A number of key trends have arisen in BEE transactions concluded over the last 12 months which, according to Soria Hay, executive director of integrated equity and debt company Bravura, have for the most part been positive.
"Recent BEE transactions reflect not only lessons learnt from past deals but also the changing legislative landscape surrounding empowerment in the country," she says.
One new trend, says Hay, is that while few companies currently conclude deals only with their employees, most now include their employees in their transactions as opposed to not including employees at all in the past. The Department of Trade and Industry (DTI) refers to this trend as the golden triangle of BEE - whereby companies do deals with three parties: their employees, entrepreneurs and a broad-based group.
Another trend which is becoming increasingly regular is that the vendor company (ie the company that needs to do the BEE deal) assists in the funding of the transaction, ensuring the deal is no longer funded at arms length in the market place.
Hay points out that while some arms length deals are still being transacted, most of these are unsustainable because they depend heavily on the dividend flow coming from the company to be able to service the interest and on the share price performance of the company.
"What you are increasingly starting to see is that while some of the funding is done by a third party, mostly assistance is provided by the company needing to do the transaction itself (through accepting a put option on the shares) or even the shareholders of the company," she says.
Examples of BEE deals where outside funding was procured include Investec and Unitrans while, in the case of Sanlam, the group said its transaction would be funded mostly by outside parties but was unable to raise the funding. Eventually, it ended up assisting in a big part of the funding itself through certain mechanisms.
Hay explains that one of the reasons why companies have started to look at ways in which they can fund their BEE transactions themselves is that the recently issued DTI codes penalise firms that do not have robust funding structures with the BEE party shareholding needing to be "in the money" with a certain percentage per year. The incentive to assist in the sustainable funding of deal is therefore high as only 12 out of a potential 20 points can be earned for ownership if the funding is not correctly structured.
According to Hay, one trend which is both negative and worrying is that you still find a lot of "celebrity" transactions, ie deals characterised by a lack of new entrants and a lack (or very small part) of being broad based. These deals are not sustainable and do not help build the bigger, positive economic landscape needed in South Africa.
However, what is interesting is the trend among industries to adhere to the codes issued by the DTI, tweaking them appropriately, as opposed to the original drive among sectors to come up with their own customised charters.
In addition to the above trends, Hay says companies have now really started looking at all the different elements on the BEE scorecard, not only ownership and management but also areas such as preferential procurement, skills development and employment equity.
"It is therefore likely that we are going to see rapid transformation in the economic landscape within the next year because companies are starting to genuinely implement thorough transformation within their structures, incorporating a broad range of BEE elements," she believes.
Looking back, there are, however, certain BEE transactions that should rather not have been implemented.
"It is a vexing phenomenon that certain companies concluded BEE transactions in the past including only black staff and excluding white staff, such as the deal done by Nampak, rather than applying the "modified flow through" principle described in the DTI codes, says Hay.
Other negative transactions have included deals clinched by companies that have approached BEE with a lack of long-term vision. For example, Edcon concluded an empowerment deal only with employees but these employees were not locked in to the deal and are free to trade the shares on the stock market after vesting. "This transaction was implemented at a huge cost to shareholders," says Hay.
These kinds of deals give additional bonuses to staff but fail to lock in the benefit of having a sustainable, long-term black credential and thereby truly transforming the company. The result is that the company may in all likelihood have to conclude another BEE transaction, at considerable cost to shareholders four years from now once their BEE shareholders have sold out.
Other transactions, such as the one done by Pioneer Food, which was concluded with staff, cost 4.5% of the market capitalisation of the company. Hay points out that this is even more than the "accepted cost" of BEE transactions and may indicate that a company is not managing shareholder value thoughtfully.
"The question this deal raises is whether the necessity to do a BEE transaction negates normal corporate finance theory, of which a fundamental tenet is never to undertake equity transactions that do not add shareholder value," she says.
"The fact is that it is absolutely possible to structure BEE transactions without this huge value dilution for shareholders. Contrary to current practice, BEE transactions could have a positive impact on shareholder value if not from day one, then certainly from the first year onwards. When structuring a transaction it is important to employ a mix of both equity and debt instruments, which makes it possible to lower the cost of debt overall and structure a deal that makes commercial sense for everyone involved."
Hay concludes that while there are on-going challenges surrounding the structuring of BEE transactions, lessons from the past are for the most part being integrated and will be reflected in deals coming into the market.
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