This is a second installment (See first installment here)
The Welkom Yizani BBBEE investment scheme which is set to be traded on an over the counter (OTC) market next week, the 9th of December 2013, was established on a pile of debt needed to supplement contributions made by initial investors in 2006.
Back in 2006, when Naspers invited black people to invest into the Media24 BBBEE investment scheme, Welkom Yizani, about 108 000 people and groupings responded. There were 14.6 million shares up for grabs at R10 per shares. The shares were worth R50 per share. And so, R40 was borrowed from Naspers to complement contribution by investors.
The borrowing was done via the preference share structure, resembling the funding of many other BBBEE investment schemes like the Sasol Inzalo Public, the MTN Zakhele, Phuthuma Nathi etc. Welkom Yizani issued preference shares to Naspers.
What is a Preference Share?
In simplistic terms, a preference share is like a loan given to a company by an investor. It is styled as a share that ranks higher than an ordinary share for dividend payment purpose.
Definition of ‘Preference Shares’ from Investorpedia.com:
“Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a company bankruptcy, preferred stock shareholders have a right to be paid company assets first. Preference shares typically pay a fixed dividend, whereas common stocks do not. And unlike common shareholders, preference share shareholders usually do not have voting rights.”
In the case of Naspers, the media group was issued with about 58 million Welkom Yizani preference shares at a price of R10 per share. Note that the number of Welkom Yizani preference shares issued to Naspers (58 million) are about four times the number of ordinary shares issued to Welkom Yizani shareholders. Remember that the R10/share paid by investors to earn Welkom Yizani shares needed loan funding of four times its value to get the R50 share.
In simple terms Naspers funded Welkom Yizani investors by R40 per share through the preference shares structure. At establishment of the scheme Naspers said “the Welkom Yizani preference shares are redeemable over 10 years or such extended period as Naspers may allow. Dividends are ordinarily calculated at the rate of 75% of the prime interest rate.”
As such, whatever dividend flowing out of Media24 to Welkom Yizani would have to first service the obligations to the Naspers held preference shares and then the balance goes to investors. The capital amount of the loan, the preference shares remains largely unshaken and would have to be repaid at maturity of the scheme.
Things did not go well in the early years of the Welkom Yizani initiative. Along with the rest of the economy, the media industry came under pressure as the global financial crisis peaked in 2009. By 2009 it became clear that there was not enough money coming through from Media24 into Welkom Yizani and further into Welkom Yizani’s obligations and mainly the Naspers held preference shares. This situation was threatening to wipe out value due to Welkom Yizani investors. Naspers stepped in to save the scheme in 2009.
This is a second 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.