Black economic empowerment (BEE) momentum continued unhindered in 2004, with the number of transactions increasing 29% to 244 from 189 the year before. BEE deal value increased from R42,2-billion in 2003 to R52,9-billion in 2004. In the last four years, BEE has surged, becoming the dominant feature on the mergers and acquisitions (M&A) landscape in South Africa.
This is according to the annual mergers and acquisition survey titled Ernst & Young Mergers & Acquisitions: A Review of Activity for the Year 2004. The publication, now in its 14th year, is an independent analysis of all merger and acquisition activity in South Africa.
“Since the inception of Ernst & Young’s M&A research, the Corporate Finance team have analysed 8Â 507 transactions with disclosed values in excess of R2,327-billion,” says Dave Thayser, Ernst & Young partner and corporate finance director.
It has become a reference of record for the corporate finance, legal, brokerage, academic and media communities, providing the longest-running objective overview of the industry in South Africa, designed as a service to the M&A industry.
In 2004, the top ten BEE transactions were:
1. Acquisition of 10% of FirstRand by BEE Consortium R7,895-billion
2. Sale by Thintana of 15,1% of Telkom to the Elephant Consortium R6,6-billion
3. Acquisition of 7,6% of Standard Bank by Tutuwa R4,14-billion
4. Sale of 18% of Lonplats to Incwala R3,187-billion
5. Acquisition of 25% of Uhambo Oil R3-billion
6. Acquisition of 4,8% of MTN by Umthunzi Telecoms Consortium R2,5-billion
7. JCI unbundling 1,84-billion
8. Merger of Rebserve and Mvelaphanda 1,546-billion
9. NAIL unbundling 1,428-billion
10. Pelawan Investments/ Anooraq Resources Corporation merger 1,276-billion.
Two of the BEE deals mentioned fall into the mega deal category (defined as those in the R5-billion category and over) of 2004’s survey — the FirstRand BEE deal, and the Thintana disinvestment from Telkom.
Thintana’s stake was sold to BEE group, the Elephant Consortium, which was unable to come up with the R6,6-billion within the required time period.
Controversially, the Public Investment Commissioners – the public sector pension fund – stepped in to warehouse the shareholding to give Elephant Consortium time to raise the funding.
Interestingly, the number of transactions on the R1-billion plus category almost doubled in 2004, from 19 to 37.
“This increase reflected the number of organisations continuing to consolidate their positions by buying out minorities and by concluding BEE transactions. The key issue now is not whether BEE deals will be done, but how they will be done,” says Thayser. “BEE in 2004 contributed in no small part to the controversy around M&A. The Financial Sector Charter of 2003 stimulated a number of financial services groups concluding significant BEE deals during the year.”
However, the release of The Codes of Good Practice on Broad-Based Black Economic Empowerment, published by DTI (previously known as the Department of Trade and Industry) has questioned whether these and other BEE deals comply with stipulated Government requirements.
According to the Ernst & Young 14th edition of M&A, the corporate finance community has raised concerns about the Codes, saying it may force dealmakers to do non-commercial transactions. Furthermore, they say that the uncertainty around BEE has added an extra dimension to transactions.
Many have either taken longer to do, or have been cancelled after many months of negotiation.
The Ernst & Young corporate finance director, Sanjay Soni, says that one of the emerging trends in BEE in 2004 is that companies are preferring to bring staff into BEE schemes rather than outside parties. “The sense is that these structures create greater value-add and greater empowerment. Employees who have experience in the sector concerned, can help fill key vacancies, influence the client base as well as engage with Government.”
Soni says experience has indicated that bringing in outside shareholders into empowerment deals can create morale problems, particularly if the outsiders are vendor-financed.
“Giving employees a share in the company has been shown to be a successful way to motivate the workforce, and it is more broad based, which goes some way to alleviating Government concerns about making empowerment more representative.”
Other new trends that gained prominence in 2004 included the growing popularity of new financing structures for BEE deals. Soni says that in privately owned companies, currently the best option is to leverage the financing through the creation of a new company.
“No shares change hands between vendor and BEE acquirer, so the debt sits at the operating company level rather than with the BEE entity. The Newco is indebted, and all the shareholders — vendor and BEE acquirer — share equally in the risk. The financing of such a structure would typically be a mix of third party and vendor funding, and the debt is usually repaid out of dividends.”
In the past, BEE deals were funded through the creation of Special Purposes Vehicles (SPV) against which the BEE entity borrowed from an independent institution and repaid the debt out of the capital appreciation of the shares and dividends. However, in many cases this didn’t happen, and in terms of the way the SPVs were structured, the shares held by the BEE companies reverted to funding institutions, and the empowerment transaction fell apart.
“Such transactions were possible in the past in the absence of sector charters. If a BEE deal fell through, there was no real cost to the vendor in terms of BEE points or credentials. Now the vendor has an interest in making BEE deals work because it is assuming risk and sharing risk, and the failure of any deal has an effect on its sector charter compliance,” says Soni.
Dave Thayser says BEE will continue to dominate the headlines, given its controversial nature. “As we move into an era of increased compliance related to BEE, we need to ensure that we are not allowing compliance to blur the overall objective, which is to increase the size of the economic cake and share it more equitably. The greater focus in the short term on empowerment measures other than ownership could be very beneficial in the long term.” — I-Net Bridge