Older BEE deals hang in balance

Experts believe that many of the BEE deals struck in recent years may have to be renegotiated if the Department of Trade and Industry's goal to place 25percent of the economy in black hands by 2017 is to be achieved.

Experts believe that many of the BEE deals struck in recent years may have to be renegotiated if the Department of Trade and Industry's goal to place 25percent of the economy in black hands by 2017 is to be achieved.

BEE rating agency Empowerdex puts at R41billion the worth of potential BEE deals that have been wiped out due to unfavourable trading conditions in the past two years.

Last year alone, the total value of BEE deals sealed on the JSE declined five-fold to R13billion - from R66billion in 2007, according to the rating agency.

But the real threat are the deals that have already been struck, which the BEE experts say may begin to unwind.

A solution says Morné van der Merwe, Werksmans senior director in the corporate and commercial department, is for the government to consider a bail-out package so that the country remains on target to meet DTI objectives.

According to Van der Merwe, a number of BEE deals, especially those struck in the mining sector at the top of the cycle last year to meet the Mining Charter deadline, will undoubtedly be under threat during the current economic slowdown.

He is confident, however, that a large portion of these deals should be safe because a significant number of the latest wave were struck on a vendor-finance basis, using less bank finance than was the case under the model that collapsed during the 1990s.

"We will not see anything like that this time round. Vendors tend to be a lot more sympathetic and would rather renegotiate the deal to save it than see it collapse."

Paul Austin, head of corporate finance at BDO Spencer Steward, says that where bank finance is present in a deal, the structure may be under stress, not so much because of the share price collapse, but due to falling company earnings in an economic slowdown.

He says the deals done in 2005 are likely to still be in the money even if a share price had collapsed from, say, R500 to R300, as the original share price might have been R100.

But Austin says there have been some such spectacular collapses in share price of as much as 94percent, as in the case of Super Group. He says many of these deals still have a long-time horizon in which to recover.

Van der Merwe says any renegotiation offers the opportunity to strike new fully-compliant deals which offer maximum scorecard points, and create the opportunity for more broad-based partners to be brought into any deal.

This would align with a financial role by government agencies in supporting vulnerable deals.

"Government really needs to step in here to ensure all the good work achieved in BEE is not undone by factors which started beyond our borders, as well as helping preserving the good parts while improving aspects deserving of criticism," says Van der Merwe.

Austin says in the absence of a government bail-out or renegotiation, there are few alternatives still open to BEE groups as it is very difficult to raise new finance in this market to replace debt.

He says should the worst happen and some deals collapse, companies might even view this as a benefit, as it would give them the opportunity to negotiate a new deal from scratch.

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