How Sanlam’s BEE deal made Patrice Motsepe another R8bn

Former President Thabo Mbeki was obsessed with creating Black business “role models”. Well and good. But instead of focusing on producing the kind of examples a developing country needs – bootstrapping, hard-working entrepreneurs who create jobs and build industries – he went for a quick fix. Whatever his intentions, Mbeki’s ideas encouraged Big Business to systematically enrich selected individuals. Time and again stuffing the same pockets through poorly named Black Economic “Empowerment” transactions. Enrichment would be a far better description. This resulted in a massive transfer of wealth from shareholders of JSE-listed companies to Mbeki’s favoured few. Now that these schemes are maturing, the true extent of corporate South Africa’s largesse is becoming apparent. Sanlam’s BEE transaction is the latest where details have emerged. It reveals an already super-wealthy Patrice Motsepe’s 2004 investment of R200m into the Sanlam BEE scheme delivering him a staggering R8bn profit. Motsepe is an unfortunate bullseye. He is no robber baron. Indeed, Motsepe is a disciple of Warren Buffett’s philanthropic ideals and has already given away much of his fortune. Mbeki could hardly have selected a better role model. And one cannot blame the entrepreneurially minded Motsepe for grabbing the opportunity. But few of the other beneficiaries think or act the way he does. Most have wasted large chunks of these endowments. Even with Motsepe, there’s a delicious irony in a well educated, sophisticated lawyer benefitting so handsomely from a company started by dirt poor Afrikaners who believed their savings would uplift “Die Volk”. In the interview which follows, our BEE expert Riaz Gardee, a Chartered Accountant, unpacks the Sanlam BEE transaction – AH

RIAZ GARDEE:  Recently, Sanlam announced a 14.6 billion Rand transaction, which they started in 2004, so that’s quite a significant transaction in terms of the size of the deal.  Maybe I’ll just give you a bit of background in terms of what they did and how they did it.

Riaz Gardee is an expert on BEE transactions. A CA, he speaks to Alec Hogg about this exciting investment terrain for black South Africans.
BEE shares: Riaz Gardee is an expert on BEE transactions. A CA, he speaks to Biznews editor Alec Hogg about this exciting investment terrain for black South Africans.

ALEC HOGG:  Please, yes.  Ten years on…it was big in 2004.  It’s even bigger now.

RIAZ GARDEE:  Yes, that’s right.  In 2004, Sanlam formed part of the Financial Services Charter and their target was to get ten percent BEE.  What they did is they did a deal with a company called Ubuntu Botho, and interestingly, that’s essentially a company controlled by Patrice Motsepe whose company controls 55 percent of that company.  His company Sizanani has 55 percent.  There’s a Community Development Trust, which as 20 percent and various other broad based BEE groups, which make up 25 percent.  That then forms the Ubuntu Botho transaction, which was formed on ten percent of [inaudible 0:01:04.0].

ALEC HOGG:  That ten percent: is it going to be tradable?

RIAZ GARDEE:  It’s not going to be tradable because it’s owned in the hands of this company.  What happened is in 2004, they acquired a six percent stake in Sanlam for one-point-three billion and Mr Motsepe contributed 200 million in cash – of his own money – and the balance was funded by debt.  Sanlam then threw in the two percent donation – equity to the development trust – and they also promised them a two percent deferred equity of Sanlam met certain targets.  What happened then is they effectively got the ten percent target, but in the interim Sanlam also repurchased shares on the market.  That didn’t have a dilution effect on Ubuntu Botho, so they now have 13 percent of Sanlam, which is worth about 15 billion Rand today and in essence, they bought the shares at R4.60 each and today they’re trading at R52.00.

ALEC HOGG:  That’s incredible.

RIAZ GARDEE:  Out of that pie of 15 billion, 55 percent goes to Patrice Motsepe, which is about eight billion for his company.

ALEC HOGG:  So Patrice has done very well, but the other shareholders who went along for the ride…them, too?

RIAZ GARDEE:  Yes definitely, but as I said, the other company is the Community Development Trust, so that would be for education and that type of beneficiary.  There are a few broad based BEE shareholders, so the shareholder base isn’t very wide.  They aren’t hundreds and thousands of shareholders and I think that’s the parallel to draw to Equity Express.  If you look at all the transactions…all the companies on Equity Express, as well as MTN Zakhele, which is not on Equity Express, the total value of all those companies traded is about 20 billion.  Sanlam on its own is about 15 billion, so it’s a significant size of a BEE transaction but I think where it fell short is that the shareholder base isn’t as widely spread as the other one.

ALEC HOGG:  Why would they not – given that there are some broad based shareholders – why would they not list this through Equity Express or the MTN Zakhele platform?

RIAZ GARDEE:  Well, we don’t know what they’re going to do and I think it would probably be best to contact through Sanlam and Mr Motsepe to see what intentions they have around that.  At the end of the day, they own the companies and it would be their prerogative in terms of what they’d like to do and how they would like to monetise that or trade that.  It is possible that they would want to do that, but I think they would be the best people to provide you with that answer.

ALEC HOGG:  Sure, it’s a pity that it isn’t transparent and broader.  There must be many other BEE share-type schemes waiting in the wings.  Have you come across any?

RIAZ GARDEE:  There are.  For example, there is a First Rand one, which is coming up I think, in 2015 and similarly, there are also other ones, which are also coming in the wings.  I think the important point is each one of them is totally unique, like the one we just spoke about in terms of Sanlam.  Some have wide shareholding; some have a larger number of shareholders, and some of minimum shareholders.  There are definitely ones coming in the wings, but it doesn’t mean they’ll all be publicly traded and available to the participants or the public.

ALEC HOGG:  Indeed.  One of the oldest of them has been Ukhamba and that has, of late, had a bit of a spotty record…Ukhamba – Imperial’s Ukhamba – it’s one of the oldest of them, but it hasn’t really been performing lately.  What’s the reason for that?

RIAZ GARDEE:  I think that was driven by the negativity around Imperial and the sector in which they operate.  The rising interest rates and pressure on the consumers is driving the Imperial share price, which is directly correlated to Ukhamba and I think there’s been some resistance in that area of the market.

ALEC HOGG:  All right, so they aren’t totally related.  I suppose, when you talk about negative thoughts of different companies, Welcome Yizani is the same.  The Naspers share price hits new highs.  The MultiChoice area is doing quite well, too – BEE share there, but the BEE share on Media24 or the Welcome Yizani is not doing as well.

RIAZ GARDEE:  Yes, and that’s because those are specifically the media assets, which are ringed within that entity and only the print assets in South Africa, which Naspers owns, are in there.  They are therefore directly correlated to that sector of the market whereas Naspers listed on the Stock Exchange, is more correlated to Tencent because they hold a large shareholding therein, and Phuthuma Nathi is then again more correlated to the South African Pay TV business, which they have.

ALEC HOGG:  Riaz, just as a broad question, if one qualifies…in other words, if you’re from a previously disadvantaged group, surely it makes sense to register for these schemes even if you aren’t going to be investing a lot of money.

RIAZ GARDEE:  No, I think that’s a very good point and I think many people probably don’t know about it or they’re not aware of what’s required to do that in terms of administration, but it’s actually quite easy.  Once you register with somebody such as Equity Express or the MTN Zakhele platform, it’s quite easy to go through the motions and trade, so definitely, what you’re saying…broadly speaking, in principle, it’s…for these participants to get into the market.

ALEC HOGG:  You don’t get anything at a discount that often and here you have shares that are available to you.

RIAZ GARDEE:  Exactly, and especially if you can wait for a couple of years, you’d be able to unlock that value even if the shares remain at exactly the same price.  I like to say it’s not often that you will be in a position to take advantage of this type of arbitrage opportunity.

ALEC HOGG:  So it’s all about arbitrage.

RIAZ GARDEE:  That’s right.

ALEC HOGG:  What kind of discounts are you likely to enjoy if you are able to participate?

RIAZ GARDEE:  Well, it depends on the period remaining of the lock-in period, but it’s anything between 20 and 40 percent in terms of the discount that you would be able to get.

ALEC HOGG:  So it seems a bit silly if you’re a patient investor, to invest through the Johannesburg Stock Exchange.  Rather go directly into these stocks at such discounts.

RIAZ GARDEE:  Exactly, I think that goes without saying.  However, the other side of the coin is that there may not be as many sellers in the market either, so relatively, it’s not very liquid, but for an average investor there’s definitely an available amount of equity that you would want.

ALEC HOGG:  The key point though, that you made earlier, is know that you’re investing in an underlying share.  These aren’t guaranteed – even though you’re getting them at discounts – to surge.

RIAZ GARDEE:  Yes, with investments, nothing is guaranteed, but I would say that because of the discount you have a margin of safety, which somebody else doesn’t have.  For example, if you’re getting a 40 percent discount, that would mean that even if the underlying drops 40 percent, you still wouldn’t lose money.

ALEC HOGG:  I think there’s a gentleman in Omaha who would quite like that – talk about margin of safety – Mr Warren Buffett.  Indeed, he would.  Riaz Gardee is our specialist on BEE shares.  He’s a Chartered Accountant.

 

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