Collapsed RCL BEE deal forces R230m bailout

RCL Foods, majority owned by Remgro, has said it will ‘unwind’ its 2014 black economic empowerment (BEE) transaction at a total cost to shareholders of R230 million.

In effect, it needs to bail out its BEE shareholders, because since the implementation of the transaction its “share price has significantly declined in value, resulting in the … transaction being materially underwater at the end of its term in May”.

It will buy back shares from its employee share trust (the ESOP Trust), two special purpose vehicles – SPV 1 and SPV 2 – and “the Strategic Partners” through a targeted buyback of nearly 20 million common shares from the trust and SPV 2 at R11.49 per share as well as 43 million nominal shares at 1c each.

The transaction circular is no longer available on the RCL Foods website (its document library only extends to 2015).

The BEE transaction was concluded in May 2014 after delays at the Companies and Intellectual Property Commission (CIPC).

At that time, shares were trading at around the R17 level. In May this year, RCL shares were just above R10. On Friday, its thinly-traded shares closed at R11.

The shareholders of SPV 2 are the Imbewu Consortium (69.76%), Ikamva Labantu Empowerment Trust (29.07%) and businesswoman Manana Nhlanhla (1.17%).

The group said at the time that the economic cost of implementing the transaction in 2014 was quantified as approximately R276 million.

This comprised R193 million relating to the staff trust and SPV 1 which was amortised over the full term of the transaction, R83 million relating to SPV 2 which was expensed immediately, and an accelerated charge of R17 million incurred on the unwinding of the previous (2008) BEE structure.

At the time, RCL Foods said the former “BEE structure is considered unlikely to deliver any equity value to the BEE parties and as such, RCL Foods and the BEE parties have agreed to unwind” it and “implement a new BEE ownership transaction in order for RCL Foods to sustain its BEE ownership and to create value for the BEE parties”.

Current transaction

RCL Foods asserts that the current (2014) “BEE Transaction was not recognised for accounting purposes and the financial effects on the earnings, headline earnings, net asset value and/or net tangible asset value of shares will be limited to the transaction expenses and are considered to be negligible”.

It adds: “The financial position of RCL Foods is not expected to change as a result of the repurchase and, as such, no pro forma financial information is provided.”

But, in effect, RCL Foods will have ended up paying for the BEE deal twice (three times if you count the failed original transaction).

The ‘unwind’ will be put to shareholder vote and will need to be approved by the requisite majority.

The 2014 BEE deal, announced the previous year, was implemented at the same time as the acquisition of TSB Sugar, the implementation of the BEE transaction of that firm as well as an equity capital raise of R2.5 billion.

Read: RCL’s sugar unit reports record earnings

Matthews Phosa (and his MTM Family Trust) was identified by TSB as an appropriate “strategic partner” in the BEE deal, which was under negotiation prior to the acquisition by RCL. It was then tweaked to ensure that the empowerment partners would become a shareholder at the listed company level, in a transaction valued at R120 million. RCL Foods estimated the economic cost of the transaction at R25 million.

Remgro

Remgro owns 74.9% of RCL Foods and there has been speculation in the market for some time that it will delist the business in the near term.

Read: Is Remgro planning its exit from the JSE?

Its market capitalisation is R10.5 billion, with the portion not owned by Remgro accounting for around R2.6 billion. Any offer would need to be made at a premium.

This potential transaction likely hinges on the unbundling and separate listing of the chicken business, Rainbow, as well as the probable trade sale of its logistics unit Vector.

Read: ‘No cheap chicken on the shelf’ – chicken producer