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Moneyweb | 15 August 2023

Insurer Sanlam has had to begin unwinding its failed R8 billion broad-based black economic empowerment (B-BBEE) transaction implemented in March 2019.

The deal, which saw a 5% stake in the financial services group effectively issued to five new beneficiary trusts and existing empowerment partner Ubuntu-Botho, has been under water since early 2020, when the effects of the Covid-19 pandemic rattled through markets.

The deal boosted Sanlam’s direct black shareholding to 18%, with black economic ownership (including indirect holdings) increasing to 35%.

Of course, no one could’ve predicted a global pandemic, followed by Russia’s invasion of Ukraine and surging global inflation.

The result is that the group’s share price has traded below the R70 issue price of the 111 million shares practically since just one year into the five-year deal.

Sanlam provided half the funding of the transaction, with Standard Bank providing the other half via preference shares in the special purpose vehicle (SPV) and equity-secured funding.

Or, as Sanlam describes the situation: “Due to the negative impacts on the Sanlam share price, the Funding SPV remains in a negative equity position, a situation which has existed since March 2020 and is likely to persist in the short-term until the repayment date of the funding in March 2024.”

Sanlam’s problem is that the A preference shares held by Standard Bank are secured by Sanlam shares.

Further declines in the group’s share price could see a breach of debt covenants which would force the disposal of a “large block of shares” which, it says, “is likely to negatively impact the Sanlam share price”.

Sanlam admits there is “unlikely benefit” to any of the beneficiaries of the transaction, which include trusts for rural and urban poor black women, professional black women, black youth, black business partners and broad-based groups and group employees.

To remedy this, Sanlam will purchase the A preference shares in the funding SPV from Standard Bank for R2.421 billion.

It will fund this from existing cash resources, with a small adjustment for interest between the end of June and when it is finalised.

(Even if the share price holds up, the second issue is that the subscription SPV is required to dispose of 85 million shares in Sanlam in the open market once redemptions occur in March next year. This wouldn’t be a problem if the price was, say, double the level it is currently. It is not.)

This solves some of Sanlam’s headache, but not all of it.

More issues …

It is on the hook for the vendor funding provided via second ranking (‘B’) preference shares, which totals R3.7 billion (its 50% share of the funding).

To date, it has impaired its holding in the B-BBEE SPV by a total of R2.923 billion (R1.673 billion in 2020, R145 million in 2021, and R1.105 billion in 2022). These are accounting entries necessitated by the group’s share price, among other factors, and the group has been clear that these “impairments can reverse in future periods based on the movement in the group’s share price”.

The group says it anticipates that the funding SPV structure “may be unwound following its maturity in March 2024” and that it “will continue to consider alternatives in the best interest of stakeholders to implement the orderly unwinding” of it. This could include a possible repurchase of Sanlam shares from the Subscription SPV – in other words, the 26 million shares pledged to Standard Bank for R1.2 billion in collar funding.

At the end of the first quarter this year, Sanlam reported “discretionary capital” of R3 billion.

‘Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER’.


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