Nomzamo Xaba, page 18

Lock-ins of black eco­nomic em­pow­er­ment share­hold­ers must be­come thing of the past

The Star Early Edition - - BUSINESS REPORT - Nomzamo Xaba

THE FACE of a Black Eco­nomic Em­pow­er­ment (BEE) share­holder has evolved. From the po­lit­i­cally con­nected elite in the early days of BEE deal­ing when in 1993 San­lam dis­posed of its con­trol­ling stake in Met­ro­pol­i­tan life to the late Dr Nthato Mot­lana’s con­sor­tium New Africa In­vest­ments Lim­ited, to South African’s from all walks of life. This is ev­i­denced in the Kumba Iron Ore En­vi­sion broad-based em­ployee share par­tic­i­pa­tion deal which saw its em­ploy­ees re­ceiv­ing up to half a mil­lion rands each in 2011, as well as nu­mer­ous public of­fers as was the case of Mul­tichoice’s Phuthuma Nathi, for ex­am­ple.

Since 2003, when the mea­sure­ment of BEE was first in­tro­duced, the Codes Good Prac­tice on BEE (the codes) have gone through a num­ber of amend­ments. Ini­tially, the fo­cus was on mea­sur­ing whether a com­pany is owned by black in­di­vid­u­als, then there was a move to­wards broader par­tic­i­pa­tion of black or­di­nary peo­ple through the Broad-Based BEE (B-BBEE) codes. This ex­panded be­yond just own­er­ship, but in­cluded other el­e­ments such as mea­sur­ing em­ploy­ment eq­uity, skills de­vel­op­ment, and even procur­ing from other com­pli­ant com­pa­nies.

How­ever, with the amended B-BBEE Act and its cur­rent codes, we find our­selves at the very place we started, fo­cused on black own­er­ship all over again. The weight­ing for own­er­ship points on the score­card has in­creased from 20 per­cent to 23 per­cent, while pro­cure­ment points are heav­ily weighted to­wards 51 per­cent black owned com­pa­nies – which should be a good thing.

De­sired ef­fects

We need to as­sess whether the cur­rent ways that deals are struc­tured is ef­fec­tive and whether it yields the de­sired ef­fects. With bankers, lawyers, pri­vate eq­uity play­ers and other as­sort­ments of ad­vis­ers tak­ing full ad­van­tage of the clear busi­ness op­por­tu­ni­ties that ex­ist in South Africa’s econ­omy, the BEE trans­ac­tions of 2016 are far more com­plex than the early trans­ac­tions.

It re­mains a valid con­cern that the un­der­ly­ing black share­holder may not be re­ceiv­ing any value from the use of their “black­ness”, let alone the leg­endary lock-in pe­ri­ods that have ef­fec­tively dis­abled black share­hold­ers.

We have cer­tainly moved from the days of the gar­dener who is the chief ex­ec­u­tive and also the 30 per­cent share­holder of a com­pany he does not head, to the era, as some might ar­gue, of the com­pla­cent black share­holder who knows the value of their “black­ness” and for the right price, will sell this com­mod­ity to a will­ing bid­der.

Of course this is a gen­er­al­i­sa­tion, how­ever there are more and more in­stances of this hap­pen­ing as in­di­cated by the BEE com­mis­sioner’s com­ments in late Oc­to­ber.

When mak­ing ref­er­ence to a BEE trans­ac­tion, one is gen­er­ally in­ter­ested in three crit­i­cal cri­te­ria, that is, do the black peo­ple vote in pro­por­tion to the shares they hold; do they have the right to ben­e­fits of the eq­uity they hold, both the div­i­dend and changes in cap­i­tal (ap­pre­ci­a­tion and de­pre­ci­a­tion); and what is the net value in the hands of black peo­ple, that is debt free eco­nomic par­tic­i­pa­tion of their eq­uity? This third cri­te­ria be­ing the point of dis­cus­sion for most ad­vis­ers.

It is all good and well that black peo­ple will sit in a board room and be en­ti­tled to a share of eq­uity at some fu­ture date, but what do they ac­tu­ally own, free of debt, what value do they have in a com­pany? And what about liq­uid­ity con­cerns? With many a trans­ac­tion still be­ing funded through some or other form of debt, the point of any BEE trans­ac­tion should be fo­cused mainly on this net eco­nomic value.

Stay­ing in debt

The codes have gone some way to en­cour­age share­hold­ers to put in place mech­a­nisms to pay down the debt in the hands of black peo­ple, but far too many trans­ac­tions are be­ing re­fi­nanced, mean­ing that the black share­holder stays per­pet­u­ally in debt.

The or­di­nary South African who has very lit­tle in the way of col­lat­eral or own funds to buy into new trans­ac­tions will un­for­tu­nately still find him­self funded to en­ter into any trans­ac­tion of this na­ture, whether through a ven­dor funded struc­ture or al­ter­na­tively through more strin­gent third party fund­ing via the tra­di­tional fund­ing houses.

The pres­tige that ap­par­ently lies with be­ing a B-BBEE share­holder soon loses its ap­peal once the black share­holder re­alises that they may be trapped into mil­lions of debt raised to turn them into share­hold­ers, pa­per-rich but cash-poor. This is com­pounded when they are un­able to re­alise value when the mar­kets im­prove, like any other in­vestor can. This wealth may be a func­tion of fac­tors out­side of their own con­trol, like their in­vest­ment as­set’s per­for­mance in global eco­nomic up­swings and down­swings. Even with all the risk at­tached to be­ing a share­holder of a com­pany, re­gard­less of race, many South African’s still have dreams of their big break com­ing through a BEE deal that will change the course of their lives as they be­come the big man with mul­ti­ple BEE deals in place.

It is clear that any share­holder is keen to re­ceive the rights of own­er­ship at­tached to the shares that they hold, and so solutions that give rise to per­pet­ual black own­er­ship for the com­pany while at the same time af­ford­ing a level of liq­uid­ity to the share­holder are the ideal sce­nario when struc­tur­ing any deal. Lock-ins of BEE share­hold­ers should be­come a thing of the past, the new share­hold­ing struc­tures should al­low for the shares bought by black peo­ple to be trade­able and the process of mak­ing this trade­abil­ity should be ac­ces­si­ble, ap­pro­pri­ate and of­fered at fair value to the or­di­nary South African.

This will make the par­tic­i­pa­tion of black peo­ple more ro­bust and it will in­crease the pro­por­tion of black peo­ple own­ing the econ­omy. There are reg­is­tered stock ex­changes in this coun­try have al­ready made strides in mak­ing this a re­al­ity.

It re­mains a valid con­cern that the un­der­ly­ing black share­hold­ers may not be re­ceiv­ing any value from the use of their “black­ness”.

Nomzamo Xaba is the group ex­ec­u­tive of re­search and ad­vi­sory for Em­pow­erdex.

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