The top brass of chemical conglomerate Sasol has promised that its new empowerment scheme Khanyisa would be nothing like the current Inzalo, which has left bruised shareholders with a smothering debt load instead of lucrative dividend payouts.
When Inzalo – the R28 billion scheme launched in September 2008 to own 10% of Sasol shares – expires in the next 12 months, shareholders might be left with no actual value but a small portion of dividend payouts.
This depends on whether Sasol’s share price appreciates to at least R483, which would be enough to settle the scheme’s R13 billion bank debt that financed the Inzalo scheme and dividend payouts to shareholders. The share price appreciation is unlikely to happen.
Most Inzalo participants funded their investment through debt, provided by banks or Sasol, while other investors used their own cash in 2008.
Over the last nine years, Sasol has paid dividends worth R7.6 billion, in which R5 billion was paid to banks to service debt and the remaining R2.6 billion was paid to shareholders.
Sasol came under fire last week, with critics saying that Inzalo benefitted banks more than shareholders. Inzalo also underscores the inefficiencies of debt-financed schemes that depend on volatile commodities for shareholder value.
Sasol will embark on an accelerated bookbuild that would raise up to R13 billion to settle the Inzalo debt, said joint-CEO Bongani Nqwababa. This is expected to dilute Sasol shareholders by 5.1% compared with a 4% dilution in 2008. Nqwababa added that other fundraising options would be considered.
Khanyisa will cost Sasol R7.3 billion over ten years from 2018.
So, what’s in it for shareholders this time around?
Unlike Inzalo, Khanyisa will be funded by Sasol and will hold a 25% stake in the South African operations, which includes gas, chemicals and synfuels businesses. Sasol is pulling out all the stops for shareholders to participate in the new scheme, which is grossly complicated in structure.
Paul Victor, Sasol’s CFO, said Khanyisa will provide participants value from day one, as Sasol would be giving free shares to its employees and ordinary black shareholders valued at R1.9 billion and R1 billion (R2.9 billion in total) respectively.
“This bonus of R2.9 billion from day one means that shareholders don’t have to wait for ten years [like with Inzalo] to get value. They can also monetise their shareholding,” he said.
Sasol has two empowerment structures that trade on the JSE with a different set of shareholders: Inzalo (funded by debt) and Sasol BEE Ordinary shares (SOLBE1), which trades at a 13% discount to Sasol’s share price and has no debt. SOLBE1 shareholders have been offered three options: keep their shares on the JSE, participate in Khanyisa or convert their shares into Sasol shares (if they don’t choose to participate in Khanyisa).
Shareholders opting to keep their SOLBE1 shares would receive a bonus share for every four SOLBE1 shares they hold.
If existing SOLBE1 shareholders participate in Khanyisa, they would receive one Khanyisa share for every one SOLBE1 share held (fully debt-funded by Sasol) and a further SOLBE1 share for every ten Khanyisa shares held.
Inzalo shareholders (funded by debt) would be given similar options. They would receive one Khanyisa share for every one Inzalo share held (fully debt-funded by Sasol) and a further one SOLBE1 share for every ten Khanyisa shares held. An example that Sasol gives is that if you own 100 Inzalo shares you will receive: 100 Khanyisa shares and a further ten SOLBE1 shares, worth R3 300 based on a share price of R330 per share (depending on actual share price).
Various Sasol employees would be awarded Sasol, SOLBE1 and Khanyisa shares with vesting periods of three to ten years.
Sasol shareholders will need to approve the Khanyisa scheme and options to shareholders at its AGM in November.
Whichever option shareholders choose, Riaz Gardee, the group head of corporate finance at Liberty, said any shareholder must be able to assume the risks inherent with investments. In the case of Inzalo, Gardee said the risks were high debt levels and the volatility in the scheme’s underlying investment (Sasol shares) that tracked Brent crude oil prices and rand/US dollar exchange movements.
Arguably, the Inzalo scheme is technically insolvent, as its liabilities for the year to June 2017 exceed its assets by nearly R1.3 billion – meaning that the Inzalo scheme is not creating net value for its shareholders.
With Inzalo being under water, Sasol is also not achieving its ownership minimum requirements under the new Department of Trade and Industry broad-based black economic empowerment Codes of Good Practice. “We will structure the Khanyisa deal so there is net value from day one as no further capital would be required from participants and there will be no external debt required,” said Sasol’s Victor.