Unintended consequences spring from decisions taken by those engineering change. Especially when those trying to alter the status quo, well intentioned as they usually are, come from a narrow ideological base. In those instances, the danger of making things worse is very real. In this detailed analysis, independent financial advisor Craig Gradidge explains why the latest raft of proposals from the Zuma Administration will kill off any hope for Abil’s 10 000 Black co-owners – and seriously hamper potential upside for millions more potential shareholders. – Alec Hogg    Â
By Craig Gradidge
In September 2007 the results of the National Empowerment Fund’s (NEF) public share offer, Asonge, was announced. The NEF was selling off its stake in MTN to members of the black South African public at very attractive terms.
My business partner and I had both independently bought the maximum number of shares allowed in terms of the scheme, but were concerned that such an attractive investment opportunity only managed to attract 85,000 investors from around the country. After a chance meeting between him and myself soon after that, we decided that we needed to leave corporate and start a financial planning business that would incorporate these opportunities into the financial and investment planning needs of investors.
Our first initiative as a business was to explain to over 100 people how the Sasol Inzalo deal worked. A month later, we did the same presentation to over 1,500 people at Emperors Casino in conjunction with KayaFM. Two months later we were back at Emperors presenting on Vodacom’s YeboYethu deal to about 600 aspiring investors.
Over the years we have presented to over 10,000 primarily black retail investors across the country on a broad range of financial planning and investment related issues, including BBBEE share investing. Our hypothesis in starting the business was that these public BBBEE share offers could be a potent catalyst for bringing in new investors into the mainstream economy has largely proven correct as we received many testimonies of first time investors.
A short history of public BBBEE share offers
Under the Ownership element of the BBBEE scorecard, companies could choose one or a combination of investors to do an equity deal with in order to increase black ownership. They could partner with a well connected individual or groups of individuals, they could partner with staff, they could partner with broad based groupings (such as women, children or community groups), or they could partner with members of the public in general. Much of the criticism of earlier deals were that they enriched only a few individuals.
Public BBBEE share offers really took off in 2001/2 with Telkom’s Kulisa offering. Black investors were offered Telkom shares at a discount to the expected listing price, and were required to hold the shares for a minimum period before being able to trade them.
ABIL did their deal, Eyomhlaba, in 2006 followed by DSTv’s Phuthuma Nathi, Media24’s Welkom Yizani, ABIL’s Hlumisa, PSG’s Thembeka Capital, Nedbank’s Eyethu, NEF’s MTN Asonge, Sasol’s Inzalo, Vodacom’s YeboYethu, and MTN’s Zakhele. Subsequently Imperial opened their staff scheme, Ukhamba, to the general public as well. According to Riaz Gardee there are an estimated 750,000 investors and with over R26bn invested in these deals as at August 2014.
These deals have had varying degrees of success with Phuthuma Nathi, Zakhele, Thembeka and Kulisa delivering phenomenal returns to shareholders. YeboYethu and Sasol Inzalo have delivered good returns, while SOLBE1 and Welkom Yizani have underperformed. ABIL’s two deals are currently worthless.
Notice of Clarification
Late in the day on 05 May 2015, the Department of Trade and Industry (DTI) issued a Notice of Clarification (GN 396 of 2015) in which it clarified certain aspects of the revised BBBEE Act (46 of 2013). Section 1 (d) states “Black participants in Broad-Based Ownership Schemes and Employee Share Ownership Programmes holding rights of Ownership in a Measured Entity must only score points under paragraph 2.2.3 under the Ownership scorecard.”
According to Transcend Corporate Advisors “The clarification notice effectively limits BEE ownership recognition via BBOS and ESOPs, and reduces the number of BEE ownership points that can be earned by BBOS and ESOPs to only 3 points out of the available 25 points. This change removes any significant benefit of including employees, communities, or foundations in the Black ownership structures. The majority of BEE ownership transactions involve BBOS and ESOPs. Accordingly, the consequences of the change is that most companies will see a significant reduction in their B-BBEE ownership points…”
According to a note by Grant Thornton BBBEE division “Takalani Tambani, acting chief director of the dti’s BEE unit, indicated that ownership held through these vehicles was viewed by the department as “passive” and was not a real driver to businesses. Concern was also raised that in some cases, the intended beneficiaries never saw any value from these schemes. This was due to complicated formulas and requirements inserted by the larger parties, ensuring that these vehicles never met the criteria required for paying out any benefits to the shareholders.”
There is real merit in the concern expressed by the DTI, but one wonders whether or not there is a better way of managing these issues. Has the department engaged with business on this particular issue? Was legislation the only suitable tool in dealing with these issues?
The potential impact on ABIL’s BBBEE shareholders
ABIL had two BBBEE schemes, Eyomhlaba and Hlumisa, which attracted approximately 10,000 retail investors, including staff, suppliers and members of the public. With the spectacular collapse of ABIL mid 2014, both schemes went from being profitable for most of its investors to being largely worthless. Trade in ABIL and the shares of both schemes were suspended, and a curator appointed to manage ABIL.
On 18 December 2014, the board of Eyomhlaba and Hlumisa notified shareholders that they were in discussions with the curator and with the PIC to look at ways of considering both schemes in terms of the shareholding of the Good Bank. Given this week’s notice from the DTI, one would not blame the newly appointed CEO of the Good Bank to rather consider alternative options, where he could get more bang for his proverbial buck. Surely a company looking to convince shareholders that it remains a credible investment option post the curatorship would exercise prudence on all matters, including BBBEE and the associated cost of compliance?
This would be devastating for Eyomhlaba and Hlumisa shareholders who have had their hopes raised by the December 2014 communication that perhaps all was not lost.
Impact on other schemes
Investors in Vodacom’s YeboYethu must be feeling an increased sense of nervousness given that Vodacom SA has offered significant financial support to that scheme. By my estimates Vodacom SA stands to lose between 7 to 9 points as a result of this. Given the structure of the YY deal which involves significant vendor funding, YY shareholders have every right to be nervous. Sasol Inzalo shareholders are also invested in a heavily funded scheme, which could collapse if support were withdrawn and allocated where the company could earn higher points.
Kumba Iron Ore made headlines for paying out over R500 000 each to staff members as part of its ESOP. They stand to lose out significantly especially given the current trading environment for iron ore producers globally, industrial relations challenges, Eskom, and now potentially issues around their BBBEE score.
Conclusion
We have witnessed firsthand the ability of public BBBEE share offers and ESOPs to grow the investor base in South Africa, and bring many new participants into the formal financial sector. We have also invested many millions of rands for clients which were proceeds of an ESOP or a maturing public offer. As shareholders in Eyomhlaba and Hlumisa we, and many of our clients, are very concerned that we may become collateral damage in a war between the regulators and big business. We also are concerned that BBBEE, which we support in principle, loses an important aspect of its broad basedness.
