I once bought a beautifully preserved second-hand 2,5-litre Rover from a family connection. Its age and my poverty soon disproved the bargain — ”classic cars” and deep pockets go together, like leeks and potatoes. The previous owner had merely disposed of a problem.
I think of that car when I contemplate some black economic empowerment (BEE) deals. Sometimes, BEE is a handy way of selling up and moving on. Two recent BEE deals in health care raise the question of ”exit strategies” for white shareholders.
Of course, in business the best deals suit both parties. Anglo American’s sale of the industrial interests in JCI led in time to the creation of the biggest BEE company on the JSE Securities Exchange, MTN, and the transformation of Johnnic Communications.
But some empowerment players have ended up with assets in which, shall we say, the market has not seen the attraction. Sometimes the reason for selling is to realise value and focus the investment strategy.
The BOC group, which is disposing of profitable Afrox Health, sees no future in owning a hospital group when its business is gas. The hospital group, an Afrox subsidiary, is to be sold to a group comprising a BEE consortium (75%) and Medi-Clinic (25%).
Another exit scheme is that of Medscheme founder Keith Hollis.
A consortium led by Africa Vanguard Capital, chaired by BEE mover and shaker Sandile Zungu, is buying an initial 15% stake in Medscheme, with a short-term option to take up a further 33%.
This will lead to effective majority black ownership, taken together with the small shareholding by Cyril Ramaphosa’s MCI, part of a consortium that has 17,5%, and the black staff who make up 70% of the 7% staff stake. In the process, Hollis will see his family trust disposing of the 36% it held in Medscheme.
A Medscheme spokesperson points out Hollis is 68, has made no secret of needing to exit and could have done so by listing. Leaving behind a company with good BEE credentials seems a fitting legacy.
On the face of it, the deal looks inspired. The 48% owned by Medscheme plus other empowerment interests will make Medscheme majority black-owned and a strong contender for government business. It goes beyond the 10% or even 25% stakes now being achieved in the financial sector.
Moreover, the consortium includes representation from individuals and groups active in the health care industry, such as women’s interests, health care professionals and the National Association of People Living with Aids (Napwa).
The company believes these will add value. A third of Medscheme’s existing members comprise women as the main breadwinners. So it is hoped that the involvement of professional women’s group Thulong Investments will ”harness the resources of professional women” in designing products for female breadwinners. Napwa will help guide development of products for people with HIV/Aids.
But how will Napwa handle the potential conflict of interest? As a member of the consortium, it will benefit financially from adminis- tration of medical schemes. The schemes’ interest is to keep down costs, including the cost of Aids treatment. Yet Napwa should represent the interests of people in trying to get the maximum benefit from the medical scheme.
Of the initial 15%, half is bought for cash, and comes from a management trust that holds 15%. The other 7,5% is ”vendor-financed” — new shares will be issued to African Vanguard Resources equivalent to 7,5%.
In issuing new shares, the existing shareholding will be diluted. So the 36% now held by Keith Hollis will fall to 33%, which AVR has a 60-day option to acquire.
The transaction does not affect the consortium arranged by Cyril Ramaphosa, comprising his Millennium Consolidated Investments, Praxis Capital and the Commonwealth Development Corporation.
No numbers have been revealed, and the worth of an unlisted group is hard to assess. Alexander Forbes holds a good slice through PF Administrators. In its 2004 annual results, Alexander Forbes notes that a reason for a R30-million decline in pre-tax profit from associates was trading losses incurred by Medscheme.
However, if the deal results in Medscheme getting significant government business, the price may seem a bargain in retrospect.
So, let’s not look all gift horses in the mouth, even if Greeks have left them outside the city gates.
Still, I keep thinking of the time I spent pushing that damned Rover …
Reg Rumney is director at BusinessMap