BEE deals a skimmer's dream come true

Conceived perhaps with the best of intentions but hopelessly unrealistic, writes Ann Crotty

The first phase of black economic empowerment is the story of missed opportunities and massive enrichment for a relative handful of well-placed individuals.

Some, such as Irene Charnley, Phuthuma Nhleko, Patrice Motsepe and Mzi Khumalo became enormously wealthy, as did their advisers, such as Jonty Sandler, Rob Dow, Andrew Sprague and Zenzo Lusengo.

For a few, the new wealth was a fleeting experience. Khumalo was propelled into the ranks of the super-rich when he managed to secure a ringside seat at Anglo American's unbundling of JCI. However, within a few short years, much of his debt-funded wealth had disappeared to leave only debt.

With the enormous benefit of hindsight, the initial objective of using black economic empowerment transactions to create a black- managed and controlled industrial/financial/mining base was hopelessly unrealistic.

Critically, the objective had not allowed for the extent to which individual greed would usurp the bountiful opportunities that were made available at the time. Not merely the greed of well-placed black individuals but the greed of an army of financial advisers who realised that BEE offered huge opportunities to generate enormous transaction fees.

And then there was the more mundane, but crucially important, issue of how to provide finance on reasonable terms to the targeted beneficiaries, who generally had limited access to funding.

The first empowerment deal done in South Africa was Sanlam's sale of a stake in Metropolitan to a little-known entity called New Africa Investments (Nail). In 1993, more than 10 years before the first BEE legislation was introduced, Sanlam rushed the sale through when it heard that Anglo American was about to do a similar transaction with its insurance operation, African Life.

The Metropolitan deal could have been the start of great things. There was talk of it being a black Sanlam, which would attract the savings and investment funds of blacks to build a black economic powerhouse.

Metropolitan's funds came from black policyholders, so it was entirely appropriate that they would be used to build a powerhouse that would manage and control large sections of the South African economy.

However Nail's lack of vision, discipline and skills meant that it failed to appreciate the need to accumulate assets in a steady and methodical manner. Although the well-regarded Nthato Motlana was Nail's executive chairman, in reality the company was run by Sandler and his advisers. As anyone who visited Sandler's offices at the time will have realised, Sandler had unbounded ambitions for Nail.

Rather like those of some manic military man, his office walls were covered with details of acquisition plans, which even to the untrained eye looked dangerously ambitious.

Perhaps caught up in the BEE hype of the time, Sandler believed nothing - not the shortage of funds or skills - should interfere with his plans to create another Anglo within the space of a few years.

The situation was not improved when, in 1995, Nail established African Merchant Bank. This meant there was now a team of financial advisers scouring the economic landscape for deals to be done and transaction fees to be earned, largely for their own pockets.

Things became even more frenetic when, after two long years of negotiations, the Johnnic deal was finalised. This was another potentially huge opportunity for black economic empowerment. In 1996, Anglo sold its controlling stake in Johnnic to the National Empowerment Consortium (NEC) for R50 a share, a little below the market price, but significantly above the price prevailing two years earlier when negotiations began.

Johnnic's assets included significant stakes in SA Breweries, Premier Food, Times Media and, indirectly, MTN.

The deal, which placed attractive assets in black hands, had two major flaws. First, in what was seen as a bid to avoid charges of favouritism, Anglo insisted that the NEC, which had started as a small collection of BEE groups, be expanded to include almost anyone who might have opposed the deal if excluded. At the time the deal was signed the NEC had an unwieldy 50 members who were dominated by Nail.

Second, funding for the members of the NEC was expensive and provided on a relatively short-term basis. This meant that there was very little chance of the NEC participants emerging with any value from the transaction when it came time to unwind or roll over the funding.

In the years following the NEC transaction, Johnnic was restructured to focus on media and telecommunications. SAB and Premier were sold to fund the building up of the MTN stake. But the generally weaker market conditions saw Johnnic's share price drop well below R50 by the time the three-year funding came due.

In terms of the financing agreements, most of the NEC members were obliged to hand over their shares to their funders, such as Metropolitan and Future Growth.

Asief Mohamed, who was head of research at Metropolitan Asset Managers at the time, points out that the huge profit subsequently shown on Johnnic's controlling stake in MTN benefited the millions of black Metropolitan policyholders - even after fees.

"The timing was fortuitous, and the extent of the effect was unintended, but it is possible to claim that millions of blacks benefited from the Johnnic deal."

Twenty years later, Nail is a shell on the verge of being wound down completely, AMB has become a more modest operation and Metropolitan was rescued from Nail by Momentum.

After spending tens of millions of rands on transaction fees since Anglo sold out, the Johnnic conglomerate no longer exists. In its place is the enormously valuable MTN, which is continuing to churn out money for its lucky management team. Johnnic's other components have faded from glory or, like SAB and Times Media, gone their own way.

"It was all about what they could skim for themselves, and not about building a long-term sustainable black business," remarked one empowerment analyst who worked on the Johnnic transaction.

How the high-rollers made their millions

Though Cyril Ramaphosa was involved in the first phase of BEE - through Nail and the Molope Group - he emerged with little money or business credibility.

He did, however, score substantially in what might be deemed the second phase when, after Molope was rescued by Rebhold, he was given substantial mining-related assets, which were used to build up Shanduka.

With few exceptions, the trade unions fared dismally with their involvement in BEE; their investment companies made little money, but managed to compromise union officials who, while they fought to get access to the corrupting influence of the better-paid jobs, ignored the needs of their members.

But former union officials did do very well out of BEE, and probably none as well as the NUM's Irene Charnley, who became a billionaire. As a union representative on the Johnnic board, Charnley was in the right place at the right time to stake a claim to a hugely valuable chunk of MTN shares.

There might be much to learn from the fact that Phuthuma Nhleko was one of the few blacks not to make any claims about working to benefit "black business".

Nhleko, regarded as an outstanding businessman, works for Nhleko. He is credited with building a powerful MTN and his Worldwide Africa is a very successful group operating away from the BEE spotlight glare.

Patrice Motsepe was enormously fortunate to be excluded from the NEC back in 1996. This exclusion meant he was available to do a deal with the hugely wealthy Sacco family, which controlled iron-ore company Assore.

Motsepe's stake in Assore was key to the establishment and growth of African Rainbow Minerals. Presumably Motsepe's relationship with long-serving cabinet minister Jeff Radebe helped persuade the Sacco family, who may have had an eye on mineral rights, that Motsepe was the ideal partner. He is one of the very few BEE players to take philanthropy seriously.