ANDREW BAHLMANN: Implications of BEE compliance for M&A deal approvals

The tension between regulation and business flexibility continues to be a debated issue in SA. The role of the Competition Commission has become an increasingly central factor in M&A deals, with an insidious influence being its heightened scrutiny of the BEE component.

The commission’s mandate is the protection of consumer interests by promoting fair competition and preventing monopolistic practices, but its activities have led to over-reach through the enforcement of policies not directly aimed at consumer protection. This includes the pressure it is bringing to bear on the BEE component within deals, with the risk of deals not being approved if the BEE shareholding goes “backwards”.

It is evident that the commission has broadened its focus to include socioeconomic factors. Its view may be that this represents a commitment to not only foster competition but also ensure the economic benefits of growth are equitably distributed among SA’s historically marginalised communities, but this was never its mandate.

This poses as much a risk to black entrepreneurs and “empowered” business as to any African entrepreneurs who want to sell businesses in the future to multinationals. As multinational corporations seek to expand their presence in SA they are often required to demonstrate that their acquisitions contribute to economic empowerment. The Competition Commission’s review process now places considerable emphasis on whether a deal supports or undermines the objectives of BEE.

One of the most pressing concerns for businesses is the potential for BEE shareholding to regress. If a company’s BEE ownership structure deteriorates — such as through buybacks, dilution or other changes — this could lead to significant ramifications during the deal approval process. The commission may view any reduction in BEE shareholding as a sign that the company is not committed to transformation, potentially resulting in the rejection of merger applications.

This scrutiny presents several risks for empowered businesses and entrepreneurs. For instance, a decline in BEE shareholding could delay deal approvals or even lead to outright rejection, which can jeopardise the financial health of a business relying on the proceeds of sale.

Companies that are perceived as failing to meet BEE requirements may see a decrease in their valuation. Multinational buyers often factor in compliance when determining the worth of a business, potentially leading to reduced offers or the abandonment of negotiations.

Companies that struggle to maintain BEE compliance may find it increasingly difficult to engage with multinational partners or attract investment, limiting growth opportunities in an increasingly competitive landscape.

Noncompliance can also lead to reputational harm, both for the business in question and for its owners. This stigma may deter future investors and partners who are focused on ethical and responsible investment practices.

One example is the merger of Massmart and Walmart in 2011. Though ultimately successful, when Walmart had sought to acquire a majority stake in Massmart, the Competition Commission scrutinised the deal’s impact on local suppliers and employment.

One of the concerns raised was about Massmart’s BEE compliance and how the acquisition would affect its empowerment credentials. The commission ultimately approved the deal but required Walmart to commit to enhancing BEE initiatives, highlighting how compliance can directly influence deal timelines and outcomes.

Another example came in 2020 when Imperial Logistics attempted to sell a portion of its business, with potential buyers evaluating the company’s BEE status as a crucial factor in the valuation process. Concerns arose regarding the sustainability of its BEE shareholding, which had seen fluctuations due to various corporate actions. This uncertainty affected potential buyers’ offers, illustrating how a perceived lack of compliance can lower business valuation.

Telkom has also faced challenges in maintaining its BEE status, particularly after it attempted to reverse some of its empowerment transactions. This reversal led to concerns among potential investors and partners about the company’s commitment to transformation. As a result, Telkom found it more challenging to engage with multinational firms that prioritise BEE compliance in their investment decisions.

In contrast, when insurer Santam sought foreign investment it engaged proactively with the commission to ensure compliance with BEE regulations. By addressing potential concerns upfront, Santam was able to secure a favourable outcome for its investment while reinforcing its commitment to empowerment, showcasing how early engagement can lead to successful deal approvals.

The commission’s extensive scrutiny of BEE compliance is an overreach, with this level of intervention potentially stifling business growth and deterring foreign investment. At a time when companies are imploring for a cut in red tape, they are rather facing increased regulatory hurdles.

The commission’s focus on socioeconomic factors sometimes complicates the traditional role of ensuring fair competition — but until there is a change BEE issues have to be an integral component of any M&A negotiation.

As the Competition Commission intensifies its scrutiny of BEE compliance in M&A, the stakes have never been higher for empowered businesses and African entrepreneurs. The risks associated with BEE shareholding reversals pose significant challenges, particularly for those seeking to attract multinational buyers.

• Bahlmann is CEO: corporate & advisory at Deal Leaders International.