/ 31 July 2006

BEEing Madame Lafarge

When the De Beers black economic empowerment (BEE) deal was announced last year, Cheryl Carolus could be described as not being “one of the usual suspects”.

Not now. In a short time Carolus, former ambassador to London and darling of those nostalgic for the optimistic non-racialism of the United Democratic Front, has become a firm BEE favourite.

Carolus, Dolly Mokgatle, Wendy Lucas-Bull and Thandi Orleyn make up the Peotona consortium, one of two lead partners of the R1,1-billion BEE deal of cement producer Lafarge. The other lead partner is Motjoli, led by Nchakha Moloi and Nonkqubela Mazwai.

Carolus is a likeable person, but because she used to be a revolutionary she may not escape being called Madame Lafarge, in punning reference to A Tale of Two Cities.

In some ways, the deal encapsulates recent trends in equity transfer.

Politically connected individuals like Carolus have always featured in BEE deals. The difference now is that they head companies or consortia that don’t pretend to be broad-based in themselves.

The broad-based component is supplied by what is normally considered corporate social investment.

The mathematically challenged should skip the details of the deal, which are more complex than usual because there are two companies and several beneficiary groups.

Together, all the BEE stakes will make up 26% of Lafarge’s mining operation — the Mining Charter target for ownership — and 10% of Lafarge’s manufacturing operation.

Suffice it to say that the Sinaka Consortium, comprising Peotona and Motjoli Resources, will each end up owning just less than 4% of Lafarge Mining and about 1,5% of Lafarge Industries.

An education trust, communities around Lafarge’s operation and Lafarge’s black employees get the lion’s share.

However, the value of Peotona’s and Motjoli’s stakes will be about R165-million each, not small change.

By comparison, the worth of the stake owned by an independent broad-based education trust will be about R437-million. The Employees Share Ownership trust will have R275-million. Communities around Lafarge’s operations will own about R58-million.

The education trust is designed to benefit “the visually impaired and historically disadvantaged South Africans (HDSA) from marginalised communities, with particular emphasis on women”.

The mechanics of the community empowerment have not been specified, and Jimmy Shiganga of Lafarge says the company is still in discussions with the communities to decide how to disburse the money.

Both these trusts will get preferential dividends worth R80-million over the next 10 years. The company says the dividends will start flowing in next year.

Peotona and Motjoli Resources will get dividends, but these will be used to pay off the finance raised to pay for their stakes in Lafarge.

The company has provided 70% of the finance, with the remaining 30% to come from an unnamed financial institution. The company has not provided guarantees for that 30%.

BEE deals increasingly tend to be broad-based in the sense of benefiting communities and staff. An extreme example of this was the BEE deal of retailer Massmarket. This reserved equity for loyal staff only.

The difference between the Massmart deal and most other BEE deals is that Massmart was not constrained by any charter or official code of good practice.

Firms other than those in the retail industry will have to keep a close eye on the codes or the relevant charter when doing a BEE deal. Increasingly, BEE is a matter of compliance.

What that means is that BEE deals offer little prospect of direct commercial gain, as the rationale for BEE deals in the past. There is less talk of the BEE partners “adding value” or of performance agreements for the BEE partners to earn the shares that they are getting at a discount.

True, the BEE partners in the Lafarge deal are locked in to their investment — and locked in for a long period too. Shiganga says that, barring certain extraordinary circumstances, the lock-in is 10 years.

He adds that the lead BEE parties don’t want to be passive investors, but want to be involved in the direction of the company. They are committed to board participation, and will be expected to contribute in “policy-making, strategy and transformation”.

However, this is significantly different to some of the unrealistic ideas that used to be advanced of what the BEE partners could add to the business. Carolus and Co are not expected to become sudden experts in mining or marketing.

Since compliance is the order of the day rather than value addition, companies seem to be deciding to shape BEE deals for maximum social impact, and to reward staff, as well as getting the well connected on board as political insurance.

This is more acceptable to shareholders and the broader society than completely narrow-based BEE deals would be — despite narrow-based BEE being arguably more in line with building black business by creating capital accumulation.

Such broad-based deals have rightly been applauded. They should also be monitored to see if they really do make a difference to those the company says it wants to benefit. I will return to this in a year’s time to see whether these initiatives are in place, and how they are working.

An interesting aspect of the Lafarge deal is that the company uses the term “HDSA” in referring to the beneficiaries. This has been superseded by government’s definition of BEE beneficiaries as “black” — African, coloured and Indian.

The Mining Charters uses HDSA, and counts white women as historically disadvantaged, so that Lucas-Bull, who cannot surely be poor, can be a legitimate beneficiary of the Lafarge Mining deal.

Her participation in the manufacturing side, according to the codes, would dilute the deal. Peotona is overwhelmingly black, and there is no manufacturing charter, so it probably doesn’t matter that much in this case.

The company’s official announcement also says the employee share trust is for “current and future” HDSA employees. What is a “future historically disadvantaged South African”? A “white person”?