Current BEE transaction models will make it very difficult for companies to meet empowerment targets as, once funding and other costs are factored in, and the transaction has been wound up in five years time, the BEE partner is likely to be left with, in many instances a shareholding of between only 3% and 5%. In the best case, a shareholding of under 10% might be achieved and in the worst case, the result could be zero. So says Soria Hay, Executive Director of integrated equity and debt company Bravura.
The Financial Sector Charter calls for financial services institutions to be 25% black-owned by 2010, 10% of which must be satisfied by way of direct ownership of black people, provided that the company` board is 33% black. "According to our calculations none of the current transaction models will, in most instances, produce this result," says Hay.
She says that there are really only four core ways to structure a BEE transaction.
Firstly, there is the classic deal model whereby an investor has funds, and uses these to purchase a percentage of a business. "For a number of reasons, both historic and current, this is the least common form of BEE transaction."
Then, there is the revenue contribution model in terms of which the BEE partner earns a stake in a company by bringing a new revenue stream to the business. "In our opinion, this model is most successful when applied to a small company and virtually guaranteed to fail when applied to a large company." She explains that to be meaningful, a BEE stake should be at least 25% of a business. If a company produces turnover of R750 million, for example, it can be extremely difficult (if not impossible) for the BEE partner to provide a revenue stream that grosses R250 million. Which is not to say that such a deal should be structured on a rand-for-rand basis, as the company will no doubt employ its own resources in both helping to secure and service the additional business.
The third type of BEE transaction is where it is funded in one way or another. In the first wave of empowerment deals, special purpose vehicles were created, and these were funded in order to make the investment. "After a few years these fell out of favour as it became clear that, if the deal went wrong, every bit of value was destroyed and the BEE partner exited with little or nothing."
In order for a funded deal to be profitable, the circumstances need to be absolutely right, Hay contends. To begin with, the BEE partner must be able to buy in at a discount, and the value of the shares must grow exponentially in order for such party to service both the debt and to be able to pay for their shares. Another pitfall revolves around security. In order to buy a stake, a BEE partner often has to cede their shares to the funder as security, which could result in the funder attaching the shares and exercising the voting rights in the event of non-performance by the BEE party. "Whilst this is standard banking practice, it leaves the company with a bank as a shareholder, as opposed to a BEE partner - a situation that not many companies relish. There are many examples of this, amongst other the much-criticised Foodcorp/Pamodzi deal where ABN Amro ended up with the shareholders rights," Hay elaborates.
The fourth type of deal is where a company takes a view that there is a cost to doing a BEE transaction, and is thus prepared to allow a BEE partner to buy shares now, and acquire the rights of a shareholder, but pay for them in three, four or five years` time at today`s value. "For the BEE partner, this is certainly more attractive as he or she will not be burdened with escalating debt," Hay points out.
An example of this type is the Bidvest BEE transaction that was reported last year. However, it must be noted that these transactions normally come with an equity-related cost of funding because in practice, the existing shareholders have funded the purchase of the shares. "Once this is factored in, and the structure runs out, the BEE shareholding is likely to be 5% or less and the company will not meet its ownership targets."
Finally, there are hybrids of these approaches. For example, a portion of the deal could be on a revenue-stream basis, and the remainder could be funded. Even in leveraged-buy-out transactions, there will always be an equity portion that has to be contributed by the participating shareholders (including the BEE partners), and such equity could be structured using one of the above methods.
Although the structure of each transaction is dependent on the characteristics of the company involved, the financial muscle of the BEE player and the preferences of the vendors, there are certain key characteristics that have to be considered when undertaking BEE transactions, Hay advises. These are the following - strong cash flows, good assets in the company, the ability of the BEE partner to add value and a reasonable entry price for the BEE partner.
"Ultimately, regardless of which structure is utilised, it is clear that it is extremely difficult to address the wrongs of the past, and progress made in this regard will in most instances be incremental at best. That being said, step by step, year by year, the transformation of the South African business environment can be achieved," Hay concludes.
Share
Editorial contacts