Sasol Inzalo Troubles: Empowerment ‘pay day’ will not happen

The scheme must neutralise the debt in order to create value. But this debt has actually grown over the years to R7.2 billion, from about R5bn, because there is not enough money created in the scheme to water down interest let alone retire the debt. The under-performing Sasol share price is not helping the situation.

By: Sibonelo Radebe

The 8th of September 2018, was marked as pay day by multitudes of black South Africans who bought into the broad based black economic empowerment (BBBEE) promise made by petrochemicals giant Sasol. As the maturity date of the 9 years old Sasol BBBEE scheme gets closer, a great deal of uncertainty, bordering on despondency, is setting in for the group of more than 200 000 black people who bought the Sasol Inzalo Public shares.

The latest financial numbers produced by Sasol Inzalo Public are not inspiring confidence. The scheme is suffocating under a huge and expensive debt.

Sasol Inzalo Public was established on the 7th of September 2008 as a 10 years long BBBEE deal. It was part of the R30 billion Sasol empowerment deal which promised to deliver 10% of Sasol shares to black people. The deal was shared as follows: broad-based groups (15%); members of the black public (30%); Sasol Employees (40%) and the Sasol Inzalo Foundation (15%).

The latest financial status of Sasol Inzalo Public comes from the financial results for the six months ended December 2016. The scheme’s total liabilities exceeded its total assets by R990 million. This means that if the scheme was wounded up, it would deliver negative value for its investors. Technically the investors would have to pay in money to walk away from the scheme.

This is largely a function of three interrelated factors: expensive debt, a depressed oil price and an under-performing Sasol Group share price.

Sasol Inzalo Public was established with a huge debt (about R5bn) used to acquire Sasol shares. The retail scheme was allocated 1.5% of Sasol total ordinary shares valued, back then, at about R7bn. Sasol invited black people to subscribe for the scheme at a price ranging between R18.30 and R36.60 for each Sasol Inzalo Public share. This raised a total of about R2.1bn. The balance was funded through debt of R4.9bn.

The scheme must neutralise the debt in order to create value. But this debt has actually grown over the years to R7.2 billion, from about R5bn, because there is not enough money created in the scheme to water down interest let alone retire the debt. The under-performing Sasol share price is not helping the situation.

The Sasol BBBEE deal was done when Sasol’s share price was trading around R440.00 per share. In line with the tradition of offering BBBEE discounts the scheme was done at R366.00 per Sasol ordinary share which represented about 17% discount. And the scheme was kinda in the money on day one of launch.

Further growth in the Sasol share price would create more value for the scheme which would then allow it to dilute the debt. But then the Sasol share price started going south soon after the scheme was launched in 2008. At some point, in 2013, it dipped below the strike price of the deal, R366.00. Sasol share price did recover to flirt with R650 in 2014. This was short lived as commodities depression set in causing the collapse of the oil price.

Sasol derives a significant portion of its profits from its petrochemicals business which takes its cue from the oil price. Simply put, a higher oil price means more money for Sasol. It loses money when the oil price declines.

The collapse of the oil price, from levels above $100.00 per barrel in 2011 to below $30.00 in 2015, devastated Sasol. This partly explains the depressed Sasol share price which is currently seating just above the R400.00 mark.

At the time of writing this piece, Sasol’s share price closed at R410.00 per share. At that price Sasol Inzalo Public’s stake fetches a value of about R6.6 billion against debt of about R7.2 billion as quoted in December 2016. The scheme generates about R500m per year in dividend from Sasol which is used to pay down debt and other things. The finance costs have traditionally outstripped finance income which means that the debt keeps growing. At this rate, the Sasol share price will have to almost double for Sasol Inzalo Public investment to create considerable value. That is unlikely to happen between now and maturity date, the 8th of September 2018.

Individual participation comes via shares held in Sasol Inzalo Public which in turn holds the Sasol BBBEE stake. Sasol Inzalo Public shares are also listed on the JSE and are also depressed at levels around R40.00 per share. Prospects aren’t looking good.

How they did the encumbered Sasol Inzalo Scheme

news@ujuh.co.za

  • Bheka Derrick Radebe

    I was hugely disappointed in 2008 when after applying for an allocation of Sasol BEE shares to the value of R 25000-00 I was not successful & instead only obtained shares to the value of R 2500-00. R 22500-00 was refunded to me. After reading the above report I am breathing a sigh of relief as it means that whatever losses I may incur, will be less than what would have been had I been successful in obtaining the full complement of BEE shares I had originally applied for. Another person may feel that I am still likely to lose R 2500-00 which to me is miniature compared to the whopping 1500% appreciation I am currently enjoying in the Phuthumanathi BEE scheme. This only serves to confirm that in the investment environment an investor will win some & lose some.

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