/ 31 July 2009

Retailers embrace change

By allocating shares to staff, the retail sector is slowly joining the empowerment drive.

BEE deals — or their absence — in some important areas of the economy show the weak links in government’s black economic empowerment drive.

Retailing is one such area. Here, it could be argued, the state does not have as much leverage through procurement and licensing to bring about BEE deals as it does in other areas, such as IT, for example.

Retailers sell to consumers, who care more about the price of groceries than about the company’s BEE profile. Licensing is also not tied to empowerment, as in broadcasting.

Some big retailers, such as Clicks, Pick n Pay and Shoprite, are conspicuously absent from the table showing BEE deals done in the retail sector.

The retailers that have made the move have done broad-based deals, these have mostly involved providing shares to staff share trusts. The share allocation has been nonracial, although the staff is often 80% black, or more. Usually the stake set aside is about 10%, below the 25% ownership targets of the codes.

The recent Spar BEE deal is illustrative. Spar announced that it would allocate 10% of its shares to Spar staff and to employees of the independent Spar grocery outlets it supplies. At the present share price this is equivalent to a little less than R900-million.

The issue of giving shares to employees outside of its own staff fits in with Spar’s structure of being a supplier to branded independent outlets. It echoes the BEE deal recently done by SA Breweries, in which outlets of SAB products were also rewarded with BEE shares. It is a way of ensuring loyalty, delivering a benefit to Spar as well as to the intended beneficiaries.

In other ways the Spar deal is similar to most of the BEE deals done in the retail sector.

A big difference between the employee share-ownership schemes, which companies introduced in the past, and the BEE staff share deals in the retail sector is the element of risk. This they share with normal BEE deals. There is a risk that the individual’s shareholding is diluted if the share price does not perform.

But in ordinary BEE deals the BEE partner puts down some capital to take part in the deal. Staff are usually simply allocated shares.

Another difference is that employee share-ownership schemes are ordinarily limited to owning 3% to 4% of the shares. In practice this may be the eventual outcome of the BEE deal.

The Spar BEE deal allocates 10% of the company’s shares to staff, but the actual number of shares each staff member will get after seven years depends on four things:

  • The initial allocation;
  • The difference between the share price now and the share price in seven years’ time;
  • What happens to interest rates; and
  • The dividends the company actually pays out.

The number of shares that the staff member gets at the end of the seven-year lock-in period is worked out according to a simple formula.

A notional loan pays for the share at the present share price. Interest is charged over seven years on that loan. Notional dividends, based on the actual dividends paid during the seven years, pay off the loan.

The amount still owing on the loan is subtracted from the allocation of shares at the end of seven years at the new share price.

In effect, then, the staff member will be awarded ordinary shares according to how well the share price has performed, how good the dividend flow has been and the level of interest rates.

If the dividends have been high enough to pay off the whole loan, the employee gets all the shares originally allocated. If the share has not performed well, the employee gets a less valuable stake. This is the risk.

The employee has a direct incentive to make Spar profitable. The level of interest rates and inflation, which are both out of the hands of staff, are also important. The best scenario for staff would be low interest rates and a booming share market, with a scintillating performance from Spar.

Mixed picture in newspapers
As with retailing, laws encouraging BEE ownership do not have particular traction in the newspaper business.

Consumers arguably care less about the ownership of a newspaper than about who the newspaper’s writers are and what they write. That depends largely on the editors, and the elevation of black people to editorships has been evident.

Selective licensing of newspapers would be seen as a form of censorship. For the same reason, using procurement to force a newspaper to do a BEE deal would be problematic.

Guy Berger, head of the Rhodes School of Media and Journalism, said: “To use advertising as a political weapon is an illegitimate and, arguably, illegal understanding of this particular tool.” That would seem to put paid to government using procurement as a tool to enforce BEE. Yet it is unfair that some groups have taken the time and gone to the expense of bringing about ownership transactions and others have not.

The holding company of Avusa has been through several BEE transactions and Avusa is now owned 25.5% by the Mvelaphanda Group. Naspers, originally a group with a strong political, Afrikaans identity, has transformed itself into a thrusting capitalist enterprise — and done a BEE deal in its Media24 magazine and newspaper company.

The country’s two other major newspaper groups, the unlisted Independent Newspaper Group and Caxton, have zero identifiable black ownership and have done no BEE deals at all. This is unfair to Avusa and Media24. BEE should apply to all or it has no credibility.

That Independent Newspapers is entirely foreign-owned makes no difference.

So there is no reason to delay an Independent Group BEE deal. Given the pressures newspapers are under, it would make sense to do a BEE deal now, while newspaper assets still have value. Foreign investors have in the past done BEE deals as an exit strategy, selling off their assets as they wave goodbye to the country. This would be a pity. As for Caxton, the company remains resolutely silent on the issue.