Last year was a record year for empowerment deals. Almost R90bn-worth of transactions were concluded, according to research done by Empowerdex. This was 60% more than in 2006. Through these deals a large chunk of the ownership of corporate SA was transferred to black investors.
But all indications are that 2007 will go down in history as the climax of black economic empowerment deal-making. Most of the big deals have been done, and most of the pressure that has driven deals will dissipate over the next year.
It's no coincidence that many of the large deals of 2007 were in the mining sector (see table). Government's mining rights conversion process, set out in the 2004 Minerals & Petroleum Resources Development Act, requires miners to comply with the mining charter in order to secure rights to dig. The charter covers a wide range of empowerment factors, but ownership is a critical one - by 2014, 26% of the mining company must be black-owned. Applications for the conversion of rights have to be finalised by April 2009. Rather than leave it to the last minute, mining houses have chosen to push the deals through as soon as possible. Each application is expected to take at least 12 months to finalise, and there are concerns about the ability of government to manage the process in time. Though some miners have already secured their rights, many others complain that the bureaucracy and delays in the department of minerals & energy (DME) pose a serious risk to their businesses.
"It is the tail-end of some of the empowerment deals for the big resources companies," says Peter Hayward-Butt, co-head of investment banking at Rand Merchant Bank. "We've probably got two or three relatively sizeable deals in the resources pipeline but it's not going to stay that size."
But even beyond the resources sector, there is a sense that most large SA companies have now got their empowerment deals under their belts. "It's quite hard to talk about sustainability of [last year's dealflow]. I think most of the large corporates have done a BEE deal by now," says Kevin Kerr, joint head of corporate finance at Investec.
Hayward-Butt says that some deals will come through once the DTI's empowerment codes - which are to apply to all industries - have been finalised. Though they were meant to come into effect early in 2008, various issues remain to be resolved. Consequently, a number of deals have been put on hold until the codes are finalised.
The resources frenzy has been a fillip to investment banks, but BEE overall was not as large a driver of deals as is often thought. Empowerdex calculates that only 15% of deal-making last year was driven by BEE.
One deal stands out as a potentially large BEE headline grabber in 2008: the empowerment deal for Vodacom, which would come with a tomb-stone value in the tens of billions. The deal, though, has already been mired in controversy as various ANC-aligned bidders are exposed. It has become a political hot potato, unlikely to be finalised until the controversy has died down. But Vodacom is one of the last major entities left to do a megadeal.
So corporate financiers are preparing themselves for a year of smaller deals, from a growing source of empowerment action: older deals that are being refinanced or deals taking place between firms. Thanks to the equity bull market of the past five years, many empowerment shareholders are now sitting in strong financial positions.
"We're also seeing some parties playing a BEE consolidation role," says Kerr. "The larger parties in the consortia with cash tend to mop up the smaller guys." Many deals done in the past included a group of smaller shareholders. That achieved a broader base of black shareholders, but was also driven by the shortage of capital held by each party. But as deals have accumulated equity, it is starting to make sense for the larger black shareholder to buy out the smaller ones, or for one industry specialist to buy out the nonspecialist. That provides a substantial stake in the business, which gives the remaining shareholder the strength to drive operational changes.
Those deals become virtually the same as traditional merger and acquisition activity. "That is exactly what the whole thing intended," says Hayward-Butt. "The dynamics have changed. The share prices have run hard and people are now looking to access that wealth or build their businesses."
Indeed, Empowerdex found that more deals are being done to give the acquiring empowerment firm control over the target, rather than the passive stakes typical of the past. Last year 15 deals worth R24bn took place involving the BEE acquisition of a controlling stake in the target - R27bn-worth was done for passive BEE stakes in 58 different transactions.
The trend of empowerment firms buying stakes in each is also clear - last year 13 transactions worth R6,5bn were done involving BEE entities buying each other or their respective investments.
Indeed, Empowerdex noted that few BEE deals involved insignificant stakes of 10% or less. Those that did were mostly deals involving acquisition of a stake in a company by black employees.
Investment bankers are also working on hedging in the gains on those deals for those investors that are tied into the investment - BEE shareholder agreements often stipulated that the shareholder could not sell for a certain "lock-in" period. But that doesn't stop them from using various financial instruments to lock in the gains and eliminate the risk of share prices heading south.
But the trend of empowerment players buying each other will have interesting implications - the larger empowerment players are likely to become even larger as they leverage the capital they have already accumulated. "I think you will have three to six very big influential players out there with strong balance sheets," says Kerr. Those would include players like Mvelaphanda, the Mineworkers Investment Company and Royal Bafokeng Holdings - three companies that were involved in most of the large deals of 2007.
