Published Date: 2021-07-07 | Source: INCE|Community | Author: The Finance Ghost
There was a time on the JSE when B-BBEE deals kept corporate advisors busy, especially the advisors who weren't making money from property fund capital raises. With the revised B-BBEE Codes, many companies had to top-up on ownership deals.
They are less frequent these days, with deals occasionally being rolled or restructured. New deals are rather unusual.
Ellies has a market cap of just R62.02m. When it's that small, I feel bad rounding it down to R62m, let alone R60m. As you've probably guessed, it wasn't always this small. The share price is less than a third of what it was at the start of 2018.
Ellies was in really bad shape from a B-BBEE perspective, listed as non-compliant and thus unable to win business that requires a decent B-BBEE rating. This deal was desperately needed.
B-BBEE Ownership transactions are usually expensive for current shareholders. Shares are issued at a discount and there's typically a bank guarantee of some sort as well. However, Ellies has managed to pull off the "cheapest" B-BBEE deal I've ever seen.
The B-BBEE partner is the Imvula Education Empowerment Fund Trust, which suggests that broad-based ownership points will also be scored by Ellies.
In this case, the B-BBEE shares are being issued at 10 cents per share, which was the prevailing market price before the announcement. This definitely isn't the norm, with such deals usually concluded at a 10% discount. This helps to lock in the net equity value points for the first year, in an attempt to avoid the nasty penalty level drops in the Codes.
In fact, these shares are being issued at a slight premium to the 30 day VWAP (volume weighted average price). That's extraordinary for a B-BBEE deal.
There's a 10-year lock-in period, which is definitely towards the upper end for these deals. In fact, I can't recall seeing a lock-in longer than this. With such a long lock-in, I'm even more surprised that the shares have been issued at the prevailing market price rather than a discount.
It gets more interesting after that. Imvula will fund the subscription price from its own cash resources, with no funding required from Ellies. Ellies will receive a genuine cash injection from this transaction of around R18.5m.
This takes Ellies from non-compliant to Level 4, via an issue at a premium to VWAP with no vendor assistance and a 10-year lock-in. Next time you need to negotiate your lobola payments, I highly recommend sending a representative from Ellies. I don't think I've ever seen a B-BBEE Ownership deal on such favourable terms to the company being empowered.
What's in it for the B-BBEE partner, I hear you ask? Well, the trust achieves a significant stake in the company which would otherwise be impossible to build in an illiquid small cap without sending the share price to the moon. Also, the trust has numerous social objectives at its core and will be allowed to identify beneficiaries to receive the other types of B-BBEE spend that Ellies is required to execute, like skills and supplier development spending.
It's not surprising that the Ellies share price jumped 20% on the day. They've empowered the business at literally no cost to existing shareholders.
Sometimes, small caps really nail it.