HCI’s restructuring benefits BBBEE

Black Economic Empowerment (BEE) styled investment holding group Hosken Consolidated Investments (HCI) has announced another corporate restructuring plan that promises to cement the trade union linked business into one of the most outstanding BEE stories ever.

Championed by former trade unionists, John Copelyn and Marcel Golding, HCI has developed from a classic rider of the early BEE wave to become an empowerment wave in itself. There will be moral questions about HCI’s ventures into the gambling industry but these do not take away the commercial success of the group. And yes, Golding and Copelyn have in the process become super rich. But then the Sactwu Investment Company is most probably the best performing BBBEE entity by far.

The unfolding HCI move seems like a straight corporate restructuring but a closer look reveals an intelligent plan to breathe new life into Seardel, the once troubled textile and clothing operation. The restructuring also promises to enhance endowment base of the South African Clothing and Textile Workers Union (Sactwu).HCI Structure 1

This is to be achieved through a complex rejigging of HCI’s 63.9% stake in Sabido Investments, a prospering media entity. Sabido owns amongst other businesses free to air television channel, e.tv, and commercial radio station YFM. The plan is to transport the stake in Sabido into a new entity (SPV) that will be directly held by Seardel (70%) and Sactwu (30%). The transportation is set to take place via a complex, derivative infested, process of paper movement between the three interrelated entities HCI, Seardel and Sactwu Investment Company.

In essence Sactwu Investment Company is reducing its stake in HCI and taking a direct stake in the SPV which brings it closer to Sabido’s income. Sactwu currently owns about 40% of HCI which in turn owns about 76% economic interests in Seardel and 63% of Sabido.

The Sactwu/Seardel connection is interesting in representing a move by a trade union linked investment to save a struggling business in its sector. A few years ago Seardel was going down largely due to the flooding of the local clothing and textile markets by imports from the East, mainly China. Government stepped in by imposing higher protective import tariffs. But the market was losing patience on Seardel and some of its executives had turned into predators. HCI stepped in by taking a majority stake in the JSE listed company. Arguably HCI, given its historical and current relations with Sactwu, was to be more patient around Seardel which hosts the livelihoods of thousands of blue collar workers.

And so Seardel has been on a recovery path over the past few years with the support of HCI/Sactwu connection. The group has diversified its earnings base by expanding a previously neglected unit of toys, stationery and electronics. This unit features brands like Prima, an interactive toys supplier, electronic goods supplier Sharp and The Empire Group which specialises in stationery, books, partyware and luggage. This unit has grown to contribute about 23% to Seardel’s total revenue from about 12% in 2008. The clothing and textile division which accounted for about 90% of total revenue in 2008 now accounts for 76%. The clothing and textile division has also been pepped up but is still struggling.Seardel Graphic1

An attempt by some previous Seardel executives to make off with the company’s fixed property was stopped dead in its tracks. Last year Seardel settled with these executives and realized an extraordinary income of about R191,8 million. That helped the group to report s income attributable to ordinary shareholders of R136,9 million in the year ended March 2012. When stripping out the extraordinary item Seardel was still reeling in the red with a headline loss of R45m. Earnings are expected to fall by about 20% in the twelve months ended March 2013.

This picture is about to change. If the latest restructuring goes through Seardel will now house 70% stake in the SPV which owns 63.9% stake in Sabido. Sactwu will earn 30% interest in the SPV.

HCI said proposed transaction was intended to achieve several strategic objectives including:

  • Creation of an empowered media platform
  •  Investors will have greater visibility in respect of the performance of the media investments in Sabido;
  • The Proposed Transaction is anticipated to unlock value for HCI shareholders
  • As a subsidiary of a separately listed investment holding company, Sabido will have greater access to debt and equity capital markets to fund future growth opportunities.
  • Seardel shareholders will obtain exposure to an investment in a cash generative media asset
  • The move is consistent with Seardel’s stated strategic objective of diversification

In addition HCI has said it was committed to furthering the interests of empowerment across the various industries in which it invests. “In furtherance of this strategy, several strategic initiatives were undertaken with a view to creating separately focused and empowered entities which can apply an investment strategy which is focused on a specific investment mandate, backed by strong empowerment credentials. The most recently completed example of HCI’s strategy was the successful listing of Niveus Investments, which resulted in a separately listed and empowered investment holding company, principally focused on the gaming, entertainment and alcoholic beverages sectors”.

It could be that the thinking which says Marxists make better capitalists is on point.

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