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The case of the blind giant and the black investors’ ghetto

It’s difficult enough to sell a minority stake in any unlisted company; try doing it when the buyer needs to have the same or better BEE rating as you the seller.
By fixating on the simplistic percentage of shares owned by black investors the state is failing to achieve its original goal, says the author. Image: Dean Hutton/Bloomberg

The South African state has rightly devoted much attention to economic empowerment of black people who were prevented by the apartheid laws from accumulating capital, and indeed deprived of their capital in many instances by expropriation, over a very long period.

But our state is not very capable. It is certainly large and has considerable power, but sometimes it fails to see the wood for the trees. Well-intentioned policies get switched onto the wrong track. You may liken it to a blind giant – destroying as much as it creates as its great clumsy feet trample on the very people it is trying to help. Its brain is slow and sometimes the neurons fuse and produce abnormal reactions.

The recent decision of the Competition Commission to bar the sale, by Grand Parade Investments, of Burger King to a foreign private equity fund is just such a case of the blind giant at work.

But it has served providentially to bring to the fore a key issue in the black economic empowerment (BEE) terrain. What’s it for?

What is the real purpose of BEE?

For background, Grand Parade is 68% owned by BEE investors, including over 5 000 retail black investors with fewer than 10 000 shares each – mainly small investors who live on the Cape Flats and make Grand Parade genuinely broad-based.

When its application to the Competition Commission was rejected, therefore, and the price of Grand Parade shares dropped, these small black investors were the ones to suffer.

The rejection of this deal has moreover created a precedent that will continue to affect Grand Parade as well as every other black investor, since it seems to mean that no sale will be approved unless the buyer is at least as empowered as the seller.

Grand Parade will therefore have to find a buyer that is 68% black owned or close, before it can sell Burger King, and this rule will surely be applied to every other instance where a black-owned company tries to sell an asset.

Obviously, the number of buyers that qualify as 68% black-owned is tiny, and those who want to buy a burger chain may be non-existent. This will reduce the value of Burger King by a substantial amount, as Grand Parade will have to reduce its price substantially to make it attractive to the few buyers who do qualify.

I wonder if the Competition Commission has the slightest idea what it has done here?

It has cemented into competition practice a black discount on sales of assets, but it is only thereby enforcing an existing consequence of the BEE Codes – a case of the Law of Unintended Consequences.

Let me explain …

Companies are encouraged by the BEE Codes to have 25% plus one black ownership, and indeed this is mandatory where government licences are required, or in transactions with government. The requirement in practice has risen to 50% plus one in many instances.

Companies selling these stakes to black investors naturally want to do it only once – it’s costly – so the black investors are invariably compelled to agree to sell their shares only to other black investors. That keeps the company’s BEE rating intact.

But what does it do for the black investors? It creates a segregated pool, or black investors’ ghetto, where only black investors may buy.

This pool is obviously still today a rather small sub-set of the overall market. And the smaller the pool of buyers, the lower the price. This imposes a discount on almost all black assets acquired under the BEE Codes.

Sasol as an example

To illustrate, Sasol is trading today at R233 per share. Its BEE share, known as SOLBE1, is trading at R120, a discount of 48%. They are identical in all respects except one. They have the same voting rights and dividend rights. But SOLBE1 may be owned only by black persons. Hence the discount.

Great when you want to buy, but not so great when you want to sell.

Most of the traded BEE shares, such as Vodacom YeboYethu, trade at large discounts to intrinsic value and 50% in my estimate is typical. One or two such shares are trading closer to fair value, such as MTN Zakhele Futhi, because you can’t repress those traders’ instincts when they think they see a bargain. But among most black-owned assets, acquired under the rules of the BEE Codes and not listed or otherwise tradable, the discount is vast.

It is difficult enough to sell a minority stake in any unlisted company; try doing it when the buyers have to have the same or better BEE rating as you the seller.

It is true that the codes allow sales to non-black buyers in some cases, but only 40% of black ownership may be so counted (ie. 10% out of the required 25%). And most companies simply forbid any such sales particularly where they have provided vendor finance. Who can blame them when the BEE rating is so critical to their business?

The state’s fixation on ownership

The problem, like so many of our problems, is that the trees have not been seen for the wood. The state, our blind giant, does try to do the right thing, but often gets confused. In this case, his poor feeble brain has fixed on ownership as the objective, when the correct objective is actually empowerment, specifically empowerment through the accumulation of capital.

Ownership is surely the means to the end, not the end itself. Through ownership, black investors large and small are able to accumulate capital. Ownership is the means to the end being capital accumulation which is empowerment.

But the black investors’ discount deprives them of the full value of their capital. It’s not easy to say how much capital is locked up in the black investors’ ghetto, but it must run to many tens of billions of rands even if the figure of 50% is used. But my experience is that the discount is probably larger on average.

Now imagine if the black discount were abolished, as it could be by the stroke of a pen.

Vast amounts of capital would be released to black investors to do with as they pleased. Sounds empowering, doesn’t it? To invest in their own businesses just for example, or to rotate into a sector more attractive to them.

There would be R715 million extra capital in black hands in the case of the Sasol SOLBE1 share alone and that is one of the smaller schemes. But there are hundreds more BEE deals out there that would be repriced favourably.

Ownership vs capital accumulation

The state would have to take a bold decision here of course. Ownership would have to take a back seat to capital accumulation. It would have to fixate less on the simplistic percentage of shares owned by black people, as it does today, and encourage and indeed celebrate the accumulation of capital by black people instead.

A simple way of doing it would be to alter the codes to permit companies to retain their ownership ratings even if the black investors sold their shares, provided certain conditions had been met. For example, it could be required that any finance would have to have been repaid, and the shares retained for a further five years after that. The black investor is not here being required to sell, only to have the right to sell to the highest bidder.

What will be the result? Black investors will be able to escape the black investors’ ghetto. Companies will have done what they have been asked to do, which is provide the means for black people to accumulate capital. A very large uplift in the value of black-owned investments will occur overnight, with probably very positive overall impacts for the economy.

Money trapped in old BEE schemes will be released. Black individuals and companies will have liquid capital at their disposal to invest in new ventures and expand their existing ventures.

Sure, the black ownership of many companies will drop as measured by percentage shareholding. So what?

Is black ownership to be seen merely as a statistic, or a means to the accumulation of capital? Only a blind giant would say “What I want is that black people own 25% of all companies. I don’t care if they never reap the full benefits, as long as that statistic is observable.” But that is what our blind giant is saying.

Of course no one ever intended, when the BEE Codes were conceived, that there should be a black investors’ ghetto, which reeks of apartheid and discrimination.

To be fair, it is a symptom of the success of the codes in enabling black investors to accumulate capital on a large scale.

But it is past time to end this unintended consequence and free up that large portion trapped by the rules.

Listen to Dudu Ramela’s interview with Bravura’s head of corporate finance Soria Hay (or read the transcript here):

Gordon Young is investment advisor to a BEE investment company. He writes in his personal capacity.

COMMENTS   25

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Hahhaaaa…..oh the irony! Imagine when all ” white” business’s invest off-shore or just don’t invest and rather pay out dividends! Stalemate..

Rule 1. Try to not to have a business in a country that is race-obsessed and limping along economically

x 10000

Yes got to ask why cry now Gordon?

BEE investments not turning the punted upside?

Serves well those Well people that choose color as an imporant attribute for some or other reason..

A classical case of “unintended consequences”.

This just proves that things were not through properly.

BEE is centrally planned social engineering that benefits only the political elite, while it disempowers the rest of society.

A growing economy creates employment opportunities and drives wage increases. This is the only viable mechanism for “broad-based black empowerment”. The inefficiencies of the BEE tax prohibit economic growth and destroy jobs. The politically-driven BEE project is synonymous with broad-based poverty creation. This parasitic policy sucks the livelihoods from poor unemployed black citizens to boost the living standards of politically connected cadres. Therefore, BEE is the modern-day version of feudalism or enslavement. This deplorable and highly exploitative form of serfdom should be rejected in the strongest terms by all mindful patriots.

“I cannot possibly understand how fraternity can be legally enforced without liberty being legally destroyed…”
― Frédéric Bastiat, The Law

The economy “grew” between 1948 and 1994 without “creating employment opportunities and driving wage increases” for over 90% of the (black) majority. So no Sensei, it’s not just growth that ensures employment opportunities. Sometimes central planning is very necessary, especially where institutionalised racism was previously Government policy.

BEE is but one of a few strategies to right past wrongs. It’s no more than, what 18 years now, and yet you expect it to be perfect in addressing the ills created by centuries of discrimination? Is it perfect? No! Nowhere near. Is it at times misused? Absolutely! The solution is not removing it however, it’s amending it. But that epiphany requires erstwhile beneficiaries of colonisation and apartheid to accept the effects of apartheid both in disenfranchizing blacks and in presenting white people disproportionately with opportunities. “Feudalism”? “Enslavement”? Sensetionalist maybe!

Disclaimer: I am no beneficiary of BEE, in fact I can’t benefit because my charcoal looking skin apparently doesn’t qualify as black according to this law!

@Sankara – rubbish. The unemployment rate in the 1960s was a fraction of what it is today. Between 1900 and 2000, the black population literally exploded – it increased tenfold, but until 1994, the unemployment rate was a fraction of what it is today. So your statement about the 90% is factually incorrect.

Agree 100% with this comment. Time to be rid of racist BEE policies – a country is only as successful as its economy and a healthy economy is only possible if ALL its people participate including those with the knowledge and experience required. It will take a brave leader to make this happen – I hope CR has the balls for it.

The attitude from gov that investors must do this and investors must do that is woefully flawed. Actually investors are obliged to do nothing if the hurdle rate is not exceeded.

Essentially a similar argument for ‘once empowered, always empowered’ as that promoted in the context of the mining charter, among other things.

‘A simple way of doing it’ isn’t that simple though. Companies and businesses aren’t necessarily the same thing – I would expect a lot more invasive approval process to head off manipulation in M&A, eg shifting unempowered businesses into permanently empowered companies.

The irony ias that the CompComm has waded into and pontificate on a matter that falls squarely in the lap of the BEE Commission. CompComm’s brief is outlined in law, as is that of the BEE Commission. A sad day indeed.

Another reason why BEE will never work.

Try finding a true Broad Based Black Economic Empowerment company (very few and far between as there are normally no broad based ones) with the same or better rating.

Vale destruction, upon value destruction.

Entrapment.

Thank you for the insightful article. Much of the trouble stems from government using legislation to address the symptoms rather than the causes of racial inequality in South Africa. Chasing political targets and arbitrary % figures means nothing if the root causes of racial inequality are allowed to remain.

The reality is that (mostly black) South Africans born in townships or rural villages still receive substandard primary and secondary education, still live with limited running water and electricity and still face a lack of affordable and reliable public transportation despite living far from most job opportunities.

As long as major issues like this exist, no amount of BEE ownership will solve the inequality we still see in South Africa.

Agree 100%. SA has had so far 27 years to improve on EDUCATION for the majority. Mixed results (many still sub-par).

And then Govt tries to stifle the minority, which are the creators of capital (the Govt asks as thieves of capital) with a large portion emigrating…..there goes the income tax base, which Govt needs to uplift education for all.

(On the other hand, by looking at how well fed to the point of being obese South Africans are….way better off than other compatriots of rest of Africa….I think, we’ll reach a point where our local brothers need to uplift the rest of continent.)

Unfortunately most empowerment share holdings are sold/given away next to nothing.. why would a new empowerment group want to pay full value…

BEE was a pre-1994 scam agreed to by white capital and black labour to transfer mega wealth to a select few and so legitimise Apartheid criminal practices, especially synthetically cheap labour and the Bantu education system upon which those huge undertakings were built. This was to keep the shops and factories from literally burning. Those who took the coin are as bad as those who made it. I give you Cyril Ramaphosa. The white elites needed the time to manage their exposures down and out. Not a fig was given for the poverty stricken black majority (significantly worse off now than say 1992)

Correction: poverty stricken majority much more over-weight/obese than 1992. So how come they’re “worse off” now. Ethnic South Africans live in relative opulence and luxury, compared to other African compatriots.

It’s time black Saffas, now that they have arrived at the food troughs, to start a programme to feed & uplift other Africans on the continent to reach the same level of comfort.

Will NEVER happen! The spirit of “Ubuntu” is a myth! The wealthy blacks in this country aren’t even prepared to help their own people….why on earth would they consider helping Other Africans? Only Europeans and Asians understand what Charity is, and that it begins at home!

Stupid stupid ideology is not going to feed the masses. This is Africa again, in (not so slow) motion.
Wake up ANC.

To the ANC regime elites who make the legislation and whose friends and family benefit from it this isn’t stupid at all; its great’; ask Mzi Khumalo. Pity about SA and the rest of us.

I smell a rat here. Some B-BBEE investor that wants to force the consortium to onboard them as the B-BBEE shareholder, got into the competition commission to reject the deal. I suspect bribes.

BEE has very little to do with actual improvement of lives for people at grass roots and everything to do with enrichment for the elite and vote buying, albeit by stealth.

Those benefiting from BEE (Cadres, Traditional leaders, even Municipal placements) know they can and have accumulated great wealth and luxury through the proceeds of BEE. They know that any changes in ruling party would bring that to an abrupt end – So they flex maximum control and influence to benefit ANC power structures.

This is especially true of tribal and traditional structures, who are the feedstock of votes at the most fundamental of grassroots voters.

Great article,,,thank you! Apt comments, but lost on the those with the wrong ideology or experience?

BEE is having the counter-effect,driving more and more money off-shore and eliminating the will by true entrepreneurs to invest and employ.

A BEE ghetto of your own creation. Enjoy. I’ll rather just buy shares on the JSE & have the right & pleasure of being able to buy/sell them the same way every other un-entitled soul does. And make profit.

End of comments.

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