What is immediately notable about the Pepkor black economic empowerment deal, announced last week, is that it is the first equity transaction in the retailing sector.
It has been thought, quite rightly, that retailers have little reason to do empowerment deals. Buying power, the main state lever for encouraging empowerment, doesn’t apply to retailers. The customers of department stores are ordinary consumers, not government departments or parastatals, or corporations.
No charter is in the offing for the retailing sector. Moreover, the sector is characterised by small corner shops as well as big chain stores.
Consumer pressure for transformation seems to be a no-no. ”Quite frankly, the customers don’t give a stuff about empowerment,” remarked a banker I spoke to about BEE in the sector.
All this doesn’t mean the retail sector will be forever immune to the tides of empowerment. Transformation pressure may eventually be exerted on the bigger retailers by providers of capital. It may be that the pressure will be political rather than economic.
Has the enthusiasm of the advertising industry for BEE deals come about because of the prospect of losing government business, which is big but not dominant, as the government is not the only advertiser in town? Or has it come about because of political pressure, in the form of two parliamentary inquiries into racism in the advertising industry?
The other notable feature of the deal is that it uses private equity for BEE, rather than third-party finance or vendor financing.
The two investment companies together sharing equally a 7,5% stake in Pepkor are Medu Capital and J&J Private Equity fund.
J&J Private Equity is part of the J&J Group, started by former unionist Jayendra Naidoo and former telecommunications minister Jay Naidoo. Medu Capital was founded by Nhlanganiso Mkwanazi and Ernest January.
The two private equity funds raised R208-million for the stake, which values the whole of Pepkor at slightly more than the R2,6-billion the shares commanded when it was delisted. This in turn shows that the chain was undervalued in the buyout.
So the deal is a rarity in a sector not known for wild fans of empowerment, and since Christo Wiese, Pepkor chairperson, is known for his shrewdness in being ahead of the curve in business, it will probably pay off for the shareholders.
The deal is a small beginning, but gives Pepkor a first-mover advantage against competitors, who will be forced to play catch-up when BEE pressures do materialise.
How much of a BEE deal is it?
For once it is more than hype that Pepkor ”represents an attractive investment opportunity”. It has turnover of more than R8-billion, and is a strong South African brand, as well as having a big network of stores in South Africa and Australia.
In the short to medium-term, South Africa’s optimistic consumerism will boost profits. In the longer term, the inexorable growth of the black middle class can only be good news for Pepkor’s stores.
But 7,5% is not enough of a stake to represent significant economic influence at Pepkor. True, Jayendra Naidoo and January will get seats on the board, and this represents the strategic involvement — rather than operational involvement — that some believe is the real benefit of BEE deals.
Jayendra Naidoo and January will help advise on issues such as employment equity, and Jayendra’s union background will stand him in good stead in looking at employment issues. But they could legitimately have been invited to sit on the board in their personal capacities.
Secondly, one question over private equity fund BEE is whether it represents a change in ownership or is merely another form of financing.
Private equity funds do not invest for the long term (on the other hand, nor do some BEE companies).
Private equity funds tend to be staffed by highly skilled, highly remunerated, profit-driven people who demand returns on their investments above the norm, so this kind of financing is not suitable for all BEE transactions. Perhaps the BEE private equity firms will be prepared to take on more risk than other private equity firms, and be more willing than others to include an element of broad-based empowerment in their deals.
The Pepkor deal does include a special trust for the workers, and this will benefit workers and their families according to a formula, if the firm’s profitability increases.
The deal does not, however, include a share ownership scheme for workers, which has been a growing trend in big BEE deals recently.
(PS Now that J&J is doing so well, can I have the money back — adjusted for inflation — that I lent Jay Naidoo for cigarettes at a Mail & Guardian party in the 1980s, when he was still a struggling unionist?)
Reg Rumney is director of the BusinessMap Foundation