The tale of Mzi Khumalo’s quick profit from investing in construction firm Basil Read raises many interesting questions about black economic empowerment (BEE) deals — not the least being what makes a BEE investor a BEE investor.
That corporate raider Khumalo has successfully struck again will not surprise anyone who has followed the career of this one-time associate of the late Brett Kebble, (both men presided over the demise of JCI Gold in the late 1990s) before they fell out .
Once a committed communist, ex-Robben Islander Khumalo now plays the business game in a manner that should inspire admiration in the proselytisers of ruthless capitalism.
Broad-based BEE consortium Simane was allotted a 7% stake in Harmony Gold in 2001, but Harmony later woke up to the fact that its broad-based consortium was actually Khumalo. To its consternation, Harmony also found that he had sold the stake, leaving Harmony without an empowerment partner at all.
Khumalo’s Metallon Ventures reportedly bought shares in Basil Read towards the end of last year and sold eight months later to leave the construction firm that thought it was black-owned suddenly 14% whiter and making himself R70-million richer (before financing costs).
This has outraged many in the business world, according to financial magazine Finance Week.
BEE personality Bear Khumalo leapt to Mzi Khumalo’s defence in the Business Times last Sunday, questioning why black investors should be forever excluded from profiting from their investments.
Metallon CE Andile Reve has defended the action by saying Metallon was not a “classical empowerment company”.
Presumably, not being a classical empowerment company means not receiving the kind of preferential treatment characteristic of BEE deals. This special dispensation usually means a discount on the value of the shares, or the vendor company facilitating the loan in some way, at a cost to the shareholders.
Looking back at the announcement of the deal, it appears that the seller, Bouygues Travaux Publics, gave the buyers of a 52% stake in Basil Read, Metallon Ventures and Bulelani Ngcuka’s Amabubesi Investments, a loan at 12% per annum to buy the shares.
There is no specific mention of any other cost, though Bouygues, the major shareholder before selling, would have incurred some cost in its books.
Also, the French company sold the shares to the BEE buyers at 82c, a price that now looks like a real bargain for shares trading on Monday at more than 10 times that level. But share purchases always have an element of risk.
So was there a clause locking Metallon in to Basil Read in this case? If so, why have penalties not been invoked?
Basil Read CEO Marius Heyns is on record as saying that he understood Bouygues had the lock-in clause, and it was up to the French company to use it. Reve has denied there ever was one.
Bear Khumalo questions the need for lock-in clauses, but the lock-in is the price you pay for getting the shares more cheaply than on the open market — or at all. Metallon did not at the time of the announcement distance itself from the deal as a BEE deal.
Not being locked in is fine, but you can’t put yourself out as a BEE company one day while getting a deal and the next day claim you don’t want to be considered a BEE company when you sell.
In any case, the government’s codes of good practice do not allow companies to choose whether they are black or not. Black is black.
Without some kind of lock-in, established companies looking for BEE partners could end up having spent money without having a BEE shareholder, and have to go through the arduous process of finding another.
Operational involvement of the BEE partner is the best way of locking in BEE shareholders, but clearly Amabubesi and Metallon are closer to investment holding companies than construction firms.
The most obvious question is, of course: Given Khumalo’s history, why did Bouygues ever do a deal with him?
Though using BEE fitted Bouygues’s exit strategy, it still owns 18,5% of Basil Read. Selling a sizeable stake to Khumalo was surely not a case of “take the money and run”.
At any rate, Basil Read still has a substantial BEE shareholding at 36%, though this is far less impressive than the 52% BEE ownership it boasted before Khumalo sold out. The JSE has lost one of the few companies with outright black control.
On the other hand, why is 51% so impressive? Basil Read does not really look like a black-owned company. It has some black non-executive directors, but the executives are white.
The government’s scorecard approach de-emphasises BEE ownership. How empowered is Basil Read in the other BEE categories described in the latest Codes of Good Practice, such as affirmative procurement and employment equity? There is no clue on the company website. Apart from the 52% shareholding, there is no mention of BEE at all.
In the early days of empowerment, every ownership deal could be seen as a step towards creating a critical mass of black business. Outright ownership mattered less than control, because control of companies was seen as the key to changing the colour of South African business.
The government’s policy aims to do just that, mainly through affirmative action and affirmative procurement rather than ownership.
So why are we obsessing about the level of ownership? Because for the moment, the way public sector procurement is structured, a black-owned firm will always trump one with lower ownership but more black management and better procurement policies.