Comments on ArcelorMittal BEE Deal

Original publish date – Mon, 16 Aug 2010 11:10:28 +0000, Keith

Salient features:
ArcelorMittal is creating a new business OPCO which will carry on business in South Africa as Mittal.
South African assets of ArcelorMittal will be transferred to OPCO.
OPCO is effectively the new ArcelorMittal in South Africa.

OPCO will be owned by:
ArcelorMittal – 74%
BEE SPV – 21% (a BEE consortium)
ESOP Newco – 5% (an employee share options scheme)

OPCA has share capital of R1000, and has 1000 shares in issue.
Payment:
BEE SPV will subscribe to 210 “A” shares of OPCO at a subscription price of R1 per share
ESOP Newco will subscribe to 50 “B” shares of OPCO at a subscription price of R1 per share

The BEE SPV is a consortium of:
ZICO SPV (led by Sandile Zungu);
Mabelindile Archibald Luhlabo;
Mojalefa Mbete;
Pragat Investments (Jagdish Parekh);
Prudence Zerah Mtshali;
Phemelo Ohentse Robert Sehunelo;
Zebo Lesego Edwin Tshetlho;
Oakbay Investments (Gupta family members); and
Mabengela Investments (led by Duduzane Zuma).

Approximately 25% of the shareholding in BEE SPV remains to be allocated to a women-led consortium.

It should be noted that Oakbay Investments is the Gupta family, and Indian national, and therefore not “black” as defined in the codes.

The ESOP Newco is a special purpose vehicle for facilitating an employee share ownership plan in relation to OPCO shares

Voting Rights:
All parties will have full voting for the duration of the ownership of the shares.

Economic Interest:
The “A” shares will receive 5% of the ordinary dividends per share and nothing on extraordinary dividends.
The “B” shares will also only receive 5% of the dividends until the fifth year of the deal.
This implies that there is effectively zero economic interest.

Put option
The BEE SPV will be allowed to sell the shares back to OPCO at any time after four years, provided that ArcelorMittal South Africa receives confirmation from the Department of Trade and Industry and the Department of Mineral Resources, that OPCO shall be permitted to continue to recognise the BEE rating afforded to it through the Transaction.

This clause probably refers to the continued recognition of ownership after loss or sale of shares, or what some ignorant people refer to as “once empowered, always empowered”. The true situation is that the codes do not give the dti discretion to permit OPCO to continue to recognize the BEE rating as a result of the transaction. DMR is similarly excluded from the decision which is clearly covered in the codes, section 3.5 of statement 100. What they do say is at most continued recognition cannot contribute more than 40% of the score on the ownership scorecard. The repurchase of the share therefore will not happen with the codes as they are. This is  a bit of a concern that this clause was inserted into their SENS announcement considering that Sandile Zungu is a member of the BEE Council and should have known better.

Repurchase of Shares:
If the BEE SPV does not exercise its put option (which as explained above is impossible for them), then OPCO has the right to repurchase some of their shares from years 5 to 20. The number of shares to be repurchased will depend on various factors including the dividends foregone over the previous years – presumably as a mechanism to use the dividends to pay for the initial cost of the shares.

 

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