Understanding Sasol’s BEE offer

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Some advice to a would-be Inzalo share scheme subscriber from a Riaz Gardee.

Riaz Gardee
11 Jun 2008

Dear Aunty Kay,

You seemed to be very interested in the Sasol Inzalo BEE offer during our last visit and mentioned that you had read very little about it in the press. You also thought the prospectus was too lengthy, had a print which was too small and filled with jargon that you did not clearly understand. I have set out some of the key matters for you to consider prior to making your decision.

Sasol has been under pressure from the Government and various stakeholders about its empowerment status and recently put forward the Inzalo scheme to the black market. By this I mean black people (African, Indians and Coloureds) or companies owned by black people and not the ‘black market’ where your last cellphone ended up!

You basically have the following two options (cash or funded) for acquiring Sasol shares:

Cash Option

a) Pay R366 per share with the following restrictions

i) You are not allowed to trade it for 2 years

ii) For the next 8 years you can trade it but only to other black people or black owned companies.

iii) Thereafter (after 10 years from commencement) you can trade it freely.

You will be entitled to receive all dividends paid by Sasol (A R9 dividend per share was paid for the June 2007 year-end).

Funded Option

b) The funded option is structured so that you effectively pay an initial amount of R18.80/ share for the first 100 shares and R36.60/share thereafter. The balance is loaned to you and this loan will be settled over the next 10 years through the structure that Sasol has put in place. The restrictions for the funded option are:

i) You are not allowed to trade your shares for 3 years

ii) For the next 7 years you can trade it only to other black people or black owned companies. Thereafter (after 10 years from commencement) you can trade it freely on the JSE with anyone.

iii) You will only be entitled to receive up to a maximum of 5% of the dividends declared by Sasol

The key consideration is that any outstanding debt must be subtracted from the share price to arrive at the value of these shares. So if at year 3 the Sasol share price is R400/share and the outstanding debt is R400/share your share will be worth R50/share (bearing in mind you paid about R36/share). At year 10 any outstanding debt will be settled by selling some of your shares in the market and utilising the proceeds to repay the debt due. The balance of shares, after settling any debt, will be yours to do with as you please so you will probably end up with less shares then you initially purchased.

The Verdict

Now that you understand the basic mechanism of the offer you need to decide which option, if any, is best for you.

As you are effectively buying a share in Sasol you need to be confident that the price of the share will rise by the time you want to trade them. The key factors affecting Sasol are the international oil price, the rand/$ exchange rate and the situation of the oil market at the time when you want to trade your shares. You need to have a view of these factors at the time you can trade your shares which can either be after 2, 3 or 10 years (depending on which option you selected). That’s right! You need to guess what these factors would be like after 2, 3 and/or 10 years. Who ever said BEE would be making money for nothing? By the way you are also at risk – meaning that if the price of Sasol shares drops you can lose money too. Still interested?

I know you were saying that you made good money from the MTN and Telkom BEE offers and wish that you had subscribed for more shares but these deals were all very different and so are the oil and telecom industries. There were also limits to the amount of shares that you could take up with these BEE offers and there is NO LIMIT with the Sasol Inzalo BEE offer. I remember Grandma always saying that good deals are never open-ended and unlimited. I guess that’s why retailers always use the terms ‘while stocks last’ or ‘for the first 5 customers only’ when advertising real bargains!

Cash option

So let’s go back to your options. I know you said that you prefer the ‘more expensive’ share but want to let you know that by paying more i.e. R366 you are not getting a ‘better’ share. At the end of the period they will convert to the same type of share.

The current price for Sasol on the JSE is about R480, with no marketability, dividend or lock-in restrictions. I know you said that this was a great deal as you are getting it for a 24% discount or a ‘R113 immediate profit’. Unfortunately this is not true as you are not comparing like with like. The Inzalo share has restrictions and the ordinary share for R480/share has none. Think about it this way in order to better understand the impact on value of restrictions: You are offered two motor cars which are exactly the same by two different dealers. Dealer A says you can use the car as you please and dealer B says you cannot use the car for the first two years and then for the next eight years you can only drive around with black people as passengers. Would you pay the same for these two vehicles even though the cars may be identical? Probably not, as you would expect a discount that sufficiently compensates you for the restrictions. A large accounting firm recently conducted a survey that reflected an average discount of +-30% for a 10 year lock-in period. On this assumption the fair price of the ‘cash option’ Inzalo share would be R336 meaning you would actually be paying a premium if acquiring the share at R366! Is this empowerment or disempowerment? You can take your own view about what you think the marketability and lock-in impact should be and calculate the price you believe is ‘fair value’ considering these restrictions.

Funded option

Now that you understand the ‘cash option’ here’s an overview of the ‘funded option’. The earliest you can sell your shares would be after 3 years so I have taken the following two scenarios viz. sell after 3 years or sell after 10 years.

· In order to sell after 3 years and make a 25% p.a. return the Sasol share price (as listed on the JSE) needs to be above R640/ share. A marketability discount greater than 25% will reduce these returns.

· If you sell the shares after 10 years the price needs to be over R820 to make a similar return of 25% p.a.

The key assumption made by an investor would be whether the Sasol share price will be higher than those targets. Your guess is as good as mine. Try guessing tomorrow’s oil price and exchange rate and you will appreciate the difficulty in predicting both of these in 10 years time! It would be interesting to know how many fortune tellers have subscribed for this offer.

Other considerations

In addition any investor should consider their current age to determine their investment horizon. How old will they be in 3 years or 10 years? I know this does not apply to you as your age does not ever seem to exceed the late 30’s.

Be sure to check the above with your financial advisor before making a final decision. She will take into account the specific circumstances of your situation – it may be better for you to pay off outstanding debt which is attracting ever higher interest costs.

I hope I have been of assistance and remember the closing date is the 5th of July should you wish to take up any of these offers.

Good luck!

Riaz