The most exciting, though little noticed, transactions last year were conducted by the Tiso Group, which focuses on mining, mining services and financial services.
The deals involved companies buying into unlisted groups or buying the underlying assets of companies.
Tiso's empowerment strategy is to target assets at cashflow level, which allows for leveraged buyouts (LBOs). In an LBO the buyer uses the cash of the company it is buying as the collateral. The target company needs to have a strong cashflow to minimise the pressure on working capital. There must also be strong growth potential in the target company.
The first deal involves the acquisition of a stake in unlisted lime and carbon producer Idwala for R938m. Tiso led a consortium in a private-equity deal that took control of 42% of Idwala. The Tiso Private Equity Fund took 10%, Idwala management and staff have 26% and RMB holds 22%.
The most exciting deal is Tiso's acquisition of African Explosives Ltd (AEL), a subsidiary of AECI. The deal is exciting because it gives exposure to Tiso's particular approach to empowerment in the sector - a strategy that involves targeting subsidiary investments in operating entities because the group believes sustainable empowerment is best achieved through acquisitions at holding level.
Structured finance deals, particularly LBOs, have been used in empowerment transactions, but mostly in the mining industry because mining companies do not mind selling stakes in their mines or mining operations to empowerment groups. In other industries, however, companies are reluctant to sell to empowerment groups at an operating level.
Many argue that leveraged finance is one of the best ways to aid empowerment because it provides financiers with assets against which to lend. Companies faced with BEE pressure are willing to provide access to operating assets and thus cashflows.
However, LBOs will generally work best in sectors whose businesses are cash generative by nature. They have been used in the retail sector. The recent delisting of Pepkor used an LBO structure.
One of SA's larger LBOs is the Afrox Healthcare transaction involving Tokyo Sexwale's Mvelaphanda Resources and Brimstone Investment Corp. African Oxygen, the parent company, sold its listed health subsidiary to the two parties. They in turn intend to delist Afrox Health. By delisting the group, the two empowerment companies are able to tap into the considerable cashflows of Afrox Health.
The AECI deal is not simple, but it makes sense. In the AEL-AECI deal the subsidiary was valued at R1,6bn. The company was then sold out of AECI into a new company, AEL Holdings (AELH). That transaction was funded by equity of R100m and R1,5bn in loans.
Tiso then created a new empowerment vehicle that it capitalised through Tiso Private Equity with R18,7m; the AEL Community Development Trust injected another R6,27m.
The trust is funded by a soft loan from AEL because even in LBOs there will always be an equity portion that has to be contributed by the participating shareholders.
The new company bought 25,1% of AELH for R401m, with equity and R376m in debt. This means that the company is highly geared and the shareholders have substantial debt.
AELH has a turnover of more than R2bn and its profit margin is about 12%. It is a private company with black shareholders. The deal has the following advantages:
- Black shareholders have direct exposure to the cashflow of the company;
- AECI has facilitated this transaction, acting as surety for a portion of the bank loan provided to the employee consortium, Empco;
- Once the debt in AELH is repaid, there will be an opportunity for a secondary BEE buyout, which could lead to the BEE groupings acquiring a controlling stake in AELH from AECI; and
- Though the highly geared nature of the transaction involves high financial risk in the early years, once the debt is repaid there will be the opportunity for significant value creation for the BEE equity investors.
