Empowerment? or just smoke & mirrors

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During the last fortnight BAT Zimbabwe issued a circular to shareholders detailing a proposed indigenisation plan in which it seeks to allot a 20% stake to employees and the community.

Report by By Kumbirai Makwembere

This is part of its plan to comply with the country’s empowerment laws in which companies in the manufacturing sector are expected to allocate 26% of their shareholding to locals by the end of October 2012; raise it to 36% by October 2013; up it to 46% by October 2014; and finally to 51% by October 2015.

Subject to shareholder approval, BAT therefore intends to allot shares to the Employee Share Ownership Trust (ESOT) and the Corporate Social Investment Trust (CSIT) so as to comply with the first indigenisation threshold of 26% as currently only 6% of its issued share capital is in the hands of locals.

In implementing the transaction, BAT will first seek shareholder approval to increase the company’s authorised share capital by 3 252 000 to 20 633 517. Of the new shares, a total of 1 031 676 (5%) will go to the ESOT while the remainder will be for the CSIT.

The parent company, BAT International, which currently holds 57% in the company, will donate 5% of its shareholding to employees and this will ensure they hold a 10% stake post the transaction. The company has disclosed that both beneficiaries from the ESOT and Community Share Ownership Trusts (CSOT) will subscribe for the shares at prevailing market prices.

Though the company has made an effort to issue the shares on commercial terms by compelling beneficiaries to subscribe for the shares at market prices, the financial assistance being offered makes the whole transaction appear like a donation. BAT is offering beneficiaries loans at 8%, for an indefinite duration, with no fixed repayment terms.

The average cost of funding in the economy is around 15%. Furthermore, if the loan has an indefinite duration, and no fixed repayment terms, what will motivate the beneficiaries to repay the loans? Effectively the company will foot the cost of the shares that will benefit employees and the investment trust, and this will put a strain on the company’s financial performance.

It will also be interesting to see who the beneficiaries of the CSIT are, considering the new crop of tobacco farmers in the country. Will the new shareholders make any meaningful contribution to the company?
The net effect is going to be dilution on the part of the existing shareholders.

In a way the transaction is empowering employees and those involved in tobacco production, at the same time prejudicing existing shareholders, including indigenous ones. BAT has been paying a healthy dividend, with a payout ratio of 79%, ever since it started generating profits and we support this. Could it be that the current shareholders want to take out as much money as they can before it is “looted”?

Compliance with the first 26% will result in existing shareholders being diluted by 18,8%. In the coming year, locals are expected to have at least 36%. Depending on the approach the company takes, existing shareholders are likely to be short-changed further. Unless the company comes up with an improved plan going forward, by the time the shareholding of locals reaches 51%, current shareholders would have been prejudiced severely.

Another question is whether or not the new shareholders will have the capacity to support the company’s funding needs when they arise. BAT is not the only company that has adopted the employee and community share ownership scheme.

Mining companies have been at the forefront and examples include Zimplats, Mimosa and Unki. These corporates awarded a 10% stake and further donated US$10 million to the community. If Zimplats today decides to raise more capital for exploration works through a rights issue, will the community be able to follow their rights? If not, then the stake of the CSOT will be diluted. Does this therefore mean that the company will again donate some shareholding to the community to ensure that it remains compliant?

Perhaps the equity approach is not the best way to indigenise firms.

Companies should at least strike a balance between the need to transfer ownership to locals and business continuity. It is important for a company to have value adding shareholders at all times.

Almost all companies are in need of funding, so the best approach towards indigenisation will be to estimate these capital requirements and offer shares to locals in return for capital. Mining companies, for instance, can estimate the funding required for exploration works over the next five years and then offer shares to locals to raise this funding as a way of complying.

Nonetheless, the equity approach might not work always as some of the intended beneficiaries might not have the funding to take up the shares on offer. In this regard, the companies in question could offer the intended beneficiaries an opportunity to supply products and services that the company requires in its operations.

In the case of BAT, the company can go beyond just acquiring its leaf requirements from indigenous farmers and offer them additional help to ensure that they improve their production levels. Either way the approach that the company chooses must be purely commercial.

Free lunches do not work, neither do they benefit the company nor existing shareholders. As it stands, if shareholders approve the BAT transaction, the new shareholders will benefit from investments made by other shareholders.

All this suggests that government should reconsider its current approach to indigenisation as this may discourage future investments by foreign shareholders. It is highly unlikely that a company like BAT International will consider making additional investments in the country in light of current empowerment policy.

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