Keep old hang-ups out of new BEE deals
Many notable second-phase BEE deals, such as those involving Vodacom, Barloworld and Sasol, were struck in 2007/2008. Ten years later, 2018 presented an unwinding opportunity for some of these deals and the introduction of new deal structures.
Many deals have been total failures and some have been spectacular successes. The difference appears to have been the detail of how they were financed, who is involved and what variables influence the balance of power.
On the financing front, there has been an interesting departure from the classical special purpose vehicle model, with share price performance as a main driver of how value is unlocked (if at all) alongside an
equity upswing and prohibitive lending terms. An example of this is the recently announced Barloworld Khula Sizwe transaction. The deal made provision for empowerment partners (black entrepreneurs, workers, the black public and an empowerment foundation) to acquire selected parts of Barloworld’s property portfolio at a 5% discount and financing at 80% loan to value.
The property company would then enter into a lease agreement with Barloworld, wherein the firm would pay the black property company for leasing the properties over a 10year period.
This is not insignificant. Primarily because most BEE deals have historically been structured around share price performance, this shifts the terms of the deal towards the operational and cash-generative assets of the business, which as Barloworld executive for human capital Tantaswa Fubu notes is different from how these deals have been struck in the past.
Whatever value the PropCo derives will have to buy Barloworld shares, so by the time they acquire those shares, they will not be encumbered.
What has happened with BEE schemes that have gone under is that the value of the schemes has been linked to the value or appreciation of the company’s share price.
Notwithstanding the significance of this, there remain key elements of the BEE model that require greater scrutiny: use of empowerment schemes to offload noncore assets or assets that are too lumpy to dump in instances of strategy change.
The question that remains is whether the cash flows in the Barloworld deal, modelled to pay off debt used to fund the deal in six years, will provide a different and more “real economy” experience of how empowerment can work.
However, the old hang-ups remain. The deals are illiquid and lock-in periods remain, which prevent these stakes from being exchanged.
Moreover, there is a disjuncture at policy level that continues to place black capitalists without capital at great risk a misalignment between macroeconomic policy and empowerment objectives.
Sasol CEO Bongani Nqwababa was very firm in an interview a few weeks ago in suggesting he didn’t control the macros, when asked whether he felt a similar shift towards the operational elements of business performance, rather than share price performance in the Khanyisa deal, would mean better outcomes than Inzalo.
He is right. However, with the central bank modelling an interest rate hike before the end of 2019, not only does a tight monetary policy constrain household demand, it also limits the power of that policy tool to pursue other objectives beyond just price stability.
One wonders how deserving the black nouveau riche is of such an investment when history is replete with examples of narrow, rapid and unproductive patterns of accumulation that do little to change the lopsided structure of our economy.
One of the things sociologist Karl von Holdt poignantly recognises is that this era has coincided with shifts to disembed accumulation from production and territory, in the interest of finance.
Re-embedding that accumulation with productive activity in the real economy may require something simple
building deals on the basis of things management teams, deal participants and policymakers can actually control, rather than relying on the herd instincts of market traders and speculators.
● Cawe (@aycawe), a development economist, is MD of Xesibe Holdings.