Thorts - The role of Socio-Economic Development funds in deal-making

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Thorts - The role of Socio-Economic Development funds in deal-making

Published Date: 2018-12-07 | Source: DealMakers | Author: Gideon van der Schyff | Comments

Thorts - The role of Socio-Economic Development funds in deal-making

Agreement by parties on the price and other commercial terms for a takeover or merger is often only the first step in a complicated and lengthy process to be followed before the transaction is finalised and implemented, and which may involve the need for competition or other regulatory approval.

The various regulatory processes are rigorous and time consuming and may, in some instances, make or break a deal. Where the approval of the South African competition authorities (Competition Authorities) is required, the conditions imposed by them will be of key importance, as a successful transaction is often dependent on realising envisaged synergies.

In recent years, the Competition Authorities appear to have adopted a stricter and more interventionist approach, especially when unskilled or semi-skilled jobs are on the line. It is also evident from the current proposed amendments to the Competition Act, 1998 that there will, in future, likely be an even greater focus on public interest considerations and transaction conditions sought by the Minister of Economic Development.

It is apparent from the above that, when considering a potential transaction, parties should not only evaluate whether the transaction makes commercial sense and will create shareholder value, but should specifically also take into account or focus on any public interest considerations.

In addition to prohibiting or limiting unskilled and semi-skilled job losses, Competition Authorities have in recent large merger transactions also required the establishment of funds aimed at socio-economic development goals (Socio-Economic Development), including:

  • uplifting communities in which the target company operates;
  • developing/empowering small and medium-sized enterprises within the target company's supply chain; and
  • enhancing the skills of employees and future employees,

to ensure that the transaction will be in the public interest and to require a level of commitment by the parties to the development of the South African economy.

Although Socio-Economic Development funds are less common in respect of local mergers, they have been imposed in transactions where international firms were acquiring companies within South Africa. However, given the growing focus on public interest, such funds could, in future, potentially play a bigger role in local merger transactions.

Examples of Socio-Economic Development fund requirements imposed on previous transactions include, inter alia:

    Walmart - Massmart
    Walmart was required to commit R200m to a development fund (1.2% of deal value¹), focused on developing South African suppliers, particularly small and medium-sized enterprises that are black-owned or black-empowered or that are local manufacturers.

    SABMiller - Coca-Cola Sabco
    As part of the transaction, SABMiller and Coca-Cola Sabco were each required to commit R400m to support small businesses, in a deal that took more than two years to be approved by the Competition Authorities.

    AB InBev - SABMiller
    AB InBev was required to commit R1bn (0.066% of deal value²) over a five-year period, to be invested in the development of South African agricultural outputs for barley, hops and maize, as well as promoting the entry of emerging black farmers, and to undertake to continue to source products like glass bottles, cans, bottle crowns and raw materials for beer, from South Africa.

    Old Mutual restructuring
    As part of its restructuring, Old Mutual has committed R500m, over a three-year period, to an enterprise supplier development fund (0.3% of Old Mutual's market capitalisation prior to restructuring³), with the mandate to drive the growth of small businesses and employment.

    Chevron South Africa
    In respect of both bids (Sinopec and Glencore/Off the Shelf Investments), conditions were imposed to ensure that the transactions are in the public interest. In addition to conditions relating to job preservation and capital investment, a development fund is to be established, to the value of approximately $15m (1.5% of deal value4), focused on the development of small and black-owned businesses.

While such funds may, in many cases, benefit the South African public at large, in an already technical and complex deal-making environment the introduction of Socio-Economic Development funds will result in additional complexity, as well as a further layer of costs. This has made, and will continue to make, deal-making negotiations more difficult, especially where they involve international (and in some instances local) suitors who are not familiar with such public interest considerations.

Notes

  • 1.Based on a deal value of R16.5bn.
  • 2.Based on a deal value of R1 522bn and a fund value of R1bn.
  • 3.Based on a market capitalisation of R186bn (prior to restructuring), as at 22 June 2018.
  • 4.Based on a deal value of $1bn.

Van der Schyff is a Corporate Financier at PSG Capital.

an image of Van der Schyff

This article first appeared in DealMakers, SA's quarterly M&A publication


DealMakers is SA's M&A publication.
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