The black economic empowerment deal announced last week by steel giant ArcelorMittal South Africa qualifies the company for mining rights but does little to enhance its broad based BEE profile.
Mr Keith Levenstein CEO of BEE consultancy firm EconoBEE described the deal as BEE pointless because it could earn the firm as few as 4.95 points over the first 5 years, compared with the 23 points available on the BEE scorecard's ownership element.
ArcelorMittal SA is to transfer a 26% stake in itself worth ZAR 9 billion to the Ayigobi Consortium, which includes President Mr Jacob Zuma's son Mr Duduzane Zuma and a share trust representing ArcelorMittal SA employees, through a new operating company.
The reason for Mr Levenstein's assessment is that the participants' dividend rights are limited to 5% of ordinary dividends and 0% of extraordinary dividends.
Moreover, he said that "When the true substance of the deal is evaluated, we feel there is a strong case that the deal serves no purpose toward broad-based BEE and therefore the estimated points should be zero. Though it may sound as if the participants have been given a golden plate, they will never fully participate in the running of the business and may even end up with far less than they expected when the repurchase finally takes place."
According to the original announcement, the participants will be able to sell the shares back to ArcelorMittal SA after four years, provided the company is allowed to keep its BEE rating. And the operating company will have the right at any time between five years and 20 years to repurchase the shares. Thereafter the shares must be repurchased.
After 5 years, the new shareholders stand to make a minimum of ZAR 900 million and a maximum of ZAR 1.7 billion on the deal, after repaying a notional loan to the vendors, depending on the share price at the time.
But Mr Levenstein warned that the BEE codes did not have a once empowered, always empowered clause. He said that "The true clause is called 'continued recognition of ownership after loss or sales of shares' and at most can contribute 40% of the ownership score."
Mr Peter Leon, a partner at Webber Wentzel, said the 26% stake was enough formally, under the mining charter signed in 2002, to allow the steel company ultimately to secure the Sishen iron ore rights it had lost, through its opportunistic acquisition of Imperial Crown Trading, which controversially now holds the rights.
The BEE deal and the purchase of ICT came after ArcelorMittal SA failed to renew its mining rights for part of Sishen and the Department of Mineral Resources awarded them instead to ICT.
However, broad based BEE applied a more sophisticated measure of scoring and Mr Levenstein said the ArcelorMittal SA deal did not maximize BEE points. He contrasted it with a 2006 deal concluded by consumer goods company Massmart.
He said that "The company sold about 6.93% of the equity to black staff, which initially resulted in about 5 points and they are in a position to earn more. So they can expect more points for selling nearly 7% of their business than ArcelorMittal can in selling 26%."
(Sourced from www.busrep.co.za)
