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City Lodge’s disastrous BEE deal

How a R485m transaction ended up costing (mostly shareholders) over R900m.
Image: Supplied

It is hard to overstate just what a terrible deal City Lodge’s 2008 black economic empowerment (BEE) transaction has been, principally for shareholders.

Just three weeks ago, the hotel group surprised the market with a request for the approval of a R1.2 billion rights issue. At that point in time, its entire market cap was just R1.3 billion. Since then, it has declined to R914 million. Of course, the impact of Covid-19 and the countrywide lockdown since the end of March has been brutal on the hospitality sector. City Lodge shares are down 70% this year, so it is tempting to imagine the group desperately needing funding for the market to sustain its currently limited operations.

The reasons disclosed in the rights offer circular include allowing the company to “repay corporate debt; provide for its obligation under the BEE Funding arrangements; allow the Company sufficient working capital to fund its cash flow shortfall as a result of the impact of the Covid-19 pandemic and national lockdown; and create debt capacity and a flexible capital structure to position the company for future growth”.

Remove the substantial burden of BEE funding from its balance sheet, and it would be hard to describe the level of debt as “high”, which the group does in the circular. In fact, it is clear that shareholders are being asked to stump up R1.2 billion for the primary purpose of bailing out City Lodge’s BEE scheme.

Rewind to 2008

In 2008, the group completed a BEE transaction with three entities who, together, would acquire 15% of the company. At that time, the value of the deal was R485 million.

Vuwa Investments would acquire 6%, the Injabulo (“happy smiles”) staff trust a further 6% and an entity to be established by the University of Johannesburg, School for Tourism and Hospitality for the education of primarily black students of the tourism and hospitality industry would acquire 3%. The investments by the two latter entities are held via Newshelf 935 and Newshelf 892.

Vuwa was described at the time as “an empowerment company led by Mr. Bulelani Ngcuka who is an 18% shareholder in Vuwa. Vuwa is majority-owned and controlled by historically disadvantaged individuals and includes African Footprint Investment Holdings, an investment holding company controlled by black women”. Vuwa was not allowed to dispose of shares until 31 December 2017 and it undertook to “ensure a minimum contribution to City Lodge’s empowerment rating which includes a commitment to remaining at least 75% black owned and remaining 10% owned by black women”.

Funding for the acquisition of City Lodge shares by the various parties would be via preference share funding provided by Standard Bank. This funding would be guaranteed by the company.

2008 Vuwa Education SPV Staff SPV Total
A preference shares R80 million R35 million R80 million R195 million
B preference shares R64 million R62 million R114 million R240 million
Equity R50 million R50 million
Total R194 million R97 million R194 million R485 million


These seven-year A preference shares would bear interest at 74% of prime, and the (rolled-up) cumulative zero coupon five-year B preference shares at 75% of prime. With the scheme under water, the redemption date on both was extended to “no later than” 31 January 2021.

Fast forward to 2020

Today, the situation is dire. The June circular says matter-of-factly: “The B-BBEE Transaction is unfortunately materially out of the money”. The total value of the BEE SPV shareholding on 15 June was R161 million. The amount outstanding in terms of transaction funding was R750 million.

2020 Vuwa Education SPV Staff SPV Total
A preference shares R41.2 million R14.3 million R49.4 million R104.8 million
B preference shares R161.5 million R154.7 million R284.1 million R600.3 million
Loans R12.1 million R11.6 million R21.3 million R45 million
Total R214.8 million R180.5 million R354.9 million R750.1 million

* Amounts rounded. Totals may not add up.

The R50 million loan granted to Vuwa remains outstanding and has attracted total notional interest of R37.4 million, which has been converted to equity. It was not repaid at the original due date of 31 December 2017, as this was subject to the settlement of the BEE preference shares.

Excluding lease liabilities (a change under recent IFRS amendments), City Lodge’s long-term liabilities as at its interim results on 31 December 2019 were as follows:

  • Interest-bearing borrowings R660 million
  • BEE preference shares R353 million
  • BEE shareholder loan R50 million
  • BEE B preference share dividend accrual R337.2 million
  • Deferred taxation R210.9 million

The total exposure to the BEE scheme funding has since increased to the total of R750.1 million. This is more than the group’s three revolving funding facilities (R660 million) secured over certain of its properties!

It is this exposure that shareholders are being asked to bail out. By 31 January, an amount of R774 million (including interest to that point) will be due to Standard Bank, the preference share funders.

Obviously, if the rights offer is successful, the additional R426 million raised will be useful to reduce (actual) debt further. But, there is an enormous difference between a company trying to raise half its current market cap, or an amount 30% greater than its currently valued at!

To make matters worse, though, the BEE SPVs plainly have no funds to follow their rights. Not to worry, says City Lodge, the SPVs “will sell rights allocated to them and use the proceeds to follow their remaining rights” through a “tail-swallow”. This will ensure “the degree of dilution of their percentage holding in the share capital of City Lodge” is reduced. This means it is quite conceivable (in the absence of a detailed circular) that the total stake of the BEE entities reduces from 14.7% to well below 10%. Never mind the R774 million price tag, this will have a significant impact on the hotel group’s prized BEE rating.

This commentary is not a slight on BEE, per se. Companies operating in South Africa have to ensure they comply with government regulation. This is a simple fact and is especially true if companies want government business (and City Lodge enjoys strong public sector support). In fact, one could possibly argue that the entire reason the majority of its hotels are at a certain standard – comfortable, with not too many amenities – is so that they meet travel criteria for government (and corporate) employees. At last count, City Lodge was rated a level four contributor, i.e. 100% B-BBEE recognition under the tourism sector code.

BEE is not the issue here. Rather, the highly leveraged structure of this deal from the very start was the problem. To be sure, the bankers will be smiling.

In this transaction, BEE participants were issued 6.4 million shares. Add R86 million in redeemed preference shares to the R774 million due in January (and the Vuwa loan) and the cost of this disastrous deal is over R900 million.

It would’ve been far, far cheaper to have simply gifted shares – for free! – to these trusts and BEE partners.

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These shares were giving to one person and an alleged group of women who constitute 10%.

If you were to disassemble these convulted schemes you’d find that there are not blacks in this scheme, except one person (usually an ANC heavyweight) and a ‘group’ of women. But have you ever wondered why you don’t get to see the ‘women’ or get to know of them.

Its the same guy who comes out often to reassure you that there are
‘women’ doing this and that. And how come one black person is now a vehicle for the empowerment of the black community. What good are the black communities deriving from these schemes in the names of individual persons, who are personally and individually enriched while the rest of the communities they purport to represent, do not get the smell of a single cent?

Am I correct – Frank Kilbourne – now heading STRAUSS ART – was CE at the time of this deal??

I seriously doubt that Conrad Strauss and Elisabeth Bradley would have condoned this kind of scheme.

“BEE is not the issue here. Rather, the highly leveraged structure of this deal from the very start was the problem. To be sure, the bankers will be smiling.”

Good article, but why the banker bashing Hylton? How else do you propose the deal would be funded? Maybe the shares should initially have been granted for free yes, but then shareholders would have taken the knock twelve years ago which they are taking now. Standard Bank did not force them to take on the loan. It is akin to blaming a bank if a person defaults on his mortgage.

Being a pref share investment this is a far riskier asset on SBK’s balance sheet than a normal senior or even subordinated loan. The capital that SBK will carry against this under Basel will be very onerous, risk weight of 150% + probably initially, now even higher. For context a 60% or lower LTV mortgage will carry a 30% risk weight. On an after tax basis SBK is getting the same return on this than it would on a prime mortgage, yet it needs to carry 5x the capital!! On a risk adjusted basis they are not making money on this and are actually destroying value for shareholders, if anything you should criticise them for doing rubbish business.

Come on, most of the media is bashing capitalism and esp banks on a daily basis, no need for MW to join the chorus

Not *bashing* bankers. But it is clear the banks, Vuwa and the two trusts were the only winners in this transaction.
Shareholders lose, as they always do (I am not a shareholder, fwiw).
The company loses.
(Ok, maybe directors are winners too as they kept getting their fees or pay and bonuses!)

Bankers seem to loose.
Who are the bankers to give out loans and take no risk for the reward of profits that they so enjoy?

The bankers are in bed with the criminals, and the politicians who write laws to protect their profits.

You can follow any illegal money transaction and it always ends with a bank at the cost of the tax payer and or shareholder.

Let that be a lesson to all. If you start with a concentration on ownership rather than a broad base you are on a hiding to nowhere.


BEE is nothing but a racial tax and rent-seeking. It causes outrageous losses of efficiency and competitiveness. SA can either have a successful economy, or BEE, but never both.

Sure true,

yet here again you have banks willfully playing along and cashing in..

BEE will destroy this country —

Oh wait !!

BEE has destroyed this country !!!!!!

It already has, and that with the support of some big banks and corporates

BEE is a tax on capital formation. BEE is intended to redistribute capital from the rightful owner to the politically connected beneficiary. As such, it is a form of expropriation without compensation. It is to be expected, therefore, that the previous owners will be sitting high and dry, without property or assets. In the typical communist fashion, the property that has been expropriated to be redistributed, with the aim of redress and alleviating inequality, eventually has no value for the new owner. The entire process was an experiment in the destruction of value, the destruction of capital, the destruction of jobs and the destruction of the economy.

A tax on capital formation punishes, prohibits, disincentivizes and discourages savings and investment in capital. Capital formation drives the productivity of labour. New investment in plant and equipment enables the worker to become more productive and to earn a better wage. A tax on capital formation prevents the rise in labour productivity and turns the process around to increase the unproductivity of labour. Wages have to decline to match the decline in productivity, or the job will become redundant. In the end, BEE simply redistributes the job opportunity of the wage earner to the BEE beneficiary for whom it is worthless.

The fact that we have the highest unemployment and inequality in the world, combined with a lack of new investment, plus a flight of investor capital, proves that BEE is doing exactly what we all knew it would do.

I conjure a generous amount of abhorrence at the mention and mere existence of the BEE policy. Unknowingly and way before its(BEE) existence, Steve Biko would describe a situation where-by an established system in addressing the racial-economic gap, will absorb and benefit only a few black people and not remedy the actual problem at large and that is what BEE is.

The past government (Anc’s predecessor), has its own share of blame in this. There was a void of actual and saner interracial cooperation, filled with a farce of a new democratic dawn where the black people were just figureheads.
The ANC and the NP should have worked together in addressing racist policies that excluded black people as equitable economic participants. Physical emancipation does not amount to much when there still persists economic slavery/exclusion. Now we are stuck with nonsensical policies such as the BEE that are really hurting the economy and the country as a whole. Honestly, time has ran out to right the wrongs of the past. Just like a ‘sunk cost’ in finance, all those have to be deemed as ‘sunk injustices’ in politics. We should just move on and prioritise the economic landscape of this country.

Unlike countries such as the USA and France that have a democracy that is over 250years old, South Africa is still in its infancy stage of life. There is still a long way to go. Anc is an exceptional failure. One day this land will be endowed with a governing body that will press forward and do right by its people and put an end to this racial nonsense.

Bull Efficient Excrement …no more, no less

I think this is starting to look like such a Brett Kebble style BEE deal – and to quote him:

”We’re competing for scarce resources, What is Africa? Is it mining? Is it Telecoms? Is it fishing, farming? No: It’s the power that’s locked up in people’s potential. We’ve done about 32 joint ventures. We benefit from generating a new patriotic wealth-creation base”

Famous last words but he failed to mention that he deployed his lackeys at TSec and at JCI to achieve these types of goals!

BEE holding a gun to the head of corporate South Africa. Focusing on building a sustainable business is almost impossible these days.

After 25 years, they can most definitely be reclassified as “historically advantaged”!

Shouldnt this share be close to Zilch??? Covid19??? BEE deals that dont make sense?????

Show me 1 successful BEE deal…. im talking broad based. THe president Cyril is aware of this as well. He says nothing. He benefited handsomely in the MTN BEE deals….. handsome free allocation of shares…..while the rest of the population got the scraps.

Once again , censored

There must have been a few ‘investment bankers’ and law firms involved – and auditors – please name them and ask them to divulge what fees they earned out of this scheme.
If memory serves – anyone becoming aware of slimy deals must report it. This is a slimy deal

EVERYONE KNOWS that BEE is a failure they keep perpetuating!!!! Anyone else hear that flushing sound???

Somewhat of a cop out by the author. Perhaps we need an article on the cost of capital and BEE?
Sasol, Barloworld, City Lodge,…..the list keeps getting longer. I wonder when the penny will drop. The government is determined to force change of ownership of listed companies using various constructs.
This make ZA inc largely uninvestable.

End of comments.



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