With evidence that South Africa’s  Black Economic Empowerment (BEE) share schemes have improved lives, it seems a pity that more companies have not followed the likes of Vodacom SA, Sasol and Naspers. That’s the message delivered in this insightful overview of South Africa’s empowerment landscape, by analyst Riaz Gardee, as over-the-counter trade in BEE shares gathers momentum.
A chartered accountant with a wealth of experience in mergers and acquisitions, Riaz cuts through complexity and the emotional cloud around BEE share schemes to set out its benefits. He reckons South Africa’s mining landscape would be very different if companies in that sector had taken another approach to BEE in the early phases that share schemes were being implemented. – JC.
By Riaz Gardee
South Africa’s first democratic election in 1994 heralded a new age of hope for a non-racial and equal society. However centuries of racist policies and structural imbalances led to vast inequalities amongst the different race groups.
The Government realised that to ensure long-term sustainability greater equality was required and embarked on policies to redress these past imbalances, deracialise society and accelerate economic growth. Needless to say the challenge was enormous as undoing centuries of established economic power could not occur overnight.
The aim of the Government was stated as inclusive broad-based black empowerment which included ownership, employment, skills development, gender focus and empowerment in the broadest sense. The Reconstruction and Development Programme was implemented in the mid-90s followed by the Employment Equity Bill being passed in 1998 and BEE legislation in 2003.
The key concern and focus has been the ownership component of BEE as the transfer of ownership and capital represents a significant structural change in the capitalist system.
Access to capital proved a significant hurdle in BEE transactions as most of the intended beneficiaries had very limited capital. As a result a large amount of debt was used to fund the transactions as well as various forms of vendor support.
In times of market weakness this placed many structures ‘underwater’. The market crashes of 1998 and 2008 put severe strain on highly leveraged transactions and BEE transactions were no exception.
The first generation of BEE deals were usually concluded with high-profile individuals creating an elite black business aristocracy. BEE has since evolved in its relatively short-life span with many companies in recent years inviting the public into its BEE initiatives.
This has been seen as more palatable than only empowering a narrow elite and enriching them even further. BEE’s stated of objective of being inclusive also allows white participation in BEE deals by defining a Black Controlled group as one that has >50% shareholding by black qualifying individuals. Most transactions have also included an employee component which now makes them equity holders in their employers.
The mining companies concluded their BEE transactions in the early phases of BEE but omitted public participation structures. As these deals were done at the beginning of the commodity super-cycle they would have created significant value and broad-based ownership if the public was included.
The entire South African mining landscape would have probably been very different.
The evolution of these early deal structures led to many large companies subsequently concluding public participation schemes over the last few years. They would typically have an initial no-trade restriction and thereafter restricted trade to only BEE participants.
Many of these schemes have now passed the initial no-trade restriction and allow BEE participants to trade amongst each other for the second part of the restriction period. Restriction periods vary amongst the different schemes and are typically between 3 and 10 years.
These restrictions were to ensure the long-term success of the schemes and eliminate short-term market fluctuations. Shareholders are thus forced to take a long-term view which also encourages a culture of saving and investment.
The following is a summary of these schemes:
Some salient points regarding these schemes:
- R20bn of value is held by BEE participants with a significant portion representing new value created for them;
- Almost 800 000 direct shareholders which excludes employees and broad-based groups thus probably taking the figure to over a million direct and indirect beneficiaries;
- Liquidity of c. 5% with annual trade of over R1bn;
- Over 95% of the shareholders are individuals;
- Only 4 companies BEE’s schemes constitute a significant component of these figures – MTN’s Zakhele, Sasol’s Inzalo and SOLBE1, Nasper’s Multichoice and Vodacom’s Yebo Yethu.
If only a handful of companies have achieved such broad-based and significant gains then more entities, especially publicly companies should be encouraged to consider this route to empowerment.
It has proved to be the most inclusive, broad-based and transparent mechanism which has been used thus far. BEE still has a long way to go in achieving its stated objectives but this is certainly a good start.
* Riaz Gardee is a Chartered accountant who specialised in mergers & acquisitions and corporate advisory for a number of years. In recent years he has been working on expansion and development of businesses in sub-Saharan Africa.Â
For more by Riaz Gardee, see:
Gardee analyses MTN Zakhele – postponed trading disappointed, but its value appreciation certainly hasn’t
Pricing Vodacom’s YeboYethu: Gardee sizes up whether it is worth R50/share
