The volume of black economic empowerment (BEE) transactions completed in South Africa over the past decade is valued at R200-billion, ratings agency Moody’s said on Friday.
Releasing a special corporate finance report, Moody’s said not only does BEE have “a profound impact” on the South African economy, but it also continues to be a key driver of corporate activity in the country.
“BEE has been an important driver of corporate activity such as mergers and acquisitions [M&A] and private equity in South Africa, and this trend is expected to prevail for at least the next five to seven years,” said Moody’s.
Last year, 153 transactions were carried out for a total value of R96-billion alone, and while this figure shows a dip in the number of transactions, the value of the deals exceeds that of those completed in other years.
The value of BEE deals during 2006 amounted to R56-billion, which was very similar to the R56,2-billion-worth of BEE deals carried out during 2005.
BEE transactions represented 30% of all M&A activity in South Africa during 2006 in terms of the number of transactions and 20% in terms of the total value of M&A activity.
The number of transactions decreased slightly, however, to 221 during 2006 from 238 in 2005.
A trend identified by Ernst & Young in its annual review of M&A activity in South Africa is that the Codes of Good Practice for Broad-Based Black Economic Empowerment — drawn up in February 2007 — provide business with more flexibility in terms of BEE deals.
“This is mainly due to the conditional provision for mainstream companies to retain BEE points if their empowerment partners sell their shares or these shares are ceded to funders,” said the ratings agency.
Moody’s expects the number of BEE transactions to remain strong in the medium term, based on both the regulatory aspect of the initiative and as a result of the expectation that 52% of South African privately held businesses will experience a change in ownership in the next 10 years.
“This is considered a world high in terms of expected ownership churn,” Moody’s said.
But BEE transactions have had no effect on corporate ratings yet.
The varying structures of the deals have meant that some ratings have been assigned following BEE activity such as in the case of private equity acquisitions, while others have been executed following the initial assignment of ratings.
“The effect of a BEE transaction is a key factor considered by Moody’s rating committees, although it may not always have a material impact on the rating outcome,” the ratings agency said.
“The result of a proposed BEE transaction could be credit neutral, credit positive or credit negative, and needs to be assessed on an individual-transaction or case-by-case basis due to the different transaction structures, financing options and business considerations applicable to each individual transaction,” it added. — I-Net Bridge