Wednesday, October 22, 2008

Pretoria Portland Cement Company, the listed cement company that was unbundled from Barloword in 2007, announced its R2.7 billion black economic empowerment (BEE) transaction in August this year. The deal remains subject to fulfilment of a number of conditions, including shareholder approval and the conditions applicable to the funding. The circular outlining the transaction was sent to shareholders on 16 October.
If the deal was long in the making (PPC invited potential black partners to present to it in January 2007 and its board has for some time been fielding questions on its progress from interested shareholders), it is impressive in its breadth and depth. The deal has at its core a focus on broad-based empowerment, while also including strategic partners which, apart from their strategic benefits, also contain broad-based elements.
Once implemented, the transaction will result in an additional 15.29% of PPC’s share capital being in the hands of black people (PPC already has a sizeable black shareholding, in large part attributable to the holding of the Public Investment Corporation). Its BEE ownership status is of course crucial for purposes of converting its “old order mining rights” to the to “new order mining rights” by May 2009, by which date the Mining Charter requires it to have at least a 15% black ownership.

Empowerment transactions within this space primarily need to take cognisance of the requirements of the Mining Charter, as well as focusing on the Codes of Good Practice on Broad-Based Black Economic Empowerment. There has been some debate within the mining industry as to whether or not the Mining Charter should be aligned with the Codes.

PPC’s approach to transformation has been a ‘bottom-up’ one, focused on overcoming a number of barriers that were historically created: the poverty barrier, by it empowering and uplifting disadvantaged communities; the skills barrier, by it creating opportunities for its black leaders and employees; the business barrier, by it developing black entrepreneurs and, lastly, the ownership opportunity barrier, by providing for black equity participation. PCC’s CEO, John Gomersall, commented at the announcement of the transaction on 28 August: “This is a historic milestone for the company and the culmination of processes started many years ago. Today heralds a significant achievement by the company as it reaches a key empowerment objective at the equity level.”

It was important to PPC that its deal benefitted a broad range of parties, including its employees. Said John Gomersall at the announcement: “We set out to ensure that the structure of the deal was as broad-based as possible, benefiting mainly black South African stakeholders.”  PPC has estimated that the transaction will positively impact on about 3.5 million directly.

Fourteen entities are participating in the transaction, each of which has their own shareholders or beneficiaries. These entities can broadly be classified into three groups: the first is entities that represent PPC’s chosen strategic black partners; the second is entities that represent community service groups; and the third is entities that represent internal and external stakeholders of PPC’s business.

The strategic black partners are Peu (1.92%), led by Peter Malungani; Nozala (1.82%), led by Salu Dakile-Hlongwane; Portland Consortium (1.82%), led by Mandla Gantsho; and Capital Edge (1.51%), led by Jerry Vilakazi.

The community service groups are Shalamuka (0.76%), headed by Paul Harris and benefiting the highly regarded Penreach Whole School Development Programme; and the Disability Empowerment Concerns Trust (0.76%), led by Mike du Toit and benefitting seven umbrella organisations for the disabled in South Arica.

The internal stakeholders of PPC are represented by five trusts: a trust formed to benefit PPC’s current and future black managers at its South African operations (1.85%); a trust formed to benefit current black and white employees at its South African operations (0.45%); a trust formed to benefit future black and white employees at its South African operations (0.12%); a trust formed for the education, development. healthcare, wellness and other compassionate needs of the primarily black employees of PPC’s South African operations and their immediate families (0.50%); and a trust formed for the benefit of PPC’s current black independent non-executive directors (0.05%).  

The external stakeholders of PPC are represented by three trusts: a trust established for the empowerment of construction and related associations and their members (2.02%); a trust established for the education and development of stakeholders in cement, lime and aggregates mining, manufacturing, construction and related industries (1.01%); and a trust established for the empowerment and upliftment of the communities in the regions where PPC operates and/or from which it sources its employees in South Africa (0.71%).

As John Gomersall noted at the unveiling of the transaction: “The success of our business lies in the hands of our current and future employees and in the communities in which we operate and it is vital that their interests are aligned with that of the company. Their participation in this BBBEE transaction is therefore a cornerstone.  Additionally, it is essential that we are able to attract and retain future black management.”

PPC, through one of its subsidiaries, has been acquiring and will continue to acquire shares in the open market to limit the dilutionary effect the broad-based ownership initiative will have on its shareholders.

The deal will be implemented by a two-pronged approach: new shares will be issued to the strategic black partners and community service groups, whilst the trusts representing PPC’s internal and external stakeholders will acquire shares from existing shareholders by a scheme of arrangement.

To secure PPC’s interests and the sustainability of the broad-based ownership initiative, the strategic black partners and community service groups have committed not to sell their shares in PPC until the end of 2014. Thereafter and until the end of 2017, they may only sell to black parties of whom PPC approves.

The acquisition of the shares by the strategic black partners and community service groups will be funded, and will simultaneously allow PPC to raise long-term to replace current short-term debt. The acquisition of shares by the trusts representing PPC’s external stakeholders, as well most of the trusts representing its internal stakeholders, will be funded by preference share and debt funding provided by third party institutions.
Charles Douglas is a director and Annelize Taylor is a senior associate in the Corporate Department of Bowman Gilfillan.