Coast2Coast-controlled Ascendis Health has built a R200-million BEE deal that has raised some eyebrows – not only because of its unconventional choice of partner, the Mineworkers Investment Company (MIC), but also because its structure avoids any earnings dilution for its minorities and presents no immediate cost to the company.  The deal revolves around the issue to the MIC of a Coast2Coast debenture which the mineworkers will pay for in three tranches over the next three years. While the deal ticks the  BEE box in the sense of business transformation and corporate citizenship, it is no surprise that Ascendis has a strong focus on government tender business, and that MIC was  an investor (R50-million) at the time of  the company’s listing. CEO Karsten Wellner unwraps the full details of the deal with Alec Hogg and Gugu Mfuphi in this interview on CNBC Africa’s Power Lunch show. – GK
ALEC HOGG: R200m broad-based economic empowerment transaction for Ascendis Health… Coast2Coast is the controlling shareholder of Ascendis. The transaction will have no earnings dilution or cost for Ascendis shareholders – the minority shareholders, that is. We’re joined now by the Chief Executive of Ascendis, Karsten Wellner. It’s an unusual transaction in that regard Karsten, in that your controlling shareholder Coast2Coast is actually doing the deal with the MIC (Mineworkers Investment Company) and minority shareholders I guess, in this respect, are getting a bit of a free ride.
KARSTEN WELLNER: Yes. Firstly, hello Gugulethu and Alec. It’s nice to be back on your show. For us, this deal with the Mineworkers Investment Company is a milestone and you have actually described it accurately. The existing shareholders, beside the majority shareholders, don’t get any dilution with this this deal. This was important for us because we are a young company on the JSE – just listed a few months ago, in November – and in a phase where you are still growing, and our normalised earnings still have to show through our bottom line results in our annual financials. We don’t actually want to issue new shares and Coast2Coast – our majority shareholder – was also unwilling to sell a big chunk of shares at the moment because they believe very strongly, in the further growth of our business, going forward.
ALEC HOGG: Just explain it. Just unpack it for us. It’s a R200m transaction. Coast2Coast is issuing a debenture to the Mineworkers Investment Company. How are they going to pay for it and is this ever going to be converted into equity?
KARSTEN WELLNER: At the moment, we have an approximate BEE shareholding component of around R160m in our business, depending on the share price – and the share price went up nicely in the last day – so it might be a little bit more than R160m right now. The agreement with the MIC (Mineworkers Investment Company) is to invest R200m over a three-year period in the form of a debenture with Coast2Coast. The first tranche is happening after one year; the second tranche – another 15th percent, (the first one is 15), next tranche – another 15 percent, and then the third tranche is actually brining R140m onto the table. The first tranche is mandatory to exchange into shares. The next tranche is voluntary, but with certain hurdles. It gives Coast2Coast the opportunity to accept this amount of R200m, which they don’t want to sell now, over a period of three years and still participate in the growth of our business. We all know that in South Africa, we have to transform our businesses. From that perspective, it’s a very important deal for us, not only because of some of our deals being in government, but as our role as a corporate citizen in South Africa as well, and that we have to be more empowered than we are right now. The R160m is already a good start, but it will bring us to R360m after three years – that’s the start. We are having talks to more interested parties, but we wanted to anchor our BEE involvement with the MIC.
GUGULETHU MFUPHI:Â Maybe we can explore that further. You also mentioned in the release that you were looking to augment your BEE initiatives. What exactly does that mean?
KARSTEN WELLNER: At the moment, our business is 40 percent in consumer brands, 40 percent in Pharma and medical devices, and around 20 percent in our Phyto-Vet plant and animals business. Of the business in the Pharma and medical devices business, probably 40/50 percent of the business is with government tender and of course, the government tender looks at the BEE credentials. Of course, the equity part is only one part of the scorecard, but we actually want to have good credentials because when you tender for Pharma products, the price, of course, is an important point as well in our generics business – affordable, accessible generics. When we tender, besides the price the BEE component is important too, and to score at the BEE rating – the company gets. From that side, we have to work on that, but the other thing is also the underlying assumption as a listed company…we have a corporate citizen role to play in South Africa and therefore, we have to increase our BEE holding on a corporate level as well.
ALEC HOGG: Karsten, why have you done it all with MIC? Why not, as has been popular in the past, identify certain role models who would benefit from this kind of transaction?
KARSTEN WELLNER: We actually got a contact at the MIC due to the fact that the MIC was prepared to go with us on our listing already, so one of our listing shareholders in November – when we went to the stock market – at that time, with an investment of around R50m. At that time, they said that they love our idea, they love our concept, they like our strategic imperatives, our grown strategies, our acquisitive, organic, and our synergy. They said they wanted to increase it to a number of R100m or maybe R200m. When we started negotiating with them, we realised we didn’t want to dilute our existing shareholders so we found this construction with Coast2Coast.
ALEC HOGG: That wasn’t my question. My question was why did you not go for individuals? Why did you go for MIC rather than individuals? In the past, individuals used to get benefits from this kind of thing. Why did you go a different route?
KARSTEN WELLNER: It’s the first step. We have to do more and one of our ideas is actually a broad-based scheme. We have also already empowered our staff with this very small share incentive scheme and we want to do more, so we want to go that route you explain – exactly. That’s also one of the targets we’ve set ourselves, beside the MIC, to empower a wider range of people in our company with the share incentive scheme and an equity incentive scheme. That’s definitely on the cards for us going forward, too.
ALEC HOGG: That was Karsten Wellner, Chief Executive of Ascendis Health. It’s nice to hear that story. It’s particularly nice to hear that last answer. In the past, in South Africa many people were enriched by being identified as being the right people for the boards of directors of companies who wanted to give them gifts, effectively – no more than that. Now, broad-based black economic empowerment is really starting to catch hold, as evidenced in the example here.
