OPINION: BEE shares can bomb too
BUSINESS LIVE /18 JUNE 2018 - O5.03 / STAFF REPORTER
Vodacom’s YeboYethu scheme and Sasol’s Inzalo scheme illustrate the yin and yang of black economic empowerment (BEE) schemes: one worked like a bomb; one bombed. What does this duality tell us about how BEE schemes are structured and perhaps about their social desirability?
The most basic conclusion is also the most obvious: it helps to invest in a company that’s growing.
Or, to put it another way, there is an element of luck involved, and that is part of the problem.
When Vodacom began its YeboYethu scheme in 2008, its share price was about R60 and its market capitalisation about R83bn. Its share price is now almost R140 and its market capitalisation R240bn. This means its shareholders, BEE and otherwise, can reap the benefits. YeboYethu shareholders will be getting a special dividend of about 2.7 times their original contribution, and they will participate in the new scheme too.
BEE schemes of this kind are essentially put options, with a strike price at a slight discount to the existing price, which is why they really only work when the share price rises significantly.
Sasol launched its Inzalo scheme when oil prices were in three figures. Its market capitalisation at the time was R280bn and the share price R460; both are little changed today and not far from where they were. As a result, the financing charges have eaten up the entire scheme, and more. Sasol will have to chip in roughly R1.7bn to cover the shortfall.
In response, Sasol has changed track and Vodacom has more or less doubled down. Sasol has launched essentially a gradualist scheme paid for progressively out of dividends, and provided its 200,000 or so black shareholders with the opportunity to participate in the new scheme, which it describes as "vendor financed", though this is something of a misnomer since BEE shareholders will in effect be building their shareholder through accumulated dividends. But it does take the scheme somewhat out of the vagaries of the share price.
Vodacom is also offering its existing shareholders the opportunity to take part in its new scheme, but this scheme is largely bank financed, though at a reduced rate.
Still, there is a risk here. BEE schemes of this kind are essentially put options, with a strike price at a slight discount to the existing price, which is why they really only work when the share price rises significantly. The new scheme does have the interesting new quirk that shareholders can sell immediately to other black shareholders.
There are larger questions at stake, the largest of which and regrettably the least asked, being: does it actually help? From society’s point of view, the idea of BEE is that it provides black South Africans with the ability to capitalise themselves.
The answer probably lies somewhere between "it’s better than nothing" and "not really". Consider the notionally very successful Inzalo scheme. Assuming Inzalo shareholders paid R100 for shares in the scheme at the start, they now get a special dividend worth R270 back and their shares are now worth R320. Add in about R100 in dividends over the years, but subtract the borrowing fee of 70% of prime, which probably comes in at about R200, and of course tax. The real difference between just buying the share and buying the BEE share would be about 20%, probably less than most people imagine.
What about the disadvantages to society? The question needs to be asked, because these deals create all kinds of unusual incentives, including attacks by rival BEE consortia and regulatory arbitrage. They may be linked, they may not, but only the willfully blind will not notice that SA’s cell companies are recording thumping margins, and cellphone user charges in SA are high by international standards.
Vodacom has a gross profit margin of about 60%, which may explain why shareholders raise so little objection to these deals despite the fact that they dilute their holdings; they know it’s worth paying the roughly 1.7% of market capitalisation involved to secure a good relationship with the licence holder.
There is a subsidiary question too: there are employee share schemes that form part of the BEE schemes, but do they encourage loyalty and motivate staff? The research on the topic is mixed. In most cases, employees view them as a kind of Christmas present that may or may not come to fruition, but depending on the amount at stake they don’t make much of a difference.
That’s not to say these deals are not worthwhile. They remain a useful exercise in general and do help somewhat in binding social cleavages. Yet, it’s worth bearing in mind they are not the whole answer, and they are often no answer at all.
Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER