The seven years old Welkom Yizani BBBEE investment scheme is set to list on an over the counter (OTC) platform next week, the 9th of December 2013. Before you buy the shares you might want to understand what went into the making of this scheme. How did they do it?
South African media giant Naspers needed to engage BBBEE substantially in the 2000s. And so in 2006 the company set out to facilitate black ownership in its South African anchored operations. On site was pay television operation Multichoice and print media bias operation Media24.
On the part of Multichoice, Naspers established the Phuthuma Nathi BBBEE schemes whose shares started trading on the OTC platform in 2011.
On the part of Media24, Naspers devised the Welkom Yizani BBBEE scheme in 2006. The idea was to facilitate transfer of 15% of Media 24 shares to black retail investors. As with many such schemes, Naspers wanted to facilitate this transfer in a way that strikes a balance between political imperatives and commercial fundamentals. This is largely done by subsidising through loan funding the investment made by black investors.
A new company called Welkom Yizani was created. Media24 which was back then 100% owned by Naspers issued 14.6 million shares (15% of Media24) to Welkom Yizani at R50 per share. Welkom Yizani shares would hold 15% of Media24.
Media24 was valued at R5.017 billion (enterprise value of R6.08 billion) which meant that 15% would fetch R730 million. So they needed R730 million to make this transaction happen.
Black people were invited to subscribe for Welkom Yizani shares at R10 per share. The balance of R40 would be subsidised via loan type funding by Naspers. For such a scheme to work, Media24 has to grow its business, grow its value and pay dividend at a rate that far outstrips the cost of debt.
The ideal situation would be for the business to enable Welkom Yizani to pay down the R40 per share loan (and cumulative costs of the loan) to zero in its life time. This would mean that investors would at maturity of the scheme emerge with an unencumbered stake in Media 24.
But then this does not happen and with all things being equal, the ideal outcome will not come to be. This is largely because a situation whereby shares acquired with significant debt produces a return that pays out the debt is a rarity, an impossibility where the underlying asset is located in a matured industry. That was just dealing with the ideal. In reality, some value can be realised in these schemes.
This is a first installment in a series that seeks to comprehensively explain how they made the Welkom Yizani BBBEE Scheme. Stay with us. Our next installment will follow shortly and all will be clear.