Listed property fund Redefine has been praised for tagging a 15% discount on its recently announced R548m black economic empowerment (BEE) transaction. The discount gives the impression of a cheap transaction - until one takes a closer look.
Preliminary details show extraordinary rights for financiers Rand Merchant Bank (RMB) and Standard Bank, and to Redefine itself. These include overhanging profit-sharing rights and a significant portion of the upside during and beyond the life of the transaction.
That means the designated BEE beneficiaries will realise far fewer real economic benefits than indicated by the figure quoted in the announcement.
Such deals have become cause for serious concern in the BEE world. Black Management Forum (BMF) stalwart Lot Ndlovu has said many BEE deals were a form of legalised and organised fronting (in effect, for financial institutions). The BMF has suggested the establishment of a BEE deals ombudsman.
The Redefine deal seeks to transfer 10% of the property fund's linked units at a 15% discount to market value. About 80m Redefine linked units will be issued at 685c/unit. The discount is calculated on the October 10 closing price of 808c.
Says Redefine CEO Brian Azizollahoff: "The economic cost of the transaction is 1,5% of Redefine's market capitalisation, reflecting the discount to market value." The costs will be outweighed by commercial and strategic benefits stemming from the BEE partnership, he says.
The consortium of BEE beneficiaries is split into two categories: BEE groups and broad-based partners. The selected BEE groups, including Ngatana Property Investments, Mtshobela Capital Holdings, Vunani Capital, Clearwater Capital and Loato Properties, will get 60% of the newly issued BEE units.
The balance goes to broad-based empowerment partners, including Phuthanang Youth Trust, African Lotus Education & Development Trust and MaAfrika Tikkun.
The strategic BEE investors will contribute 5% equity into funding their portion, while the broad-based side will be 100%-funded by the three financiers.
The funding by both RMB (R464m) and Standard Bank (R67m) is repayable in five years, including interest.
Here is the catch. At the end of the funding term Redefine will be entitled to a profit share equivalent to 10% of the growth in value of the BEE units, after taking into account funding costs. This is to compensate for the discount at which the BEE units are being issued, and in return for Redefine guaranteeing the servicing and repayment of the funding.
Standard Bank's entire capital of R67,2m, together with accrued interest, is repayable at the end of the period.
The RMB funding will not attract interest, but the BEE partner's right to distributions will be ceded to RMB over the five-year funding term. At the end of the funding term RMB will also be entitled to a profit share from the BEE participants, equivalent to 23,33% of the growth in value of the BEE units.
Defending these features, Azizollahoff says it must be understood that the BEE partners are effectively putting up no cash in this transaction and taking little risk. "They have backers who must be remunerated for taking risk," he says. "The BEE partners had to give up some of the benefits to get the backers in. It's better to have 50% of something rather than 100% of nothing."