SAA sale sets off a storm of controversy

The pending sale of a 51% shareholding in South African Airways (SAA) to the Takatso Consortium, comprising Harith Management Partners (HMP) and Global Aviation, has set off a storm of controversy and conspiracy theories.

The Department of Public Enterprises (DPE) has however made a brave decision in launching a public-private partnership that could be the blueprint of such partnerships in the future.

The honourable ‘no-nonsense’ Minister of Public Enterprises Pravin Gordhan has drawn a line in the sand regarding debt. The government will pick up the historical liabilities, definitively stopping the fiscal bleed.

The consortium has raised R3 billion to get SAA into the skies and operating again.

Perhaps we should look back some 24 years ago, when SA Breweries sold its wholly-owned subsidiary OK Bazaars to Shoprite for R1 and walked away.

In retaining 49% in SAA, the government will at least share in the upside, with no downside.

If the consortium is successful, the government can look forward to dividends and taxes on revenue. It will in any event receive employment taxes and value-added tax.

The due diligences on the consortium, and on SAA by the consortium, still have to be carried out. It is possible that some value will be put on SAA’s intangible assets, such as the Star Alliance and its brand. Parallel to this process, the route, flight and staffing plan will be finalised. The final step will be the signing of the purchase and sale agreement.

SAA was insolvent and grounded

SAA was hopelessly in debt, and grounded.

SAA Technical, one of SAA’s key subsidiaries and the entity responsible for its maintenance, was unravelling. Mango, another subsidiary, was also facing challenges with creditors.

SAA was placed under voluntary business rescue in December 2019, and this was wrapped up in April 2020.

The business rescue partners (BRPs) informed the Standing Committee on Public Accounts (Scopa), at its meeting on March 25, that liabilities and claims had been reduced by R35.7 billion through a compromise negotiated with concurrent creditors and lessors, and that SAA’s workforce had been reduced from 4 700 employees to 1 000. Further, membership of the IAA Star Alliance had been retained.

Audited annual financial statements

SAA’s last set of audited financials is for the year ended March 31, 2017.

The auditor-general did not conduct any audits during the business rescue process.

Draft financial statements for the years 2018 and 2019 were submitted to parliament in 2020 by the BRPs.

At the Scopa meeting held on March 25, it was apparent that the financial statements for the year ended 2020 had not been finalised, and the 2021 financials are now due.

The auditor-general will be tasked with auditing four years. Taking into account that the auditor-general will have to find audit evidence to verify the figures in the financials, this is going to be an onerous task.

Background to the deal

Selling shares in SAA is not unprecedented.

In the 1990s SAA was held by Transnet. Transnet sold 20% of its shareholding in the airline to Swissair for R1.4 billion in June 1999. The government repurchased the shares in 2002.

The government has previously brought up the possibility of public-private partnerships as a solution to loss-making state-owned entities (SOEs).

As shareholder, the government, and in this case the DPE, may enter into closed discussions with prospective buyers. There is nothing untoward about this.

Unfortunately, we have been scarred by state capture and the backroom deals made between crooks – but selling a 51% shareholding in a loss-making SOE to a consortium that has the expertise in entrepreneurship, raising capital and running an airline is a rational decision.

In 2020 the DPE met with various interested bidders, including Gidon Novick, who is CEO of Global Aviation. Novick is former joint-CEO of Comair and founder of Kulula.com. He also served as CEO of Discovery Vitality, founded venture capital platform Lucid Ventures, and recently launched Lift Airline.

Read: Gidon Novick’s Lift takes to the skies (Dec 2020)

In a telephonic discussion with Moneyweb on June 15 Novick confirmed that he and his aviation team commenced discussions with the DPE in 2020 and had made recommendations regarding SAA’s future.

He was under the impression that several bids had been made.

He and his team envisaged the new SAA as a start-up, and had in mind a very agile innovative model from a cost point of view. But there will no compromise from a safety point of view.

“It will take effort and commitment to get this right, and [it] will not be a magical return on investment,” said Novick.

“One needs to have a long term view.”

Novick was put in touch with HMP, which he said had previously put in a bid for Comair, and they formed the consortium.

At the public announcement of the consortium Novick said that this is the best time to start an airline – “legacy models are being challenged, and they are flawed in many ways”.

He also mentioned that there are incredible opportunities right now. “One can access aircraft at affordable prices, and can source unbelievable talent.”

The consortium will prioritise the training of black pilots.