Free shares worth almost R1-billion in Capitec is what a consortium linked to financing the ANC has scored thanks to finance from two state bodies.
These are the Public Investment Corporation (PIC), which is supposed to focus on growing state employee pensions, and the Industrial Development Corporation (IDC), tasked with economic development.
Alongside a funding trust set up by ANC leaders, individual beneficiaries include Gugu Mtshali, the life partner of Deputy President Kgalema Motlanthe, Lotto boss Bongani Khumalo and Pilisiwe Twala-Tau, the wife of Johannesburg mayor Parks Tau.
The deal was simple. The consortium, assembled by a controversial ANC fundraiser, bought an empowerment stake in Capitec using funds provided by the IDC. Later, exploiting strong growth in the Capitec stock price, it sold just enough to the PIC to pay off all debt associated with the original purchase.
The ANC and some well connected individuals now stand to benefit from the value of the remaining shares – over R950-million – in another instance of the ruling party acting as both player and referee. The party has hit flak in the past for investing through its front company, Chancellor House, in areas where government has a say.
The consortium is named Coral Lagoon after the shelf company it uses to house its interest in Capitec. Coral Lagoon's second-largest beneficiary is the Batho Batho Trust, founded by ANC leaders in 1992.
Despite attempts to dissociate itself from the ANC, Batho Batho is a major sponsor of the party. A spokesperson would not say whether Batho Batho would transfer proceeds from the Capitec windfall to the ANC, calling it a "hypothetical question" (see "The consortium players that will reap the rewards from the deal").
Batho Batho holds 20% of Coral Lagoon, giving it a net gain of Capitec shares now worth about R190-million.
Other significant stakes are held by the companies Keabetsoe Holdings (32%) and Regiments Capital (18%), both of which appear to have strong links to the ANC treasury.
Mtshali, Motlanthe's life partner, gained shares now worth R9.5-million. She worked for the ANC treasury when Coral Lagoon was formed.
The PIC's role is particularly contentious, because it bought the shares only to warehouse them for onward BEE sale. This echoes its 2004 warehousing of Telkom shares to assist the politically connected Elephant Consortium that consisted of close associates of then-president Thabo Mbeki.
The warehousing allowed Coral Lagoon to gain hugely from an investment for which it paid nothing. But the long-term benefit to the PIC and its customers – government employees, whose pensions it invests – is not as clear.
The IDC and PIC both denied politics played a role, saying they acted within their mandate of supporting BEE while ensuring decent returns.
Coral Lagoon said in a statement: "This transaction can be seen as one of the most successful BEE transactions in South Africa as Coral Lagoon now has an unencumbered holding in Capitec that pays regular dividends."
Capitec said it had found both the IDC and PIC "professional" in their dealings and that it had been un-aware the ANC might benefit.
ANC treasurer Mathews Phosa declined to respond to questions.
New kid on the block
JSE-listed Capitec entered retail banking as little more than a microlender in 2001 but, because of technological innovation and product simplicity, it is now barking at the heels of the four big retail banks.
In 2006, Capitec found itself way behind the financial sector charter's target of a 25% black shareholding by 2010, after a restructuring reduced its BEE shareholding from 17% to 4%.
Capitec needed a new BEE partner. Although potential takers for such deals tend to be plentiful, institutions willing to finance them are not.
What set Coral Lagoon apart was that it brought the IDC along, offering to lend almost the entire purchase price.
ANC's "Mr 15%"
Central to putting the consortium together was Zwelibanzi "Miles" Nzama, a controversial ANC fund-raiser. Nzama attracted public attention in 2003 when a printing company alleged in court that it had lost a Transnet tender because it rebuffed his attempt to extort shares for the ANC.
The company, Sechaba Photoscan, said in an affidavit: "Miles Nzama informed us that … with his contacts in the African National Congress, he could guarantee our success for a consideration of 15% of [our] shares … at no cost to his principal."
Though Transnet had scored Sechaba Photoscan the highest, it awarded the tender to a rival bidder, which had allegedly fallen for Nzama's advances. Sechaba Photoscan won a record R57-million in damages from Transnet.
Nzama, who at the time ran the ANC Fundraising Trust with the then ANC treasurer, Mendi Msimang, remained closely associated with the ANC treasury. Nzama is now an executive of Chancellor House. He did not reply to questions.
… and his friends
Nzama in turn roped in Regiments Capital, a black-owned investment and advisory firm, to help with the corporate financing and to take up a stake.
Regiments executive chairperson Litha Nyhonyha told the Mail & Guardian earlier this year: "Miles [Nzama] and I go back a long way so I know him very well … Capitec was looking for BEE partners. I don't know how they got to approach Miles. And he came to me. We were invited to participate and that's how the deal happened."
Nyhonyha too has a long-standing connection with the ANC treasury. In 1992 he and Vusi Khanyile, who was then head of ANC finance, established the Thebe Investment Corporation, then fully owned by Batho Batho.
Nyhonyha denied rumours that Regiments is linked to the ANC treasury. "We are a strict private company. We were never set up by the ANC and we were never facilitated by the ANC."
But he added: "We believe in this country democracy should be supported financially and, yes indeed, we do donate to the ANC."
A third person who helped to set up Coral Lagoon was investment banker Tshepo Mahloele. After stints at the PIC and the Development Bank, he was qualified to help. In fact, as head of the PIC's BEE-supporting Isibaya Fund between 2003 and 2005, he was directly responsible for warehousing the Elephant Consortium's Telkom shares.
Shares mystery
Mahloele heads Keabetsoe Holdings, a special purpose vehicle whose 32% in Coral Lagoon makes it the biggest beneficiary of the Capitec deal. It gained shares now worth about R300-million.
But Keabetsoe's shareholding is opaque. In a January 2007 circular announcing its imminent deal with Coral Lagoon, Capitec stated that Mahloele and Nzama each held 50% of Keabetsoe.However, attempts to establish Nzama's supposed 50% share and whether he held it personally or as a nominee for the ANC, led to contradictory responses. Mahloele even produced a share register purporting to show that Nzama had never held any shares.
This would leave Nzama without any stake in Coral Lagoon, which is highly unlikely given his role in launching it. Company registration records show him as one of its active directors.
The deal
Capitec issued 10-million shares to Coral Lagoon in February 2007. At R30 a share, the price was R300-million.
Information provided by the parties shows that Coral Lagoon financed the purchase with two loans: R285-million from the IDC and R15-million from Capitec itself. As this covered the full purchase price and the loans were structured using preference shares, Coral Lagoon carried no risk, even if Capitec's share price collapsed.
This left Coral Lagoon as the owner of just over 12% of Capitec, but without the full benefit, as it had to use the substantial dividends received from Capitec to service the IDC and Capitec loans.
That changed in February this year, when the PIC bought about 5.3-million of the 10-million shares from Coral Lagoon, at a small discount to the going price of R185 a share. The proceeds were enough to redeem the full original IDC and Capitec loans and pay taxes and transaction costs.
The net result was that Coral Lagoon remained with about 4.7-million Capitec shares unencumbered by any debt, then worth R872-million. Further growth in the Capitec share price took this to more than R950-million by the close of trading on Wednesday this week.
Coral Lagoon may have some difficulty in turning the shares into instant cash – they cannot be sold on the open market as they must remain in BEE hands – but there is already the benefit of Capitec's sturdy dividend flow. Since February, Coral Lagoon has earned about R22-million in pre-tax dividends.
Denials
The IDC and the PIC denied favouring Coral Lagoon because it is politically connected and said that the deals made commercial sense.
The IDC sidestepped a question about whether it knew of Coral Lagoon's closeness to the ANC treasury, saying: "The IDC considers all applications for funding based on the economic viability and developmental impact of each transaction … Political affiliation of applicants is not a consideration for funding whatsoever."
The PIC responded: "The PIC follows robust and rigorous due diligence processes on all transaction we invest in. This includes assessing transactions on merit and value to be derived for our clients. The PIC does not exclude anyone based on their political affiliations."
