MOVING TO REAL EMPOWERMENT?
No longer aimed at the huge enrichment of the connected few, BEE is on track for a much broader spread of wealth, with employee share schemes gaining increasing traction
Less than 30 years after the first major transaction was concluded, BEE has moved onto a distinctly different trajectory. It’s no longer about the huge enrichment of a relative handful of wellplaced individuals, but the slight enrichment of a much broader range of individuals, as recent empowerment deals by Capitec and Shoprite highlight.
In 1993, more than 10 years before the corporate community came face-to-face with the first BEE legislation, Sanlam rushed to complete the sale of its stake in Metropolitan to a little-known entity called New Africa Investments Ltd (Nail).
At the time, Anglo American was about to do a similar transaction, selling insurance business African Life to Real Africa Investments.
The Metropolitan deal looked for all the world like an attempt to replicate the role Sanlam played in the commercial development of Afrikaners from the early 20th century. Under black ownership, the company was expected to attract the savings and investment funds of black South Africans, building a powerhouse that would manage and control large secdespite tions of the economy.
Unfortunately, it didn’t quite work out that way.
Nail was headed by the wellregarded Nthato Motlana, but run by an impetuous Jonty Sandler. It lacked the discipline and skills to accumulate assets in a steady and methodical manner. Instead, the BEE hype of the time encouraged Sandler to believe he could create another Anglo by using debt to acquire a vast array of businesses. Perhaps it was inevitable that Nail would have a short lifespan.
Sandler’s lofty ambitions were encouraged by Anglo’s sale of its controlling stake in its industrial holding division, Johnnic, to the National Empowerment Consortium (NEC). Remarkably, Anglo was able to tag the deal as an empowerment transaction, the drawn-out sales process pushing the price up to the top end of the range.
“The R50 a share at which the deal was struck was almost 50% above the level the share was trading in 1994, when negotiations first began,” one of the advisers to the NEC tells the FM. He puts the delay largely down to Anglo’s indecisiveness and its willingness to encourage an unwieldy number of participants to join the consortium.
The NEC at the time comprised 50 members, including trade union and black business interests. But it was dominated by Nail, whose leadership included political heavyweights Cyril Ramaphosa and Dikgang Moseneke.
The entry gate to the BEE world has become much narrower, even as the people on the other side of that gate have become much wealthier
Sahra Ryklief
The NEC funding structure was typical of that first-generation transaction. As analyst Duma Gqubule describes in a recent report: “Firstwave financing involved the establishment of special purpose vehicles with two classes of shares. The black investors had political control through a majority of voting shares. The thirdparty financier issued preference shares — a debt instrument. The interest was rolled over for the funding period. The black investors would own the economic shares after settling the debt.”
The shares were used as security for the debt. And while debt was relatively easy to access at that stage, it had a major drawback: it was provided on a relatively short-term basis.
Crucially, this meant the underlying share price had to perform strongly in the short term. That rarely happened — and it certainly didn’t happen for most of the highly geared BEE deals, including Johnnic. This meant expectant BEE investors were left with little to no value once the funding facilities were unwound.
By the early 2000s financiers were shying away from short-term, speculative funding. But the government was on the move, and empowerment charters in the mining and finance sectors helped support a new phase of transactions, with companies now more willing to assist in funding their BEE investors.
FirstRand, Standard Bank, Nedbank, Exxaro and SA Breweries all generated attractive returns for their BEE investors.
Patrice Motsepe, who secured a deal with iron ore company Assore after failing to be elected chair of the NEC, became enormously wealthy during this second phase of BEE. After setting up African Rainbow Minerals he went on to lead a consortium that took a major stake in Sanlam.
And, having done miserably in the first BEE phase, Ramaphosa scored substantially in the second, when he got access to significant mining-related assets that he used to build up Shanduka.
But the global financial crash and growing uncertainty about the “once empowered, always empowered” principle killed much of the appetite for highprofile deals after 2009 (though there were a number of replacement BEE deals). Crucially, BEE activity continued apace at smaller, unlisted companies that were also subject to empowerment legislation — particularly if they did business with the government or supplied large companies that had to meet BEE requirements.
Sahra Ryklief is chair of Ditikeni, an investment company set up by 24 NGOs in 1999 in a bid to access BEE deals. She agrees that BEE has gone through a few stages since 1993 — and has certainly moved away from the earlier focus on big names such as Motsepe, Tokyo Sexwale, Eric Molobi and Phuthuma Nhleko.
“Today the only thing that counts is the ability to bring cash to the deal. If it’ sa big deal then you need a big balance sheet,” Ryklief tells the FM. And bank finance is now hardly ever available.
“The entry gate to the BEE world has become much narrower, even as the people on the other side of that gate have become much wealthier,” she says.
Ryklief is happy Ditikeni found a BEE niche. Starting with minimal financial resources and much determination, Ditikeni was able to access a few of the bigger deals in the early 2000s.
Ditikeni’s NGOs provided critical services to hundreds of thousands of residents in underresourced communities across SA. It was the ideal broad-based empowerment partner, and BEE offered an opportunity to replace the international donor funding that had dried up after 1994.
“BEE has proved to be a valuable source of income for a sector which is always financially challenged,” says Ryklief.
Through astute manageworked ment, Ditikeni has grown its initial R2.7m into a few hundred million rands. This means it has the funds to do deals with smaller companies that are in need of a BEE partner.
With banks unwilling to provide finance, uncertainty around the “once empowered, always empowered” principle, and a reluctance to be seen as further enriching the black elite, it was probably inevitable that employee share ownership plans (Esops) would move centre stage.
Tshepisho Makofane, MD of blackowned and -managed investment, advisory and fund management company Tamela Holdings, says the increasing focus on Esops represents a shift away from the use of black partners.
It’s not just a tie-up with the “usual suspects” that companies are keen to avoid; they also prefer to stay clear of banks, if possible. Doing the funding themselves “gives [companies] flexibility in case the share price falls”, Makofane tells the FM.
Esops at Capitec and Shoprite, for example, “were fully funded by the companies”, he says.
The design of the two plans demonstrates how far Esops have come since the late 1990s.
Capitec’s offering — available to all staff below executive level who have for the bank for at least three years — is valued at R1bn. It is essentially a heavily discounted share option scheme; employees have to pay just
50% of the cost of the shares after five years, with Capitec providing funding at favourable rates. If the share price tanks, the employees don’t have to repay the loan portion. It’s an essential aspect, given that the scheme is intended to encourage retention.
Over at Shoprite, employees who have been with the group for at least two years are entitled to dividends on 40-million Shoprite shares that will be held in a trust. The scheme is described as evergreen and, though there are voting rights attached to the units, there is no provision for employees to ever own the shares.
Management wouldn’t provide anything more than the sketchy details in the Sens announcement, so it’s impossible to know how many Shoprite employees will benefit. But the company has already made its first dividend payment on the shares in the trust. The 233c a share dividend cost the company R77m, but it’s unclear how much of that was paid into the trust, and how much to employees.
Makofane says the use of Esops has been given a boost by the 2021 clarification note from the department of trade, industry & competition (DTIC), which said such schemes would contribute to BEE points.
DTIC minister Ebrahim Patel has made no secret of his fondness for employee share schemes: most of the large mergers that have passed through the competition authorities in recent years have emerged with some form of Esop.
For Capitec, and even more so for Shoprite, the hope is also that the schemes will boost employee loyalty. Shoprite loses more than 20% of its staff each year, resulting in hefty costs to the company. But there’s no doubt also a competitive angle, given Woolworths’ “Just Wage” initiative, and the fact it has hiked pay at the low end of the scale by a hefty 24% since 2020.
Asief Mohamed, chief investment officer at Aeon Investment Management, who was at Metropolitan in the 1990s, says the broader, more inclusive focus on BEE schemes is appropriate, all things considered.
Among the biggest of those considerations has been the disappointing contribution to the economy by the early beneficiaries of BEE, who are now enormously wealthy.