Empowerment deals should stand or fall by their own merits

The story of how Mzi Khumalo profited from his empowerment deal with Harmony Gold more than a decade ago will probably go down as one of the shrewdest pieces of business done in the name of black economic empowerment. One day Harmony was in a deal with a broad-based consortium called Simane, the next day they woke to find that, in fact, Khumalo was their partner and, to top it off, he had already sold his stake, leaving the miner without a black empowerment partner. What Khumalo had done was what any smart investor would do — buy on the cheap and sell at a profit. But it’s true that perhaps his dealings weren’t in the spirit of empowerment and towards what, I guess, is its ultimate goal of transforming major sectors in the economy and, in the case of his Harmony deal, mining.

He didn’t ensure that Harmony retained its empowered status by selling his stock to other black investors, the few that there are — he sold in the open market. It was a smart investment play, but it raised questions about just how one ensures that companies keep their black shareholding at levels that meet government targets while not prejudicing black investors.

And having done its deal with Khumalo, should Harmony be eternally credited for its empowerment efforts despite the fact that it quite clearly no longer had a black investor? The miner would in the years following the famous empowerment play by Khumalo move on and now have Patrice Motsepe’s African Rainbow Minerals as its partner.

In the case where a black investor bought into a company and saw an opportunity to exit at a profit and move on to a better bet, I think it’s fair that in a case like Harmony it retains its empowerment score with regard to ownership. The problem has been that there have been a few successful transactions where black investors had made great bets and years later have emerged capital rich.

In some cases black investors were pushed out because of, say, capital raising, which in the case of South African miners over the past decade has been a feature because of low commodity and share prices. I think there’s an argument that their empowerment deals should be revisited.

In most cases these are rights issues in which the black investors, because of their minority stakes, don’t have a say — the board deciding whether to undertake such corporate activity or not.

Black consortiums had to raise debt to buy their interest in miners, which debt was to be repaid by dividend flows. For the most part these investors didn’t have stakes significant enough to insist that dividends were paid, and in the case of mining, the environment ensured a barren decade.

They are but casualties of market conditions, which is the fate of any shareholder, I guess. But what is the whole point of the experiment of empowerment? As I understand it, it’s to put capital in black hands and in turn for those hands to invest in the real economy, increasing the size of the cake.

When a black shareholder gets an admittedly discounted stake in the company and gets locked in for a 10-year period only to emerge at the end of that period with debt and nothing else, what was actually achieved? The company in question got its credentials and met targets that ensured mining continued unhindered by any regulatory burden, or it continued to do business with the state.

All for the cost of just placing a director or two from the black consortium on its board.

Now, black investors being squeezed out by market forces and by directors not in favour of empowerment is not unlawful. It’s the rough and tumble of business. Given that South Africa is in the mood for reviewing its transformation efforts of the past two decades, it is in the interest of all business, and not only miners, to take a sober look at the transactions of yesteryear.

Where forces beyond the control of established business have squeezed out black consortiums, deals should be reimagined in a manner that makes them more sustainable.

It is in the interest of all to take a sober look at their transactions