When BEE is not a ‘get-rich-quick scheme’: Low oil price torpedoes Sasol’s Inzalo
Biz News / SEPTEMBER 22, 2017 / Riaz Gardee (GARETH VAN ZYL)
JOHANNESBURG — Black Economic Empowerment in South Africa has become synonymous with the notion of creating ‘instant’ wealth. But as Riaz Gardee points out below, this is often a truism that doesn’t necessarily hold water. One example of this is a BEE scheme launched by Sasol in 2008. As it approaches the 2018 termination date, beneficiaries look like they may be headed for a 100% capital loss. – Gareth van Zyl
Sasol announced the end of its 2008 black economic empowerment schemes as they approach the November 2018 termination date. The current Sasol share price, at R373, is slightly lower than from inception of the scheme in 2008 and as a result no distribution of Sasol shares will be made to participants. Over 200 000 Inzalo BEE beneficiaries are facing a 100% capital loss after holding the investment for 10 years due to the current Sasol share price and high debt component of the scheme. Investors who believed BEE investments to be synonymous with extraordinary wealth transfers at zero-risk will be learning an important lesson in the associated risks of equity investment.
Two schemes were launched with great fanfare in 2008 allowing over 300,000 BEE investors an opportunity to own equity in Sasol; a heavily geared Inzalo option with vendor support from Sasol and an ungeared SOLBE1 option offered at a marginal 10% discount to the Sasol price at the time. Both options had an initial no-trade restriction period and then restricted trading with other BEE participants for the remainder of the 10-year term. After the 10-year term both would convert to ordinary Sasol shares which could then be freely traded.
In trying to achieve its broad-based ownership targets Sasol essentially created a derivative to allow Inzalo beneficiaries to participate through a geared structure. For the ungeared SOLBE1 the 10% discount to hold a volatile asset for 10-years was hardly a reasonable proposition for any investor.
What went wrong?
The key wealth-creator would arise from an anticipated rising Sasol share price. For Inzalo a rising share price was critical to allow it to sell some of its Sasol shares to settle the outstanding debt at the end of the term resulting in the net gain accruing to the BEE beneficiaries. This financial engineering is only value enhancing if the share price rises sufficiently above the debt levels. However, in the case of Inzalo the debt exceeded the equity value by R2.1bn leaving Sasol to settle this liability. Typically, in an arms-length non-BEE transaction the investors would have to absorb this loss and BEE shareholders have thus avoided this liability due to the ordinary Sasol shareholders absorbing it.
The following were the key factors resulting in Inzalo investors receiving no Sasol equity:
High levels of gearing;
Low oil price which has a material impact on the Sasol share price;
The pin risk being the Sasol share price at the end-date of the scheme irrespective of its movements over the 10-year period;
Exposure to a single commodity making Sasol’s earnings and share price more volatile; and
Possible lack of investor risk awareness and culture where BEE schemes are often associated with ‘zero-risk easy-money’.
The abysmal financial outcome of the scheme is probably one of the worst returns ever but certainly not the intended scenario the company envisaged. However, considering the combination of the above known factors an astute equity investor would have been prepared for such an outcome; being closed-out on a leveraged position on oil futures.
New Sasol Khanyisa Scheme
Separately from the termination of the above schemes the scheme members will certainly be pleased that Sasol announced its intention to launch a new 10-year scheme, Sasol Khanyisa. Its shareholders will own 20% of Sasol South Africa allowing it to fulfill ownership requirements of the Revised Codes of Good Practice. Qualifying current BEE shareholders will be invited to participate in this new scheme and ‘invitees will be deemed to have accepted the invitation unless they have indicated in writing that they do not wish to participate’. This will effectively be a variation of the current transaction extended for a further 10 years. The details of this scheme are yet to be published on the 18th of October. It will be interesting to note the gearing levels and whether any assets are excluded, particularly its flagship Louisiana project, as the transaction is at the ‘Sasol South Africa’ level.
File Photo: Sasol Ltd. branding is displayed at the company’s offices in Johannesburg, South Africa. Photographer: Nadine Hutton/Bloomberg
Investors, regulators and vendors should carefully examine their intentions which often create self-imposed constraints in achieving transformation objectives. The results of this scheme imply that meaningful transformation is not about large wealth-transfers achieved through high-levels of debt, BEE is not a ‘get-rich-quick scheme’ and sound investment analysis should always be undertaken or financial advice sought as required.
Riaz Gardee is a mergers & acquisitions specialist, financial writer and contributor to various media platforms including print, online, radio and television.
GARETH VAN ZYL
LINK - http://www.biznews.com/wealth-building/2017/09/22/bee-low-oil-price-torpedoes-sasol/