BEE analysts pick holes in Arcelor deal
Ayigobi deal earns few ownership points
By Ethel Hazelhurst – Business Report
The black economic empowerment (BEE) deal announced last week by steel giant ArcelorMittal South Africa qualifies the company for mining rights – but does little to enhance its broad-based BEE profile.
Keith Levenstein, the chief executive of BEE consultancy firm EconoBEE, described the deal as “BEE pointless” because it could earn the firm as few as 4.95 points over the first five years, compared with the 23 points available on the BEE scorecard’s ownership element.
The local arm of the global steel company is to transfer a 26 percent stake in itself – worth R9 billion – to the Ayigobi Consortium, which includes President Jacob Zuma’s son Duduzane, and a share trust representing ArcelorMittal SA employees, through a new operating company.
The reason for Levenstein’s assessment is that the “participants’ dividend rights are limited to 5 percent of ordinary dividends and 0 percent of extraordinary dividends”.
Moreover, he said: “When the true substance of the deal is evaluated, we feel there is a strong case that the deal serves no purpose toward broad-based BEE and therefore the estimated points should be zero. Though it may sound as if the participants have been given a golden plate, they will never fully participate in the running of the business and may even end up with far less than they expected when the repurchase finally takes place.”
ArcelorMittal SA spokesman Themba Hlengani would not comment on the BEE points as the company was “still doing its own verification”.
According to the original announcement, the participants will be able to sell the shares back to ArcelorMittal SA after four years, provided the company is allowed to keep its BEE rating. And the operating company will have the right at any time between five years and 20 years to repurchase the shares. Thereafter the shares must be repurchased.
After five years, the new shareholders stand to make a minimum of R900 million and a maximum of R1.7bn on the deal, after repaying a notional loan to the vendors, depending on the share price at the time.
But Levenstein warned that the BEE codes did not have a “once empowered, always empowered” clause. “The true clause is called ‘continued recognition of ownership after loss or sales of shares’ and at most can contribute 40 percent of the ownership score.”
Peter Leon, a partner at Webber Wentzel, said the 26 percent stake was “enough formally, under the mining charter signed in 2002, to allow the steel company ultimately to secure the Sishen iron ore rights it had lost, through its opportunistic acquisition of Imperial Crown Trading (ICT), which controversially now holds the rights”.
The BEE deal and the purchase of ICT came after ArcelorMittal SA failed to renew its mining rights for part of Sishen and the Department of Mineral Resources awarded them instead to ICT.
Because ArcelorMittal SA was, in this instance, “operating in the mining space”, Leon said the mining charter applied.
However, broad-based BEE applied a more sophisticated measure of scoring and Levenstein said the ArcelorMittal SA deal did not “maximise BEE points”. He contrasted it with a 2006 deal concluded by consumer goods company Massmart.
“The company sold about 6.93 percent of the equity to black staff, which initially resulted in about five points and they are in a position to earn more. So they can expect more points for selling nearly 7 percent of their business than ArcelorMittal can in selling 26 percent,” he said.