Be­tween a rock and a harder place

Much de­pends on the struc­ture of the trans­ac­tion

Finweek English Edition - - Openers - SIKONATHI MANTSHANTSHA sikonathim@fin­week.co.za

“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

val­u­a­tions.

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

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