Paul Janisch

Vesting and a Rabbitt in the tree

I was at a meeting with a company who wanted to know what happens when the shareholders vest their shares.  After about half an hour I figured they were talking about cashing out.  I like cashing out - it generally means you are going to make some money.  Companies who have done BEE deals don't like it.  Why - because our esteemed government is so obsessed about ownership and not about value created from the shareholding.  Companies need to try and retain their black shareholding or suffer the consequences - which generally amounts to wild accusations of lack of transformation and racism et al (you might be able to figure out that I do not hold the ruling party or its corresponding government in high regard).

Take a look at ABSA.  Theirs was one of the first BEE deals that vested - certainly the first of the big 4.  Their ownership score dropped from 14 points to 9 in a year.  And this is a problem for them.  FNB on the other hand is not going to have this problem in a while.  TimesLIVE reported

Though the term of the initial third-party funding was five years, maturing in 2010, it was always envisaged that [the trust] would, subject to it being commercially feasible, refinance the third-party funding in 2010 for a further five years, since the BEE transaction contemplated a 10-year term, maturing in 2014

Mzwandile Jacks of Business Report phoned me yesterday and asked me what I thought.  He didn't publish my whole diatribe, so I thought I'd add in the bits he missed.

FNB's deal was underwater and they very cleverly went off and and refinanced their deal for another four years - their ownership score of 16 points is likely to be safe.

A smart move that should be emulated across the board.

And on the subject of racial obsession I have posted a lovely little duo by Margaret Singana and Rabbitt - a cover of a Freedom's Children song called Tribal Fence. 

13 - Rabbitt - Tribal fence

There is some Jeremy Taylor stuff coming soon too - I will try not to be so sparse in my posting.

Fronting and other misadventures

Caird spent an afternoon with a BEE deal maker, a rather successful one at that.  He offered a bit of the dirt on some of the deals he's done in the past, without mentioning names.  If real transformation is your bag then he recommends that you steer clear of some of the bigger deals.  They can either elate or disgust you, he claims that the latter is more common. 

The problem is that the deals (not all I must stress) are done because they are a necessary ticket to fulfilling certain government conditions that might be contained in the mining (see today's Business Day about Anglo Coal eventually being awarded prospecting rights) or petrochemicals charters; or maybe they want to do business with certain narrow-based institutions like Eskom or Telkom.   We enter a willing buyer, UNWILLING seller routine.  The reluctant seller concludes the deal with little or no intention of including the new investor in the management of the business.  The deal however is huge and the PR machine operates overtime, big smiles all round.

I then asked the deal-guy about the buyer's attitude.  He said they tend to take a dismissive approach to the whole thing, at best they could earn some money either through director's fees or through some other flow of cash; at worst they may have wasted some time.

Who then is the rotter in the deal?  Is it the reluctant seller who makes Napoleon seem like a Sunday school teacher, or is it the investor who is the biggest chancer in the world.  I can't really see the difference between the two.  The ridiculous combination makes a mockery of all the best intentions.

The deal-guy suggested that these deals are effectively fronts.  What then is a front?

There is a whole statement (code 000, statement 001) covering fronting.  The statement defines fronting as

any practice or initiative which is in contravention of or against the spirit of any law, provision, rule, procedure, process, system, policy, practice, directive, order or any other term or condition pertaining to BEE.   The practice is most often found in relation to ownership and management and control, but the codes are quite clear that fronting can happen within any of the codes.

There are penalties for fronting, ranging from fraud convictions through to blacklisting (unlike the SABC, this list will be written down and made public).  In spite of the risks I have my doubts whether the practice will stop in a hurry.  I think the reasons for this are:

1. A total lack of understanding of empowerment from government (biggest culprits), to parastatals like Eskom (who write their own ridiculous rules) to many large corporates.
2. It suits many parties; the business owner doesn't really sell anything and the investor gets money for nothing (and doesn't end up in Dire Straits - I couldn't resist that).
3. The more difficult fronting is made the more ingenious the front will be.  I asked Christiaan van der Merwe and Chris van Wyk (CA and lawyer respectively) of Exceed Verification Agency whether they could create a company whose front would never be detected.  They did not think this would be an insurmountable challenge.

What then is the solution?  The scorecard contains all the answers.  By rating a company on their total score, irrespective of where the points are generated on the scorecard, you create a situation where empowerment becomes an achievable thing for every company.  I wrote something about this a while ago in Real Business.