South African petrochemicals group Sasol arguably set a new benchmark for broad-based black economic-empowerment (BBBEE) on Tuesday when it unveiled the terms of a R7,2-billion transaction for 10% of the global group – valued at nearly R26-billion, it was also the biggest deal of its kind in South Africa’s corporate history.
Making it particularly distinct from earlier-generation empowerment deals, no big name beneficiaries were included. In fact, the deal was specifically structured in such a way as to steer clear of the “usual suspects” and to be, in CEO Pat Davies’ words, unparalleled in both “size and reach”.
The deal had also met with approval from government, with the Cabinet having reportedly endorsed it, as well as with the Public Investment Corporation (PIC), a key Sasol shareholder, which had hitherto been one of Sasol’s harshest critics on issues of transformation and empowerment.
In fact, PIC CEO Brain Molefe told Engineering News, through a spokesperson, that he welcomed the deal, and went on to describe the transaction as a "milestone" for broad-based empowerment.
Molefe said it also confirmed Sasol's status as a jewel in the South African economy, that could now "truly belong to all the people" of the country.
Ultimately, the deal could result in more than 200 000 black South Africans taking a stake in one of South Africa’s highest-potential companies, which possesses technologies (able to convert coal and gas into precious liquid fuels) that are increasingly in vogue internationally.
The deal, dubbed the Sasol Inzalo BEE Transaction (‘Inzalo’ being an Nguni word for ‘new beginnings’), was based on a closing price on March 18, 2008, of R410 a share, translating into a market value of R25,9-billion for 10% of the company. When it was first mooted in September 2007, the transaction value was estimated at around R18-billion, given a share price at the time of around R280.
Executive director Nolitha Fakude, who was a key figure in structuring the deal, explained that it catered for four categories of beneficiaries including: staff (black and white) at 4%; an education and research focused foundation, dubbed Sasol Inzalo (1,5%); selected equity participants, comprising suppliers, customers, franchisees and petrol-pump attendants, and its unions (1,5%); and between 100 000 and 200 000 black South Africans (3%), who would be able to subscribe for shares through a public offering to be managed in conjunction with the State-owned National Empowerment Fund (NEF).
Sasol acknowledged that it would not receive any points under the South African government’s BBBEE codes for the shares to be distributed to its 10 037 white employees, but said it remained confident, regardless, of achieving a ‘level 4’ empowerment status once the deal was concluded by June 30, its year-end. Sasol added that the Department of Trade and Industry was canvassed and was comfortable with the inclusion of white employees.
Fakude indicated that the transformation deal "will offer affordable ownership in one of South Africa's leading companies", would introduce new participants into BEE, and create a legacy for skills and human capital development.
"It is not just about ticking boxes, but embracing the spirit of the BEE Codes set for the industry," she added.
Shareholders would meet to vote on the transaction on May 16, and should it be approved, some 63,1-million shares would flow to the designated beneficiaries.
But Sasol FD Christine Ramon also stressed that the company would continue with its plans for a repurchase of an equivalent number of shares in a bid to mitigate the dilution for existing shareholders.
Ramon said a 60-day volume weighted average price was employed to reduce the volatility of the final price, with Sasol’s stock having moved from R285 a share in September to R410 a share on March 18. The result was a transaction price of R366 a share, or an 11% discount to the current price.
BLACK MANAGERS COME UP TRUMPS
Big winners in the deal were Sasol employees, and more especially its black-management cadre, who would benefit materially through a scheme designed to attract and retain senior black staff.
Sasol’s 24 571 employees, 14 534 of whom are black, were set to receive 3,7% of the 10% on offer, the equivalent of 23,2-million shares. Given a valuation a share of R366 each, this would equate to R8,5-billion, which was also an 11% discount to the R410 a share strike price.
Under the black management scheme, senior individuals had a right to a maximum of 25 000 shares, valued at R9,8-million, while more junior employees could access 5 000 shares, valued at R2-million. It was estimated that there would be 235 individuals in this category, which together could take 0,3% of the shares, valued at R693-million.
“Empowerment has to begin at home and we are very excited about the prospect of more of our employees participating,” Fakude said, adding that 90% would be allocated upfront and the 10% balance retained as an instrument to attract and retain black employees.
A WHOLE NEW ASSET CLASS
But undoubtedly the most exciting aspect of the transaction, was the public offer to black South Africans.
Here, two invitations had been issued. The first would be funded, where only a small cash contribution was required to participate, while the second involved a cash purchase. Individuals and/or black companies, partnerships or trusts could participate, including informal groups such as stokvels, church groups and families.
A minimum of 25 shares could be bought under the funded portion of the transaction, whereby a one-off deposit of just R458 would be required from individuals and groups wanting to participate. “This makes the scheme extremely affordable and enhances its reach,” Fakude enthused.
Further, should there be an oversubscription for shares, Sasol would endeavour to allocate from the bottom up, which would give preference to the smaller subscribers over the bigger ones, which is important given that no maximum level had been set for the public offer.
NEF CEO Philiswe Buthelezi told Engineering News separately that it would work with Sasol and other service providers to get the message out about the offer, and would employ both the mass media as well as educational events.
“What we have found previously is that education is the key to ensuring both understanding of the deal as well as broadening the base of potential participants,” Buthelezi explains.
She said the Sasol deal set a new benchmark for direct participation by black South Africans into a new asset class, being equity ownership.
“We anticipate that others will follow suit,” she added, noting that a number of mining and information communication technology companies were in discussion with the NEF about similar offerings.
LEVERAGING SA’s SKILLS BASE
Meanwhile, the BEE groups selected by Sasol for the transaction fell into two main categories: those involved in Sasol's business as suppliers, customers, franchisees and unions; as well as groups focusing on broader empowerment objectives such as community upliftment projects and women's groups.
Fakude said that a comprehensive process to identify appropriate partners for this category was nearing completion and that 86 BEE groups, from an initial list of more than 1 000 applicants, had already accepted the invitation to participate.
Skills development and capacity building formed the final component of the deal, through the Sasol Inzalo Foundation.
The focus here would be on the development of critical skills in maths, science and technology. “This foundation is an extension of Sasol's long-standing tradition of giving back to the community through, among others, artisan training programmes, bursaries, co-operation agreements with tertiary institutions and other sponsorships", Fakude explained.
DEAL GOOD FOR SA, A MIXED BAG FOR SHAREHOLDERS
Analysts canvassed by Engineering News following the announcement were generally impressed by the well-structure and comprehensive nature of the transaction, but warned that it did pose some downside risks for existing shareholders.
Deutsche Securities’ Jonathan Kennedy-Good told Engineering News that, while he was ‘positive’ about the transaction for the sustainability of the business and for South Africa, more generally, it would be expensive for existing shareholders.
He indicated, too, that the timing of the deal, which coincided with a banking crisis globally, might also have forced Sasol to contribute greater equity than it had first hoped, which would make the transaction more expensive.
“There is real value at risk, to use a loose term” Kennedy-Good explained.
“This deal relies heavily on asset prices moving up so that there is no need to recapitalise the deal. In the worst case scenario, banks will come to Sasol,” he explains, adding that the true cost was thus likely higher than the 2,8% to market capitalisation as proposed by Sasol.”
Ramon acknowledged that, given the sheer magnitude of the transaction, market capacity was a serious consideration when it assessed funding instruments.
“Sasol will be facilitating close to 80% of the BEE transaction both directly and indirectly. We are expecting more than R1,6-billion in equity contributions from our selected participants and through the black public invitation. Total internal funding from financial institutions and the equity contributions is expected to be in the order of R8,1-billion, 35% of the value. Sasol will be underwriting the selected participants and the black public invitation and fund any shortfall that arises,” she explained.
The deal would cost the company R7,2-billion, of which R130-million was a direct cash cost, and the balance a noncash cost. Excluding the noncash payment charge, the transaction would have a marginal impact on attributable earnings, Ramon said.
Another analyst, who spoke to Engineering News on the condition of anonymity, described the deal as comprehensive, well structured and as “setting a new benchmark for such transactions”.
This said, he agreed that the costs to shareholders did appear higher than initially anticipated.
“But as a Sasol analyst I might be a little disgruntled about the dilution. That said, while it is not positive for shareholders, it is not overwhelmingly negative.”
- with additional reporting by Christy van der Merwe