BEE Defended
The two recent attempts in this direction suggest emphatically that it is, with both Sasol and Vodacom’s public offers, Inzalo and Yebo Yethu, being heavily oversubscribed. Both were very large deals that some suspected might be gulps too large for black South Africans to deal with.
However, a closer look at the numbers and the deals themselves suggests that while they are certainly surprising on the upside, their success does not immediately imply that the efficacy of these new structures is totally demonstrated.
The argument against BEE public offers is that even if share price growth ends up being impressive in percentage terms, a very widespread offer often makes very little difference in absolute terms to people’s lives.
In the Yebo Yethu offer for example, the minimum subscription was 100 shares which would cost R2500. More than 60% of the offers were of this nature.
Assume, generously, the price doubles over the five-year period, it still means that more than 60% of the participants will only make R500 a year out of the deal, and in the process, R2500 of their savings will be tied up for five years.
The increase might be gratifying but it’s hardly likely to make a meaningful contribution to their lives, and it’s certainly not going to address poverty, the detractors argue. Furthermore, in this particular case, participants won’t actually know whether they have made any money until they are eligible to cash in their shares in five years’ time, since Vodacom is an unlisted company.
After the initial five years, Vodacom plans to establish an over-the-counter market in the shares. Until then, participants are in the dark.
However, the small elite of potentially big-time participants in BEE deals have a natural interest in arguing against general offers to black South Africans for the simple reason that anything that ends up in the pots of the public will not end up in theirs.
The argument in favour of general offers is simply that the whole point of BEE is to create a sense of economic fairness in a country with a history of economic exclusion to promote a sense of inclusiveness. So, the wider the share distribution the better.
The way BEE was unfolding with many of the same ANC faces becoming the main beneficiaries time and again, instead of encouraging a sense of economic inclusion, BEE was in danger of doing the opposite.
So much so that you could almost talk of a second wave of BEE deals where this component specifically became a fact that needed to be addressed. This new wave coincided with the government intervening earlier this year with the Broad-Based BEE guidelines, (BBBEE) which was not named that way by accident.
The guidelines did not in fact reduce the equity ownership requirements but made it possible to reach pretty high up the ladder by overcompensating with some of the other mechanisms, such as black management control.
Yet in attempting to address the equity portion, the two big BEE deals this year, Vodacom and Sasol, general public offers were chosen, as well as setting aside a proportion of the deal for staff.
How do you assess the alacrity with which the offers were taken up? I think the obvious answer is that ordinary South Africans can spot a bargain just as well as the BEE elite.
In Sasol’s case, there were more than 300000 applicants. In Vodacom’s, there were more than 100000, with cash tend ered coming in at R1bn, while cash actually raised will come in at R360m — impressive.
However, it must be remembered that Sasol and Vodacom are household names and have had an extraordinary financial track record over the past few years. Could a company whose recent track record was not as sparkling or whose prospects were not a bright achieve the same level of popular support? Probably not.
There is another thing. Increasing shareholder base also involves increasing the spread of reputational risk. When one of the first BEE deals, involving Johnnic, failed, the participants were a fairly localised group.
But should Sasol fail, management are going to be facing not just a small group of fund managers, but a huge base of very grumpy shareholders.
The base of BEE has been broadened, but so have the consequences should the deals fail — and of course the levels of satisfaction should the deals succeed. Yet you have to say, on balance, that the system of making general offers to black South Africans is working and should be extended.
Since the Vodacom R1bn deal was three times oversubscribed, it’s at least possible that R750m is sitting on the table waiting for someone to pick up.
For companies that need to boost their BEE rankings, this must seem a tempting prospect.
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