Our company turns 10 this month. On 26 June 2008 CIPRO (as it was known back then) confirmed that our business had been registered. Kagisho and I went for dinner that evening to celebrate this milestone! All the talking, planning and dreaming were now kicking into action. It was an exciting time in South Africa in general. Markets had been going up strongly for almost 5 years, the economy was growing, property prices were soaring. Fast forward a few months and President Thabo Mbeki is recalled, the global financial crisis hits global and local economies hard, interest rates shoot up, the currency falls off a cliff, and the stock market loses almost 40% of its value in a matter of months.
In the middle of everything, Vodacom announced a BBBEE deal, YeboYethu (YY). The deal came to the market soon after Sasol’s hugely popular Inzalo deal had gotten investors all excited. This was initially a concern because what if investors spent all their money on the Sasol deal, then few people would take up the YY deal? That sentiment changed quickly as Inzalo was oversubscribed and prospective investors got a lot of their money back. Now there was a real risk that YY would also be oversubscribed. It was, but many investors were disillusioned by their Inzalo experience that they did not bother with YY in the end.
In the end, over 102,000 investors received 100 shares each, and got the rest of their subscription refunded if they had applied for more. More frustration as investors lamented the effort and time taken to participate in these deals with seemingly very little to show for it. This discontent showed in future deals as MTN’s Zakhele deal received a lot less interest than it should have.
A lot happened in YY’s 10 year empowerment period; SA got a new president, World Cup 2010, and 2014, Whitney Houston and Michael Jackson left us, as did a host of famous people in 2016. Our beloved Madiba would also leave a tearful nation behind. Julius Malema went from only being known in ANC circles to becoming a SA household name. The Gupta’s would also become widely known, and despised over this time. And Bafana Bafana would continue their slide into obscurity. Oh, and don’t forget Barack Obama.
In the BBBEE share space, Phuthuma Nathi (PN) and Thembeka Capital (TC) would reward their shareholders with massive returns as they reached the end of their respective empowerment periods. R10,000 invested in PN in 2007 would have yielded over R73,000 in dividends and be worth around R100,000 today. R30,000 invested in TC in 2007 would be worth around R365,000 today with investors getting their capital outlay back in dividends. But it would not be all good news for Black shareholders as African Bank’s two deal; Eyomhlaba and Hlumisa would lose investors ALL their capital, and Welkom Yizani would have to be bailed out and only reward investors with a windfall late 2017, essentially growing a R10,000 investment to about R35,000 over 11 years. Zakhele would also disappoint by turning R20 into R56, despite being worth over R120 at one stage. Not bad though considering that the JSE Top 40 returned just under 120% of the past 10 years.
YeboYethu surprises the market
Imagine my surprise when I read the YY announcement earlier this week. As an investor I will be getting a massive dividend and I will keep my YY shares and I will get exposure to Vodacom Limited and I will be able to trade my YY shares at any stage before or after the transition (although it’s possible there may be a pause in trading somewhere along the way). It was like a gift that kept on giving. The share price rallied – up 42% on the day! Suddenly those 100 YY shares were worth something, and potentially will be worth a lot more in a few months’ time. There is the small matter of YY shareholders having to vote to agree to the deal on the table. Only a fool would vote against it in my opinion.
In essence YY is currently worth around R7.5bn. R3bn of that will be paid to shareholders in the form of a dividend (R67 per share before dividends tax – R54 afterwards), the remaining R4.5bn will be reinvested in the ‘new deal’. This new deal sees the underlying Vodacom SA asset in YY being swopped for Vodacom Ltd (VOD) shares. There will be some facilitation (financial assistance) from Vodacom and a bit of debt funding in the new deal which results in YY owning as much as 6.2% of Vodacom Ltd and lift its overall Black ownership to around 20%. Investors will have a sense of the value of the new deal once the price at which the deal is struck is known.
Lessons in YY for Black shareholders
I have been reflecting on this entire YY deal a lot these past two days. I am invested so naturally I am delighted by the news. I will get some meaningful cash out and I will still own an asset of (higher) value come 8 October 2018. But I am saddened at the fact that more than 15,000 YY shareholders threw in the towel over the past 10 years. They missed their pay day. The 2017 financial statements show that fewer than 650 shareholders own more 1,000 shares (36 own more than 10,000 shares). So the broad based effect is not that broad. None of this is Vodacom’s fault. The company has gone beyond the proverbial extra mile to educate existing and prospective YY investors. They really can be proud of the YY deal and everything they have done to support shareholders.
I looked at all the emails and tweets and sms’es and WhatsApp messages around YY over the years. The disappointment at only getting 100 shares features a lot. I too got 100 shares. But once YY became available for trading I started buying more. Too many opted to sell out of disappointment. It took me months to build up a meaningful exposure because I could only buy 100 shares at a time. The lesson here is clear; do not let emotions get in the way of your investment decisions. Stay connected and adapt your strategy to changes as they happen.
I have presented on the BBBEE deals on many occasions over the years. My usual refrain when it came to YY was “the benefits of this deal are back end loaded”. In simple terms, you are going to get most of your returns towards the end of the deal. This is exactly what has happened. Too often I’ve had people come to me and say, we see you like YY, but PN or TC or Inzalo is doing well at the moment. Shouldn’t I buy one of those instead? The lesson here is also clear; do not get caught up in the noise of daily share price movements. Stop trying to pick the ‘best’ performing share. Diversify your portfolio across a number of shares. If an investment has merit include it in your portfolio.
Warren Buffet’s business partner, Charlie Munger, once said that when it comes to investing: the real money is not in the buying and the selling, but in the waiting. YY is yet another example of investors being well rewarded for biding their time and waiting. The usual objection I hear is; but 10 years is so long. Sure, but looking back at the last 10 years it doesn’t feel like it in the end. It will feel long if the only thing you do is count the days. But you have your life to live. There are World Cups to watch, Presidents to vote for, famous funerals to discuss, trends to observe, kiddies parties to attend, and so forth. Before you know it, ten years has gone. Develop a long term perspective, it is a necessary mind set to create real wealth and financial freedom in your lifetime.