures, [empowered equity interest] is at 46 percent.”
In contrast, Nail’s equity shareholding (at the time of going to print) is dominated by financial institutions such as Sanlam, Metropolitan, Hollard and UBS AG London Equities. Although Nail’s ‘ordinary’ shareholding is 52,5 percent held by Phaphama Holdings, this is a structure giving ’empowered’ interests voting control. The true equity interests of Nail’s empowerment bloc stands at around 5 percent (against the 52,5 voting interest), a major cause of regulator Icasa blocking the group’s proposed merger with Kagiso Media in 2001.
If the HCI delisting is successful, and odds are that it will be, e.tv will be around 30 percent economically empowered. Oddly enough, this will make it the only company of those discussed above to fulfil government’s criteria – the strategy document defines a black empowered enterprise as one that is 25,1 owned by black interests, and clearly states that ‘ownership refers to economic interests.”
But it’s unlikely that Nkuna, Pillay and Jardine are too worried. After all, it’s not really their companies that the strategy document is complaining about.