You are currently viewing our desktop site, do you want to download our app instead?
Moneyweb Android App Moneyweb iOS App Moneyweb Mobile Web App
Join our mailing list to receive top business news every weekday morning.

Grindrod forced to bail out R1.6bn BEE failure

One could argue that shareholders have paid the R1bn price so far …
The company can’t quite bring itself to use the word ‘debt’, but at R1.4bn, the effective debt in the scheme far outweighs the R300m market value of the shares. Image: Moneyweb

Grindrod has asked shareholders for approval to bail out its failed black economic empowerment (BEE) scheme by ‘buying back’ shares issued to a special purpose vehicle (SPV) in 2014.

Shareholders will vote on this early next month.

Though not quite a City Lodge-level of disaster, the logistics company has been faced with this large headache for some time and while IFRS accounting will make the problem simply go away, it’s not as if shareholders haven’t had to pay up.

The original plan in 2014 seemed elegant enough: BEE shareholdings at various operating companies would be replaced by a direct stake at the listed (holding) company level. How Grindrod would get there is another matter entirely.

It raised R4 billion in capital by issuing new shares. A total of R560 million of this was spent buying out BEE stakes in its various subsidiaries from Calulo and Solethu. These same partners (Calulo and Solethu) together with Brimstone and two other parties (Safika and the Adopt-a-School Foundation) then subscribed for R1.6 billion in shares during the capital raise.

Funding

This gave BEE shareholders an 8.39% stake in the overall business. Funding for the SPV was provided by Grindrod through the issue of R400 million in vendor preference shares, as well as Absa through a further R450 million in senior preference shares.

The funding agreement with Absa came to an end in July last year and Grindrod Holdings was at that point forced into the first bailout of the BEE SPV. The SPV issued Class C preference shares to the logistics group and the proceeds were used to repay Absa.

Grindrod, however, points out that a share covenant for the preference share agreement was breached as early as 2016 and “several times thereafter”.

To support the funding structure, Grindrod has had to provide numerous guarantees and cash collateral to “remedy the share cover ratio breach”.

Fast forward to 2018, and Grindrod unbundled its shipping business (Grindrod Shipping) to shareholders.

This led to the BEE SPV owning 8.39% of a shipping business that didn’t want or need empowerment shareholders.

By December 2018 the situation had deteriorated to such an extent that Grindrod had to consolidate the BEE SPV in its own accounts. Effectively, it has treated these shares as treasury shares since that point.

This, then, is where Grindrod finds itself: It says “due to the significant decline in the Grindrod share price over the past two years”, the effective debt in the scheme (R1.4 billion) far outweighs the market value of the shares (R300 million). It cannot quite bring itself to use the word ‘debt’ though, preferring to instead refer to the “aggregate redemption value of accrued, unpaid dividends in respect of the Vendor Preference Shares and the Class C Preference Shares”.

Just how bad things are …

Brimstone, which is majority shareholder in the BEE SPV, shows just how bad things are. At the end of 2019, it held 6.1% (in aggregate) of Grindrod and Grindrod Shipping shares and valued this stake at R345 million. But it also disclosed a total of R960 million in debt related to these shares. With the limited recourse nature of the BEE funding structure, however, it notes its “investment is shown at a minimum value of zero”.

While the “repurchase price” is set at R209.8 million by Grindrod, because the SPV is already consolidated, the transaction will have no material financial effect on the company.

In a peculiar defence, Grindrod says “shareholders have been appraised of [these] developments … over the years as per the disclosures contained in Grindrod’s annual financial statements”. In the August circular, it argues “the administrative process to unwind the 2014 BEE transaction has therefore already commenced”.

But in the 2018 financials (when Grindrod consolidated the SPV), shareholders are provided with the most limited of “disclosures”, with the group saying only (repeatedly) that “due to the additional security [provided], the group’s rights have changed from protective to substantive and the consortium is now controlled by the group in terms of IFRS 10”.

The R4bn capital raise in perspective

One wonders whether the R4 billion capital raise in 2014 would’ve been necessary at all, were it not for the BEE deal. It’s not as if Grindrod had any other pressing uses for the money, aside from the R1 billion needed to buy out the empowerment partners and fund a portion of their new stake. In fact, one could easily argue that shareholders have paid the R1 billion price for this empowerment mess through that rights issue.

If shareholders approve the transaction in September, Grindrod will cancel 64 million shares (8.39%) it holds in itself and will also end up with an 8.39% shareholding in the shipping business it unbundled two years ago.

Lawyers, auditors and other experts will be paid R3.38 million for their efforts on this “transaction”.

Despite the artificial earnings boost created by the “buyback” and cancellation of shares, Grindrod will find itself worse off than in 2014. At least then its various operating businesses had empowerment credentials. Its current Level Two Contributor status is under obvious threat.

Any bets against another BEE transaction being announced in the next 12 to 18 months?

AUTHOR PROFILE

COMMENTS   38

Sort by:
  • Oldest first
  • Newest first
  • Top voted

You must be signed in to comment.

SIGN IN SIGN UP

BEE is an aristocratic absorption scheme. A scheme that empowers very few individuals who make up the highest class in certain societies. It is they who benefit and not the majority, neither the intended recipients by numbers, nor their socio-economic status.

BEE is a farce, a mirage, where to the naked eye people see empowerment opportunities but really, there is but a few, reserved for the already politically connected and their immediate subordinates and benefactors. The policy is far from what it is intended to be and should be abolished.

I turns some guys into billionaires and they get to “run” a country !

*Kakistocratic, not aristocratic. “A kakistocracy is a system of government that is run by the worst, least qualified, and/or most unscrupulous citizens.”

For those that do not know it is a guaranteed way of providing funding for the ANC so in other words BEE will never be taken off the table.

…yup, part of the “patronage” system (unfortunately)

Looks like average Joe Public in SA will see the trickle down benefits of BEE in about 100 years time.

Are these not the kind of companies to avoid investing in?

Better still, do not invest in any SA companies. With a higher inflation rate and constantly depreciating currency plus BEE and corruption it’s not a place I will invest in. So far this year my investments are up nearly 50%. All US$, mostly technology and hedged with gold.

You talk of a “higher inflation rate”
If you knew what the current inflation rate is – and it seems you don’t – you wouldn’t be making uninformed statements like that.
And, does inflation even play a role in this failed BEE deal – is it a factor that contributed in any way to the failure? It doesn’t seem to. But leave this to the BEE experts like the author of the article.

Please show me a BEE transaction which has actually worked and which achieved broad-based black economic empowerment successfully.

Good question – do let me know if you get an answer

It will never work because South African labour work at 50% of the world employee efficiency level.

And they are paid at that rate correctly so R3,200.00 compared to a Slaves wage of R7,250.00.

The anc and their voters think there no consequence for poor management. Whether they like it or not Real Wealth is not created out of thin air.

BEE without a broad base is meaningless but even still there is very little broad economic empowerment taking place, no matter what race.

It time to rethink this noose around the country’s neck.

Assuming Ramaposa & all returning their ill-gotten wealth?

Cyril Ramaposa accentuates “Fraud”. The nation assumed he was “kosher” how wrong we are finding that out

BEE = Nothing else than anc cadre scoping private sector money, nothing but absolutely nothing was learned from zimbabwe history

More BEE nightmares from a programme that has not done a thing to empower the under-educated masses. Oh it has helped the elite.

The cost of doing business in South Africa

No surprise to SA’ns – investors are NOT falling over themselves to invest there – BEE and Corruption etc.

To my unwoke eye, BEE is not helping the disadvantaged.
It is actually doing the opposite, by advantaging the elite.
And yes, guess who is carrying the cost of these share issues- it is you, dear shareholder.Another tax under another name.

Was going to write a comment talking about cost of capital but honestly could not be bothered anymore. Nothing will change, except the ANC will double down on existing policies.
This country is not investable, finish and klaar.

Is it politically incorrect to ask exactly what value these BEE comrades brought to the company ? Ball and chain comes to mind.

lol, they “help” the companies be able to be included in government related deals/business etc which in Grindrods case is potentially a few things, it is also easier to do business with the government when you have a favorable rating… the problem is everybody went about this BEE thing the wrong way, there was no need to issue shares to SPV’s using debt, they could have simply ring fenced a few shares and sold them at a discount to black people publicly and rather spend a few bucks on PR to get black people to buy those shares that are up for grabs,the problem with that is the politicians cannot now raid these SPVs in cahoots with executives, the people would actually prosper which is not ideal. Quick disclaimer: I am black. These BBBEE deals have not benefited any black person i know because they simply are not open to all black people but are rather for specific groups. It would be better if our brokerage accounts had a Race Confirmation Feature and companies could achieve BEE status organically by investing in encouraging black people to invest with a special black people discount on each share. Yes, there system would have many problems such as manipulation, falsifying race, but i can assure you black people have the money to buy shares, they just need to be taught how in mass.

We implement a strategy that makes a distinction that is based on race and gender, in order to create a non-racial, non-sexist society. Then, we treat citizens differently in order to make them equal. The same constitution preaches equality before the law, and material equality. This is a contradiction in terms. We can have one or the other, but not both at the same time. So, the constitution enforces the quest for material equality by enabling and protecting legalised plunder to reach social justice. Clearly, social justice is not justice at all. It is a disguised form of plunder. After 25 years of socialist rule, the insanity of these bipolar policies is revealing itself in the form of an imploding state.

Yet another problematic KZN company!
Giving Rands away for 90cents is never a solution…….
When will we learn that BEE policies are racist and shouldn’t be necessary after 25years.
I shake my head.

Agree, why does BEE/AA still exist a quarter of a century?

The answer is in fact a slap in the face of the black business community….i.e. still needed, as they cannot economically uplift themselves(?)

(….after 50 years, there will still be some form of BEE left, so long there’s capital to ‘transfer’)

The company raised R4b of which R1.6b was not cash. R600 of that was swapped to buy out minorities’ shares in group subsidiaries and R1b was owed to the company for shares taken up not in cash. The BEE partners owed the company R1b for their shares This part fairly simple. Company btw has R2.4b cash from the share issue.

Why did the BEE structure need the R450m and R400m preference shares? I would assume their shares in minorities had debt that carried forward to the top?

Did anybody ever put in at-risk cash to own the shares – now lost?

How was the Grindrod dividend ever going to fund the debts?

These BEE schemes try and be too clever. If BEE must exist, Regulations need to allow a dead simple broad based employee scheme where a trust is awarded the shares (for free or low cost), the shares are issued to employees over time based on service, and the trust is the mechanism that defers the taxable gain to when an employee resigns or retires or chooses to draw down actual equity to be sold by employee.. One debt between company and trust, zero cost, no banks, if things go pear shaped the shares extinguish the debt and shares are cancelled by company.

Anyway, not my problem

I also found this maze of share ownership impenetrable even for my reasonably intelligent brain.

Why don’t companies stick to what they originally began with instead of trying to be so smart?

Any big ticket item , Car ,white goods etc or Estate agents complying with BEE Lrgislation i will NOT Support . All Home repairs now via cash deals excl VAT : Its the only way !!!

The question I would like to ask now is..
Which other JSE listed companies are hiding a huge BEE failure which innocent ordinary shareholders will be asked to bail out?
Grindrod and City Lodge are just the tip of the iceberg…

Which Island produced the most million/billionaires?….
Robben Island.

BEE is the biggest joke of the post apartheid government and must be declared unconstitutional.
Cyril has so much egg on his face he should be even more shy to show it.

Google Sasol deal, Bizz news 2017

BEE by its ANC definition on paper was different to what happened. It benefit the ANC gang whilst the majority got nothing and shareholders had to fund it. There is not a single BEE deal that actually benefitted the broader population…like any thing driven by the ANC greed … shareholders funds wasted

I find it concerning and interesting at the same time, that nobody is calling for the Lawyers, Accountants and other Advisors to articulate their roles in these transactions. All those transaction docs, and you telling me that a pack of advisors has never been asked to explain why it was necessary to adopt such a convoluted transaction plan? The double-standards in this country are gob smacking. As smaller players in legal and compliance services, every time we compile a compliance report we are made to present to the main Boards of companies. But I love this because you are made to account for your work, and the record reflects that you presented yourself and your work to the scrutiny of the Board.

Yet here are transactions that are costing already frail investors hundreds of millions of Rand, and not a single professional is called to explain anything? I sincerely hope that I am placing the cart before the horse, in that the professionals on these transactions will at some stage be called upon to articulate their roles in these transactions.

Yet another BEE transaction failure, led by lawyers, accountants and other professionals. My thoughts are with shareholders and their cash that is being burned like Formula 1 soft-tyres traversing Silverstone 2 weeks ago.

Ditto all of the above comment.

(…BEE is an artificially created system, that will die out one day…like apartheid did. Unfortunately, there’s still sufficient pension/retirement funds domiciled in SA to bail govt and SOE’s out…so BEE will still survive for quite a while longer)

Funny for the words “BEE” and “failure” is used in the same sentence in the heading 😉

BEE is for the politically connected. The masses have never benefited from it and never will. Scrap it.

End of comments.

LATEST CURRENCIES  

USD / ZAR
GBP / ZAR
EUR / ZAR

Podcasts

NEWSLETTERS WEB APP SHOP PORTFOLIO TOOL TRENDING CPD HUB

Follow us:

Search Articles:Advanced Search
Click a Company: