Massmart’s recent R1-billion black economic empowerment deal, following in the footsteps of Edcon’s BEE deal, shows clearly that companies will do deals despite being exempt from the government’s licensing and buying power.
Retail, unlike mining and broadcasting, is not subject to licensing or contracting that gives the government the power to compel industries to negotiate a charter.
From the government’s point of view, leaving retailing out of the BEE picture altogether would rankle in time. From the company point of view, BEE is, in the words of Massmart CEO Mark Lamberti, simply “the right thing to do”.
Now that Massmart and Edcon have put together equity transfer deals, one could conclude that Pick ‘n Pay, Woolworths and Shoprite Checkers will feel a bit exposed.
The two big retailer BEE deals, however, do not fit entirely into the government’s idea of what equity transfer should look like, as outlined in the draft codes of good practice.
Both the Edcon and Massmart deals focus on staff, for instance, and are, arguably, forms of Employee Share Ownership Schemes (Esops).
The transfer of 8,5% of Massmart’s shares to a staff share trust is explicitly non-racial because, Lamberti believes, at the lower levels the staff scheme operates this would be extremely divisive. However, 83% of the 14 500 staffers are black.
The stake envisaged in the codes is 25%, far from the 8,6% the Massmart deal sets aside for black staff, management and non-executive directors, on top of any share scheme in place.
Yet the Massmart deal clearly gives the staff voting rights and rights to dividends, as if they owned the shares set aside for them. Such rights are not commonly associated with Esops.
However, the 8,5% allocated for all employees, black or white, is too small to prevent special resolutions being passed that may disadvantage the empowerment trust.
The way it will work is that, as with many BEE transactions, the company will create and pay for preference shares equal in number to the shares to be allocated.
The Thuthukani Empowerment Trust will be able to vote its stake on behalf of the staff shareholders.
At the end of certain set periods, the prefs can be converted to ordinary shares at a cost of R55, the closing price on May 15 this year.
That is when the element of reward enters, as with most BEE transactions. If the staff have done their bit and the share price has risen, they will get the benefit of that rise. So if the share price has doubled to R110, then a staff member will pay R55 for each share worth R110 he or she is entitled to. He or she can realise the profit of R55, or convert that into shares.
Lamberti confirms that if the share price doubled in six years, black beneficiaries would end up owning 4,3% of the shares as opposed to the 8,6% allocated in the deal.
The reward element is not unusual for BEE transactions, so criticism voiced in some quarters about this facet of the deal is misplaced.
The Massmart deal sets aside 0,3% for present and future black non-executive directors. The three present black non-execs, KK Combi, Phumzile Langeni and Dawn Mkhobo are allocated 0,1% of the issued share capital. The 30 black managers at Massmart are allocated 1%. This group gets preference shares that do not pay dividends.
Lamberti says this part of the BEE deal should be differentiated from the broad-based part and is more like an executive option scheme. Should the share price double over six years, each of the black non-execs and the 30 black managers would get R3,7-million in today’s money.
The maximum allocation of 2 400 shares of an ordinary staffer would realise, with a R55 appreciation, the equivalent of R132 000 — as well as dividends over the course of the six years, whatever happens to the share price.
If the share price falls over the six years, management, non-execs and the employees get none of the capital appreciation — but lose no actual money.
Massmart, in turn, would presumably have to look for new empowerment partners. They may have to do that anyway if the demand mounts for retailers to transfer 25%. But a start has been made, and Massmart and Edcon have put pressure on their counterparts in retailing to do something similar.