MONEYWEB, Felicity Duncan, 21 September 2004
There is a good argument for buying the BidBEE securities
When Bidvest announced its empowerment deal in June 2003, true capitalists immediately began looking for a way to make money out of it. The answer? The so-called BidBEE securities (traded on the JSE as BDEs). These BDE’s created by the Bidvest empowerment deal are, according to some investment analysts, very attractive investments.
The Bidvest BEE transaction, unlike many others, shifts the cost of the transaction more on to the shareholders than the business itself. Basically, the shareholders all gave up 15% of their stock – for every 100 Bidvest shares they held, they gave up 15, which went into the Dinatla trust. Shareholders won’t get paid for those shares until 2006, when they will be paid based on the share price at the time -capped at R60.
They did, however, get 15 BidBEE securities and 6 call options for every 15 shares they gave to the Dinatla trust. The call options are tradable, and they entitle the holder to subscribe for a share of 18-m Bidvest shares that will be issued in 2006. The options can be exercised at a strike price of R60.
According to one analyst, the BidBEE security is the really sexy bit. These securities are basically debt instruments – the money that Dinatla owes for its 15% stake is owed to the BidBEE shell (created to trade in the securities). When the settlement date comes on December 12, 2006, the holders of the BidBEE securities will be paid the money for the shares that Dinatla acquired. They will be paid the price decided at the time based on the traded price of Bidvest – R42 is the lowest possible price, the maximum is R60.
The BDEs were trading at 4400c on Tuesday – compared to a high of 5480c and a low of 3000c since being listed on the JSE.
The reason why these are attractive vehicles is that they have low downside risk potential, as Dinatla will pay shareholders a minimum of R42 per BDE, regardless of what the Bidvest share price is trading at come 2006. However, the upside is also capped at R60 per security. Imagine an investor choosing between the BidBEE securities and the ordinary Bidvest shares: one has low-risk and an almost-guaranteed return, the other doesn’t. “I think, on a risk-adjusted basis, the BidBEE securities are a good investment. There is less downside risk, and although you may not necessarily benefit on all the upside, the ordinary share price has to go very high to provide the same return,” said John Biccard, portfolio manager at Investec.
If you buy the BDE at 4400c, and it sells at 6000c at the end of 2006, you would earn a compound annual interest rate of 17%. The Bidvest share closed at 6225c on Tuesday, after brushing a low of 6151c during trade. At any rate, the share would have to reach 8500c to give a similar annual return (excluding dividends).
However, during a Moneyweb Radio Breakfast Show interview, Arthur Buchner of Nedcor Securities cautioned investors against Bidvest shares, based on the effect of the BidBEE security. While he agreed that R60 is good value for Bidvest shares, he cautioned against buying at that level. “What people must remember is that in doing the Dinatla Black Economic Empowerment deal Bidvest introduced the BDE shares. These shares trade at a discount to the Bidvest shares, and they do not share in the upside above R60. They convert to Bidvest shares in 2006. So what you may see happening is people buying BDE shares at R41 and the price of the Bidvest shares not getting above R60,” he said.
In short, the BidBEE securities may have the effect of holding the Bidvest shares at the R60 level. But at that price, it spells a great opportunity for those holding the BidBEE securities. And in a worst case scenario, if the Bidvest share price fell below 4200c, it would mean negative returns for the holders of the shares, but those holding BidBEE securities would still earn a small positive return.