BEE deals may have to be renegotiated
13 March 2009

Many of the black economic empowerment (BEE) deals struck in recent years after painstaking negotiations may have to be renegotiated — a blow to the Department of Trade and Industry’s goal for an unprecedented 25% of the economy to be in black hands by 2017, according to analysts.

About R41bn worth of potential BEE deals have been wiped out due to unfavourable trading conditions in the past two years, according to recent statistics released by rating agency, Empowerdex. A solution, according to Morné van der Merwe, a senior director in the commercial department at Werksmans Attorneys, would be for the government to consider a bail-out package to ensure no BEE deals fail, and the country remains on target to meet its objectives.

Last year alone the total value of BEE deals sealed on the JSE declined fivefold to R13bn (from R66bn in 2007). Van der Merwe said yesterday that a number of BEE deals would undoubtedly be under threat during the current economic slowdown, particularly those deals struck in the mining sector at the top of the cycle, to meet the Mining Charter deadline.

“However, I’m confident a large portion of the deals should be safe in light of the fact that a significant number of the latest wave of BEE deals were struck on a vendor-finance basis, using less bank finance than was the case under the model that collapsed during the 1990s market correction.

“We will not see anything like that this time around,” said Van der Merwe. However, many deals (especially the large value deals) were structured using bank and private equity funding.

Paul Austin, head of corporate finance at BDO Spencer Steward in the Cape, said that where bank finance was present in a deal, the structure might be under stress, not so much because of the share price collapse, but due to failing company earnings in an economic slowdown. “A lot of BEE deals are still financed with debt, and bankers the world over are under pressure to find more security and reduce their exposure to risk,” Austin said. “Although banks have a substantial exposure to BEE finance, we have not yet seen any deals actually collapse because there is a degree of robustness in many of the older deals.

“Even if a share price has collapsed from, say, R500 to R300, if the deal was done in 2005 it is still likely to be in the money. For instance, the original share price might have been R100.”

Austin said that it would only affect deals either done at the peak of the cycle last year, or where the share price collapse had been of spectacular proportion.

There had been some such spectacular collapses in share price of as much as 94% in the case of Super Group. Austin said many of these deals still had a long time horizon in which to recover, and BEE partners were therefore no worse off than other shareholders. Should the worst happen and some deals collapse, companies might even view this as a benefit, as it would give them the opportunity to negotiate a new deal from scratch, he said.

Sanchia Temkin, www.businessday.co.za