Over the last 13 years, Transcend has helped nearly 200 South African corporates and multinationals address BEE Ownership. While the most common approach to BEE Ownership has been share ownership by Black investors, an increasing number of businesses are taking advantage of the ‘Sale of Assets’ BEE Ownership recognition opportunity. So what does this entail?
In a nutshell, Sale of Assets involves an entity selling a productive asset to Black investors. “What’s an asset?” you may ask – well this term includes hard assets like property and plant, but also includes equity investments and businesses.
The percentage of BEE Ownership that can be recognised is driven by the relative value of the asset sold to value of the selling entity, and the Black ownership credentials of the purchaser. As the relative value of asset sold and/or the purchaser’s ownership credentials increases, so does the percentage of recognised BEE Ownership for the seller.
An increasingly popular approach to BEE Ownership
I think there are a couple of reasons why this is an increasingly popular approach to BEE Ownership, particularly amongst multinationals. These include:
- In a somewhat shaky economic and socio-political operating environment, having more liquid assets is preferred;
- There may be opportunity for positive BEE implications in various places on the BEE scorecard; and
- Is does not raise concerns from foreign decision-makers about dilution of control or realising fair value, and may then be more palatable and easier to execute.
A knee-jerk reaction may be that this is bad for BEE as there is less ownership by Black people in businesses. But in my opinion, unless a Black investor is taking a majority stake in a business, a typical sale of assets transaction will most often better achieve real increased participation by Black people in the economy through ownership and control of assets. This is aligned to one of the government’s stated goals of BEE, being to empower more Black people to own and manage enterprises.
Recognition of BEE Ownership
In order to qualify for BEE Ownership recognition, a Sale of Asset transaction must meet certain recognition requirements:
- The transaction must result in the creation of viable and sustainable businesses or business opportunities in the hands of Black people;
- The transaction must result in the transfer of critical and specialised skills, managerial skills, and productive capacity to Black people;
- The transaction must involve a separately identifiable related business which has no unreasonable limitations or conditions with regards to its clients or customers, and clients, customers or suppliers other than the seller;
- BEE shareholders or their successors (if the BEE shareholding is the same or improved) must hold the asset for a minimum of three years;
- Any operational outsourcing arrangements between the seller and the purchaser must be negotiated at arms-length on a fair and reasonable basis;
- The transaction should be subject to a valuation by an independent expert;
- A repurchase transaction cannot be entered into within a three period after transaction implementation, even if transaction implementation is deferred post year three;
- Ownership points are subject to existing contracts between the parties to remain in effect on market related terms, subject to marked norm service levels.
Quantifying Sale of Assets BEE Ownership
As mentioned above, the percentage of BEE Ownership that can be recognised is dependent on the relative value of the asset sold to value of the selling entity, and the Black ownership credentials of the purchasing party.
As an example, Opco, with an equity value of R500 million, sells a factory worth R100 million to a consortium of majority Black investors that is 80% Black.
The calculation of BEE Ownership recognition is as follows: (R100m / R500m) x 80% = 16%
Therefore Opco would be able to record 16% Black Economic Interest and Black Voting Rights on its BEE Ownership scorecard, and earn related points.
A similar principle applies to other measured areas of Economic Interest and/or Voting Rights, such as ownership by Black women, Black Designated Groups, and Black New Entrants.
While most of the BEE Ownership scorecard is focused on achieved percentages of BEE Ownership across these different categories, arguably the most important aspect of the Ownership scorecard is measurement and scoring of Net Value – wealth creation in Black hands.
BEE Ownership is a ‘Priority Element’, and if a minimum threshold of Net Value is not achieved, then a measured entity will be penalised by dropping a level on its BEE status.
Traditional Net Value assessment (in a share ownership transaction) involves application of a series of formulae that input value of the measured entity, the value of related shares held by Black investors, as well as their outstanding acquisition debt, in order to assess related net asset value of the Black investor as a proportion of the value of the measured entity.
In a Sale of Asset transaction, instead of looking at value of shares in Black hands and related debt, you need to rather assess the value of asset acquired by the Black investor, and related outstanding debt in financing the asset acquisition.
How Transcend can assist your business
With regard to Sale of Assets BEE Ownership, our team of skilled and experienced experts can assist you with:
- Evaluating BEE Ownership options;
- Developing and communicating a tailored BEE Ownership strategy that is sustainable and makes business sense;
- Through our extensive database of qualified Black investors, engaging with and evaluating prospective Black purchasers; and
- Implementing the preferred solution – negotiation with the shortlisted investors and execution of the transaction.
To set up a meeting regarding Sale of Assets, or for a broader view of how Transcend can assist your business with its BEE strategy find out more about our Sale of Assets services or contact us to speak to one of our consultants.