Empowerment deal slowdown
FEW decent-sized deals take place any more without a black empowerment angle - and black empowerment deals have become so commonplace that they scarcely require a separate genre any more. African Merchant Bank and Standard Chartered and Merchant Bank have been involved in the major empowerment deals from the outset.
The number of deals has shown considerable growth from 45 in 1996 to 100 so far this year, according to Mduduzi Ndlovu of Real Africa Asset Management, which is a joint venture between Gensec and Real Africa.
Ndlovu says the JSE's total market capitalisation of black chip shares has grown from 0.05% in 1995 to almost 20% today. However, it is likely the deal flow will dry up for the remainder of the year in the face of high interest rates and low share prices. Institutions are unwilling to accept scrip in deals.
The real achievement is in the continued success of companies such as Nail, Real Africa and others, says Carel van der Merwe, head of corporate finance at African Merchant Bank (AMB). During the year, Nail increased its stake in Metropolitan Life and listed subsidiary AMB, and acquired a controlling interest in Theta. Real Africa led a consortium to acquire 50% of PQ Holdings. AMB itself is a black empowerment success story, with more than 60% of its shareholding held by black investors. AMB has grown from a capital base of R7-million to a market capitalisation in excess of R3-billion in three years.
Commenting on recent reports that most black empowerment transactions are under threat due to the recent market conditions, Van der Merwe says: "Although some black empowerment deals may be at risk if the stock market remains at its current levels, this cannot be said for the majority of transactions. Nail, Real Africa and numerous other unlisted black groups are not geared, and the market crash affects them no different to any other listed corporation. Other black empowerment transactions were financed by institutions on a limited recourse basis linked to the share price."
Investors in black empowerment deals are, therefore, protected to a degree from the market turmoil - at worst they will lose their shares, but with limited financial loss.
"In a free market society such as ours, black groups must be prepared to take the risk of their financial decisions - anything else is simply donation," Van der Merwe says. "Nevertheless, there has been a willingness in South Africa by the institutions to give loans to black investors with limited risk to the investor. South African institutions and businesses have been highly innovative and quite unique in the world. No other African country, for instance, has gone this route.
"Empowerment is an emotive issue, but there has to be an understanding that any deal is premised on risk and if the black investor is not prepared to fail he will also not enjoy success. If we are heading for a long bear market, many of the flakier deals will unwind and may have to be restructured, but they will not stop. If anything, the pace will increase."
Ndlovu sees the opportunity in the current reasonable prices of many listed companies for the pace of black economic empowerment to accelerate. He feels the process will not be affected by the downturn in the economy. Government has also gone out of its way to ensure that all public-sector work contains black empowerment criteria at every level.
The process will provide a self-generating work flow. Down the track, the pyramids and conglomerates that are now being assembled to enable black investors to take control positions without the capital to buy them outright will eventually be dismantled and the companies repositioned along industry or product lines, as is the case with the rest of the business world.
Standard Corporate and Merchant Bank (SCMB) has positioned itself as one of the leaders in the process of black economic empowerment, identifying the credible players in the black community, sourcing and structuring appropriate transactions for such players and participating as investors in black economic empowerment initiatives. Its position is facilitated by the fact that its professionals are structured along industry lines, one of which is a dedicated empowerment team. SCMB head of investment banking Rob Shuter says the bank has been involved, both as financier and merchant banker, with both Nail and Real Africa as well as many smaller transactions.
The black empowerment team has been involved in several high-profile transactions and capital-raising exercises, including the raising of more than R500-million for Women Investment Portfolio, the acquisition by Real Africa of its strategic interest in PQ Africa and the financing and structuring of the acquisition by management and Worldwide African Investments of a majority shareholding in Zenex.