PIC funding disinvestment?

The Public Investment Corporation (PIC) has supplied the money for two of the biggest disinvestments from South Africa since the apartheid era. Let’s be thankful. During apartheid the big conglomerates grew fatter by swallowing the assets of departing foreigners.

The first disinvestment was that of the United States and Malaysian strategic equity partners in Telkom. The PIC has followed this up by funding the purchase of 85% of Swiss-owned cement manufacturer Holcim by BEE consortium Afrisam.

This BEE deal was concluded in June last year. Holcim and international banks provided bridging finance of R6-billion.

It is that R6-billion that the PIC, which manages R720-billion worth of assets on behalf of the government, is replacing.

The PIC is buying R200-million in equity and R4,5-billion worth of preference shares. Loans to Afrisam make up the rest.

What’s in it for the PIC? As with the funding of the Telkom deal, the PIC is getting a good return. This is not free money for the Afrisam consortium. PIC head Brian Molefe says the return will be in excess of 20%.

Molefe says the equity stake sweetens the deal. He’s sure that the debt portion will be refinanced or repaid within six or seven years. Holcim is unlisted, so the PIC has not readily been able to get a stake before. He says one possibility is that the PIC might exit its investment through a public listing.

Molefe is sure that in that time local financial institutions will want to take over the debt and that, as with the Telkom deal, the PIC can reduce its exposure. Other financial institutions have already expressed interest in participating in the funding of this BEE deal, he says, but it was easier to negotiate alone because of the size of the deal.

Asked about the robustness of the broad-based nature of the deal and whether the smaller investors might not be bought out before they see the full value of their stakes, Molefe acknowledges that this is a concern. ”We will have to try to ensure that this doesn’t happen.”

At least in this BEE deal, then, someone is looking after the stakes of the broad base. But what will broad-based ownership mean in the long run?

Of the original rash of big BEE deals, only one led to the creation of a truly successful BEE mega-company. MTN was born out of the Johnnic deal, though the Johnnic conglomerate itself has been restructured until little remains. Of the original 35% or so that could be ascribed to black ownership of MTN, far less is now apparent.

Smaller black investors sell their shares for the same reasons that all investors do, which is to make a profit. The shares they sell tend to end up owned by institutions. This includes the PIC, which at the end of last year owned, according to Sharedata’s online service, about 10% of MTN. This is not too far from the 13% owned by the staff and management BEE entity Newshelf 664 — and a major beneficiary of Newshelf is Rob Nisbet, who is not black.

Some of the institutions who buy shares in South African companies are foreign. It would be ironic if Holcim became indirectly foreign-owned as small investors offloaded their shares. The Holcim sale represents sizeable disinvestment, though there’s no need for anxiety. Money flows into and out of countries for various reasons.

One reason for direct investment in other countries by big cement multinationals such as Holcim is that, unlike other multinationals, cement makers cannot easily manufacture in one market and sell in another. Cement is of low value and heavy. It is not easy to transport.

Why should foreigners rather than South Africans own cement factories and quarries, after all? Foreign direct investment (FDI) is supposed to be more long-term than the billions that have flowed into South Africa to buy shares. Another supposed plus of FDI is that it transfers expertise and knowledge. Surely we know how to make cement, which is not a high-tech product?

Before we become too enthusiastic about local ownership, while one or two disinvestments don’t mean much, a flood of disinvestment is a warning siren. Domestic investors have to be here, but foreign money is highly mobile. If foreigners are not investing or are selling their investments here, we have to ask why.

The question on many commentators’ minds, whether they say it or not, is whether BEE discourages foreign investment or encourages disinvestment.

There is little evidence that BEE represents a disincentive to investing in South Africa. Many foreign investors have done BEE deals.

On the other hand, our inward flows of FDI have been low in comparison with other comparable countries, so we don’t have room to be complacent. Holcim Switzerland invested the money unlocked by the Afrisam deal in India.

The real issue, though, is how the Holcim deal and others contribute to creating a new business class to invigorate competition and spread wealth. The 85% ownership level is symbolically important, a signal that major businesses can be majority black-owned.

It will be disappointing if the direct black ownership of Holcim, now renamed Afrisam, slowly dwindles and is not replaced with at least indirect black ownership. Judging by past experience I fear that is exactly what, in time, will happen.

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