DM 2022 Annual BEE DoY | DealMakersSA

DealMakers - 2022 Annual

BEE Deal of the Year

Recognising the value of employees

The announced transaction in May 2022 was the first of its nature in the retail sector – the deal at Shoprite’s subsidiary level boosted its B-BBEE ownership to 19.2% from 13.5%. The deal recognises the role of employees in the success of the group, by providing them with additional compensation over and above their salary.

Shoprite will, over the next 10 years, place 40 million shares into the B-BBEE Employee Trust, which has been established on a non-vesting, evergreen basis, and which will be primarily facilitated by Shoprite Checkers on a notional basis.

Shoprite’s 126,000 South African employees and 16,000 non-South Africa employees will become beneficiaries of the transaction which has an estimated value of R8,9bn. Of the South African employees who will benefit from the transaction, 97% are black and approximately 66% are female. A two-year eligibility period is in place before employees are entitled to receive benefits, a move taken to retain and incentivise staff.

An inaugural distribution equating to R77m was paid to eligible shareholders shortly after implementation, for the six-month period to 2 January 2022. The impact of the transaction on the Shoprite Group’s headline earnings is anticipated to be a reduction in the region of 2.7% and will not have an impact on the shares in issue.

Local Advisers

Rand Merchant Bank and Werksmans

The bespoke and efficient transaction structure allows for the flow of meaningful benefits to Shoprite’s employees, whilst minimising the cost to its shareholders. Shoprite Checkers’ R888m capital contribution enabled the subscription of 10% of the shares, with the balance to be funded on a notional basis. The evergreen scheme has no capital distributions, which prioritises employees’ needs to receive meaningful annual benefits versus long term capital pay-outs. These benefits received will be equal to a Shoprite dividend even though the employee trust will not hold listed shares, ensuring that there is full transparency and enabling recognition of the tangible benefits of the Group’s strong operational and financial results.

Comment from the Independent Panel:

This transaction is a landmark deal in the retail sector and, at R8,9bn, was the largest of the BEE transactions nominated. It impacts 142,000 people, and the panel liked the evergreen structure and noted that it has already started to make distributions to beneficiaries.

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Bespoke and evergreen

In September 2022, Anglo American Platinum (Amplats) announced the establishment of its evergreen employee share ownership scheme (ESOP) through its subsidiaries, South African Rustenburg Platinum Mine (RPM) and Zimbabwean Unki Private Mines.

The ESOPs comprise two components:

An evergreen component where each ESOP Trust acquires shares in RPM, constituting c. 1.87% of the issued share capital of RPM by way of a capital cash contribution from Amplats. The evergreen shares are non-transferrable and will be held by the ESOPs until the end of the life of the mine, delivering a full cash dividend to the beneficiaries of the ESOPs, but no intended capital appreciation during the existence of the ESOP.
A vesting component where each ESOP trust purchases Amplats shares in the open market on an annual basis (equivalent in value to c. R8,000 per beneficiary per annum). The vesting shares will be funded by an annual cash contribution from Amplats and purchased by the ESOP trust on an annual basis, then vested in the hands of the beneficiaries over an intended 3-year cycle. Thereafter, these vesting shares will deliver a cash dividend and will deliver capital appreciation to beneficiaries on their vesting. The vesting component will indirectly hold c. 0.13% of the issued share capital of Amplats. Upon vesting, the shares may be disposed of or retained, such that the beneficiaries could become shareholders in Amplats.

Local Advisers

Rand Merchant Bank, Merrill Lynch and Webber Wentzel

Paving the way for a better tomorrow

During the Old Mutual separation process announced in 2018, the financial services giant undertook an empowerment commitment to increase its B-BBEE ownership to 30% by June 2023. The disposal of a further 4.18% stake in 2022, in a three-legged process involving employee and community trusts and a retail offer, satisfied this commitment. The R2,8bn deal, named Bula Tsela (Sesotho for ‘pave the way’), involved complex funding options of notional vendor financing to the trusts and actual vendor funding to the retail scheme.

Local Advisers

Rand Merchant Bank, Tamela, Merrill Lynch, Bowmans, PwC and Deloitte

The Amplats group of companies employ over 20,000 people, and those who already participate in another share incentive scheme will be excluded. The estimated total value of the vested shares over the life of the scheme is R1,8bn and the estimated value of the 2% evergreen shares (based on the 30-day VWAP of 27 September 2022) is R6,5bn.

The ESOP ensures significant value unlock and, at the same time, alignment of interest between beneficiaries and Amplats’ shareholders into the future.

As a novel structure, though identical in nature, the transaction agreements have to ensure compliance across two jurisdictions, with local laws of each country adding complexity to the implementation of a seamless transaction.

A total of 205,3 million new Old Mutual shares were issued, allocated along the following lines – 1.6% to the ESOP Trusts, 1.3% to the Community Trust and 1.3% to ‘black’ members of the public via a special purpose vehicle (RetailCo). The retail scheme shareholders could apply for a minimum of 200 Bula Tsela shares at a cost of R10 per share, payable upfront, representing a 15% equity contribution towards the transaction. To accommodate those who did not have access to that amount of money, the scheme provided for the option of buying 100 retail scheme shares for R1,000.00, payable over a 12-month period.

The retail scheme, a first for the insurance sector, has a lock-in period of five years and was 85% funded by Old Mutual through a combination of a cash contribution (15%) and Old Mutual Pref Funding of 70%, providing increased exposure to Old Mutual shares for each beneficiary. The preference share funding, provided at a cost of 85% of prime, is relatively cheap and should ease matters if Old Mutual does not pay a dividend. Assuming Old Mutual pays a dividend, investors can expect a 15% trickle dividend after payment of taxes and operational expenses. It is anticipated that the ordinary shares in RetailCo will be listed within five years.

Comment from the Independent Panel: The panel noted the challenges of implementing a successful BEE retail offering in the current environment, along with the multifaceted nature of this transaction impacting employees, communities and retail investors.

Comment from the Independent Panel: This transaction is commended for its evergreen structure benefitting employees in both South Africa and Zimbabwe, and the complexity of both an evergreen and vesting component.

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Seriti Resources’ acquisition of Windlab Africa

The acquisition by Seriti of a 54.2% stake in Windlab Australia’s South African and East African wind and solar-powered businesses for c.R892m, via subsidiary Seriti Green, marks the transfer of strategically important renewable assets from foreign ownership into the hands of a black energy company. Other parties to the transaction were Standard Bank and Rand Merchant Bank, both acquiring stakes of 15.4% and the balance of 15% by VennEnergy (owned by Seriti Green’s CE, Peter Venn).

Local Advisers

Standard Bank and White & Case (SA)

Windlab Africa consists of 100% of Windlab Africa and 75% of Windlab East Africa. The South African assets have a complementary geographic location to Seriti’s operations, and will enable change in the areas in which it operates. The East African assets will provide Seriti with geographic diversification, an optionality, and an alliance with a new partner – Japan’s largest wind power developer, Eurus Energy. With its new ownership and local capital, Windlab Africa is now in a position to accelerate the development of its significant pipeline to assist in alleviating the electricity shortages on the continent.

Windlab Africa has developed 230MW of projects currently operating and supplying the South African grid and has plans for a further c. 1 300MW of wind farms. A total of 3GW is in the development pipeline that Seriti Green wishes to construct between now and 2030. Using Seriti’s relationships and expertise, building and owning the generation assets and supplying power into SA’s commercial and industrial energy consumers – this transition across the full value chain of private power provides the shareholders with huge potential value unlock going forward, and differentiates Seriti Green from standalone developers.

While Seriti is currently Eskom’s largest black-controlled coal supplier, the introduction of renewable energy into its existing portfolio will provide long-term financial stability and diversification. Seriti CEO, Mike Teke said the need for an energy supply that meets current and future needs, along with the obligation to move towards a managed transition to renewable energy sources, meant that this acquisition is especially timely. The acquisition speaks to the company’s goal of ensuring long-term sustainability as a diversified energy producer.

Seriti Resources is co-owned by four anchor shareholders – Masimong Group, Community Investment Holdings, Zungu Investments and Thebe Investment Corporation. It is Seriti’s philosophy that 10% of the equity in its mining operations be ring-fenced equally for the benefit of its employees and communities.

Comment from the Independent Panel: While smaller in size than the others shortlisted, this transaction means that strategically important renewable assets are no longer foreign owned, but black owned, and is a great example of the just energy transition in practice.