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.