Paul Janisch

SAB's BEE deal

It's made the press again -in fact it's made a lot of press.  I was referred to the Business Day report by Robert Simmonds.  This report concentrated on the beneficiaries, 20% of whom are SAB's lower paid white employees.  And once again Mr Obvious (one Ajay Lalu) is asked for his opinion - to which he replies  “Unfortunately, according to the codes of good practice, white beneficiaries don’t qualify,”  Er....... tell us something we don't know Ajay.  So what if they don't get any points for this deal - what SAB hopes to achieve is the financial independence of their staff and sundry other players.

And then not to be outdone ol' Aj "criticised the fact that there was no guarantee on the value of the stakes at the end of the 10-year lock-in period."  He might have been taken a bit out of context here so I'll cut our hero a little slack - but just in case AjLal is not that clued up about these things I'll explain it for him.  RISK AND REWARD OLD MAN, CAPITALISM IS ALL ABOUT RISK AND REWARD.

I've blogged about the SAB deal before

SAB is a fascinating deal, it stands out as the only one where the business reasons are so apparent.   We know that the Western Cape is clamping down on unlicensed taverns and 70% of SAB's turnover comes from unlicensed taverns.  Here is SAB staring at the potential demise of their biggest channel unless they do something.  Sheer brilliance, if I may use such a superlative.

And I still think it's the best deal done so far, in spite of what Fawu says.  Let them strike I say - just make sure that you suck on Windhoek Lager at the end of the day of hard toyi-toying.

Owning's up

I made the Star Workplace last Monday.  The article said that BEE deals should dry up  until the new power base in the ANC is known.  Stuff I have mentioned before on this blog.

I've made my feelings about BEE deals well known through the years.  In fact I started Caird 4 years ago because I wanted to find alternatives to ownership.  This was before the dti launched its first draft of the codes (take a look at their original scorecard).  Back then I pinned my hopes on the Employment Equity Act which stated in section 53 that companies could attach a certificate to each tender claiming they were compliant with the EE Act.  I interpreted this section as an alternative to the ownership requirement.  That was then, I am now very disenchanted with the EE Act - it is starting to take on certain apartheid overtones and is not dissimilar to apartheid's disastrous attempts at social engineering.  I must write more about this.

The ownership element is still very problematic to me.

Vuyo "Confucius"  Jack attempted to liken a BEE deal to the workings of the body in his Sunday column in the Independent a few weeks ago.  (Vuyo's philosophical warblings very rarely make for easy or pleasant  reading - so read it at your peril, but you should read his column in today's Independent).  He writes

The best place to be for the sustainability of the deal is where there is intrinsic intention from both sides which becomes a strategic glue for all parties involved.

The true context of this quote refers to the fact that the various parties need to have a clear idea why they are in business together and what their responsibilities are.  A very logical statement that rarely occurs in practice.  Almost every BEE deal that I have come across is a reluctant transaction that is being conducted because of compliance.  I have yet to find a merger that happens in the natural course of business (although they must exist).  I also find most deals are very sterile, they tend to stop at the maximum compliance level (which is typically 25%).  Whenever I see the "25% BEE shareholder" tag I automatically assume that this is a BEE deal that has been conducted out of dire necessity. 

The next thing that happens is the measurement of compliance.  I did some work for a listed company and we attempted to calculate the black ownership of the company based on the shareholders' register as of a certain date.  It was the most imprecise measure you can imagine,  we took a look at the names and then tried to place a race and a gender to that name.  Some were easier than others but we could have missed out on a whole bunch of shareholders because they don't have traditional African, Indian or Coloured names (the new police commissioner, Tim Williams is one example).   In the ideal BEE world we should have contacted each one and asked them to identify themselves in terms of blackness (it would offend me completely if I was asked to identify myself because I hold a few shares in a company).

But if you want to prove that you have X percent of black shareholders then you must conduct this research.  The question is "who is going to pay for it".  It was highly unlikely that my client was going to foot the bill for this research and rightly so, their BEE budget is not unlimited.   Bidvest on the other hand was willing to do this and probably paid KPMG a large amount of money to go off and calculate their actual black ownership.  Much of that ownership is institutional but I am sure that they must have looked at individuals who own shares as well.

Who is then responsible for ensuring that you have black investors who buy your shares on the open market? What if they don't buy shares.  Black ownership has to be either engineered or a happy coincidence. 

There is hope for me however

I was invited to Thami Mazwai's farewell from Mafube.  He's off to  the University of Johannesburg to run their “Centre for Small and Medium Enterprise Development” (CSMED).  Mazwai started talking about the need for more black entrepreneurs and then as if he was taking a leaf out of Kevin Lester's book he stressed the need for black-owned Pick 'n Pay-like stores, not black owned franchises, but businesses that are started by black people that grow to the same size as Pick 'n Pay.   It's Kevin's Volkskapitalisme!!!!

I was jumping up and down (we'd been listening to speeches for two hours at that point, and I have slipped a disc whilst picking up my son).  This is what I wanted to hear - it makes so much sense.  Don't get Kevin started on this topic, a one hour lunch will end at a very late dinner (not that Louise and I would mind).  But it was Mazwai's apt description of ABSA that really makes this point relevant.  I'll paraphrase it a bit.

Even if ABSA was 51% black owned, it will always be remembered as an example of an Afrikaner success story.

I was talking to Obed and Sakkie O'Neil about this.  A black owned (100%) bank would certainly pose a threat to the big four/five banks.  But this is what BEE is supposed to be about - creating a more competitive economy.  I am all for this concept I think it has great ramifications for our collective future.

Indigineration

I have gone through a re-branding process.  Whilst Caird is technically a group of companies the name "Caird Group" was becoming a little wordy.  So we are now operating simply as "Caird."

Dianna Games' column in this morning's Business Day discusses Mugabe's "Indigenisation and Empowerment Bill", which is waiting for Mugabe's signature before it becomes law.  What I found most interesting in this article was that this is not the first time this kind of principle has been implemented in Africa.  The Nigerians, under the military government of Murtala Muhammed,  introduced an Indigenisation Decree in the mid-70s. 

The decree listed three categories of ownership

• 60% foreign ownership was allowed in businesses with a high technology and skills component, notably the oil industry;
• 51% local ownership was ordered for a mid-tier of business, including banking and construction
• 100% ownership was decreed in smaller businesses such as retail.

Many multinationals, notably international banks such as Standard Chartered, Citibank and Barclays, pulled out.

The sentiment in Zimbabwe seems to be similar, not so much an economic re-alignment, but a feudal system of retaining vassals' loyalty.  Some go far as to call it "cronyism".

I suppose we should watch our own ownership regulations closely.  The 25.1% is designed to ensure a veto right over critical decisions regarding the business.  If the ownership requirements start increasing without any logical reason we should look at  Zimbabwe's  meltdown and wonder where we might be headed. 

Games sums up the concept of economic empowerment perfectly in her concluding paragraph.

A priority for most Zimbabweans right now is simply having a job. All the rest is “just grammar”, as Nigerians would say.

More on section 38

Section 38 made the Business Day this week, Changes to law will aid new deals (watch out for this link it is broken on their website - it might be fixed).  The story provides a little history on the complexity of doing deals when they can't be self financed. (I have to type this out - gets to the fingers a bit)

Vendor participation was limited by section 38 and this led to complex and expensive structures being put in place to facilitate the transactions...... there was a huge leakage to advisors and institutions.

An appropriate amendment to Section 38 will lead to simpler and cheaper structures and this is likely to result in more deals.  The amendment is expected to come into force during the first half of this year.

The rules for vendor financing seem to be:

• After the deal is concluded, the company must still be able to pay its debts in the ordinary course.
• The company's assets must exceed its liabilities
• The company must pass a special resolution that requires the approval of 75% of the shareholders

Here is a question for the banking people.   Section 9 of the Financial Sector Charter creates Empowerment Financing as a goal for that sector.  If more deals are enabled through the relaxation of section 38, and the banks are requested to provide financing, will this still be considered as empowerment financing for scorecard purposes?

Amendment to Act will spur on empowerment

Section 38 of the Companies Act, 1973 prohibits a company from providing financial assistance for the purchase or subscription of its own shares.  To be more specific:

38. No financial assistance to purchase shares of company or holding company.—

(1) No company shall give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares of the company, or where the company is a subsidiary company, of its holding company.
(2) The provisions of subsection (1) shall not be construed as prohibiting—
(a) the lending of money in the ordinary course of its business by a company whose main business is the lending of money; or
(b) the provision by a company, in accordance with any scheme for the time being in force, of money for the subscription for or purchase of shares of the company or its holding company by trustees to be held by or for the benefit of employees of the company, including any director holding a salaried employment or office in the company; or
(c) the making by a company of loans to persons, other than directors, bona fide in the employment of the company with a view to enabling those persons to purchase or subscribe for shares of the company or its holding company to be held by themselves as owners.

This act was promulgated a long time ago therefore it is rather difficult to understand (this is in direct contrast to modern acts, the new ones are really easy to read and understand).

There has been a fair amount of talk about the relaxation of section 38.  Today's Business Times carried an interesting article on section 38.  It is likely that section 38 will be relaxed because it has hampered BEE deals thus far, although the article does suggest that it is an antiquated restriction inherited from English law.

What I did find interesting was that there are already exemptions to section 38.  Holding companies can provide financial assistance for the purchase of shares in their subsidiaries. Financial assistance may be provided by a company for the purchase of its business, instead of its shares. Companies may also lend funds to a share incentive trust as part of an employee share incentive scheme.

If section 38 is going to be relaxed then it won't be as simple as just financing the purchase of shares.  A report in Business Day on the 23rd of May, 2006  suggested that a few conditions would apply

• company's assets must exceed its liabilities
• board must pass a special resolution to sanction the sale of shares

Caird is off to Durban

We are off to Durban for a few days, back in JHB on Friday.  I will try and post something whilst I am down there but my experience of Durban hospitality probably means that I won't get a chance.  We are also stopping off in Harrismith on Thursday to see an agricultural enterprise development project run by Nestlé. 

Foreign banks looking for a piece of BEE action

This article appeared in Business Day on Tuesday (1 Aug, 2006). http://www.businessday.co.za/articles/topstories.aspx?ID=BD4A242965

There is no shortage of financial institutions with cash for these deals, the question should be "are there enough deals out there?"  I think I might not have a full understanding of the number of deals there are to be had out there, with these big guns playing there has to be a lot of business to write.

I still do not think that ownership is the best form of empowerment.  I'll write more on this in the next few days.