Trying Times For Bee
Marcia Klein, Published:Apr 04, 2009
With BEE deals under the water to the tune of tens of billions of rands and with companies scurrying to refinance deals, those involved in BEE are still reluctant to call it a failure.
There have been calls for intervention from government and its agencies for the refinancing of BEE deals, and some, notably the National Empowerment Fund and the Industrial Development Corporation, are trying to come to the party. There have also been calls for BEE to go back to the drawing board to rethink how deals are structured . Alternative funding mechanisms have, however, remained elusive.
Companies such as Mvelaphanda and Afrisam have already refinanced their deals. Some deals, such as MTN’s, have been delayed.
Participants in Sasol’s multibillion-rand BEE deal might have a long wait ahead of them before the share, currently trading at around R275, reaches the R366 at which the deal was struck. Barloworld BEE shareholders are sitting with shares at around R33, far short of the already discounted R83.31 at which the deal was struck.
The Ernst & Young mergers and acquisitions review for 2008 showed that the value of BEE deals dropped to R60.9-billion (84 deals) in 2008 from R96-billion (125 deals) in 2007 and it warned that the pace would be slow this year, too. Most of the 2008 BEE deals were still using the special-purpose vehicles that originated with the first BEE deals in the country. Most deals rely on an increasing value of the company’s share price for repayment. The recent stock market crashes have proved how risky this is.
But a number of commentators point to the fact that ownership is just one part of BEE.
Keith Levenstein, CEO of EconoBEE, said that while ownership deals needed to happen “and don’t happen enough”, companies should not focus on one aspect of BEE only because it is often the easiest element of BEE to comply with.
Levenstein said it made sense to turn the BEE scorecard upside down and focus on socioeconomic development, enterprise development, procurement, skills and employment equity rather than focus only on owner ship.
He pointed to companies like Massmart and Vodacom, which are concerned with all elements of the BEE scorecard.
Recently Nedbank was criticised for appointing a white CEO when it had, possibly more than other major banks, made significant progress with other scorecard elements.
Paul Austin, head of corporate finance at BDO Spencer Steward, said there has been “a whole lot of wealth transfer to a whole lot of black people” over the years. He added that over time, the focus has moved away from ownership to seven components.
“We are worried about a few deals but we have not seen a flood of them,” he said. This was partly because SA banks have not lent recklessly into BEE deals. “While some may have been shaken out of the tree, most of the fruit is still hanging.”
Morné van der Merwe, Werksmans’ senior director in the corporate and commercial department, said the problem was evident specifically in the mining sector — one of the few where there was a legislative obligation to do a deal, and where financial models were largely based on share price.
These deals were struck at a high price, because of the high valuation at the time, and were to be repaid through dividend flow.
“The question is for how long will they be underwater and for how long can you hold your breath until you drown? You have to give them some breathing space. You cannot allow them to fail — a lot of time and effort has gone into putting them in place.”
Van der Merwe believed that government should act through organisations such as the National Empowerment Fund (NEF) and Industrial Development Corporation (IDC) to help refinance these deals.
“The other way is for vendors to get even more lenient on payback obligations. But they are under pressure themselves.”
Amid increasing calls for government funding agencies to help rescue BEE deals, the NEF has unveiled a rescue plan.
Chief investment officer Frencel Gillion said the NEF’s mandate entailed the promotion of sustainable black economic empowerment through financial (loan funding, equity funding) and non-financial support (advice, business plans and ongoing monitoring).
Gillion said the NEF “has finalised the appointment of a panel of business mentors that will be deployed to assist clients with various aspects of their businesses, including accounting services, access to markets, general strategic advice and support through participation on investee company boards”.
It has also “approved a programme to restructure the current financial obligations of a number of its clients that have been affected by the economic downturn”.
The proposal is expected to benefit more than 40% by number of the NEF’s existing portfolio of R800-million. It will restructure existing loans by providing softer interest rates and longer repayment terms. It might also provide additional funding to companies experiencing working capital constraints.
The programme will be rolled out over the next 12 months.
Gillion said that not only had it become more difficult to do business, but it had become more difficult for companies to raise debt finance.
The NEF was “considering BEE companies approaching it for funding on a case-by-case basis, taking into account the development impact that can be achieved through the NEF’s intervention as well as the prudential limits of the NEF”.
Kesebone Maema, head of corporate communication at the IDC, said the body was part of the team looking at various responses to the current crisis “and it is our belief that any interventions would require a partnership approach”.
“The IDC will not necessarily be refinancing BEE shareholders or any other financiers, but will consider restructuring elements that enable the successful turnaround of enterprises.The IDC had received applications “and these are being dealt with on a case-by-case basis”.