Tangible Transformation

Sale of Assets, Equity Instruments & Other Businesses

The ‘Sale of Assets’ facet is held within the Ownership element of the ‘Amended Codes, or otherwise referred to as Series 100 and defined in Statement 102. This sub-meaurement is possibly the most underutilised and least understood sub-measurement, held within the Ownership element.

It is a fact that Ownership is a stumbling block for many traditional and family-owned businesses. However, it is a little known fact that by using the ‘Sale of Assets’ mechanism to obtain ‘Black’ Ownership, as opposed to the traditional selling of equity, presents tangible opportunities to support ‘Black’ entrepreneurs.

The Business Opportunity

Organisations frequently sell or dispose of assets which are regarded as non-crucial to their current operations. The sale of non-core, nonperforming or unrelated business units, happens on a regular basis, as organisations aim to focus and streamline their operations. Recent media activity – in May 2015 – highlights three such ‘Sale of Asset’ examples.

Imperial Holdings, listed on the Johannesburg Stock Exchange, has entered into exclusive negotiations with The Hollard Insurance Group, regarding the acquisition by Hollard of Imperial`s interest in Regent Insurance Company and Regent Life Assurance Company. – Business Report, May 28 2015.

Aspen Holdings, one of South Africa’s most successful enterprises, has announced that Pharmacare Limited, a wholly owned subsidiary of Aspen Holdings and the Group’s primary South African trading company, has concluded a set of agreements with Litha Pharma. The terms of which state, Pharmacare will divest a business unit which forms part of its pharmaceutical division to Litha for a consideration of approximately R1.6 billion. – Aspen media release, 11th May 2015.

Kingfisher, a UK-based retailer, has sold a dozen of its B&Q outlets to discounter B&M, after another tough quarter for the DIY chain. Kingfisher had sold the leases of 14 of its 60 stores it wanted to offload in M

Based on the merits of Statement 102, organisations should identify assets within their operations, which are not adequately aligned to their current strategy or not contributing to their desired return on assets. The evaluation of such assets should be based on increased profitability, as well as the focus and sustainablility of an organisation. Selling on such non-core, non-performing or unrelated business units, will not only generate cash to invest in other focus areas, but may favourably impact on the Ownership element of an organisations scorecard.

The B-BBEE opportunity

From hereon, the term “new ’Black’ owned entity” relates to the party purchasing the asset. The term ‘selling company’ refers to the organisation selling the asset.

Classifying Ownership as one of the three priority elements within the ‘Amended Codes’, has presented a new set of challenges for business owners with a turnover in excess of R10m per annum. The consequence of discounting will see many organisations disappear from the Transformation radar.

In order to enhance the Ownership element of a scorecard, consideration should be given to selling non-core assets, such as:

  • Product lines that are not synergistic with other business operations
  • Branch offices or subsidiaries, which do not contribute adequately to profits
  • Plant and machinery, which is under-utilised or out-dated
  • Functions such as logistics – warehousing and distribution – which are not core to other operations
  • Property that could be sold on then leased back from the buyer

In B-BBEE terms, the actual asset being sold is referred to as a ‘Separately Identifiable Related Business’ (SIRB). This is defined as a business which is related to the ‘selling company’ by virtue of being a subsidiary, joint venture, associate, business division or any other similar related arrangement, within the ownership structure. Not qualifying as a ‘sale of asset’ transaction are transfers by way of licence, lease or similar legal arrangements that do not confer unrestricted Ownership, in addition to the sale of franchises.

Sale of Assets Scorecard Criterion

1) The SIRB transaction must result in the creation of a viable and sustainable business opportunity in the hands of ‘Black’ people. There is no requirement that the buyer must be 100% ‘Black’ owned. The equivalence % is calculated and then applied to the % ‘Black’ shareholding of the buyer.

2) The transaction must result in the transfer of critical, specialised and/or managerial skills, in order to develop the skills of ‘Black’ people.

3) There may be no unreasonable limitations in relation to clients and/ or suppliers of the “new ‘Black’ owned entity”.

4) Any commercial arrangements between the ‘selling company’ and “new ‘Black’ owned entity” must be at arm’s length, based on a fair and reasonable basis.

5) Organisations are encouraged to enter into a formal commercial agreement with the “new ‘Black’ owned entity”, which will be in force for at least a three year period. This agreement will consider and detail all aspects as mentioned above.

Adherence to each of the five criterion mentioned, will qualify the ‘selling company’ to optimise the 25 allocated points within the Ownership element on their scorecard. The total Ownership score achieved through ‘sale of assest’ is determined by the ‘Black’ Ownership status of the “new ‘Black owned entity”, taking into account the actual acquisition of debt incurred.

The full allocation of Ownership points are awarded in line with achieving the following targets, otherwise pro-rata accordingly:

• The value of the asset sold is at least 25% of the value of the ‘selling company’.

• The “new ‘Black’ business entity” is 100% ‘Black’ owned.

• The “new ‘Black’ business entity” is 40% ‘Black’ women owned.

• 8% of the owners of the new entity are classified as ‘Black’ new entrants who have not previously entered into similar agreements exceeding R50m.

• 12% of the owners of the “new ‘Black’ business entity” are members of a black broad-based scheme, co-operative or other black designated group.

• The acquisition of debt is structured over a nine year period.

This should be in accordance with the time-based graduation factor provided in the B-BBEE Codes of Good Practice. Funding for such transactions is allocated through the “designated ‘Black’ enterprise funding structures” held within the Department of Trade and Industry, www.thedti.gov.org and/or the Department of Small Business Development, www.dsbd.gov.za.

Edited by: Murray Chabant Managing Director The Signa Group

 TFM Magazine | Issue 5 | 2015

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