[TOP STORY] Insights into the Old Mutual Bula Tsela B-BBEE deal

SIMON BROWN: I’m chatting with Craig Gradidge from Gradidge-Mahura Investments about Old Mutual’s – I think it’s called – Bullet Tesla [Bula Tsela] B-BBEE deal. Craig, appreciate the time. The deal was announced last month. It runs until October 24 for people to apply. What are the sort of high-level Ts and Cs?

CRAIG GRADIDGE: Yes, good morning, Simon, and to your listeners. I think before people get too excited, it’s Bula Tsela and not ‘Bullet Tesla’ [chuckling] which could set expectations off in the wrong direction. But yes, a high level. The public are invited to participate in the public element of the deal. There are three elements – the staff deal, a community trust and a public deal. The public deal or the public component is buying 1.3% of Old Mutual at a cost of R10 per Bula Tsela share and that whole Bula Tsela structure will look to raise around R830/R840 million to buy the shares. So the public are putting in effectively 15% of the equity. Old Mutual is matching that with some facilitation at 15%, and the remaining 70% will be funded by debt, which is being provided by Old Mutual themselves.

The minimum is 100 shares. So it’s a minimum investment of R2 000. For those investors who cannot afford the R2 000, there’s a scheme where they are allocating a certain – I think – 10% of the deal for small investors to buy R1 000 worth of shares and pay R100 a month for those shares.

So it’s a fairly good deal structure. One thing that’s quite unique about it is that we can’t really say up front the value of Bula Tsela, because the price at which it buys the Old Mutual shares is not known yet. So that’s one area of interest. Despite that, it’s still a fairly attractive deal.

SIMON BROWN: Yes, the debt component, 70% standard. I imagine that’s going to get paid down with dividends. There are Ts and Cs. But Old Mutual’s a relatively stable company; this isn’t a minor who might almost go bankrupt one day.

CRAIG GRADIDGE: Well, look, they suspended the dividend in 2008. And then I think the interim dividend was suspended in 2020 with Covid. So that risk is there, it’s not sort of non-existent. There are two examples from just the last 12 years. But outside of those two fairly exceptional circumstances, they’ve been a very good and regular payer of dividends.

The deal structure is such that there’ll be between sort of four and six Old Mutual shares behind every one Bula Tsela share, so that pool of dividends doesn’t need to be very high to start eating into the debt. There will be a trickle dividend that’s paid by Bula Tsela to shareholders; 15% after the payment of tax and operational costs will go to shareholders in the form of dividend and the other 85% will then be used to settle debt.

SIMON BROWN: Got you. And there is a lock-in. As I understand, it’s five years and then they say they will list on an exchange; it would probably be the JSE, but not necessarily. But you are in for the five-year period.

CRAIG GRADIDGE: Yes. That’s fairly standard – that you have a five-year lock-in term. There’s a 10-year funding term. Another unique feature is that they don’t have a defined empowerment period. So I think it gives the board some flexibility to respond to conditions 10 years from now, after the funding period is up, to say whether they’ll unwind those shares or whether the scheme becomes evergreen or whatever the case may be, or whether it needs to be refinanced – which I think is clever because Sasol, MTN Zakhele and a couple of the other deals would’ve found that sort of wiggle room quite handy. You saw some of them having to do new deals [with] fair restructuring and incurring expenses in that. So it’s quite clever in that [respect].

SIMON BROWN: Perhaps learning from others. The actual structure itself sounds great. I suppose the point – and this is always the point – is that you only do this deal if you think Old Mutual is a good five-year investment. That ultimately is the crux of it. The deal is good; now you’ve got to like Old Mutual.

CRAIG GRADIDGE: One hundred percent. In African Bank’s deal investors lost everything. In the Media 24 deal you didn’t lose everything, but you got a fairly average below-market return. So you’ve got to have a view as an investor on the underlying company. I think there’s a lot of value built in via the structure, so if the Old Mutual share price is still kind of R12/13 a share in 10 years’ time, but the dividend has settled enough of the debt, investors could still make a 200/300% return just by virtue of the fact that there’s a lot less debt in the structure so that equity component’s a bit bigger.

You saw that with MTN Zakhele, with their first deal, where I think investors made about 150% over the period, but the MTN share price was flat. So it was just the deal structure that had a bit of value baked in.

SIMON BROWN: We’ll leave it there. Craig Gradidge of Gradidge-Mahura Investments, I always appreciate the insights.

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