Global deals threaten BEE

Black economic empowerment (BEE) must adjust to the realities of globalisation, according to reports released this week by the BusinessMap Foundation and Ernst & Young.

Both found robust activity in empowerment transactions during 2003.

The BusinessMap report raises a number of questions, the overarching one being whether empowerment is a risk or an opportunity. This question was acrimoniously raised late last year when President Thabo Mbeki clashed with companies listed in the United States and required to file an F20 form outlining potential risks who cited empowerment as a potential risk.

What is becoming increasingly clear is that empowerment is a risk in the short term and a benefit in the long term. There is an immediate dilution of value when companies sell off a stake and there is a possibility that a new partner may not deliver value, merely extract dividend. In the long term, the benefit is derived from securing business from government and an access to a more diversified skills base.

Another question raised by the report is whether empowerment is compatible with globalisation. Kuseni Dlamini, head of human resources at AngloGold and a lecturer at the University of the Witwatersrand, argues that although on the surface the two seem contradictory, “there is a potential for a mutually beneficial and reinforcing relationship between these processes”.

Dlamini calls for a balanced approach, based on a premise that globalisation is a force for global good, and BEE a force for national unity. Using the leaked mining charter, which wiped out R50-billion, as an example, Dlamini suggests sometimes good policy intentions can kill the goose that lays the golden egg. He suggests that BEE must be managed as a means to an end, the end being global competitiveness.

BusinessMap director Jenny Cargill also outlines the challenges of implementing broad based empowerment. These include the misalignment of interest among members of a consortium, where one member may seek to extract value while another wants to reinvest all proceeds to improve its stake.

There is also a new model of empowerment where a consortium is made up entirely of staff; it was used by Imperial in selling to Ukhamba. Cargill argues that the credibility of such a structure is still not tested.

And then of course there is the inherent business of risk, governance complexity and competition among BEE groups, while community ownership is sometimes politically unpalatable.

Also this week, an ordinary market transaction illustrated the harsh realities of the new order. One of the biggest empowerment transactions of the past year was the R4,1-billion purchase by Mvelaphanda Resources of 15% of Goldfield South Africa’s interests. On Tuesday, Goldfield acquired a new shareholder when Russian company MMC Norilsk Nickel bought Anglo American’s 20% stake in Goldfields for R7,6-billon.

The first Goldfields, let alone Mvelaphanda, heard of this was through a courtesy call from Anglo CEO Tony Trahar to his Goldfields counterpart Ian Cockerill.

Norilsk maintained this week that it does not intend to increase the stake, but analysts have questioned what the strategic stake is for if not to gain further exposure to gold. If Norilsk increases its holding to 35%, it will be required to make an offer to minorities, but it needs Mvelaphanda’s strategic participation to comply with mining legislation.

So in as little as three years, according to one analyst, Mvelaphanda can find itself with a completely new controlling partner in the operation. These are some of the many challenges that face empowerment players.

This week, the BusinessMap Foundation Black Economic Empowerment review found that a total of 62 deals worth R21,2-billion were finalised during 2003. This total, roughly matching the 2002 level of R21-billion, marks the return of deal values to the peak they hit in 1998 before the Asian crisis hit the stock market. The BusinessMap figure is based on deals that were finalised and disclosed, not merely announced. There were 58 undisclosed deals, and if announced deals were included, the figure would go up by R18,9-billion to about R40-billion.

That figure would have been more in line with the findings of the 13th Ernst & Young Mergers and Acquisitions Survey, also released this week. The survey details 189 empowerment deals during 2003 valued at R42,2-billion. This is up from 104 deals worth R12,4-billion from the previous year.

This surge in empowerment activity occurred against a backdrop of a slump in mergers in general. Although the number of transactions increased slightly from 783 to 790, the value fell by 38%, from R242-billion to R150-billion.

Apart from Mvelaphanda’s Tokyo Sexwale, another major player in empowerment was Patrice Motsepe. He first merged his ARMGold with Harmony, and then with Anglovaal Mining to form African Rainbow Minerals. Later, he led the Buntu-Botho consortium to purchase 10% of Sanlam.

The BusinessMap report also serves as a reminder that black economic empowerment, through the JSE Securities Exchange, remains a dishearteningly mammoth task.

Although black-controlled companies increased their market capitalisation by 32% from R44-billion to R58-billion in 2003, black control on the bourse remains at 3% because the JSE’s market cap rose by R203-billion in the same period.

Ernst & Young Mergers and Acquisition survey, 13th edition (based on transactions that are publicly announced during a calendar year):