Last year was the biggest for empowerment deals. It is expected to beat 2003 in terms of BEE deal flow value, which, according to the 2004 Ernst & Young Mergers & Acquisitions survey, reached a high of R21bn.
Whatever one's opinion of BEE, almost all corporate activity today is driven by empowerment. Managers and company directors may feel they are being distracted from focusing on their core activities, but everyone, from law and accounting firms to corporate finance outfits, is involved in some way.
The value of private equity funds managed by BEE companies and targeting BEE investments rose dramatically in 2003 and last year's figures are expected to show further increases.
An indication of just how well established BEE has become was the decision last year by Ernst & Young to launch a product to audit BEE. The group has been doing BEE audits for some time but last year took the decision to launch it as a group product offering.
The decision was in part due to the codes of good practice released by the department of trade & industry. The codes are government's official definition of and criteria for BEE.
They are expected to have a significant impact on broad-based empowerment. The codes' guidelines on how to measure empowerment ownership will also affect the way deals are structured. However, the jury is still out on how they will affect the funding of empowerment deals and deals that have already been concluded. The codes' belated definitions for BEE threaten to unravel some completed BEE deals. The expected discussions on the codes will lead to some lively debate about the finance structures of BEE deals. The codes suggest that a flow-through analysis of BEE beneficiaries in equity deals be developed to quantify the BEE status of companies. There are far-reaching implications for complex empowerment transactions, particularly where the effective BEE shareholding is being diluted by non-BEE shareholders.
According to the codes, empowerment points will not be awarded for deals where there is no beneficial interest accruing to black parties. In short, until black people own the shares, it's not a BEE deal. Business Unity SA has already indicated that it will object to this aspect of the codes.
There are only a handful of companies whose empowerment equity stakes would be recognised because most empowerment deals involve options and deferred payment structures or funded structures that still have to be paid off. Many are faced with unrealistic hurdle rates. Even the deals that are good will suffer a dilution of the equity, which based on the flow-through principle means that the percentages announced as BEE equity are likely to change. The introduction of the codes is welcome but will not change the fact that structured finance, and to a lesser extent options and deferred payments, will continue to be a big factor in BEE structuring because of the lack of capital and the large number of deals.
Of the deals chosen by the FM, most include some structured finance. Only two are straight debt finance paid for by dividend cover. Nevertheless, all represent an interesting maturity in empowerment deal-making and financing.
The most striking deals are Mvelaphanda-Rebserve and Pamodzi-Foodcorp because they are about operational BEE. The research for this section of the Top Empowerment Companies survey was conducted by African Merchant Bank.
