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Sasol Inzalo: What went wrong?

The BEE share scheme is going underwater, with its troubles stemming from the volatile oil price.
Kungega Njobe, Sasol Inzalo chairperson, at the JSE listing in 2015. Sasol will have another stab at BEE, as it unveiled a new R21 billion scheme to replace Inzalo. Picture: Moneyweb

When chemical conglomerate Sasol unveiled its R26 billion broad-based black economic empowerment (B-BBEE) scheme in 2008, then group CEO Pat Davies described it as being “unparalleled”.

Inzalo was the largest empowerment deal of its kind at the time, giving black investors exposure to Sasol’s natural gas and mining investments in SA, Qatar, Mozambique, India, US and other regions.

Davies, who retired in 2011 as Sasol CEO after being with the group for 36 years in various roles, said Inzalo would create value for many investors, unlike earlier empowerment schemes that benefitted a coterie of well-connected individuals.

Sasol sold 10% of its shares to 250 000 black investors, 23 000 employees, 54 selected customers, suppliers, franchisees and the Sasol Inzalo Foundation, which offered bursaries and skills development opportunities.

Most participants funded their Sasol B-BBEE investments through debt, provided by banks or Sasol, while other investors used their own cash.

Nine years into the scheme and with expiry on the horizon, long-suffering investors have been far from rewarded.

Inzalo has also been hit by falling oil prices as its underlying asset (Sasol shares) responded to Brent crude oil prices and rand/US dollar exchange movements. When Inzalo was put in place, Brent crude oil prices were at a peak of $143/barrel and are now at about $55/barrel. Sasol’s share price surpassed the R400 mark and later hit an all-time high of R653 in mid-2014 but has since retreated to R373 at the time of writing.

 

Sasol and Sasol Inzalo share graph

 

Inzalo has accumulated bank debt of about R13 billion since inception. The debt levels stem largely from Sasol fixing the Inzalo debt in 2008 in anticipation of higher interest rates of 20%. But interest rates fell, resulting in the empowerment scheme servicing debt at high interest.

The debt was expected to be serviced from dividend payouts, with management expecting Sasol’s share price to appreciate to at least R480, which would be enough to settle remaining debt after Inzalo expires in September 2018.

This will not happen, said Paul Victor, Sasol’s CFO.

“The share price appreciation plus dividends paid over the ten-year period will not be enough to pay the interest portion that accrued on shares because the scheme was indebted on day one,” Victor said.

Sasol has paid dividends worth R7.6 billion over the last nine years to Inzalo, in which R5 billion was paid to banks to service debt and the remaining R2.6 billion was paid to employees, suppliers and customers and black investors.

Riaz Gardee, the group head of corporate finance at Liberty, said although Inzalo hasn’t been a spectacular financial success given its poor returns to investors, its fortunes were largely impacted by the international oil price – a factor beyond its control.

“Inzalo has allowed more people to partake in the JSE and become active in the investment arena. It could be argued that a greater awareness, culture, and understanding of the investments arena was created over the last ten years through this scheme,” he said.

For Craig Gradidge, investment specialist at Gradidge-Mahura Investments, making a judgment call on Inzalo’s value hinges on when investors cashed in their shares. “Investors would have paid R25 per share when the Inzalo scheme launched. At some point in the last nine years, shareholders could have sold at R140 per share. In this case, it would have created value for shareholders.”

Gradidge said some investors cashed in their shares at the R20 to R25 level when the scheme migrated from an over-the-counter trading platform to the JSE in 2015. Inzalo’s shares have traded in a narrow range of R35 to R42 since then.

Inzalo losses

Arguably a headache for Inzalo investors is its widening losses. In the six months to December 2016, Sasol Inzalo’s debt exceeded its total assets by R990 million (R6.4bn value of its Sasol shareholding at R398/share minus debt of R7.2bn) – in theory making it technically insolvent.

Sasol plans to write off between R12 billion and R13 billion of the Inzalo bank-funded debt when the scheme is terminated in September 2018. It has also offered a R2 billion guarantee if there’s shortfall in the debt.

Sasol joins the ranks of Naspers, which recently wrote off R400 million in debt and accrued interest in its B-BBEE share scheme Welkom Yizani Investments.

On Wednesday, Sasol unveiled a new R21 billion empowerment scheme called Sasol Khanyisa that will replace Inzalo when it’s terminated. Black investors in Khanyisa will own at least 25% of Sasol SA assets for a period of ten years from 2018. Sasol shareholders will need to approve the transaction at its AGM in November.

The big question is what will be different about the soon-to-be rebooted scheme.

Listen: Sasol announces new B-BBEE ownership structure

Bongani Nqwababa, Sasol’s joint-CEO, said Khanyisa’s structure of owning only SA assets including the company’s petroleum, chemical and gas assets would “give it a fighting chance to deliver value to investors”.

“We will be closer to the cash flows because of the nature of SA assets. There are much higher cash flows compared with the global entity,” said Nqwababa. Instead of roping in external banks for debt, Sasol will be providing notional and other vendor funding for Khanyisa.

The vendor funding will be paid off using dividends declared by Sasol SA over the next ten years, meaning that most of the dividends won’t be directly paid to investors.

Soria Hay, head of corporate finance at Bravura Capital, said there still remains questions about how the vendor funding would lead to a less indebted black ownership over Khanyisa’s ten-year vesting period.

“It would seem that the sustainability of the funding structure may remain dependent on the same factors as before: the notional or actual interest rate, the dividend yield, and the Sasol share price.”

“Debt levels are a problem not only for investors, but they also become problematic for companies themselves.” Hay added that this is a case where debt in the schemes underpins the shares directly.

Part two of the article will look at options offered by Sasol to investors in the new Khanyisa scheme. 

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What went wrong – Hehehehe – these okes were only exposed to market forces and they clearly dont like it ne @@@

I still don’t understand the logic of investing in an oil company today? Oil revenues will plummet as more and more electric vehicles appear on the road. I mean Europe, China and India have already committed to phase out sales of combustion engine cars by 2020-2040. Thus less sales of petrol/diesel and less revenue for SASOL et al. Anyone investing in an oil company today is plain stupid! Sales will continue going down and oil will become cheaper as fewer sales are made…surplus of oil, less demand = lower oil prices = lower revenue for SASOL = lower share price for SASOL. If you buy SASOL today you are pretty buying it at a peak.

Isn’t this evident or am I just plain stupid here? Maybe one of these financial advisor whizzes can explain to me why they will buy into SASOL today?

Timmo, squire, let me let you into a secret. If you think that you are the only person to think of this then you are delusional – but I don’t really think you really are. The share price of oil companies has the scenario you outline and the likelihood of it happening already built into it. One must remember that there is no guarantee that things will occur as you think they will – there are an infinite number of other scenarios that could unfold. The same arguments could be made for online sales killing malls and retailers. Sure Toys ‘R us did not anticipate the online market well but you can be assured the share price of all retailers have the big bad www factored in right now. Smart retailers embraced the www because they had to.

Now, let us not confuse batteries with oil products. Batteries are more like a fuel tank than petrol. You still gotta put that energy into it. If South Africa banned petrol cars then residents would have to buy electric. You have to charge these cars somehow (coal in SA) so we are really displacing the burn. This would put upward pressure on coal prices. Sasol mines lots of coal.

When I was very young I went to a lecture in 1979 at one of the universities (UCT) as part of a school kind of thing. There were were lectured by a distinguished energy ‘expert’. His prediction was that the world would run out of oil soon and by 1999 (not 2000) we would all be driving electric cars charged via nuclear power. Well that didn’t pan out but that does not alter the fact that financial markets are really competitive.

Yep they are ignorant and fully deserve a snotklap.

Well after all these years of holding investors’ monies hostage methinks this is another desperate attempt to hold on to people’s cash. Another 10 years? Thanks but no thanks. That money would have done me well in unit trusts somewhere. People must just count their losses and incest where everyone invests and nit in special schemes that promise too much and deliver nothing. MTN Zakhele was another failed scheme.

All bee schemes deserve to fail spectacularly. Only then will our people learn that there is no free lunch.

Maybe the company shareholders can sue the recipients of bee shares for their own losses. Why should shareholders pay for another group of shareholders. DISCRIMINATION racial is what it is and is unconstitutional.

People vote for the ANC because they are promised a free lunch. Now they realize that they actually borrowed the money to buy their free lunch, and then it gets even worse(tipically ANC) the free lunch evaporates, while they sit with the debt! What a nightmare!

Even successful BEE transactions are a disaster over the longer term. Beneficiaries are led to believe that they are inferior, less able citizens because they need a special law to make them equal to other citizens. BEE is a waste, a drag on the economy, a tax that handicaps local companies and investors that gives a competitive advantage to the international competition. BEE is in fact a project that exports investments, employment opportunities and tax revenue overseas, where laws protect property rights.

The only sustainable way to empower people is to give them the equal opportunity to build their own wealth. Equal opportunity, and not special treatment and plunder of property is the only sustainable BEE. The current schemes create social tension, destroys investments and lead to the implosion of the economy. Nobody is empowered, everybody loses.

Respect property rights, treat all citizens equally, stop these racists policies, stop making people believe that they are inferior and need special laws to make them “acceptable citizens”.

The best restitution for the wrongs of apartheid is the payment of social grants. Over the last 20 years the taxes paid, and spent on social grants made good the ills of apartheid. BEE will only crash the tax base and destroy the source of social grants. The ANC government is creating a system worse than apartheid as they destroy the economy, leading to hyper-inflation and eventual mass starvation.

There is no free lunch, not even in a socialist system.

Scrap ALL bee. The concept is rotten to the core.

Replace it with a simple fractional share scheme with a measurable 5% discount on actual market price purchases. Pay the investors transactional costs on purhase only…… not sales. This way the cost incurred can be taken up in the accounts immediately with no further dark Sword of Africa hanging over anybody’s head.

Nobody to be allowed to participate unless they have been through a meaningful economics, accounting, investing courses run by the uni-ons.

This will be relatively cheap and transparent.

Oh yes…………….once empowered always empowered.

It’s quite easy to spot what went wrong!

“The debt was expected to be serviced from dividend payouts, with management expecting Sasol’s share price to appreciate to at least R480 , which would be enough to settle remaining debt after Inzalo expires in September 2018.”

The obvious solution is to amend the BEE legislation to force companies to ensure that there share prices quadruple over 10 years, so that the participants in the BEE share schemes can get nice and rich…

volatile oil price? that is not the reason….just look how this country is run….stop sucking up to the BEE’s

Spare a thought for the folks who bought SASOL shares at full price 10 years ago. Those who got the BEE discount are relatively wealthier today. I guess at either price you have to be brave to take a concentrated 10-year bet on a single company’s future. And naive to think you can have the reward without the risk of failure.

If you want to be a shareholder – you must realise the shares can go up or down.
You can make money or not.
Will Sasol bail me out if I start losing on my investment?

Are you black or white?

He/She is a South African

Yeah Chev……………..tell that to the ANC and it’s voters.

Same as going to play in the water with the big boys but your boat has a leak from the start.

BEE=grand theft from shareholders. The $900million that is the debt to be written off comes out of shareholders pockets.

Serious value destruction! And then the Gupta mining minister wishes to insist that mining Co’s repeat this never ending cycle! I agree with appropriate economic transformation but this does not work!

Please correct me if I am wrong but the SASOL “oil” business is largely artificial through guaranteed kickbacks from the SA fuel industry. This monopoly (on the subsidy) provides most of its income. The balance comes from other monopolies in SA in gas, plastic fertiliser, feedstocks, wax etc. Other, overseas, business is just pie in the sky, waste of money stuff. If I am correct, the business is largely propped up by the consumer. Pressure on the consumer equals pressure on SASOL and, with a currently relatively stable ZAR vs US$, no share price appreciation. BEE subsidisation just sucks a little more money out of a business that could get really shaky if subsidy and the lack of competition are removed.

End of comments.

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