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Rich pickings await chosen few in BEE schemes by Ann Crotty

May 29, 2014

Trading in one of the dozen or so empowerment vehicles currently available is increasingly realising ‘decent’ profits for hundreds of thousands of ordinary black investors.

It does not grab the sort of headlines enjoyed by one of Patrice Motsepe’s black economic empowerment deals largely because it does not generate anything like the profits that seem inevitably and effortlessly to accrue to Mr Motsepe.

But trading in one of the dozen or so empowerment vehicles currently available is increasingly realising “decent” profits for hundreds of thousands of ordinary black investors whose ordinariness excludes them from the richer pickings.

Trading in BEE opportunities is rather like any trading — the big money is made by a relatively few well-placed individuals, decent money can be made by ordinary investors and losses accrue to those unfortunate investors who, because of lack of liquidity or information, either traded too early or too late.

There are four basic options to choose from when designing a BEE transaction, with the choice influenced by what the company wants to achieve.

The most limited option involves the inclusion of a strategic partner, such as Motsepe, Saki Macozoma or Gloria Serobe.

Next is the staff-empowerment deal with access often limited to black employees.

Then comes broad-based black economic empowerment, which generally involves a considerably wider, albeit still select, group of individuals.

Finally, there’s the bold public offer route available to all blacks, which begins with an initial lock-in phase followed by a period of secondary market trading and then usually a conversion to equity in the empowering company.

Companies that operate in a highly regulated environment, such as the banks, generally want to involve high-profile individuals in their schemes while companies sensitive to broad consumer sentiment such as Vodacom, MTN and MultiChoice are more likely to go for the public-offer option.

But, as Craig Gradidge of Gradidge-Mahura Investments says, BEE schemes typically involve some combination of the four options. The Old Mutual deal, which was launched in 2005 and matures next year, involves Wiphold, Brimstone and black employees.

Similarly, Absa’s scheme included Tokyo Sexwale and black employees. That scheme, which was launched in 2004, matured in 2012, and generated substantial profits for the key participants.

None of the schemes implemented by the four major banks made provision for a public offering, which is regrettable given the substantial profits these deals have either already generated or look set to generate when they mature over the next six to 18 months.

The aversion of banks to public schemes is not entirely surprising, given the bad publicity they seem inevitably to attract.

Media24 and Sasol can attest to the public antagonism generated when a seemingly well-intended offer reaches the public at the “wrong” price.

The public, who have watched as the likes of Mr Sexwale, Mr Serobe and Mr Motsepe seem only to make huge profits on their BEE deals, become understandably suspicious and resentful when the value of the few shares they have had to pay for drops below the BEE price.

For them it is of little comfort to know that those who can afford to leave cash tied up are likely to make some profit when the lock-in period expires and the empowerment share can be traded over the counter.

In addition to the temporary reputational risk, companies that opt for a public offering have to commit to an expensive and complex process of communicating and educating the public.

Indeed, companies that have gone this route may feel aggrieved that they have not received recognition for their efforts, not only in reaching millions of ordinary blacks but also for providing investment education.

A critical aspect of this is getting investors to realise that, unless you are one of the lucky ones, profits are not guaranteed and share prices go down as well as up.

Source: Business Day

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From → Analysis, BBBEE

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