Encompassing subsidiary companies Nedbank and Mutual & Federal, Old Mutual’s black economic empowerment (BEE) deal, announced in April, was among the biggest and broadest-based ever.
It also displayed some unusual and innovative features, such as a BEE holding in the London-listed company rather than the local company and the involvement of customers.
It should have been hailed as groundbreaking. Instead, coverage was piecemeal, sometimes focusing on the personalities, sometimes on other elements.
Perhaps Old Mutual’s communications tactics are at fault. As an Old Mutual shareholder the first direct communication about this deal that I received was in the post last week, in the form of a circular.
The circular is not the most legalistic of documents I have read, but most of the ordinary folk out there who hold Old Mutual shares courtesy of the demutualisation will probably struggle to understand certain aspects.
One good reason for the BEE deal to be broad-based is that Old Mutual is a company owned by nobody in particular and everybody in general. The shareholders might have taken a dim view of narrow-based empowerment at the Big Green. So the deal had to be broad-based, encompassing not only staff, management and customers, but also distributors of product, an education trust and black business partners, which in turn have other consortium members. Perhaps it represents the peak of broad-based BEE, from which we will slide back into narrower, more controllable forms of BEE transactions.
A range of “black-controlled entities beneficially owned by black employees, clients and distributors, communities and black business partners will get between 11% and 13,5% of the three companies”. Complicating the matter is that the 13,5% of Old Mutual SA that passes to black beneficiaries is in the form of Old Mutual plc shares. Unlike the Standard Bank deal, the life company deal overshadows the bank deal, or the short-term insurer’s deal, for that matter, because of the sheer size of Old Mutual.
It took a while for it to sink in exactly how broad-based this particular deal was. A black former journalist suggested the money would have been better spent investing in the Gautrain rapid rail link between Johannesburg and Tshwane. The reasoning was that the recipients of the deal would take so long to benefit, and the benefit would be so small, that the money would have been better spent on a big, job-creating infrastructure project.
The arithmetic shows that on a simple average each beneficiary will get R14 400. This is misleading, since some will get more and some less. All of the 40 000 staff across the three companies will get at least R7 500 worth of shares, according to Old Mutual CEO Jim Sutcliffe (read the transcript of an illuminating interview with him on the deal at www.oldmutual.co.uk).
Nonetheless, no single beneficiary will get a big slice of either Old Mutual SA or Old Mutual plc, the holding company listed on the London Stock Exchange. Old Mutual explains it “sought to achieve an equitable balance between individuals who are internal and external to the group. In the process, the ultimate beneficiaries of the proposals have been reviewed to ensure that no individual benefits unduly.”
Again, it took a while to sink in: the individual business partners in the Old Mutual deal get very small percentages of the company. For instance, the Brimstone and Wiphold consortia each get just less than three-quarters of a percentage point — 0,71% — of Old Mutual plc. No one group gets more than 7%, and within those groups individuals and entities all get thin slices of Old Mutual. Intuitively this seems correct for the former mutual life assurer.
While it seems intuitively correct to have broad-based ownership of a company which is the investment vehicle for many policy-holders, I could find no justification of the broad-based concept itself in the circular.
And what applies to a life assurer does not necessarily apply to a bank. If the black shareholding is so broad, it might as well be “indirect” investment — in other words, through the kind of funds Old Mutual manages. Having a direct stake of a little more than 25% — the target in the Department of Trade and Industry’s Codes of Good Practice — has been justified as negative control, that is, being able to block resolutions that prejudice the black shareholders.
The counter-argument to broad-based BEE ownership is that it does not really enhance black business.
In this case, the black business partners Old Mutual brought in have benefited as much from the prior relationship with the company. Old Mutual has invested money in both the lead partners. It has almost a third of Wiphold’s shares and about 10% of Brimstone’s N-shares, which have limited voting rights.
This means the Big Green is comfortable with having these BEE players on board, but it is really more of the same. Could Old Mutual have used BEE to spur new productive and competitive activity in the economy? Or is that space the preserve of other areas of the Financial Services Charter? For better or worse, this deal is almost purely redistribution of wealth.