Are white companies pulling a fast one? That’s the thrust of a spate of recent criticism of the Financial Services Charter and several high-profile black economic empowerment (BEE) deals.
Some deals have been seen as presenting the appearance of equity transfer without transfer taking place. Is an option to buy shares at a future date the same as ownership? The criticism levelled at the Absa BEE deal is that it is not.
It all depends on the aim of ownership. In the past, ownership was secondary to control.
The thinking was that if black firms or individuals controlled ”white” companies, artificially or not, that control could be used to bring about transformation.
So if the black partner’s preference shares came with voting rights allowing control of — or at least influence over — the target company, then to all intents and purposes it was the same as owning ordinary voting shares.
In the Absa deal, the pref shares do indeed have voting rights enabling the consortium to vote as if it owned 10% of Absa, a figure high enough for the consortium to exert influence. Absa also has the required 15% indirect holding to meet the aims of the charter.
Although Absa does not, some companies have been counting as ”indirect equity” government shareholding, through the Public Investment Commissioner (PIC) and the like. This is seen as sleight of hand.
I think we are seeing confusion about the means rather than deliberate deception. That does not mean that things could not go spectacularly wrong because of unforeseen economic circumstances.
Some of the problems of perception arise from the financial engineering necessary for such equity transfers. For the uninformed, which means most of us, speaking to the merchant bankers who put the deals together can feel like stepping into Alice’s looking-glass world.
Things are not always what they seem. For instance, debt can change into equity and equity into debt at the stroke of a pen. It’s not rocket science, as one merchant banker insisted to me, but deal-structuring can surely be complex.
Moreover, since the deal- structurers make money out of their inventions, they are often understandably reluctant to give details.
That has tremendous implications for transparency. If the press and public cannot see the full details of the underlying transaction, how is anyone to assess their worth?
In a previous column I mentioned that some BEE transactions are little more than an option to buy shares at a later date. Don’t underrate these options. In the financial markets, options have a price.
In the Absa deal, which gives pretty full disclosure of the details of the deal itself, the black consortium has effectively bought options to buy Absa shares in three years’ time at a price of R48, on the assumption that the share price then will be worth at least that, and probably nearer R70.
Absa estimates that in the open market those options would be worth R10,67 per share.
The result is that Absa has given the BEE consortium a ”gift” of around R634-million, on behalf of the shareholders. It’s not really a gift. The big benefit for Absa and its shareholders of this transfer is that the bank will continue to get government business.
The deal fulfils the requirements of the charter in that, when the options are (it is hoped) exercised, the BEE consortium will have 10% of the company.
But what if members of the consortium want, or need, to sell off some or all of their shares to pay off the debt they incurred buying the options? The bank’s 10% black shareholding could vanish in a flash.
Because ”locking in” shareholders forever is unreasonable and diminishes the value of the shares, black shareholders want to be able to sell the shares they supposedly own.
The counter-argument from white companies would be that they should be given credit for having done deals in the past. It is not the fault of the white company that deals go awry or simply that the black shareholders want to use the money for something else.
There is no definitive solution to that conundrum. Expectation in some quarters is that Absa would simply have to do another BEE deal.
BEE cannot simply be about counting shares in individual companies in five or 10 years’ time.
Simply put — if in another 10 years, ownership patterns haven’t changed, South Africa will be in trouble.
If we succeed, the business sector should be able to concentrate much more on other issues, such as exploiting new business opportunities so that more jobs are created.
Here’s where the counting of indirect shareholding should come in. Indirect shareholding simply means the shares people own through pension funds, retirement annuities, endowments and unit trusts.
In the estimation of the BusinessMap Foundation and the Financial Services Charter, indirect ownership does not include the PIC, or the state-owned Industrial Development Corporation, or even central government (which owns 38% of Telkom).
Indirect ownership is important as an indicator of a change in ownership patterns. The big deals — and, more importantly perhaps, the small deals that should be rippling through the economy — are stepping-stones to an eventual goal of deracialised South African business.
If, in five years’ time, indirect ownership of shares on the JSE Securities Exchange has not grown rapidly, regardless of what happens to direct ownership, we can categorically say that BEE — in the sense of equity transfer — has failed.
Reg Rumney is executive director of the BusinessMap Foundation