The financial sector charter helped speed up empowerment within the financial services sector. Three big deals were announced in the financial services sector last year. Two of them included banks, with Mvelaphanda Holdings buying into Absa and Shanduka and Safika heading a consortium that bought into Standard Bank, that deal was duplicated for Liberty Life, the life subsidiary of Standard Bank.
The other deal involves Metropolitan Holdings, the assurance company once controlled by empowerment group New Africa Investments Limited (Nail). Kagiso Trust Investments (KTI) is buying a stake in Metropolitan Holdings.
The Standard-Liberty and Metropolitan deals are similar - they are both preference-share transactions - but the details of each are different.
The Liberty Life and Standard Bank transactions were treated as separate transactions, though they were copies of each other and were designed to complement one another.
In the Liberty Life-Tutuwa and Standard Bank-Tutuwa deals, the empowerment shareholders have created a new company called Tutuwa. The shareholders of Tutuwa are Shanduka (20%) and Safika (20%), another 40% is held by black staff and management of the bank and the assurance group. The remaining 20% is held by community groups.
The direct shareholding translates into 1,79% for Safika, 1,20% for Shanduka, 1,49% for community groups and another 2,89% for managers and staff.
What is the structure of the deal?
The Liberty Life and Standard Bank deals create three vehicles, which mirror the shareholding groups in Tutuwa. Standard Bank injected R4,1bn and Liberty Life R1,3bn into their respective deals.
The institutions use the vehicles to buy back shares from shareholders. The vehicles are then sold to the black shareholders by the institutions. The institutions issue preference shares, with a coupon fixed at 8,5%. Both institutions will pay dividends that will service the shares over a 20-year period, though the bank estimates that its dividend cover should allow repayment over 10-15 years.
The advantages of the structure are:
- The funding is dependent on the fundamentals of the group's performance;
- Black investors should be able to retain ownership of the full equity;
- Standard Bank facilitates funding, providing cheap credit; and
The deal has a safety net that few empowerment structures have. The deal will collapse only if the economy falters or the two institutions collapse.
As with the Standard Bank and Liberty Life transactions, the most attractive element of KTI's purchase of a 10% stake in Metropolitan Life, worth R540m, is that the cost of capital has been reduced to about 8,5% (74% of prime). This is because of the lower interest rate environment and the reduced cost of capital. It is also due to the funding mechanisms themselves. KTI's use of its balance sheet probably helped earn it the interest rate, which is relatively cheap for an empowerment transaction.
An important difference between the Metropolitan and the Standard and Liberty deals is that the funding for the preference shares comes from a third party at marginally lower prime rates. That means there is less built-in security for the funding obligations and Metropolitan will ensure consistent growth for KTI to repay its loans. KTI will also earn special dividends according to the extent to which Metropolitan's growth (in earnings, new business and dividends) exceeds 9%.
Metropolitan is a big group, but small enough to maintain its present growth. The I-Net consensus on the share is a buy and Metropolitan's earnings forecast for the medium term supports the view that the repayment terms can be met over the period of the loan.
This is Metropolitan's third incarnation as an empowerment entity.
The group was one of the first empowerment outfits to be formed when Sanlam sold its life business to pioneering empowerment company Nail.
Metropolitan became New Africa Capital. Nail then used Metropolitan as its financial services arm, which included African Bank and AMB Holdings.
When the Nail structure began to creek under the weight of a discounted share, then-Nail CE Dikgang Moseneke decided to unwind Nail's empowerment conglomerate structure. Metropolitan was unbundled out of Nail as New Africa Capital. Wiphold bought a small strategic stake in Metropolitan through the unbundling process. The price of that stake was a premium to the NAV, but Wiphold thought the price was worth the opportunity to be part of Metropolitan Life.
