DealMakers - Annual 2021 (February 2022)
Two landmark B-BBEE deals that deliver genuine, broad-based benefits
by Adam Ismail and Lilia França
Broad-Based Black Economic Empowerment (B-BBEE) is an essential pillar of the South African government's economic reform policy, and its roots can be traced back to the Freedom Charter.
B-BBEE has been criticised for various reasons, including the fact that it has been linked to corruption and state capture, and that many B-BBEE ownership transactions fail to deliver value to the black beneficiaries. Notwithstanding this, the ultimate prize – the economic transformation of South Africa – remains important and relevant, and the process will continue into the future; whether via B-BBEE or some other form of government policy or intervention.
In May 2021, the Minister of Trade, Industry and Competition, Ebrahim Patel (Minister) announced that he would appoint a panel to review the current B-BBEE framework to address “legitimate public concerns”.
B-BBEE, which is based on a willing seller/willing buyer approach in market-related terms, came into existence at an unfortunate time. The B-BBEE Codes of 2007 were promulgated about eighteen months before the US subprime crisis hit, and this was followed by minor and major recessions in South Africa. During this period, share prices fell and dividends came under pressure. Because many deals were predicated on aggressive funding models, participants realised little or no value from B-BBEE transactions.
Two recent B-BBEE deals, on which Webber Wentzel advised, have taken a different approach.
In its merger with Pioneer Foods in 2020, PepsiCo/Simba made certain public interest commitments which were agreed with the Minister, and these were made conditions to the merger by the Competition Tribunal. These commitments included giving equity in the South African group to all employees, comprising over 12 000 people, of whom more than 90% are black persons, by contributing R1,66bn in cash to a South African workers’ trust on a non-recourse basis. The trust used this funding to acquire shares in PepsiCo Inc, listed on the Nasdaq, thus giving staff access to the global PepsiCo operations in a highly regulated market context, through a liquid instrument.
Dividends received from PepsiCo Inc are distributed to staff as quarterly payments. Every five years, some of the shares are sold and larger milestone distributions are made to staff. These distributions incentivise staff to remain with the group in order to benefit from these milestone payments.
Reaching a deal on the above structure took 18 months and faced various challenges. From the outset, there were discussions with unions and staff representatives on the design of the trust. Only once agreement was reached were the legal agreements drafted. The unions involved were FAWU, SACCAWU and AFADWU, and non-unionised employees were also represented.
The lessons we drew from this process included, firstly, that it is important to involve employees and their representatives to get buy-in for the transaction. Secondly, the transaction must be motivated by delivering meaningful benefits for staff, rather than simply trying to obtain B-BBEE points. Thirdly, overly-aggressive funding structures, valuations and projections should be avoided.
In 2015, Northam implemented a landmark B-BBEE transaction that saw shareholders, rather than external funders such as commercial banks, funding the trans-action through a subscription for listed preference shares issued by Zambezi, a newly established B-BBEE vehicle for the benefit of black strategic partners, Northam employees, and host and affected communi-ties. Because this structure effectively aligned the commercial interests of Northam shareholders and Zambezi, the preference share funding was not subject to the usual stringent debt covenants. The structure effectively ring-fenced Zambezi from a premature call on the funding, thereby removing the risk of an early unwind of the transaction without meaningful value transfer to black beneficiaries.
In March 2021, Northam announced the intended acceleration of the maturity of the Zambezi B-BBEE transaction, and the implementation of an extended empowerment transaction.
The acceleration of the Zambezi B-BBEE transaction resulted in:
the transfer of c. R10,5bn of pre-tax economic value (i.e. in cash and Northam shares) to Zambezi's black shareholders;
holders of Zambezi preference shares receiving a c. 16% premium to the face value of the Zambezi preference shares held by them; and
an aggregate c. 29% reduction in Northam's issued share capital (net of treasury shares) and the release of the Northam funding guarantee, thereby significantly strengthening the position of the remaining Northam shareholders.
The effect was value creation for all parties concerned. The commercial alignment between the interests of Zambezi, Zambezi preference shareholders and Northam shareholders contributed towards making the Zambezi transaction one of the most successful and value accretive B-BBEE transactions to date.
The extended empowerment transaction will see Northam secure up to c. 26.5% ownership by historically disadvantaged persons (HDPs). It will entail the subscription for shares in Northam of up to 23% by Northam employees and host and affected communities. The balance will be subscribed by a newly established B-BBEE vehicle to be listed on the BEE Segment of the Main Board of the JSE, in order to facilitate the trading of shares amongst B-BBEE compliant persons, such as women's and youth groups.
In the interests of impactful and sustainable empowerment, the extended B-BBEE transaction has been structured in such a manner so as to emphasise participation by Northam group employees, and host and affected communities; ensuring that the greatest part of the value creation for HDPs is enjoyed by a larger, broad-based group of HDPs. Through the extended B-BBEE transaction, HDPs will participate across the full value chain in the Northam group. Furthermore, Northam will fund the transaction using relatively low coupon preference shares, which will enhance the potential for value creation in the hands of HDPs.
As with the Zambezi transaction, the extended B-BBEE transaction ensures an alignment of interests between Northam employees, communities and shareholders into the future. The transaction received overwhelming support from Northam shareholders, with shareholder support in respect of all critical resolutions exceeding 99% in each case.
Ismail and França are Partners | Webber Wentzel.