Business Day (Johannesburg)
2 July 2009
Johannesburg — SABMILLER 's black economic empowerment deal announced yesterday follows the pattern of recent broad-based deals, but deviates in some crucial respects.
The deal follows the broad parameters by being focused on the retail portion of the company's downstream supply chain and employees, with a smaller "worthy causes" portion added on, thereby shunning high-profile politicians and former politicians who were once the fashionable recipients of BEE largesse.
MD of SABMiller SA, Norman Adami, makes a point of underlining this issue, stressing the "truly broad-based and tangible benefits" that will flow from the deal.
The deal implicitly rejects the notion that BEE is partly meant to create a class of patriotic business leaders.
In fact, the leaders or trustees of the different entities created by the R6bn deal were not even named at the function yesterday.
The deal is different as it is internally funded and so not reliant on bank funding, which would be a sensitive issue in this credit-challenged environment.
SABMiller Group CEO Graham Mackay underlines this, saying it "places no reliance on external bank funding, and requires only a relatively small, and hence affordable, cash investment from retail participants".
In effect, the deal is vendor- financed, but surely this would result in a big hit on the company's income statement? SABMiller argues this is not the case.
The deal will have no effect on earnings next year, although 2011 earnings will be affected.
T he "economic cost" will be 220m in total.
The actual cost will be between 1% and 3% of earnings, taken mainly in 2011.
How is this miracle of financial engineering -- a 750m (R5,8bn) deal which costs only 220m (R1,7bn) -- achieved? Through time, luck and dividends.
About 30% of the value of the deal will ultimately derive from a solid flow of dividends , a peculiar advantage of large, mature and cash-generating companies.
The company has been specific that it is a share-price-sensitive deal, hence much of the upside, it is hoped, will derive from an increase in the share price.
In this sense, it is well timed, initiated while markets are depressed.
The other unusual aspect of the deal is the role management hopes it will play in developing and solidifying the supply chain.
Not only will liquor retailers participate, but also "applicants or legal entities who can provide evidence that a liquor licence application has been lodged". In other words, if shebeen owners get their act together, they participate too.
There is a slight question-mark over whether structuring your BEE deal in this way constitutes anticompetitive behaviour.
By including retailers in their deal, SABMiller does not exclude others from doing the same.
But does the warm and fuzzy feeling retailers will get from being invested in the company effectively reduce the likelihood they will stock competitors' products? Hard to say, but borderline issue.
Overall, the local company will get about 60000 new shareholders, 95% of whom will be blacks or black majority-owned enterprises, helping to spread and solidify relationships with the company.
The local company is a "level five" contributor to broad-based empowerment.
It aims to be a level four contributor (a step up) by 2012. This deal will get it close.
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