Is Khula Sizwe a good investment? Expert dissects R3.5bn Barloworld B-BBEE scheme
BIZNEWS.COM / 14 MAY 2019 - 11.07 / JACKIE CAMERON
EDINBURGH — Broad-Based Black Economic Empowerment (B-BBEE) is a feature of the South African corporate environment, as a result of a push to facilitate the transfer of wealth to those who have been disadvantaged because of the apartheid system.
Laws have been enacted to ensure that companies share in their ownership through schemes that are exclusively reserved for individuals from racial groups who were oppressed. B-BBEE share schemes can be complex and they aren’t necessarily guaranteed to reward the individuals who participate in them. Chartered Accountant Sinesipho Maninjwa has cast her discerning eye over the Barloworld scheme, cautioning that there may be higher risks than is the case with other B-BBEE schemes.
Barloworld, meanwhile, is punting its Khula Sizwe offeringas an exciting opportunity to own a stake of just under R3bn in commercial property. Applications to invest a minimum of R2,500 at R10 per share are open until May 31 at www.barloworldkhulasizwe.com. – Jackie Cameron
Barloworld – New B-BBEE Scheme
By Sinesipho Maninjwa*
In November 2018, Barloworld announced that they would be concluding a new Broad Based Black Economic Empowerment Transaction worth R3.5bn, which was then approved on 15 February 2019.
Ordinary members of the black population have been invited to be part of the Commercial Property leg of the transaction with a minimum investment of R2,500 over a 15 year investment horizon. The question becomes is the investment worthwhile?
Barloworld’s history with BEE
While there are laudable elements to this transaction, it is important to look at the history of B-BBEE at Barloworld. In 2008 Barloworld concluded a landmark transaction valued at R2.4bn. The strategic black partners were allocated 5.88% and included consortiums with well-known B-BBEE heavy weights such as Sipho Pityana, and others of their ilk. Employees, black management and black non-executive directors, an educational trust and community service groups 0.95 percent. In 2015 a transaction heralded in its time had to be restructured. Its fatal flaw, much like that of 99% of B-BBEE deals, was its reliance on an increasing share price that simply never materialised.
The Basic mechanics of the transaction
Part I: Barloworld Foundation
Barloworld will issue 6.6 million ordinary shares (3% Issued Share Capital) to the Barloworld Empowerment Foundation, which would hold the shares in perpetuity (the foundation may never sell nor encumber the shares).
The assumption the Foundation will work in conjunction with current Barloworld CSI initiatives however, the main difference is that these initiatives will be funded through dividends received from its shareholding rather than Barloworld post tax earnings. On 24 April 2019, the B-BBEE Commission, declared that a vast majority of transactions involving broad-based trusts have elements of fronting, are non-compliant with the law and do not constitute genuine and direct effective black ownership. The rationale being that Broad-based ownership schemes through Trusts/Foundations often do not have identifiable beneficiaries nor hold direct ownership.
Beneficiaries (i.e. bursary or entrepreneurship fund recipients) do not have voting or dividend rights as other shareholders (during or at maturity of the transaction). It is with caution and of interest whether this component of the transaction gets a nod of approval from the B-BBEE Commission.
Part II: The sale of a property portfolio to Khula Sizwe (PropCo)
The property deal is effectively a sale and leaseback transaction where Barloworld will dispose of R2.86bn of its properties to Khula Sizwe at a discount of 5%, and with R110m worth of development expenditure. Barloworld will in turn lease back the properties at a 9.1%yield, on a triple net basis wherein Barloworld pays all property related expenses. The agreement includes an 8% escalation for 10 years whereupon with option to renew the lease for an additional 5 years.
The PropCo shareholders would consist of Barloworld management (38%), Barloworld staff (32%) and black individuals of the public (30%). Khula Sizwe will acquire R2.8bn (gross value) worth of property in an 80/20 debt to equity funding split.
The equity portion is valued at R544m and will be raised by each category of shareholders as follows:
Barloworld management will subscribe for shares in Khula Sizwe, for a total of value of R207m (or up to R370m if the public offer is not implemented in full). Barloworld as the employer will facilitate this by providing an interest free loan to senior management, with a requirement to deposit 5% to their allotment. Junior management will not be required to contribute;
Barloworld employees will subscribe for shares in Khula Sizwe for a total of R174m, which Barloworld will acquire on behalf of employees.
Black individuals of the public, through a black public offer worth a maximum R163m can acquire shares at R10 each. There are 16,340,000 ordinary shares available to black people or black groups and the minimum subscription required is a payment of R2,500 for 250 Khula Sizwe shares.
Khula Sizwe shares have a lock in period of 15 years, with 5 years of no trading and have restricted trading in the remaining period. The black public is purchasing each share at R10, yet the net asset value is R12.51 per share however when comparing BEE listed retail schemes to relative property entities, BEE shares trade at a significant discount to value. In addition, the scheme members will not have the benefit of dividend cash flow as any excess cash Khula Sizwe has available, must be utilised to subscribe for Barloworld shares at market value.
In terms of the Debt portion:
R1bn (including service fee of 0.4% plus VAT) will be secured via bonds over the various properties and cession of rental income and a guarantee from Barloworld;
The bonds will be repaid over 10 years with a 1-year capital moratorium and an interest rate of 3-month JIBAR plus 1.95% wherein 50% of the facility is priced on a fixed rate. The effective variable interest rate cost is 9.11% (JIBAR at 7.16%), as at 29 April 2019.
Khula Sizwe operations
Khula Sizwe’s obligations besides debt and interest, is a management fee of 3% of rental income to pay for any operational expenses of the company. Furthermore, the lease period is only for 10 years, although Barloworld has the option to extend. Notably, most of the property assets (57%) are in Barloworld’s motor retail division, which is sensitive to macroeconomic conditions of the country, in the event it must close a dealership Khula Sizwe cannot adjust its portfolio as it can only have Barloworld as a tenant.
Why is Barloworld doing the transaction?
It should be noted that BEE compliance is a business imperative for companies such as Barloworld, specifically as some of the largest clients are the in mining (Mining Charter III) and public sector (Barloworld lost the COJ tender in 2018). Therefore, there was a need to craft a transaction, that speaks to the requirements of their clients.
All in all, the benefits are the following:
The company unlocks over R2bn cash from the Balance sheet;
The quantum of the sale of the properties allows Barloworld to claim an additional 13.8% black ownership in terms of the BEE codes;
The transaction secures a long-term solution for the black ownership element of its B-BBEE scorecard with 15 years through Khula Sizwe and evergreen through the Barloworld Empowerment Foundation;
The company increases its brand equity with customers and stakeholders.
The scheme’s success is entirely dependent on Barloworld as a going concern in more fundamental ways than conventional B-BBEE shareholding. Potential investors need to ascertain whether the potential payoff after an investment period of 15 years is worth the wait. The public offering for Khula Sizwe closes on 31 May 2019.
Sinesipho Maninjwa CA( SA)
Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER