Two deals with the same aims could not look more different as the banking giants try to break new ground in structuring their black empowerment deals.
Standard Bank's R4.1 billion transaction announced this week differs vastly from the deal revealed by Absa and Mvelaphanda in April in that it allows for equity ownership, while the Absa deal is option-based.
Standard Bank's deal proposes that the bank will buy back 100.5 million shares, or 7.5 percent of the group's issued stock, from shareholders. The shares, valued at R4.1 billion, will be sold into special purpose vehicles (SPVs). These will issue 20-year redeemable preference shares, which will yield 8 percent interest to Standard Bank.
Dividend payments to the SPVs are intended to fund this interest and the redeemable capital over time. It is expected that it will take 14 years for the SPVs to pay dividends and redeem the capital.
The purchasers are Safika Holdings and Millennium Consolidated Investments (MCI), which make up the Tutuwa consortium (40 percent); black staff (40 percent); and community groupings (20 percent).
In the Absa deal, cumulative preference shares carrying voting rights and options were sold to the Batho Bonke consortium, led by Tokyo Sexwale's Mvelaphanda Holdings, for R146 million. The options allow the holders to buy 73 million shares at R48 to R69 a share at specific dates from 2007 to 2010. If all options are taken up, Batho Bonke will hold 10 percent of Absa at a cost of up to R5.1 billion.
The economic cost to Standard Bank was estimated at R1.7 billion (3 percent of market cap) and to Absa at R859 million (2.8 percent).
The financial services black economic empowerment (BEE) charter signed last November adopted a balanced scorecard. There is a black ownership target of at least 10 percent of an institution's South African operations by 2010 and a target of black board representation of at least 33 percent.
Absa has not nailed down the ownership criteria, but should do so by the deadline. It is conceivable, however, that the Batho Bonke consortium might have to sell shares to fund the cost of exercising the options. In that case, Absa might need another deal to plug the gap. Standard Bank, on the other hand, has pinned down the initial shareholding target with a lock-in clause until 2014.
One analyst said his only criticism of the Standard Bank deal was that the BEE parties had not put any capital at risk. He said capital at risk tended to boost participation.
Politically, Standard Bank has hedged its bets. Safika luminaries Saki Macozoma and Moss Ngoasheng are said to be close to President Thabo Mbeki, while MCI's Cyril Ramaphosa is said to have clashed with the leader. Whichever way the winds of fortune blow in the ANC, it seems Standard Bank will have a horse in the race for the foreseeable future.
Absa is perceived to have placed most of its political bets on Sexwale, but both banks will have 28 percent black board representation after their deals, which is less than the 33 percent required by the charter.
Standard Bank's deal also allows the group to retain and attract scarce black management talent. Its employee scheme is more focused on black staff than the general Absa employee scheme, but it also has the potential to be divisive if not sensitively managed.
The accounting for the deals also differs widely. Standard Bank chief financial officer Simon Ridley said its audit opinion held that BEE was neither an item of goods nor a service, so it wouldn't need to account for its deal under the Companies Act, but as financial instruments. Absa's auditors held that its deal needed to be accounted for in 2006, financial officer Jacques Schindehutte said.
Sue Rudolph of the accounts practices board said it was still deliberating BEE issues.
Investors felt Standard Bank's deal elegantly achieved more objectives than Absa's at a similar proportional cost to shareholders.
Ajay Lalu, the director of the BEE strategic services division at Ernst & Young, said the biggest feature of the Standard Bank deal was that it was vendor funded using preferential shares.
Its biggest attraction was that, unlike Absa's deferred share ownership scheme, it did not fall foul of a charter provision on vesting. This section says any transaction involving BEE parties acquiring equity on a conditional deferred basis, with no issue of equity carrying upfront economic interest, will not be counted as direct ownership until the equity is transferred.
In real terms, Lalu said, the Absa empowerment deal was only 1 percent, whereas Standard Bank's was 4 percent.
"It is a bold move on the part of Standard Bank. However, it must make sure its management team is incentivised to perform.
"There must also be an alignment of everybody's interest, that is vendor and partner. If it does not perform well in five years the BEE partnership becomes questionable."
Lalu felt the Standard deal was better structured, although only time would tell how the Absa deal would perform. - Johannesburg