/ 28 August 2009

Broadest-based BEE deal to date

It should not surprise anyone that SABMiller’s R6-billion BEE scheme showed all the nimble thinking that has kept the brewer king of the Castle (excuse the pun) in South Africa.

This equity transaction, one of the “broadest-based” yet, also aims to ensure the loyalty of the small taverners who are SABMiller’s frontline troops in the country.

In addition, it is designed to help speed up the process of legalising the country’s many shebeens, so that SAB can supply them directly with beer. Licensed taverners, and those who have applied for licences, are eligible to apply for the scheme.

SABMiller is using legislation intended to transform the economy racially to entrench its position as a national champion and a good corporate citizen and intends to ensure the loyalty of its retailer customers.

There is nothing wrong with this. All BEE deals have to have some rationale — even if this has sometimes been a bit far-fetched — for the BEE participants to “earn” their shares by increasing the share price.

Sometimes they are supposed to do this by bringing in new customers. The implicit deal in the distant past, when high-profile politicos were brought in, was that they would either ensure the company got government business or that government did not interfere with the company’s profits.

In the SAB deal the BEE participants “earn” their shares by helping SAB to stay profitable by keeping drinkers drinking its products.

The focus of the deal is on SAB, the South African subsidiary of SABMiller, which has grown from its South African roots into a true ­multinational.

How will it work?

In theory, in 10 years’ time some lucky taverners, shebeens applying to be licensed, employees and a charitable foundation will own part of the giant beer machine that is the local operation, still called SA Breweries. They will then swap the shares in this unlisted company for shares in the listed SABMiller, which has operations around the world. The target is 10% of the shares of SAB. “Mandated investment” boosts the 10% shareholding to an effective 16%.

What “mandated investment” means is that up to 40% of the target company’s shareholding held by pension funds and the like is excluded before calculating the percentage that will be owned directly by black people as a result of the BEE deal. If the pool of equity shrinks any BEE shareholding becomes bigger.

How much the BEE participants will get depends on the value of SABMiller (and therefore SAB) after 10 years and on the dividends paid annually to them. SABMiller is making no promises, but says they are expected to be “meaningful”.

It is unlikely that all the shareholders will hang on to their shares in SABMiller when they get them after 10 years — SABMiller shares, unlike SAB shares, are easily bought and sold. Because it is listed the price of the shares is easily determined.

At the end of the 10-year transaction period, SAB Miller will buy back SAB shares and in return give the BEE participants shares in the SABMiller public limited company.

The details of how this will work have not been announced, but SABMiller says the new shares will have a value linked to the operating performance of SAB.

BEE deals are usually complex because they involve financial engineering and this one is no different. Most of them rely on the share price rising over a three- to 10-year period. In this case the value of the SABMiller shares eventually acquired will be calculated by subtracting the initial value of the SAB shares, plus interest, from the actual value of the SAB shares after 10 years.

For employees and the foundation, the shares are a gift; the retailers and ABI customers will have to put down a small cash amount.

It’s as though SABMiller will give the BEE participants a loan to buy the SAB shares and charge interest on the loans at a rate lower than, but linked to, the prime rate. The dividends paid to the BEE participants will be included in the calculation. So the value of the SABMiller shares eventually received will depend largely on the SAB share price and what happens to interest rates.

As with many other broad-based BEE deals, employees feature as beneficiaries through what is usually called an employee share-ownership scheme (Esop). Lower-level white employees are included. SAB will put shares into a trust and employees will have voting rights.

The retailer part of the deal will be available to black people or 51% black-owned companies that are:

  • Liquor retailers with a valid licence;
  • Customers of ABI, the soft drinks division of SAB; and
  • Applicants or legal entities who can provide evidence that a liquor licence application has been lodged.

As with the Esop, the shares will be held by a “retailer investment entity” on behalf of the retailers for 10 years. Participating retailers will, from inception, have voting rights. Directors of the investment entity will vote for these on their behalf.

The deal will establish a permanent SAB Foundation for community social investment.

The SAB Foundation will focus on supporting entrepreneurship development, especially among women and the youth in rural areas. SABMiller says it will target “historically disadvantaged South Africans”, though that term is essentially defunct except in the mining charter.

There is always risk in any transaction. What’s the risk here?

SABMiller’s domestic operation could conceivably fail spectacularly, rendering the shares worth less than the small payment the retailers have to put down to take part in the scheme.

Nothing is impossible. We are used to SAB seeing off competition from brewers, both local and foreign, and from other beverages, both alcoholic and non-alcoholic.

But Heineken is breathing down SAB’s neck, building with Diageo and Namibian Breweries the first foreign-owned brewery in South Africa in a long while.
For SABMiller there is the risk that the BEE regulatory environment will change and that it will be forced to make another deal or that this deal becomes irrelevant, despite the cost incurred.

It is estimated that this deal will cost R1,8-billion — almost a third of the entire R6-billion transfer of shares to black shareholders.

And there is the risk that, if the deal delivers too little in the way of SABMiller shares, there will be a backlash from the very people SABMiller is trying to benefit.

It’s the initiative that should count, not the colour
The SABMiller deal probably signals that ‘broad-based” empowerment deals are firmly entrenched.

I doubt we will see any new big BEE deals that choose politically connected, high-profile black individuals as beneficiaries, as with the ‘narrow-based” deals of the past. Any company doing a big BEE deal exclusively with those who are termed ‘the usual suspects” would look foolish now.

Narrow-based empowerment seems to be dead and it’s hard to know how it developed.

If you look back to the early deals that propelled some individuals into the BEE space, individuals were often representatives of broad groups or associated with them.

Dr Nthato Motlana, who did the first deal, referred to the 300 000 black individuals whom he said were shareholders in Nail.

There are now a handful of black individuals who are wealthy in their own right, or at least their companies are, and they could do deals that stand up as purely commercial — or at least with more of a commercial rationale than a BEE scorecard rationale.

The codes of good practice that are the detailed regulations of BEE don’t insist on ‘broad-based” ownership. Transfer of ownership, the BEE deal, is only one part of the BEE scorecard. Other elements are broad-based, such as employment equity or enterprise development.

BEE cannot stand in the way of black businesses becoming big businesses, after all.

For established ‘white” businesses, one thing in favour of narrow-based empowerment is that it is easier to justify bringing high-profile personalities on to the board.

Board representation is still important. Witness the fuss over the appointment to the Sasol board of Public Investment Corporation (PIC) nominee Imogen Mkhize. The PIC was upset by the seeming recalcitrance of the company to abide by the wishes of the PIC, its single-biggest shareholder.

However broad-based the deal, this does not, apparently, safeguard a company from criticism for a lack of transformation at board level.

The PIC, which holds a little more than 4% of the company, criticised SABMiller for the overwhelming whiteness of the company’s executive committee not long after the BEE deal was announced.

From SABMiller’s point of view, South Africa must now command less attention, as it accounts for only about 17% of total revenue. Other regions, particularly South America, are greater sources of revenue and operating profit.

Another message seems to be that even a company like SABMiller, with a long history of thoughtful and innovative corporate social responsibility in South Africa, including its owner-driver scheme and its early embrace of affirmative action, cannot escape scrutiny.

SABMiller has, in other parts of Africa, pioneered integrating local communities into its supply chain as a way of aligning development with business priorities.

SABMiller chief executive Graham Mackay described the company’s market-based solution in the Mail & Guardian in 2006. It’s a pity such initiatives by the brewer aren’t applauded instead of the spotlight falling on the colour of its board.