Between a rock and a harder place
Much depends on the structure of the transaction
“ALWAYS BE AWARE if the risks are too random or too hard to predict – like gambling on unknown factors. But remember if you opt for a safe life you will never know what it’s like to win,” wrote entrepreneur Richard Branson in his book Screw It, Let’s Do It Again.
Branson could well have been writing about the current state of black economic empowerment in South Africa. Only he didn’t mention empowerment participants might also be left sitting with the bitter taste of losing, especially in current equity markets. The market’s leaving many empowerment “beneficiaries” with huge holes in their bank accounts.
After buying 15% of motor vehicle retailer Combined Motor Holdings (CMH) at 1860c/ share late in 2006, Thebe Investment Corporation is now sitting with an asset worth just 25% of that.
CMH’s and other retail share prices began taking a hammering after the SA Reserve Bank started increasing interest rates in 2006 and haven’t seen any respite since. The com- pany’s profit at the year ended February 2007 stood at R193,6m and it paid 51c/share in dividends. A year later the respective numbers were R111,9m (42% lower) and a 28c/share (down 45%) dividend. In its August 2008 interim period CMH’s profit plunged 88% to R7,5m when compared to the previous corresponding period and it paid no dividend (10,6c previously). Its price is currently sitting at 500c/share.
As previously stated, that scenario isn’t unique to CMH but common in many companies. And it’s also hurt many an empowerment investor who bought what turned out to be rather pricey stakes. Property unit trust group SA Corporate Real Estate Fund’s 11% empowerment deal with Wiphold’s Wipken Trust collapsed in April as the units plunged from 440c to 294c a year after the deal was concluded at 329c/unit. Its third party funding arrangement couldn’t withstand the plunge and the Wipken Trust had to relinquish its stake. The units have since fallen to 235c.
Many empowerment deals have met similar premature ends or will be severely tested by current market valuations, leaving not only big holes in some pockets but shattered economic empowerment dreams.
However, that won’t be the case for Thebe’s CMH deal and many others structured for good as well as bad times. “We aren’t
Many empowerment deals have met
similar premature ends or will be
severely tested by current market
exposed to the share price, as we bought at the operating level in the company,” says Thebe chairman and CE Vusi Khanyile. “We’re only exposed to the cash flow of the company.”
For as long as the company generates positive revenue, Thebe remains secured for its debt service liability. “We try hard to make sure deals we do are structured in such a way that we don’t expose ourselves to the share price,” says Khanyile.
He should know the market can be “too hard to predict – like gambling on unknown factors,” as Branson observed – even for seasoned investors. Thebe is credited as being the oldest empowerment player but nearly went bust in similar circumstances as its value fell by 90% between 1999 and 2001.
Rating agency Empowerdex chairman Vuyo Jack says more rigorous application of “the other elements” of the empowerment scorecard can be used effectively to deliver economic transformation. “We can’t rely on only the 25% empowerment ownership for transformation, otherwise it will never happen,” says Jack.
He says corporate SA must move away from the “tick box approach” of only ownership and utilise initiatives such as procurement to help black people break into the economic mainstream. “There’s not much black capital accumulated to fund 25% purchases,” says Jack. Current conditions are wiping away what’s already been achieved.
Would re-pricing empowerment deals work? Just like Barloworld did with theirs earlier this year? Khanyile only says the current situation is “what’s called being between a rock and a hard place” – as providers of funds are also exposed. “These are unusual times in the world.” He says the nature of the crisis calls for “unorthodox interventions in order to protect what you’re trying to do”. However, Khanyile is also relieved.
“We’re grateful that we aren’t in that space and therefore don’t have the same problem (again).”
Jack says re-pricing would work only if a deal hasn’t been finalised. “Otherwise, who would bear the losses? What goes up must come down.” Jack says black people can’t be insulated from market risks, as those are the “casualties of owning shares”.
“Some you win and some you lose. Be glad when you win.” Even serial risk-taker Richard Branson doesn’t offer much useful advice. “Don’t have regrets when you lose.”
Market doesn’t affect us. Vusi Khanyile