This week BEE was in the spotlight on the M&A stage. Nedbank announced that its 2005 Brimstone-led BEE transaction had matured and Adcock Ingram stated it would terminate its existing BEE transaction and implement a new one.
Many deals cobbled together in the mid-Nineties unravelled because they were debt-financed, with repayment terms predicated on a steady rise in the share prices of the underlying company. The stock market wobble of 1997/8 left many empowerment shareholders unable to meet their repayments – and the equity ended up in the hands of the financiers. Corporate advisers were forced to come up with less risky financing models, one of which involved using the acquired assets (rather than equity) as collateral for the debt assumed by the empowerment buyers.
The transactions which have been the most successful in generating economic value are found mainly in the financial services, healthcare and telecommunications sectors, which have benefited from strong consumer spending and an upturn in the equity markets. Examples include Sanlam, FirstRand, Standard Bank, ABSA, MTN, Vodacom, Naspers, Aspen and Mediclinic. Kumba’s BEE transaction is one of the exceptions in the mining sector.
A number of the less successful BEE transactions now require some form of restructuring to give these deals a lifeline and increase the probability of beneficiaries realising meaningful value. Ernest Kwinda, senior transactor at Rand Merchant Bank says that restructure comes at a cost to shareholders but in most instances the company has already benefited from having had BEE credential for the duration of the transaction. Shareholders, he believes, need to bear this in mind when deciding on whether to bail out a BEE transaction and to what extent they should do this. In reality, he says, the cost (option value) the company would have had to account for will not materialise in a failed BEE transaction since no dilution would have been incurred by existing shareholders and, therefore, the argument that a bailout will result in subsidising for a second time is invalid.
This week’s announcements showcased the successful and the less effective.
In 2005 Brimstone acquired an effective 0.61% stake in Nedbank at a market value of R198 million. At the time Nedbank’s share was trading at R74.75. At December 31 2014 the pre-tax value of the investment in the bank amounted to R576 million, 7% of Brimstone’s intrinsic gross asset value. According to CEO Mustaq Brey, due to the combination of share price growth, performance fees and dividends earned over the period, the investment in Nedbank delivered an exceptional 76% IRR since inception. Brimstone currently has some three million beneficiaries. Its shareholder base includes 26 NGOs across SA.
The offer by Bidvest for the remaining 65.5% stake in Adcock Ingram was, the company said, a step taken to remove the uncertainty surrounding its intentions towards the pharmaceutical group. Included in the offer was the buyout of Adcock’s BEE partners Blue Falcon and Bophelo Trust in a bid to create a new scheme. The primary reason given for the termination of the current BEE structure was the depressed share price which reflected the ‘challenges’ faced by the group. It was hoped that the new scheme would create a more sustainable ownership transaction and more meaningful participation for the BEE parties.
The BEE termination will be implemented by way of a buyback of the A and B Dividend Shares at R52 per share, an action requiring the release of these shares from restrictions contained in the existing Adcock BEE transaction. Following the termination, Adcock ordinary shareholders will facilitate the introduction of a 15% to 30% BEE shareholding through a new entity valued at between R1.29 billion and R2.57 billion depending on the shareholding.
In 2007 DealMakers recorded 89 BEE transactions by JSE listed companies valued at R83 billion; in 2014 this number had fallen to just 17 at R13.5 billion with Northam Platinum’s disposal of a 22% stake valued at R4.6 billion. In 2014 seven JSE listed companies restructured their BEE shareholdings.
The Broad-Based Black Economic Empowerment Amendment Act, No 46 of 2013 which amends the Broad-Based Black Economic Empowerment Act, No 53 of 2003 to, amongst others, make the BEE Act the overarching legislation in South Africa, came into force and effect on October 24 2014.