The Fridjhon-Sawit clash (2) 18 August 2006

Clarifying some issues, raising some questions

The following is a slightly fuller version of an article which appeared in Business Day on 17 August. It is by Gavin Williams, an Oxford academic who has long paid close attention to some big-business aspects of the South African Wine industry.

I read with interest the rather intemperate exchange between Michael Fridjhon and the Trustees of Sawit on the rise and fall of the KWV black economic empowerment (BEE) deal in Business Day and in Grape. It may help to clarify some issues and to raise some questions

In September 1997, KWV agreed to pay R369m over 10 years to set up Sawit to secure the Minister’s agreement to its conversion to a company. Despite ministerial assurances that Sawit would be able to ‘top up’ its coffers (TS) with the EU’s €15 million compensation to the industry, Sawit has yet to receive this or any other funds. Sawit set up Busco and Devco; Devco was to receive 45% of Sawit’s funds to realise its aims, viz, ‘the establishment of new farmers …’ (41% of its share); ‘the support and upliftment of farm workers …’ (43% is its share); assistance with ...marketing and…extension for new entrants; (16%).

Sawit’s declared aims made no mention of BEE. It is only recently that Wieco has come into being to promote ‘empowerment’ and it has yet to make it to the Sawit home page. In 2002, the Minister, Thoko Didiza, observed that Sawit should ‘contribute to empowerment and reconsider its Trust Deeds’. In 2003, the new chairman, Gavin Pieterse, said that Sawit should give more money ‘to Devco, towards critical equity and business entrepreneurships’. On 28 July 2004, when the deal was reaching its conclusion, the press reported that Sawit had changed its trust deeds to allocate 60 per cent of its income to Devco and revise its objectives with the Minister’s approval. It was not made clear when and by what procedures the changes had been made. Sawit appears from press reports to have committed itself to funding the acquisition of KWV shares before revising its trust deeds. When exactly were its trust deeds amended and signed ‘to ensure legal compliance’?

In April 2003, KWV decided to work with Sawit, in association with Bawsi (Black Association of the Wine and Spirit Industry), whose leaders were closely aligned with KWV and, till 2004, received their emails @kwv.co.za. In December 2003, KWV set up and funded KEET, the KWV Employees Economic Empowerment Trust. In 2004, Sawit brought together a consortium, Phetogo, which included Bawsi and the ‘Lucky 14’ prospective individual shareholders, to acquire 25.1% of KWV’s shares. Sawit would fund 40% of the costs and the IDC was expected to provide the remaining 60%. The proposal would move money around in a circle: Sawit, several of whose trustees had been appointed by KWV, was to use funds derived from the KWV to buy shares in the KWV. Similarly KEET, three of whose six directors were nominated by KWV, would acquire shares in KWV. These arrangements were unusual though quite legal but they raised questions of propriety.

KWV paid out dividends of 5c per share in 2003; the closing price was 92c. In 2004 it paid out 3.5c per share. Not surprisingly IDC was initially unwilling to pay more than R1.10 per share. With the aid of a special dividend of 23c a share and the intervention of Christo Wiese, the BEE Consortium succeeded in acquiring shares at R1.85 per share. In 2004, KWV’s net asset value was estimated at R2.37 to R2.58 per share. In other words, the cost of shares was discounted from their new asset value but bought at a premium relative to their earnings and their net market value at the end of 2003, before the prospects of a deal raised the share prices. Thus Fridjhon and the Sawit trustees are both right: it depends what you are comparing the price to.

Whether the arrangements for securing the deal are ‘opaque’ (Fridjhon) or legally ‘complex’ (Sawit Trustees), they are certainly intricate and will test the patience of any reader. The funds for the BEE consortium were entirely provided by three sources: KWV provided R41 million (19%) in the form of its an interest free loan to KEET. Sawit interestingly, made an immediate payment of R44 million (21%) to Phetego and comitted itself to make a further R76 million available. This was over and above the cost of aquiring the shares. This alone would enable Phetogo to pay off a third of the value of the entire transaction and 55% of the debt to IDC. In the event, Sawit advanced R135 million to Phetogo. Quite why Sawit shoud be so generous with its money and how it was spent is not clear.

Reports (other than Fridjhon’s) of the events of the last two months have been strangely silent about the Industrial Development Corporation (IDC) The IDC agreed to lend R127M (60% of the total) to Phetogo at variable rates of interest. The loan was secured against Sawit’s future income from KWV, itself secured against KWV’s shares in Distell.

Two years after the empowerment deal was celebrated in the Cathedral Cellar, Sawit has summarily recalled its R135 million loan to Phetego. To extend Fridjhon’s metaphor, this is similar to what couples do when they get divorced. KWV bailed Sawit out of its cash flow crisis by bringing forward two years its final payments to Sawit of R110 million. Has this enabled Sawit to meet its obligations to IDC? How much does it now owe to IDC, a public institution, and on what security?

The consortium’s beneficiaries are many and varied: KEET (27%), Bawsi (25%), The Lucky 14 (19%), EPA Development Group Ltd. and Liquor and Kumnandi Leisure –LK (each 9%), South African Liquor Traders Association – SALTA, and National African Farmers Union –Western Cape – NAFU each 5%. ELK claims a modest 1000+ members; NAFU 2,000; Bawsi 70,000 and SALTA 200,000. The round numbers are revealing. Some of the Lucky 14 were, in Fridjhon’s words, ‘well-heeled’ before the KWV BEE deal, and others of them may follow in their foootsteps. Bawsi apparently holds its shares in trust; how its affiliates hold their shares and use them to benefit the members that Bawsi claims for them is opaque.

As far as one can tell, none of these diverse organisations invested their own money. They did expect to profit. Apparently they did not get on. Gavin Pieterse, blames it all on ‘non-governmental organisations, the employees and a bunch of trade unionists’ who kept the Lucky 14, ‘hand-picked’ by Sawit, from taking control. Perhaps Pieterse should himself have given more attention himself to the way in most of Sawit’s funds were invested. It may be fortunate that he has now resigned to spend more time on his own business interests. But he has not left the scene. He has been appointed to raise funds for Sawit in the USA, presumably for black empowerment, and now tells us that he plans to bid for Phetogo’s shares.