De Beers does its BEE deal

Anglo American (AAUK-Q) unit De Beers has reached a deal with South African group Ponahalo Investment Holdings to sell a 26% share in the diamond group’s South African subsidiary, De Beers Consolidated Mines. The price tag is R3.8 billion, or $671 million.

The sale will meet requirements under the South African Mining Charter that mining companies be 26% owned by economic-empowerment groups by 2014. Ponahalo Investment and De Beers employees and pensioners will each own half of a new company, called Ponahalo, formed specifically to take up a share in the company. There will be three seats on the 11-member board of directors for Ponahalo appointees.

Ponahalo Investment was also purpose-built for the transaction, and is owned by seven individual investors and three trusts. The beneficiaries of the trusts are women, disabled people, and the local communities where De Beers mines: Ponahalo Women’s Trust and Ponahalo Community Trust each own 17.5% of Ponahalo Investments and Ponahalo Disabled Persons’ Trust owns 10%.

Under the agreement, Ponahalo is obliged to pay out R5 million annually to the trusts and to invest R10 million annually, escalating at 5% per year, in other South African businesses.

The seven individual investors are Barend Petersen, a Cape Town accountant who already sits on the De Beers board; Manne Dipico, a former premier of Northern Cape province, and an African National Congress (ANC) strategist; Moss Mashishi, a Johannesburg lawyer and businessman who has served as head of South Africa Tourism and the country’s Olympic Committee; and four shareholders of holding company Peotona Capital, lawyer Thandi Orleyn, former ANC secretary-general Cheryl Carolus, bank executive Wendy Lucas-Bull, and Dolly Mokgatle, the former chief executive of Spoornet, the national railway system.

The employee and pensioner holding will go preferentially to “key employees,” via a trust owning 15% of Ponahalo. The other 35% will go out as shares in a trust whose units are allocated equally to De Beers’s 18,000 South African employees and pensioners. About 72% of the employees and pensioners, and a majority of the key employee group, qualify as “historically disadvantaged” under empowerment policies.

De Beers is providing some vendor financing for the purchase, and the rest of the debt financing will be provided by other lenders. Most of Ponahalo’s cash flow, other than its trust and investment obligations, will go into debt repayment over the first ten years of ownership.

The Black Economic Empowerment (BEE) program, which affects all South African business, has been particularly hard to implement in capital-intensive industries like mining. There have been significant new BEE investments in other mining sectors, including a R16-billion ($2.8 billion) deal between Anglo American, its subsidiary Kumba Resources (KMB-J) and empowerment groups to create a new diversified mining company out of Kumba.

The deal still requires regulatory approval, including oversight by the South African Reserve Bank. Ponahalo Investments has a due diligence period, but advisors to the company have already delivered a fairness opinion on the purchase price.

Tax relief measures, already proposed by the government, are still to be passed, and the parties are not closing until those measures are law. As well, changes to South Africa’s Diamonds Act may result in changes to the final terms of the deal.