September 20, 2017 / 5:01 PM / a year ago

South Africa's Sasol plans share issue to buy out black empowerment investors

JOHANNESBURG (Reuters) - Shares in South African petrochemicals and energy firm Sasol dropped sharply on Wednesday after it said it was looking at raising $980 million in a share sale to fund a buy- out of indebted black investors.

Companies in Africa’s most advanced economy are required to help increase black ownership, often using vendor financing deals to sell shares to groups who were excluded before 1994 under apartheid’s white minority rule.

The company plans to sell shares in a secondary offering to raise 13 billion rand ($980 million) which will be used to buy back and then cancel the shares sold on credit to investors in 2008 in a black economic empowerment scheme called Inzalo, the Zulu word for “birth” or “growth”.

Part of the proceeds of the new share sale, which is still subject to board approval, will also be used to cover costs and to pay outstanding bank debt which arose from the funding of the original Inzalo share sale.

The company also intends to replace Inzalo with a new 10-year scheme which will include Inzalo investors and will increase black ownership in its Sasol South Africa subsidiary to at least 25 percent.

Investors in the Inzalo scheme are now facing hefty losses as Sasol’s share price has slumped since the scheme’s launch, leaving them unable to fully repay their debts which come due next year, when the scheme unwinds.

To break even more than 250,000 Inzalo investors need Sasol’s share price to reach at least 462 rand by 2018 but Sasol said on Wednesday that was unlikely to happen, the share price having closed at 398 rand on Tuesday.

Shares in Sasol fell 6.5 percent to a two-month low of 372.50 rand on Wednesday, as investors reacted to the prospect of a new share issue, which is expected to dilute their holdings by as much as 5.5 percent.

“We always said we would have a certain amount of dilution at the end of Inzalo, we are just going to have more,” said Joint President and Chief Executive Stephen Cornell.

Sasol said it would buy back the shares from its black investors and cancel them, along with the 12 billion rand of share purchase debt still outstanding.

The Inzalo scheme has already paid out 7.6 billion rand in dividends to the black investors, 5.1 billion rand of which was used to pay down purchase debt.

Replacing Inzalo, Sasol aims to launch a new 21 billion-rand ($1.6 billion) black empowerment scheme called Khanyisa, which means “to illuminate”. This scheme will run for a further 10 years until 2028, giving at least 25 percent black ownership in Sasol South Africa.

“Sasol Khanyisa’s success is not dependent on Sasol Limited’s share price fluctuations. As no external funding will be used, there will be no cash outflows from Sasol,” said Joint President and Chief Executive Bongani Nqwababa.

Reporting by Tanisha Heiberg; Editing by Greg Mahlich

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