It amuses me that we commentators, analysts and consultants pore over the Broad-Based BEE Codes like technicians studying the manual of a motor vehicle to see how best to make it go.
Then along comes a saga like the Holcim empowerment deal to remind us how profoundly political BEE is. Whatever codes and charters say, BEE is not a mere technical matter.
The facts of the matter are that Swiss-based Holcim proposed to sell most of its 54% stake in Holcim SA. South African construction company Aveng held 46% and appeared to be surprised by the deal. It had a pre-emptive right to buy Holcim’s shares but instead agreed with Holcim to sell all its shares as part of the BEE deal.
The Afrisam consortium will now buy 85% of the whole South African operation — rather than 85% of Holcim’s 54% — for about R14-billion. In the process, it will also buy Aveng’s 46% stake. Holcim will now end up with 15% of Holcim SA, rather than the 8% it would have originally ended up with.
I spoke to Aveng CEO Carl Grim this week — on the record — about the investment, as well as to a “source close to Holcim” who promised to give me Holcim’s side of the story — off the record. I am not that happy with the use of anonymous sources, but have used my discretion in repeating his remarks. Obviously, both sides want to be seen to be on the side of light and goodness.
Grim had this to say when I asked directly whether politics had influenced Aveng’s decision to sell its 46% stake in Holcim SA completely rather than stay invested: “You can never, as a business, operate in a vacuum. You need to take cognisance of the political context. That is why we are strong supporters of BEE. We were the first company in the industry to do a significant BEE transaction.”
The “source close to Holcim” differed from Aveng’s statement of its commitment to empowerment, stating emphatically that in meetings Aveng had strongly questioned the need to do a deal of more than 26%, as required by the Mining Charter.
While achieving a black majority stake is laudable, I personally don’t regard wanting to go further than the charter as a lack of commitment, especially if you’re trying to please shareholders. But then again we’re in political territory here.
In the Holcim BEE deal, political intervention came in the form of President Thabo Mbeki’s weekly newsletter, praising the deal to the hilt and aiming a few barbs at commentators who dared call the withdrawal of quite a few billion rand from the country disinvestment. The arrows were directed at critics in the media, but the real target was Aveng, whose obvious hostility was taken amiss.
And yes, the detail that seemed to have taken the president’s fancy is that the deal would create a majority black-owned company rather than one with a 26% stake or less. This certainly is the angle that Holcim would like played up. And let’s be clear, if this deal leads to the creation of a black-run, black-owned Holcim, I will be urging the local mafias to switch their cement brands immediately.
Yet this majority ownership is being achieved through a major disinvestment. It would seem to be easy to create majority-owned black companies if all foreigners disinvested and sold to BEE entities. This is what indigenisation in Africa was all about.
The president’s intervention would have made it difficult for Aveng to follow its pre-emptive rights to buy Holcim’s 54% share in Holcim SA (held through a company called Altur) instead of its going to the Afrisam BEE consortium. In any case, these rights would only be triggered if the offer to sell was made. Holcim was in no mood to do anything to trigger this. So the result was something of a Mexican stand-off.
Aveng was clearly unhappy about keeping its 46% investment in Holcim. I asked Grim whether Aveng had been taken by surprise by the announcement of the original BEE deal.
“[We were surprised] by the content of the announcement. We had been encouraging Holcim to do a BEE transaction [as required by the Mining Charter]. Our view was that, because of the 54/46 split, whatever we did should be done in partnership. We left it to them to drive the process.”
He said there had been bad communication at first, but there had been regular discussions since then to sort the matter out.
The source close to Holcim said that what had really perturbed Aveng was that Holcim was serious about relinquishing control to the black consortium. It had expected a management contract, he said.
Grim said Aveng expected Holcim to sell its stake at some stage and end up with majority control. “Our long-term objective is to have management control of all our major assets.” It was clear the BEE consortium, being South African, was permanent, he said.
According my anonymous source, Aveng was not so much concerned about being a minority shareholder but about having a BEE partner as a majority shareholder. Aveng had been happy to be a minority shareholder for a long time.
Again, I don’t see that this means much: it is one thing to have a major multinational with expertise and deep pockets running the show, quite another to have an unknown entity in business terms holding the reins when you are a minority.
And this would have been especially worrying if you thought that the cash-strapped BEE parties might tap into the cashflow of the business to fund the deal.
Grim confirmed that this “had always been a key issue”. Though he had no finer knowledge of the funding of the deal, he did say “I expect they have used the balance sheet to some extent.”
While maintaining that Aveng was supportive of this empowerment deal — even bigger now that Aveng has walked away — Grim conceded that Holcim had contributed a lot to profitability in the past. This was important when construction was performing poorly. Now the steel and allied division was peforming well, and construction was beginning to turn too. “From a corporate point of view, we don’t need it as much as we did a few years ago.”
So, being supportive of BEE, but cognisant of its own shareholders, it preferred to sell. “We got a fair deal for shareholders and were party to a significant BEE transaction.”
My source was dismissive of Aveng’s claim that it got a better deal for shareholders, saying Aveng was getting exactly the same price as Holcim Switzerland.
The “source close to Holcim” also claimed that the reason Holcim did the deal was that being majority black-owned gave Holcim a competitive edge in dealing with government and getting licences to quarry on government land.
That may be true, but as Holcim in the original BEE deal would have ended up with a measly and easily disposable 8%, it all seems irrelevant to the Swiss-based cement giant.
My source was also emphatic that no money would flow out of the country, which is patently untrue, but this is because he appeared to misunderstand how these flows are stated in the national accounts. About R14-billion will be reflected as a disinvestment in the capital account at some stage, while the loan or other form of inflow to finance the deal will be stated elsewhere, possibly in the catch-all “Other” category.
And the reason we all look at FDI flows is to get an inkling of the attractiveness of the country as a long-term investment destination.
The Aveng sale is dependent on the BEE deal being funded, and my source says Holcim used its muscle to get third-party funding from international sources, so the deal will go ahead.
The question remains: apart from having so burning a desire to see empowerment flourish that it would sell most of its stock to do so, which is very noble but certainly unusual, why did Holcim disinvest?
This is especially puzzling with the pending boom in infrastructure spending. Grim pointed out that, as opposed to the view that the infrastructure drive will support cement demand, two-thirds of cement demand is consumer-driven, and if there is a decline in consumer demand, then cement sales will fall. Does Holcim know something we don’t know?
The old saying is that if you see a Swiss banker jumping out of a window, jump after him. There’s bound to be money in it. Maybe the same holds for Swiss cement-makers.