At this stage, it will probably not come as a surprise to anyone to know that Net1 had absolutely no black ownership credentials in 2011 when it bid for the Sassa contract, and absolutely none when the contract was awarded.
Apparently, they did claim in the tender that 74.57% of the services performed by Cash Payment Services (CPS) would be outsourced to its BEE partners, with a circular clause which then said that the same BEE partners would outsource those services back to CPS. One of the partners was Born Free Investments 272, headed by Mazwi Yako. This is as clear an example of “fronting” as I have ever come across.
On January 18, 2012, Sassa awarded CPS the contract for the provision of social grant payment services for five years.
On January 26, 2012 Net1 announced a BEE deal. If I were not as cynical as I am, I would probably assume that they felt guilty about the “fronting” situation and wanted to remedy it. But I am a cynic. What is clear is that the deal was struck after the tender has been awarded. “Cash on Delivery”, perhaps?
But perhaps Net1 was not fully convinced that the tender would withstand scrutiny and hence it did not sell or fund the deal for its BEE partners as is the norm. Instead it gave them a one-year option to purchase up to 9-million shares, equal to 19.7% of Net1’s issued shares, at a price of $8.96 per share, a 13% discount to the prevailing market price.
An option is a bit of a one-way street. It is a right to purchase the shares at a future date, but not an obligation. So if the tender is upheld, and Net1’s share price goes up, the BEE partners can buy the shares at a massive discount. If it does not, they simply walk away.
Who were the BEE partners? The main partner at that stage was Mosomo Investment Holdings, headed by Brian Mosehla. Mosehla is a chartered accountant who formerly worked at Mvelaphanda and African Merchant Bank. The other partners were named as the Net1 Foundation as well as a community organisation of black women and several community based projects. According to an investigation by amaBhungane, none of the latter lot have ever heard of Net1. So perhaps they can be ignored for the purposes of further analysis.
The Sassa tender was, of course, challenged in court by Absa, while the SEC and the US Department of Justice opened investigations into bribery, so instead of going up, Net1’s share price declined. A year later the BEE partners opted not to exercise their option to buy the shares. So, a year after the award of the Sassa tender, Net1 still had no black ownership whatsoever.
A new BEE deal was promptly cobbled together. In November 2013 the company announced that it would issue 4.4-million shares at R88.50, a 25% discount to the prevailing share price, to Mosomo, this time providing it with a loan to be repaid over five years. But the deal had an important caveat – Net1 could replace the Net1 shares with shares in CPS at its discretion. By December 2013 the deal morphed a bit; 4.1-million shares were issued to Mosomo, and 300,000 to Born Free Investments, that of “fronting” infamy. The price was also dropped to R60 per share as the Constitutional Court ruled the tender invalid and Net1’s share price fell further. The deal included another important caveat whereby Net1 could repurchase the shares if the share price rose above R120 a share, i.e. if it doubled. As much as the deal was announced it was not implemented until quite some time later. So, our BEE partners had every incentive to pray for Net1’s share price to go up.
I guess lots of praying went on as it became clear that the Constitutional Court had little choice but to extend the CPS contract and Net1’s share price started climbing back up. The question is whether the BEE deal would have been implemented at all if the Constitutional Court had ruled otherwise. The cynic in me says: “unlikely”.
But on June 6, 2014 Net1 announced that it would be paid an extra R275-million by Sassa, supposedly for additional costs incurred in registering beneficiaries, a deal still being investigated by the auditor-general.
On June 10, 2014 Net1 repurchased 2.43-million shares from the BEE partners for R267-million. The money was used to repay the loan owed to Net1. The BEE partners were left with just under two-million shares worth R237-million and no debt, a nice clean gain.
And again the cynic in me says, the timing is too cute and the amounts ridiculously close in timing and value. Seen another way, the entire BEE transaction did not cost Net1 a cent. It was Sassa money that made the BEE parties wealthy.
But that is not the end of the saga. Net1 was clearly not about to share future gains made from its financial services businesses, including microlending and funeral insurance, with its BEE partners. Their usefulness was limited to securing the CPS contract. Consequently, it switched Mosomo’s shares in Net1 for a 12.5% shareholding in CPS. CPS’s valuation as a business would not grow significantly as it only had one contract, the Sassa one. So as much as Mosomo could participate in that, it would not participate in other profits made by Net1 from grant beneficiaries. Only Born Free Investments, with their less than 1% shareholding in Net1, was left to share in the greater spoils.
As it stands, the Broad-Based Black Economic Empowerment Commission, established to monitor and oversee adherence with the B-BBEEE Act, has been asked to investigate Net1’s BEE credentials at the time of the tender. The commission has posed a number of questions to CPS and requested supporting documentation to be submitted by March 17, 2017.
As with everything to do with Net1, I await the outcome with bated breath. DM
For an excellent detailed analysis of the above, including the links between various characters mentioned above, please refer to this amazing article by Craig McKune and published in the Daily Maverick.