Making sense of the Sasol BEE scheme – or schemes

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SIMON BROWN: I’m chatting with Craig Gradidge of Gradidge-Mahura Investments. Craig is my go-to man on BEE deals. We’ve been talking about Sasol a bunch. Someone on Twitter asked me, hey, what about the Sasol BEE scheme – or maybe schemes. Craig, appreciate the time. The more that I dig around this, the less I understand that I actually know, what is the deal here? Are there two schemes? Is it just the one which trades on the JSE? What’s the high-level detail?

CRAIG GRADIDGE: Yes. Good morning, Simon, and good morning to your listeners. There are two deals. Initially, when Sasol first did the deal in 2008, there was Sasol Inzalo, which was a 10-year deal. That was a funded deal.

And then they have a discounted scheme as well, which is known as SOLBE1. SOLBE1 is the listed entity you just referred to in your introduction. So SOLBE1, simply discounted, if Sasol trades at R100 SOLBE1 would trade at anywhere between a 20% to 30% discount to where the Sasol share price is trading.

SIMON BROWN: Does it convert it sometime? Does it pay dividends?

CRAIG GRADIDGE: No. Those shares rank pari passu with the SOLB1 shares – okay, the Sasol ordinary shares. So those investors have the same entitlement to dividend, as well as voting rights. They’re simply discounted shares. And where the discount emanates from is the fact that they can only be traded by black qualifying investors.

SIMON BROWN: Correct. Yes, it’s on the JSE but you need to be a black qualified investor. Okay. So that’s the easy one – the SOLBE1 around that 20 to 30% discount. Do they have an expiry or are they perpetual?

CRAIG GRADIDGE: It looks like those are perpetual, and we’ll talk about the other scheme in a minute. Those are going to convert at the end of their life to SOLBE1 shares. So that implies that SOLBE1 one is the perpetual offering.

SIMON BROWN: Then the other one is the Sasol Khanyisa. This is not listed. What are the details here, because maybe this is the more complicated one that keeps tripping me up.

CRAIG GRADIDGE: Yes, significantly more complicated than SOLBE1. What happened is the initial deal, Inzalo – that matured at the end of 2018 and I think leading up to the maturity date it looked like that deal would end underwater.

And, as you know, with the BEE legislation, you get points if your partners on the equity deal actually make a return. What happened is that as the deal got closer to maturity, the Sasol share price went on a bit of a run, and Inzalo went from being underwater to being reasonably profitable, particularly for investors who went in on day one.

But the wheels were already in motion at Sasol, where head office [had] to create a second scheme for Inzalo shareholders, which they expected would mature underwater. And as part of that whole sort of transition from Inzalo to Khanyisa, Inzalo shareholders were given an allocation of SOLBE1 shares. I think it was one for every 10 Inzalos. I might be wrong on that front. And then they were given free Khanyiso shares as well in exchange for their Inzalo shares.

SIMON BROWN: As I understand, these have the potential to convert, I think, in 2028. I’m not sure what the T’s and C’s are, but there is a potential conversion to the SOLBE1 shares.

CRAIG GRADIDGE: That’s how the scheme liquidates – conversion to value. So if your Khanyisa shares that you were given for free, if they were at R100 000, then you would get a R100 000 worth of SOLBE1 shares at that point. That happens in 2028, as you correctly pointed out. In the interim, the Khanyisa shares themselves are not tradable.

SIMON BROWN: So that’s a hold until then. Is there debt involved in that? As a rule, the debt is paid down from dividends – and Sasol is struggling a bit with dividends.

CRAIG GRADIDGE: Yes. So Khanyisa is invested in Sasol South Africa, so not the listed … ordinary shares. So no exposure to Lake Charles and some of the other stuff – only Sasol South Africa. So a lot closer to the real cash-generation engine behind Sasol.

Investors have been getting a trickle dividend. The dividend’s been reasonably decent. Well, the yield is then infinite because it cost you nothing to get those Khanyisa shares. And the balance, roughly 97% of the dividend that’s been paid across to Khanyisa, has been gone to settle the vendor funding that …

SIMON BROWN: A last question. So the SOLBE1 – if you’re a relevant person, you can buy it on the JSE. The Khanyisa, there is no OTC [over-the-counter] – or is there an OTC for it?

CRAIG GRADIDGE: There’s no OTC. There won’t be an OTC. So on liquidation you would then get your SOLBE1 shares, which you can then trade on the JSE.

That I think would be good news because then there would be a lot more SOLBE1 in the market, and a lot more holders. So perhaps a better price discovery and a narrowing of the discount.

SIMON BROWN: Gotcha. That’s an important point.

We’ll leave it there. Craig Gradidge of Gradidge-Mahura Investments, now we are way smarter. I appreciate the time.

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