Mittal takes dilution hit as SA elites get steel stake

Johannesburg - A former government-appointed commissioner, a development-bank finance chief and an ex-deputy finance minister are on course to become major shareholders in ArcelorMittal South Africa (Amsa), taking a chunk out of billionaire Lakshmi Mittal’s stake in the continent’s largest steelmaker.

Apportioning a 22% stake of Amsa valued at R2.3bn to black investors, employees and communities is a way for the struggling company to support the government’s strategy of boosting black South Africans’ ownership of the economy.

While Amsa says the so-called black economic empowerment deal is "broad-based," members of the country’s business elite will get 12% of its equity while workers and communities living near its operations will get less, sharing about 10%. The producer scrapped a transaction in 2011 that would have benefited President Jacob Zuma’s son, Duduzane, after opposition party and labour union criticism.

Black economic empowerment, aimed at redressing the inequality of whites-only rule that ended in 1994, has been criticised for only benefiting a small, often politically connected elite rather than the wider population, where the average annual household income is R120 000 rand. After more than R600bn of such deals took place from 1995 to 2013, Zuma’s government said it must do more to redistribute wealth.

‘Necessary evil’

“BEE is a necessary evil in a country like South Africa to level the playing field, but the policy design is defective,” Mzukisi Qobo, an associate professor at the University of Johannesburg, said in an interview. “It encourages a gulf between the politically connected elites who benefit the most from these deals and the wider portion of South Africans.”

The steel producer will sell a 17% stake to Likamva Resources and provide the black-owned company with a loan to cover its cost, Vanderbijlpark, South Africa-based Amsa said in a statement on Wednesday. The loan will be paid back through dividends over the next 10 years or through a higher share price. Should the company’s stock reach R27 a share after a decade, the whole loan will have been paid back, CEO Wim de Klerk said. The stock closed at R9.46 on Wednesday.

Likamva will distribute a 5% stake to local communities within two years, it said. Employees will receive a further 5% stake through a separate trust.

Likamva, which means ‘heritage’ and ‘future’ in the Xhosa language, is owned by:

• Noluthando Gosa (40%): She was a commissioner that helped to design the National Development Plan, which aims to eliminate poverty by 2030. She’s a non-executive director at Investec Asset Management and a former member of the SABC's board.
• Leslie Maasdorp (10%): CEO of Shanghai-based New Development Bank, funded by Brazil, Russia, India, China and South Africa. Former board member of Barclays Africa and Telkom.
• Themba Hlengani (9.5%): Amsa’s head of corporate communications until December 2013.
  
• Warren Wheatley (11%): CEO of TSS Capital, a financial advisory firm. He’s a former investment banker at Barclays Africa.
• Others include Jabu Moleketi, a former deputy finance minister, and Yakhe Kwinana, who’s on the board of president Zuma’s foundation and is a former board member of state-owned South African Airways.

“We wanted to partner with a consortium where it would not be - as it’s become known in the South African market - the ‘usual suspects,’ where you are just perpetuating empowerment among certain regular participants,” Amsa chairperson Mpho Makwana told reporters in Johannesburg.

The company carried out “robust due diligence” on all the investors, he said. They had a good understanding of the steel business and had “chemistry” with the current board, he said.

Lakshmi Mittal, worth $12.9bn (175.87bn) according to the Bloomberg Billionaires Index, is the biggest shareholder in Luxembourg-based ArcelorMittal, which in turn is the majority owner of Amsa. ArcelorMittal’s stake will drop to 54% from 69% as a result of the BEE deal.

Likamva started pursuing the deal with Amsa 2 1/2 years ago, before the company said it intended to put one together, Gosa said. She even followed Mittal to Davos, where the World Economic Forum takes place, but was told no asset was for sale. By the time the board took the decision in September 2015, “we already had a head start,” she said.

Asked whether the stake allocated to communities is sufficient, Gosa said: “Five percent of a R10.9bn company is not small. In two years’ time, I’m sure the market cap will be higher.”