An announced but not yet “cemented” BEE deal allows me to hold up to the light an interesting facet of BEE involving foreign investors. Some have asked whether the intended sale by Swiss cement company Holcim of most of its stake in its South African subsidiary to a BEE consortium is “disinvestment”.
The plain fact is that any sale of shares held by a foreign direct investor in a South African company is considered to be disinvestment if it leaves that company with less than a 10% foreign shareholding. Foreign direct investment properly defined is when a foreign firm holds 10% or more of a local company.
So any BEE deal where a foreign company sells out to a BEE company is disinvestment, though the money does not necessarily leave the country. The foreign firm may reinvest in another local company, for instance. This would be treated as a new investment.
Multinational cement company Holcim now holds 54,35% of unlisted Holcim SA, one of South Africa’s big cement makers. After the BEE deal it will hold 8%. The Afrisam Consortium will receive the 46% that Holcim is selling.
One may wonder why foreign investors go to the trouble of seeking BEE investors when disinvesting. After all, they are leaving, so what does it matter who gets the shares?
The answer is that companies wisely do not like to burn bridges. Governments do not like the symbolism of disinvestment. It can be taken as a vote of no confidence in economic and other policies. For the apartheid government this is exactly what disinvestment was.
Apart from symbolism, South Africa needs foreign investment to balance its books. The amount of money that will leave the country is substantial, around R7billion, though it is unlikely to leave all at once. On its own it will not prove a problem, but were it to be construed as part of a trend, government would be concerned.
And of course Holcim may want to reinvest in the future. So selling to a BEE company allows the Swiss firm a graceful exit. Perhaps leaving 8% behind defends the company from the charge that it is leaving a sinking ship. Perhaps it is a strategic stake, in case it wants to build up a bigger stake again.
Two burning questions about the deal are: why is it selling now and why is it selling all but 8%?
The first question arises because the cement market in South Africa is strong and looking stronger.
It has been suggested that local cement buyers pay almost double what other developing countries pay for cement, and that South African cement prices have far outpaced inflation at 12% or so.
South Africa is on the verge of a construction boom, with government committing itself to huge sums in infrastructure spending. As it is, the major companies have to import cement to meet demand.
Secondly, the parent company reports that Holcim South Africa had an operating profit of about R1,4billion on sales of R5bllion last year. That looks like a successful company to me. Holcim South Africa is successful enough for the local company that owns the other 46% at present, listed Aveng, to intimate that it might scupper the deal altogether.
Aveng has certain preemptive rights and has to consider its shareholders. Aveng CEO Carl Grim has said he is worried that vendor financing of the deal could harm Holcim SA’s ability to reinvest. No details about financing have been released yet.
The fact remains that there is no obvious reason for Holcim’s departure now. The company explains with the bland statement: “Holcim has been fully supportive of the process of transformation in South Africa and has committed itself to ensuring meaningful and sustainable BEE in its South African Group company.”
Reportedly all employees, black and white, will be part of the BEE consortium, including senior management. White staff members are not counted in a BEE deal, so this cannot be so, but black and white employees and management could be included in the deal, with only the black employees and management personnel counting towards the final BEE stake.
At present the deal looks to create a major black-controlled building materials company, one of the largest in the country. The financing is crucial, however, because the sum is substantial. If the funding is not done correctly, the BEE partners will soon have to sell some of the shares they have rights to, so as to afford any. Then the 46% BEE shareholding will dwindle. Or the deal may unravel altogether.
What remains to be seen is what percentage is reserved for management. Present management of Holcim SA has enthused about the deal. How much of the company will they get?
We may never know exactly why Holcim is disinvesting from South Africa. There is an intriguing possibility — and this is only speculation.
The reasoning is as follows. The company now has two owners, parent company Holcim and Aveng. One of them has to give up a stake to allow black investors in.
Aveng might be unwilling to have its stake diluted because Holcim SA is an attractive investment. Could it be that, faced with having to give up 26% of its 54% stake in Holcim SA, leaving it with less than a controlling stake, Holcim decided it might as well go the whole hog? BEE would then be the reason for Holcim’s disinvestment as well as the means. How terribly ironic.