The graveyard of BEE deals is huge and this is sad, that’s according to Brian Rainier CFA, Director at Pula Capital.
Brian says this was based on an examination of many of these deals over the past 15 years or so. “ I think the reasons are fairly simple as to why many of them have failed and they tend to share similar characteristics,” he explained. Typically, the reality has been that the BEE partner has had to borrow money to buy their stake and the business has not earned dividends sufficiently so that they could pay for it.
Brian says the deal simply breaks down because 1 of 3 things happen.
- The value of the equity was priced too high;
- The cost of debt to fund the deal was too high;
- The business didn’t perform i.e. didn’t do and/or grow well enough to provide sufficient dividends to help the partner repay the debt.
And so ultimately the BEE partner could not service the debt and so never actually acquired/paid for the stake.
“The consequences of this were that either the bank (funder) landed up with the stake, or the deal was just scrapped, leaving both the seller and the BEE partner feeling pretty disappointed about the whole engagement,” explained Brian. Furthermore, the sellers often complain that the BEE partner promised it would be able to help grow the business, and therefore the value and/or cost of funding would be covered.
Pula Capital stated that both seller and BEE buyer were being too optimistic – the sellers in their valuation and the buyers in their expectation of the value they could add. In order to fix this, Brian suggested they should get realistic about the value. “Stripping out a fair bit of the historic value before doing the deal is a good start, then set a fair price: recognize that with the right partner growing the size of the pie, as the old cliché goes, this could grow the size of your slice even bigger in the end,” he explained.
The group suggested that banks should be cut out of the equation because they added 10 – 20% to costs of funding, which was not in favour of the partners. “As the seller, fund the deal yourself…make it a fair interest rate on the reduced valuation (remember you may have taken a fair chunk of the value out already)”
There was also a suggestion that companies should be selective of their BEE partner by making sure that in addition to them enhancing your BEE score, they should add sufficient value that can produce sufficient dividend for them to pay for their stake over time. “First prize is a BEE company who has operational capacity and client base that can demonstrate how together you can grow your business,” concluded Brian.
