Interview on SAFM with EconoServ chairman Keith Levenstein
NASTASSIA ARENDSE: We are looking at BEE share schemes. What prompted this idea was the Sasol Inzalo unbundling that will take place next June. Yesterday we spoke with the joint president on how the new scheme is going to work. Now we’ll look at BEE share schemes and have a conversation with Keith Levenstein, chairman of Econoserv SA, who joins me on the line.
NASTASSIA ARENDSE: We hear of these BEE schemes all the time, to incentivise people to buy shares, to participate in the companies and the growth of those companies. To understand, let’s start off with the different types of BEE schemes and who qualifies for those.
KEITH LEVENSTEIN: There are a lot of different types of schemes for BEE ownership. One scheme can simply be black people who purchase shares in their own name. Obviously the people who qualify are all those who are defined as black in terms of the BEE codes, and comprise people who are African, coloured, Indian and South African citizens, or could have become a South Africa citizen before 1994.
The other types of schemes that we see are for example the Sasol Inzalo, where Sasol offered their shares at a slight discount to black participants. It was a good scheme. Unfortunately, the share price has dropped quite dramatically, but the concept behind it was pretty good. Obviously when you do buy shares you have to take the risks with the benefits. In this particular case it might not have worked perfectly, but it was still at least a reasonable scheme as its goes.
We also obviously see other schemes such as broad-based schemes and broad-based trusts and employee ownership schemes, some of which also work very well because they incentivise an employee who works in a company. Each of these are problematic, depending on how they are implemented and how they actually are made to work.
NASTASSIA ARENDSE: Talking of the Sasol one, it was implemented in 2008. I think at that time a lot of people described it as the biggest one to date. Let’s talk about the impact that BEE share schemes have made over the years. Do they work?
KEITH LEVENSTEIN: They certainly do work, Nastassia. We’ve seen lots of people benefiting out of them and lots of people ending up buying shares and becoming quite successful. Just to mention another name there, the MTN scheme has also done pretty well for many, many people.
The Sasol scheme was at the time the largest BEE scheme around. It was worth something like R26 billion. Unfortunately, for all the investors – and we must emphasise that anybody who buys shares is an investor – they end up owning shares, and may have to buy shares or pay back the shares. Unfortunately, for those particular investors the price of oil at the time they participated was something like well over $100/barrel.
And now, as you see, the price of oil has dropped and obviously Sasol’s own share price has dropped in sympathy. In other cases it does work. Either way, there are many black shareholders of Sasol, which is a good company, and those people are benefiting. In one weird way it is exactly what the businesses codes are looking for: let’s get more people than previously to participate in the company.
NASTASSIA ARENDSE: Speaking of getting more people to participate, how does one get hold of these particular schemes? Is it via the JSE or an OTC market? How would it work?
KEITH LEVENSTEIN: Some I don’t know and I’m not part of the JSE. They are publicised very, very widely. It’s not necessarily only via the JSE. They use normal advertising, local newspapers, etc, where people are offered a prospectus. They would then fill [a proposal] in and offer to become shareholders. In some cases these schemes are oversubscribed because, after all, if the share price is currently R100, for example, and you are offered the shares at, say, R80, you’ve got an almost instant benefit. Obviously there are limitations in that you can’t sell your shares tomorrow. But there is still a benefit, so many people do want to take advantage of the benefits that could flow through to them from some of these very good schemes.
NASTASSIA ARENDSE: A few weeks ago we had someone coming to talk about small-cap stocks. Although I know this is not completely related, the one thing he did mention is that, irrespective of what you choose to invest in, you’ve always got to get background information on what it is you want to invest in, whether it’s the Sasol Inzalo or the MTN or whatever the case may be.
From your perspective, and having been involved with BEE share schemes and BEE codes, what are some of the things that people need to know around BEE share schemes?
KEITH LEVENSTEIN: I think it’s the exact same information that anybody who invests in any share would need to know. Sometimes a person is simply given shares, or they are told that they are a beneficiary, and they don’t do any due diligence, they don’t even know what their rights are, they don’t realise that they do have a right to vote at an AGM. If they own only one share they are not going to win the vote, but they need to know they have rights. They need to know what the rights of the shares are as well, that they can, for example, sell the share – if not today, in a year’s time or two years’ time.
We do often see people who don’t want to become shareholders. They are simply given shares in some way. They are told that they are given shares and they accept it. They hardly realise that there is a debt that might have to be repaid as well.
So yes, it’s the exact same as buying any asset. You’ve got to know you can afford it, you’ve got to know what the benefit is. Just because the person offering it says the share price is going to triple doesn’t mean that it is going to happen. In some cases an offer that is too good to be true is probably not true.
NASTASSIA ARENDSE: What happens when you have a little money, but you don’t have too much? How do you exactly get into the game?
KEITH LEVENSTEIN: That’s always the big problem. We want to see more people participating in the economy, more black people. Unfortunately, some people might not have the ready cash to actually participate, or even the appetite to take the risk. That is one of the biggest problems – how do you finance specific deals? For example – and I don’t know the ins and outs of Inzalo – Sasol was involved doing vendor finance as well. So at this moment they’ve got a fairly big amount of money that is outstanding and those shareholders who might have lost some of their money, are also going to have to repay some of the share price.
It isn’t the first time that this has happened. There have been other share deal schemes over the past ten, 20 years that have gone under water in that the share price is worth less than the person actually owed on that share in the first place. And where they get that money from – well, it’s usually vendor finance. The company selling their shares offers to help with the finance but, when it does unfortunately go wrong, the company loses the money and then they repossess the shares. So nobody has won under those circumstances.
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