The value of WDB empowerment stake in financial services giant Discovery has more than trebled by appreciating from R378 million in 2005 to R1.6 billion in 2013. While there is no doubt that the deal is in the money the big question is, how much of this value actually accrues to the rural women empowerment group, WDB, given the fact that the financing behind such black economic empowerment (BEE) deals tend to be highly inefficient.
Discovery announced on Friday last week that the BEE deal with WDB is to be refinanced and extended by a further two years.
Discovery said the restructuring of the deal will see WDB extend its commitment by an additional two years until at least December 2017; thereby allowing the empowerment group to lock in substantial value realised to date.
“Today, WDB’s stake in Discovery is worth over R1.6 billion. This represents a compound annual growth rate of 20%, and a substantial asset to help achieve WDB’s purpose of uplifting rural poor black women,” said Discovery. Given this growth, WDB has taken the decision, with Discovery’s consent, to replace the vendor financing provided by Discovery with a third-party financial institution, thereby locking-in the growth.”
Details of the refinancing were scant in the short Discovery announcement. This is where things get murky in the BEE equity game. Many deals of this nature parade the absolute values of the BEE stakes only to find that a significant portion of value leaks to parties supporting the deal.
The WDB/Discovery deal was established in 2005 and promised 3% of Discovery shares back then worth R378 million. Parties in the deal are singing its praises.
Discovery Group CEO Adrian Gore said “For South Africa to succeed as a society, we require a thriving economy in which all citizens are able to participate. Black Economic Empowerment is a social and commercial imperative, enables adequate transformation in our country, and is a necessary step in ensuring economic growth over the long term. For Discovery, having WDB as a partner has been highly valuable. The transaction has benefited various communities in terms of social and economic investment and the participation of the WDB leadership team in the strategic affairs of Discovery, has been highly beneficial.”
WDB Investment Holdings CEO Faith Khanyile said “The refinancing as well as the realisation of a debt free equity stake in Discovery will enable WDB to further its mandate of driving the economic empowerment of women in South Africa. Of major benefit to the WDB group will be access to future dividends; the dividend cash flows will allow the WDB Trust to grow its development programmes as well as broaden the services that it offers to women entrepreneurs and rural households, thereby contributing to a positive social impact in these communities.”
WDB Group is described as a leading broad-based women’s empowerment group which was established more than 20 years ago with the aim of facilitating the economic upliftment of rural women in South Africa. “WDB’s flagship programme is the provision of credit to poor rural women allowing them to start and grow their micro enterprises; in addition women are trained and assisted in developing and running their businesses, enhancing their household livelihoods and thereby improving the position of women in society overall. The WDB Trust also supports adult education literacy programmes as well as early child-hood development. The WDB Trust is funded by its commercial arm, WDB Investment Holdings which was established more than 15 years ago to make investments in high growth sectors in order to generate income flow for the Trust.
The refinancing of the WDB/Discovery BEE deal forms part of a string of repackaging of the deals concluded in the mid 2000s. Many of these deals have collapsed due to under-performance of the underlying asset relative to cost of capital. For beneficiary groups to unlock value out of these deals, the initial debt must be repaid. The value is realised by raising new debt to pay the old debt and only if the underlying asset has appreciated significantly enough to create reasonable net asset value.