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Sasol disbands debt-ridden BEE scheme, launches replacement

Sep 20 2017 07:54
Yolandi Groenewald

Johannesburg - Petrochemical giant Sasol announced on Wednesday that it will disband its black economic empowerment scheme Sasol Inzalo when it matures next year. In its place it will launch a new broad-based black economic empowerment scheme, the R21bn Khanyisa empowerment scheme. 

But Inzalo shareholders will receive no pay-out, after the scheme was unable to service debt due to low oil prices and lacklustre share performance. 

Sasol said based on the closing Sasol Ordinary share price (SOL) of R389 on September 4 2017, Inzalo shareholders will not receive any Sasol shares when the scheme ends in 2018, due to the fund's debt. 

The new scheme, Khanyisa, will draw from the lessons learned from Inzalo to evolve into a stronger, more successful fund, Sasol said. SOLBE1 shareholders will be given the right to participate in Khanyisa, and will also be issued with bonus shares.

Khanyisa's ownership structure is intended to achieve about 20% direct black ownership in Sasol South Africa for a period of up to ten years. It will be anchored in Sasol’s assets in South Africa, and will be vendor financed.

Inzalo haunted by debt

With over 206 000 shareholders in Inzalo, the scheme was one of the biggest BBB-EE transactions in South Africa. Inzalo holds 16.1 million ordinary shares of Sasol and derives income from its dividends. It boasted over 200 000 previously-disadvantaged shareholders. But Sasol felt the scheme has not delivered on the desired outcome.

Inzalo comprised four elements: the Sasol Inzalo employee trusts, the Sasol Black Economic Empowerment ordinary or SOLBE1 shareholders, the Sasol Inzalo Groups funded element and the Sasol Inzalo Foundation. The foundation will be renamed and will not be part of Khanyisa.

At its inception Inzalo cost R28bn.

The BEE scheme matures next year, which means debt together with its expenses will have to be repaid. Inzalo's Achilles heel was that it was heavily financed by third-party debt, obtained from mostly banks. To protect the scheme, Sasol fixed the interest rates at inception, a decision its executives in hindsight admitted was a mistake.

When interest rates declined, the fund still had to repay debt at the fixed rate. Sasol provided full guarantees for the banks in obtaining the financing for Inzalo. 

Sasol said based on the closing share price of R389, there is a shortfall, backed by the guarantees, and a funding commitment for Sasol of about R2.1bn.

In disbanding Inzalo, Sasol will write off the internal debt of the scheme, which Sasol itself financed. It will then continue to repay the banks till Inzalo's debt is serviced.  No value will be distributed to Inzalo’s shareholders at the disbandment, because of the external debt.

Sasol Inzalo was created in 2008 by Sasol Limited, structured as a 10-year investment to September 2018. When the scheme started out, the oil price stood at $100 per oil barrel. But the price has halved since then, affecting the profitability of Inzalo.

Share price

Inzalo's share price also never recovered and didn’t grow significantly, still trading at the same margins as at 2008. When the scheme started out Sasol was trading at over R400 a share, and Sasol offered the shares at a discount, costing R366. 

Sasol believed this was a significant reason, along with the low oil price, why the scheme did not perform.

Despite Inzalo’s financial woes, the scheme was still able to distribute R1.6bn in total or R52 000 per shareholder to its employees in the form of dividends.

It was the third-party debt that eventually broke Inzala. The scheme’s long-term debt pile exceeded its assets, which never improved due to the low share price.

New beginnings

This time around Sasol believes Khanyisa is starting out at a better point, with the current oil price at around $55. 

The Khanyisa Empowerment Period and ownership structure translates into at least 25% black ownership at Sasol South Africa level.

To avoid debt pitfalls, the petrochemical giant will also provide the financing inhouse, which it says will provide more flexibility.

Estimates are that the new scheme will however dilute earning for existing Sasol shareholders by 20%.

Shareholders

The Inzalo Fund companies will now have to dispose of their shares to redeem Inzalo's preference share funding and cumulative dividends in 2018. 

Sasol's preferred funding option is that Sasol repurchase the shares from the Inzalo groups at the 30-day volume weighted average price of a SOL share at the relevant time, using cash raised through an issue of up to 43 million SOL shares through an accelerated book-build to facilitate the issue.

Sasol will only issue such a number of SOL shares as are required for the above purpose, it stated.

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sasol  |  oil and fuel prices  |  bee

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