Sasol pointing the way to BEE vendor financing
HARD lessons have been learnt from the last two waves of black economic empowerment (BEE) transactions, dating back to the late 1990s. Previous incarnations of BEE have highlighted the importance of structuring BEE financing in a way that boosts investors’ chances of generating value from their investments.
Observers of BEE policy have in the past questioned the manner in which such transactions were financed and structured, arguing that expensive and inflexible funding eroded value for black investors, particularly investments that are caught up in under-performing sectors with depressed share prices and earnings.
Since the overwhelming majority of black investors do not have the investment capital or assets to acquire large stakes in JSE-listed companies, the BEE deals are financed through debt sourced from third parties (usually commercial banks) or from companies the BEE investors are buying into (vendor financiers).
In turn, the BEE investors repay their debt through dividends generated by their investments. For the debt repayments to be possible, the BEE investments must generate enough dividends to cover interest and capital costs. Second, when the repayment period reaches its maturity (usually 10 years) the value of the BEE stakes needs to be substantially higher than the outstanding debt.
Dwarfed
In cases where both share prices and earnings overshoot, the BEE investors make a killing. But when share prices and earnings under-perform, black shareholders find themselves in a situation where their investments are underwater, where the value of their stakes is dwarfed by ballooning debt. With the third wave of BEE deals upon us, future empowerment transactions will have to be structured in a manner that increases the number of transactions that flourish and minimise the number of deals that flounder.
The recently announced broad-based BEE scheme by JSE-listed chemicals and energy company Sasol, known as Sasol Khanyisa, points to a future where vendor financing could emerge as a preferred form of funding large-scale BEE transactions compared with third-party funding, which is less flexible when it comes to accommodating under-performing BEE investments.
Sasol Khanyisa is a R21 billion re-empowerment BEE scheme that will replace Sasol Inzalo, which was implemented in 2008 to financially empower 23 000 Sasol employees; 204 000 black South Africans; 6 million learners and teacher beneficiaries through the Inzalo Foundation; and 53 000 direct black investors in Sasol ordinary shares.
Sasol Inzalo will mature and unwind from June 2018. Unfortunately, due to low oil prices, Sasol Inzalo’s share price appreciation and dividends have not been sufficient to settle the debt. Sasol Limited is the underlying investment of the Sasol Inzalo transaction, therefore the Sasol Inzalo Public share price is dependent on the Sasol share price. When the scheme unwinds, Sasol will have to settle an estimated thirdparty debt of between R2 billion and R3bn, which it had guaranteed.
Since Sasol Inzalo is underwater, investors will not derive value or capital gains from their investment when it matures. However, it is advisable for Sasol Inzalo shareholders not to sell their shares. This is because the very same shareholders will be given an opportunity to participate in Sasol Khanyisa, free of charge, when the proposed scheme launches next year.
By choosing not to opt out, black investors are likely to get better returns. This is because Sasol Khanyisa is 100 percent vendor financed and will not be dependent on the performance of Sasol’s share price to generate value. Sasol Khanyisa will own 25 percent of Sasol South Africa, a wholly-owned subsidiary of Sasol. There is no doubt that when Sasol conceived Sasol Khanyisa it had learnt from past experiences of other BEE deals.
Delivering
BEE transactions that have relied less on third-party loans have fared better. Thirdparty loans have the potential to saddle BEE deals with huge debt, especially investments whose underlying share prices and dividends are not delivering the goods.
There are a string of vendor-financed deals that also support the theory of vendor financing being the holy grail of future empowerment funding. Aluminium supplier and exporter Hulamin, construction’s Group Five, and banking group Nedbank did not include third party funding in their BEE funding structures, and therefore, created value for black shareholders.
In 2016, media company Media24 used its position as a significant vendor financier to waive a debt balance of R400 million owned by its investors of its BEE scheme, enabling the scheme to generate value.
Financial services group Sanlam created value for its black shareholders by delivering strong earnings growth via a BEE scheme financed by vendor funding.
Sasol Khanyisa investors will be given favourable repayment terms by Sasol to ensure that value is created and that the company complies with South Africa’s broad-based BEE legislation.
On the other hand, third-party financiers are not as pliable, because their main concern is recovering their loans instead of being sympathetic to black investors mired in poorly performing assets.