Crisis threatens S.Africa's black empowerment push

By Rebecca Harrison - Analysis

JOHANNESBURG (Reuters) - South Africa's drive to give black investors stakes in white-run blue-chips may fall victim to the global financial crisis, forcing a major rethink of a core policy meant to redress apartheid's economic ills.

Under black economic empowerment (BEE), which has stirred controversy but is now broadly accepted by corporate South Africa, firms in Africa's biggest economy must meet quotas on black ownership, employment and procurement.

That means bringing black investors on board and giving them an equity stake usually via complex deals funded by the company, banks and existing shareholders through the issue of new shares.

Black investors usually repay the loans with dividends and sometimes cashflow, and the shares themselves act as collateral.

In a bull market, the newly-rich black investors see their assets grow and comfortably use healthy dividends and cashflow to meet monthly payments, even using stock to back more loans.

But South Africa's Top-40 index of blue-chip stocks has plunged almost 30 percent this year and falling commodity prices have hit cashflow in the key mining sector. BEE deals sealed at the height of the market are looking increasingly vulnerable.

"There is no doubt that the current economic crisis will have a material impact on BEE transactions done in the last few years," said Ajay Lalu, director of Bravura Economic Empowerment Consulting firm, which advises companies on BEE.

Industrial group Imperial (IPLJ.J) and Eqstra (EQSJ.J), which it spun off in May, have been the first big firms to see their BEE deal fall prey to sliding markets.

Imperial and Eqstra stock prices have slipped closer to a trigger or share cover ratio level built in to the deal, and they said this month they had to pump in an extra 100 million rand ($10.08 million) in cash to shore up BEE partner Lereko.

Imperial, Africa's biggest transport and logistics firm, said if it hadn't injected cash the deal would have collapsed and funders would have taken control of Lereko's board. Imperial and Eqstra would also have lost their empowerment credentials which are crucial for doing any business with the government.

DOUBLE WHAMMY

Other companies that inked stock-backed deals between late 2005, when the Top-40 last plumbed current depths, and the market peak in May, might also have to restructure or pump in more cash.

Petrochemicals firm Sasol (SOLJ.J) sealed the biggest BEE deal yet in March with a transaction worth some $3.2 billion at the time, issuing shares at 366 rand each.

The stock dropped to 287.32 rand by Friday's close and certain share cover ratios will be breached if the ten-day volume weight average falls below 211 rand, forcing Sasol to buy back shares issued to the banks to rescue the deal.

Barloworld (BAWJ.J) repriced its planned BEE deal in August given plunging asset prices -- a move that ruffled some shareholder feathers at the time but in hindsight looks astute.