DealMakers - 2020 Annual
BEE Deal of the Year
Building a pharmaceutical champion
Kiara Health was started in 2015, with the vision of becoming a pan-African pharmaceutical company, with a mission to play a pivotal role in the overall improvement in the quality of life of people on the continent. Management decided that what was needed in the next phase of this new company was a platform, with local manufacturing as a core element of its strategy.
Specpharm, a South African generic company with a fairly good pipeline and an established platform, was looking to go into the rest of Africa – a core strength for Kiara – and were looking to diversify from pure generics into consumer health, medical technologies and devices. The synergies were obvious and, in November 2017, the two companies merged.
At the time of the merger, Dr Skhumbuzo Ngozwana said that shrinking health budgets, rising demand for services and increased expectations by government and patients for better outcomes was placing significant pressure on manufacturers. The key challenge and opportunity for Kiara, he believed, was the issue of local manufacturing, not just in South Africa, but across the continent. He said that it was something that the company wanted to invest in and develop. The reality, he said, was that one was competing with companies from the East which benefited from significant government assistance and incentives. “It won’t be easy, but we are up for the fight, and we know we will ultimately prevail.”
And how right he was. In July 2020, Kiara closed a deal with Novartis, the Swiss multinational pharmaceutical company. The strategic decision taken by Novartis to move away from holding the manufacturing in-house, in all its operations, was in line with a global trend. Kiara Health, on the lookout for opportunities to expand its operations, and having secured the necessary funding as a result of the sale of a 49% stake to Imperial Logistics, was in a position to acquire the manufacturing plant and several marketed products from Novartis’ subsidiary generic drugs manufacturer, Sandoz South Africa.
Kiara Health supplies therapeutic and physiological goods across disciplines such as respiratory, infectious diseases, oncology, cardio-metabolic and the central nervous system. The company produces some 17 drugs for Novartis, under the Novartis brand, and will produce its own drugs, once the regulatory process is finalised with SAHPRA. The parties have entered into a manufacturing and supply agreement for a minimum four year period. Novartis, the second largest pharmaceutical company globally, and Kiara’s cornerstone client, will do much to build the company’s credibility in the market.
For Ngozwana and his team, this deal means one step closer to creating a majority black-owned pharmaceutical champion.
Legal Advisers: ENSafrica and White & Case
Comment from the Independent Panel:
The panel found this a challenging category to adjudicate. Nominees ranged from vendor-financed BEE shareholding acquisition schemes, to Employee share ownership programmes, to the establishment of Black ownership over existing operations. As the members of this panel, we all agreed that the Kiara Health acquisition of the manufacturing business and related properties, as well as certain marketing authorisations, is a deserving winner. The creation of a majority blackowned pharmaceutical manufacturer in South Africa has been Kiara’s long-held aspiration. Time will tell whether this enables the new entity to soar and grow beyond its initial role as a South African manufacturer,into an International company.
Dr Skhumbuzo Ngozwana
BEE Pick of the best in alphabetical order
The iSabelo Trust – benefiting all permanent employees
The R1,05bn deal was announced to strengthen the company’s B-BBEE ownership and benefit all permanent South African-based employees.
The Momentum Metropolitan iSabelo Trust was established to hold 44,9m shares, partly acquired on the open market (c.17,98m shares), and those held as treasury shares (c.26,9m). The deal will constitute 3% of the company’s issued ordinary share capital, with the allocation of shares to be structured in such a way that at least 85% of the benefits will accrue to black employees, and at least 55% to black female employees.
The scheme is intended to have a maximum duration of 15 years, eligible for full settlement after 10 years, with units allocated subject to a maximum seven-year vesting period. The transaction will cost the group 10% of the full transaction value, since 90% of the acquisition will be funded from the proceeds of ‘A’ and ‘B’ preference shares issued, through a special-purpose vehicle, to Absa and Momentum. The total consideration received from Absa and Momentum will be R350m and R700m respectively. This debt will be serviced and repaid through dividends and share growth, with participants benefiting from the 10% discount and the extent to which the total shareholder return exceeds the cost of the debt.
The initial tranche will disperse 80% of shares to eligible employees, with the remaining 20% reserved for subsequent new, eligible employees.
Financial Adviser: Standard Bank
Sponsor: Standard Bank
Legal Adviser: Webber Wentzel
Transactional Support Services: EY
Delivering real economic benefits
In 2010, SABMiller announced a R7,3bn empowerment scheme, which was self-funded via dividends and a small initial cash injection, and which sold c.8% of its local subsidiary to BEE investors, including the SAB Foundation, a trust focused on funding small businesses. The transaction has created over 42,000 beneficiaries, including 29,000 retailer shareholders, 13,000 current and former South African Breweries (SAB) employees and the SAB Foundation, who have received cash dividends of over $4bn. The transaction’s duration was for 10 years and matured on 31 March 2020.
The initial unwind of SAB Zenzele, delivering R9,7bn to its participants, envisaged that each shareholder would cede 15% of its right and entitlement to receive AB InBev shares to SAB Zenzele Kabili (the new R5,4bn BEE vehicle which was to be listed in April 2020) and, in consideration of such cession, each participant would receive Zenzele Kabili shares of proportional value. The benefit of re-investing in the new vehicle was the opportunity for participants to hold shares in AB InBev’s global operations, through discounted shares and geared exposure through attractive vendor funding.
However, the pandemic, and its impact on the liquor industry as a result of the lockdowns and government’s alcohol bans, not only derailed the transaction’s timeline, but also the economic health of the industry. Acutely aware of the effects that a postponement would have on participants’ anticipated cashflows, management resolved to pay out an amount equal to 77.4% of its settlement entitlement from the unwind of the 2010 transaction, in the form of a special cash dividend, implemented through an off-market accelerated bookbuild offering by Zenzele of 9,5m AB InBev shares, with a value of R7,6bn. The equity placement was executed despite volatile markets during lockdown. The balance that would have been reinvested in the Zenzele Kabili scheme has been retained to allow for the option to invest at a later date in 2021, albeit it in a different form.
Had the new scheme been implemented, it would have represented the largest broad-based BEE payout in the South African fast-moving consumer goods (FMCG) industry. However, in spite of this, the goal to deliver real economic benefits to thousands of South Africans through SAB Zenzele was achieved.
Financial Advisers: Rand Merchant Bank, Standard Bank, Morgan Stanley
Legal Advisers: Bowmans, ENSafrica, Webber Wentzel
Transactional Support Services: BDO and PwC