Barloworld’s novel BEE deal raises questions
Amid the growing agitation for inclusion of black people in the mainstream economy and eradication of wealth inequality in SA, it may sound utterly foolhardy and ignorant to ask whether black people should embrace the recent Barloworld-Khula Sizwe broad-based BEE share offer.
The Khula Sizwe (“grow the nation”) scheme adds to a growing list of inclusive and broad-based empowerment transactions that have departed from the historical precedent in which BEE deals were the preserve of a politically connected and selected few.
In a refreshingly innovative transaction, Barloworld has structured a R28bn property sale agreement to Khula Sizwe, a newly established black-owned property company that is collectively owned by Barloworld black management, employees and the public.
The ingenuity of this transaction is that Khula Sizwe has secured an off-take 10-year lease agreement (with an option to extend by five years) with the Barloworld group of companies in the motor retail, industrial and residential sectors. This enables Khula Sizwe to generate rental income to service its debts and finance its operations, instead of relying solely on dividend payouts or share price appreciation, as has been the case with many BEE schemes.
The deal will allow the earth-moving machinery dealer and vehicle-leasing and fleet-management company to improve its BEE credentials from 32% to 48%, enhancing its access to government and mining procurement opportunities.
Barloworld has presented an attractive investment option. The company has proven effective in growing shareholder value, with its share price increasing from R44 in 2000 to R136 in 2019. However, the Barloworld Khula Sizwe public share offer is not an invitation to buy directly into the Barloworld stock, but to acquire a stake in the newly established property company with a minimum of 250 shares at R10 per share. Acquiring the same share equity at Barloworld would cost about R34,000 at the current share price, and for many people this would simply be unaffordable.
Similar to other BBBEE schemes, Khula Sizwe has a lock-in period, albeit much shorter (five years) than similar past transactions. Given this shorter, and rather optimistic, time frame for maturity or open-market share trading relaxation, it is worthwhile to ask if Khula Sizwe will deliver value to its prospective shareholders (mindful that equity investment is a long game), while simultaneously servicing its debt.
A crude estimation based on a conservative 5% annual rental income yield from a R2.8bn property portfolio suggests Khula Sizwe would need more than just the Barloworld rental income to repay the debt over the 10-year lease agreement. It is therefore improbable that Khula Sizwe can deliver spectacular share performance after the five-year lock-in period for any investor to trade their shares gainfully, more so because the entity is delinked from Barloworld’s primary business operations.
More pertinently, the question is whether the mere offloading of a nonstrategic business unit (properties) by Barloworld to a start-up BEE company truly embodies the ethos of empowerment in its broadest sense, which is the sale of lucrative income-generating operations to BEE shareholders, particularly when the company seeks to strategically leverage the resulting BEE credentials from the transaction to access government and mining contracts. Barloworld’s money-spinning operations are its heavy equipment, automotive and logistics business units. These divisions have been able to achieve an 11% average return on equity over the past three years.
The property component is clearly not a strategic business unit. In fact, blue-chip companies that are in the business of reselling are slowly shifting their strategic investments away from bricks and mortar in favour of an online presence. In some instances the sale of property and leasing it back has been favoured to clean up the balance sheet and increase claimable lease expense allowances from Sars. This is especially true for companies that are able to generate much cash from sales operations. For them, the strength of their balance sheet does not depend on the value of non-current assets but instead on its liquidity.
However, this is not to suggest that the Khula Sizwe BBBEE transaction has disingenuous intentions. The issue is about why the deal has not been structured around any of the three high-performing business units.
To the optimist, this scepticism may be viewed as unwarranted. Barloworld is among few JSE-listed blue-chip companies with decent empowerment credentials — it is a level-three BEE contributor, and the Khula Sizwe deal is a demonstration of the company’s commitment to SA’s transformation goal.
Those who have been party to the transaction must moreover have carried out a due diligence to determine if the deal is likely to be financially beneficial in the long run.
Prospective investors do, however need a more convincing business case to take up the public share offer. Khula Sizwe is reminiscent of the first wave of BEE deals that entailed the sale of nonstrategic assets to BEE beneficiaries. Some of those assets have been sold back to the original holders or repossessed by the funders.
The scheme should be embraced, but the black empowerment imperative can no longer be about the mere transfer of assets to black hands. Transactions must be accompanied by a convincing investment-value proposition in high-performing business operations.
The use of a BEE score for procurement gearing should also be linked to long-term value creation for black investors, otherwise the empowerment ideal will remain a fantasy, overshadowed by the growing internationalisation of local capital.
• Rakabe is an independent economist.