The Mvelaphanda-Rebserve deal is the kind of deal that gets empowerment analysts excited. This is because it creates a clearer picture of the value of empowerment groups.
Mvela deputy chairman Mikkie Xayiya describes the deal as unique because it is a straight shares-for -shares deal. This is not quite true, it's an assets-for-shares deal. The only empowerment deal that has been a true shares-for-shares deal is Patrice Motsepe's African Rainbow Minerals' acquisition of the old Anglovaal mining.
The deal involved Mvela , a private group, reversing its unlisted assets into Rebserve, a listed entity. This required a valuation of both groups. In this transaction, an empowerment company completely took over the assets of a traditional business. Rebserve sold all its assets to Mvela for R1,55bn. Mvela paid Rebserve shareholders by reversing its assets into Rebserve. For the purposes of the transaction, Mvela was valued at R1,78bn.
As a result, Mvela will own 52,8% of the new group. That means the deal creates one of the largest black-controlled SA companies, with assets worth R4bn, extending into areas as diverse as mining (Gold Fields, Trans Hex and Northam Platinum), support services (Coin Security), banking (Absa) and health care (Afrox Healthcare). Unlike previous empowerment conglomerates such as New Africa Investments, Mvela's stake is paid for and secure. So it is a genuinely black-controlled group.
Mvela is arguably the most diversified empowerment company in SA. It is also one of the largest by assets and certainly the second-largest by market capitalisation. There is no shortage of empowerment opportunities. People might ask: " Why Rebserve, which has been struggling lately?"
It has a turnover that has grown only 9% from R3,2bn in 2003 to R3,5bn last year. Worse, profit plunged 7% to R180m. But that is annual profit that Mvela, with its treasure trove of assets, cannot claim to have.
For Mvela it is a neat solution to one of its stated challenges. Reversing into Rebserve means increased operational capacity, an efficient listing and a medium-sized war chest of about R300m - but more importantly, it means easy access to capital markets for the expected empowerment goldrush of the next few years.
One of the things that is most often overlooked about empowerment companies is that they rarely have earnings or a net asset value (NAV). This limits their ability to grow and take charge of their own destiny. For a start, without earnings how can they pay their staff?
In 2003 Mvela made less than R10m in earnings. That money had to cover head office and staff fees. Unlike empowerment barons, black staff working for empowerment groups rarely have numerous directorships to pay for their lifestyles, the company must pay them.
Retaining quality staff who work for the empowerment group and not its target companies becomes a challenge.
Mvel a's asset base is huge, its gross value is potentially worth more than R10bn. The company needs a strategy to squeeze value out of it, and that requires capacity.
Mvela deputy CEO Yolanda Cuba has said the takeover of Rebserve means the group is acquiring management capacity. And not just internal Rebserve management, but the ability for the new group to recruit additional management, especially black management.
The new company, Mvela Group, as it will be known, will be divided into four divisions: mining; financial; services; and property.
According to AMB the deal has the following advantages for the new group:
- A listed, ungeared and mainly black company;
- Increased opportunity for a proportion of debt financing;
- New Mvela will have a high proportion of black senior management;
- The chance to rationalise Mvela's assets; and
- New Mvela will be a mixture of wholly owned subsidiaries in the facilities management and services sector, which will put it in the ideal position to win large procurement contracts.
For years Rebserve has been a poor imitation of Bidvest's services and facilities companies, but as new Mvela it can begin to compete.
On the facilities front, there are obvious synergies between Mvela and Rebserve's mining services division, the second-biggest contributor to earnings. The synergies will make it easier for Mvela to take more operational control of many of its assets.
Mvela has also said it will issue shares to an empowerment trust to boost the group's empowerment equity. That will allow the new entity to raise capital through shares without threatening its empowerment credentials, though the group will have to be careful that it is not reducing investor value.
The Pamodzi- Foodcorp deal also represents a paradigm shift in empowerment financing. The Industrial Development Corp (IDC) and Old Mutual are joint funders of debt and debentures to the value of R450m. The senior financier in the deal is the Land Bank, which injected R800m into the transaction.
Pamodzi's leveraged buyout of Foodcorp represents a milestone in empowerment deals. It makes a great case study as a black economic empowerment (BEE) deal funded along private equity lines. Unlike the Mvela- Rebserve deal, the Pamodzi-Foodcorp deal perpetuates one of the problems of empowerment - highly geared structures, especially because an element involves restructuring and rolling over some of the existing debt from the original 20% of Foodcorp that Pamodzi already has.
However, it is not the empowerment entity that is geared, but the assets it's trying to acquire. Pamodzi's investment strategy is to invest in nonlisted entities where the group can take a stake of at least 25,1% , giving it a significant say in management.
In evaluating investment options, Pamodzi looks for experienced management, a strong balance sheet and good cash generating potential. The aim is to own unencumbered holdings. The difference is that empowerment companies traditionally do not produce an income and have to rely on the asset they are buying. Heavy debt cripples them because they are unable to service the debt regularly.
In 1997 Pamodzi and Ethos Private Equity bought Foodcorp in a leveraged buyout (LBO) worth R1,8bn. Foodcorp owns big local food brands such as Glenryk pilchards, Mageu #1, Ouma rusks, Dogmor, Yum-Yum peanut butter and Maltabela porridge. Its Sunbake subsidiary bakes more than 200m loaves of bread a year.
Ethos Private Equity's desire to exit provided an opportunity to Pamodzi to increase its stake in the food group.
The empowerment group, led by Ndaba Ntsele, raised R800m in debt finance from the Land Bank, an unusual funding source for such a deal, though the Land Bank says it is a sign of things to come. Some of Pamodzi's products are part of the agriculture value chain. The deal is worth more than R2bn.
Pamodzi raised further capital from the IDC and Old Mutual Asset Managers. As part of the transaction, Pamodzi led a buyout of 49% from Ethos' Fund IV, 15% of that is for management. Ordinary employees will own 20% of Foodcorp. The stake takes Pamodzi's holding to 65%.
The money has been raised against Foodcorp in an LBO , leveraging the assets being bought.
The deal is the largest secondary LBO in SA, and the second-largest LBO in the country.
LBOs are rarely used in BEE deals, though they are well suited to the requirements of such deals. Foodcorp was delisted in the first empowerment transaction the group undertook, with Pamodzi, which makes the deal possible. As a private company it is easier to make use of the company's own resources to help outsiders acquire it. Pamodzi's management and staff own the company completely. The company is unlisted, so accessing and paying shareholders should be easy and, if correctly managed, should not affect the health of the company. Foodcorp's turnover is just more than R4bn. The company will not disclose its profits. However, the nature of the business means that there should be significant cash pumping through the business, which gives Pamodzi room to manoeuvre.
As long as Pamodzi grows its profits, even modestly, it should be able to meet its debt cover. The financing has been structured over a long-enough period to utilise cash to pay of the debt without severely limiting the group's growth capacity.
The advantages of the deal are:
- Significant wealth creation;
- A large black-owned and controlled company; and
Unlike Mvela , Pamodzi is not acquiring new business, but the deal is also about Pamodzi's operational growth.
Foodcorp is now Pamodzi's main investment, possibly as much as 80% of its portfolio. Given the size of the debt, Pamodzi's future is inextricably linked to the success of Foodcorp.
Similarly, Mvela has tied its fortunes to the empowerment transactions. It marks a maturing of the process of empowerment. The real challenge for these companies now is to see whether there is more to them than the ability to structure deals. Now that they own the businesses, can they add value?
