Investors in BEE scheme brace for trade

2011-12-03 14:32

Another investment scheme for black investors (Africans, coloureds, Indians and Chinese) has become tradeable.

At least 120 000 investors who bought 67.5 million shares in Naspers subsidiary MultiChoice’s Phuthuma Nathi scheme will have their first opportunity on Thursday to sell these shares when the scheme reaches its
fifth birthday.

As with all similar schemes created in the past six years to promote BEE on a wide scale, there is one major question to be asked about Phuthuma shares: what are they worth?

The same question hangs over the schemes created by Sasol, SAB, MTN, Vodacom, African Bank and the Welkom Yizani scheme of MultiChoice’s Naspers stablemate, Media24.

In fact, it’s too early to tell. Virtually all these schemes were created with a 10-year lifetime, during which they redeem debts with dividends and can be traded under strict limits.

Both these restrictions make them worth less than the huge amounts sometimes bandied about when the schemes were first introduced.

According to leading analyst groups, Phuthuma shares bought for R10 each are worth between R112 and R178, with JP Morgan, for example, estimating the value at R132.

This value includes an abatement in connection with the debt the scheme still owes – close on R2 billion – and which will paid with MultiChoice dividends over the next five years.

So investors are unlikely to receive the above prices for their shares.

Phuthuma follows in the tracks of earlier transactions by African Bank Investments Limited and Sasol, which were created more recently but could be traded sooner.

Such BEE shares, which can only be traded among black investors, trade at huge discounts because of the restricted liquidity in the small market mechanisms that are especially created for just this one kind of share (see box).

Analyst groups that studied Phuthuma estimate that the shares will trade at a discount of between 10% and 30% because of the liquidity.

The shares of most schemes, including Sasol Inzalo and MTN Zakhele, are merely debt-loaded versions of the specific group’s ordinary JSE shares and can eventually be converted into ordinary shares after the
debt is redeemed.

This is the case with the biggest of these schemes, Sasol Inzalo, which was introduced in 2008 as a “R26 billion transaction”.

The scheme also issued shares for cash, but the lion’s share was debt-financed Inzalo shares that are now worth between R30 and R42.

Ordinary Sasol shares are now only slightly better than the R366 at which Inzalo acquired 10% of the group, but the interest on the loans with which it was financed is so far bigger than the dividends redeeming the debt.

However, there is still a lot of time for the scheme to recover before it can be freely converted into tradeable shares.

This is actually what distinguishes the schemes. In most cases, the debt will be dealt with in time and, in any case, it is structured in such a way that it doesn’t become the investor’s burden because the liquidity determines the long-term value of the shares.

Once the schemes have completed their normal 10-year lifetime, the chaff will be separated from the corn as they face their liquidity problem according to the way they are designed.

Investors in schemes that do not degenerate into ordinary shares will have the worst of it.

MTN’s Zakhele scheme was created last year and follows a different route to Sasol’s to the same end point of becoming real JSE tradeable shares after 10 years.

According to the cellphone group, the transaction was “worth R8.3 billion”, which was the market value of 4% of MTN at that stage.

MTN Zakhele acquired 4% of MTN with a mixture of cash contributions by investors, a donation of shares and a lot of debt.

The Zakhele shares were sold at R20 each and, thanks to the donation, obtained R42 of value.

The 4% is now worth R10.65 billion, but it’s difficult to determine the real value of the scheme from this before it issues a new set of financial results early next year that will take account of debt payment.

Vodacom’s YeboYethu scheme and SAB’s Zenzele scheme represent interests in the local activities of these international groups, rather than the full business listed on the JSE.

In both cases, the interests will later be convertible into shares of the larger group according to their value.

According to the JSE’s second study of black shareholding which was announced this year, black South Africans and black groups – through their pensions and other funds – directly own about 17% of the JSE’s market value of about R7 trillion.

That’s nearly R1.2 trillion, of which pensions make up about R630 billion.

The potential value in shares of the biggest of the schemes, Sasol Inzalo, is now about R25 billion – a small but real contribution to overall black ownership of the economy.

A number of the schemes are converted to real JSE-listed shares in the company concerned after six to 10 years.

As the final dates arrive, the JSE’s black ownership figures will receive very necessary boosts.

However, some of the schemes, including Phuthuma, will never be reflected on the JSE.

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