Financial services group Sanlam this week announced “the first step” in the “anticipated” unwinding of a broad-based black economic empowerment transaction implemented four years ago.
On 11 March 2019, Sanlam concluded a transaction to issue 111 349 000 new Sanlam ordinary shares, constituting 5% of its issued shares, to SU BEE Investment SPV (RF) Pty Ltd.
The targeted new beneficiaries of the B-BBEE transaction included Sanlam employees, professional black women, rural and urban poor black women groups, black youth, black business partners, and broad-based black groups.
A master trust was created to cater to 80% of the intended beneficiaries, with Sanlam’s long-time anchor empowerment shareholder, Ubuntu-Botho, benefiting from the remaining 20%.
In a document published on the JSE SENS on 14 August, Sanlam stated that the B-BBEE transaction was implemented by way of a subscription for Sanlam shares by SU BEE Investment – a wholly owned subsidiary of SU BEE Funding SPV (RF) Pty Ltd – at R70 per share, representing a discount of 9.88% to the three-day volume weighted average price of R77.67 per Sanlam ordinary share on 8 March 2019 (the subscription price).
Half of the total subscription price was funded through 1 million Second Ranking Preference Shares in the amount of R3.897 billion issued by SU BEE Funding to Sanpref Pty Ltd, a wholly owned subsidiary of Sanlam.
The other half was covered by “combination” funding involving Standard Bank.
SU BEE Funding issued 1 million First Ranking Preference Shares in the amount of R2,421 million to Standard Bank (secured by 85 million Sanlam shares). Standard provided collar funding of R1.196bn to SU BEE Investment (secured by 26 million shares).
Those Sanlam shares, however, are worth far less today (R64.80 a share on 15 August) than they were four years ago. With the funding repayment date less than seven months away (March 2024), prospects for beneficiaries and funding providers are looking bleak.
Market volatility persists
Citing the impacts of the Covid-19 pandemic in 2020 – a year after the B-BBEE transaction – followed by surging inflation and interest rates and geopolitical conflict, Sanlam stated that equity market volatility has impacted recovery in Sanlam’s share price.
The financial services group explained that the creation of any value for beneficiaries of the B-BBEE transaction was dependent on SU BEE Funding’s net equity position (the company’s assets, after subtracting the company’s total debts and inventory), which in turn is dependent on the Sanlam share price, “and after the repayment of all funding”.
Describing benefits to any beneficiary as “unlikely” and expressing concern over the potential negative impact for Sanlam shareholders and Sanpref (if equity market volatility continues), Sanlam said it was anticipated that the SU BEE Funding structure may be unwounded following its maturity in March 2024.
Managing risk
As a first step in the process to unwind, Sanlam has proposed that Beleggings Pty Ltd, a wholly owned subsidiary of Sanlam, acquire the First Ranking Preference Shares from Standard Bank for R2.421bn, using “existing cash resources”.
The group argues that if does not take this step, the risk exists that debt covenants (a condition or formal debt agreement) on the First Ranking Preference Shares may be breached if Sanlam’s share price declines further. Once breached, SU BEE Investment would be obliged to dispose of a large block of Sanlam shares, which is likely to impact the Sanlam share price negatively and, ultimately, Sanpref.
Sanlam said it would continue to consider alternatives “in the best interest of stakeholders to implement the orderly unwinding of SU BEE Funding in the lead-up to its maturity”. It said any further steps, including a possible repurchase of Sanlam shares from SU BEE Investment, would be communicated to shareholders.
The proposed transaction is subject to certain suspensive conditions, including a positive fairness opinion, as required by the Listings Requirements of the JSE.
The fairness opinion, provided by Deloitte & Touche, is available for inspection at Sanlam’s registered office, 2 Strand Road, Bellville, or via email request (secretariat@sanlam.co.za) until 10 September.
