Cape Town - The latest black economic empowerment (BEE) financing models may force a review of dividend policies for companies doing empowerment deals, said Dave Thayser, partner and director of corporate finance at Ernst & Young, last week.
Thayser said BEE financing structures that were heavily reliant on dividend flows created tension between the need for companies to re-invest in the business and the requirements of empowerment shareholders to access enough funds to meet their commitments to corporate financiers (creditors).
Thayser said dividend payments by companies had become an important component in financing empowerment transactions.
He said with the shift from the infamous special purpose vehicle model, which rode heavily on share-price performance, the emphasis had now fallen on the operational performance of the target company in the structuring of BEE deals.
The benefits of this model mean that performance and the return paid to BEE groups are less dependent on the vagaries of the stock market and are more linked to the operational performance of the company.
Anthony Marriner, joint head of corporate finance at AMB advisory services, agrees that the dividends from a company have become an important component in financing empowerment deals.
Marriner said to finance today's deals, recourse had to be sought from dividend flows.
Dividend yield is the annual rate of return of a company expressed as a percentage.
It is calculated by dividing the total dividend paid by a share over a year by the share price of a company.
More money to shareholders
Mature companies typically have high dividend yields because they tend to return more money to their shareholders. Growing companies tend to have lower dividend yields because they re-invest in the business.
Marriner said the new financing structures do not envisage a substantial increase in dividend yield, but rather an undertaking to maintain the current dividend policy.
He said that although the dividends attract secondary tax on companies (STC), shareholders do want to receive an income from their equity holdings.
STC is a tax on dividends declared by a company that was introduced to encourage companies to retain income for re-investment.
The current STC rate is 12,5% and the tax is borne by shareholders and paid by the company.
New class of shares
Marriner said the alternative funding method, which was recently used in the Imperial BEE transaction, is to issue a new class of shares which receive a fixed dividend yield that is distributed before any payment is made to ordinary shareholders.
A survey showed that BEE deal-making continued to increase last year, with the number of transactions rising 29% to 244 from 189 the year before.
The value of BEE deals increased from R42,2bn in 2003 to R52,9bn last year.