Media

Lereko seeks to broaden its base

Financial Mail

30 June, 2006   
By Sibonelo Radebe

Two years has been enough for Lereko Investments , the black economic empowerment (BEE) firm led by politicians-turned-businessmen Valli Moosa and Popo Molefe, to experiment with the purist model of BEE - one without compromise to white ownership.  Sexy as it is for mainstream BEE players, the idea of being a 100% black-owned entity is proving to be financially unsustainable as cash shortages and ambitious expansion plans compel many of them to surrender equity to established, white-led institutions. Examples include Investec's stake in Cyril Ramaphosa's Shanduka, Standard Bank's 20% holding in Saki Macozoma's Safika and Old Mutual's 21% interest in J&J.

Certainly Moosa, in an interview with the FM, hints strongly that Lereko is actively looking for an equity partner from the pool of institutions showing an appetite for BEE investments. Lereko walked away from an opportunity to secure start-up funding from a bank in exchange for equity, saying the move would compromise empowerment.  "I think we have reached a point where we are strong enough to think about bringing in a partner," says Moosa, the former environment & tourism minister. Lereko decided against the idea earlier because it was still too new and there was little on offer. "If we had done it earlier we would have sold for little and lost considerable control," notes Moosa. Giving away equity at inception, when the BEE player had no real asset base, would have le d to a disproportionate loss of management control, he argues.

So why now? "I think we have proven our worth in the business world and are now regarded as attractive and prospective partners," says Moosa. He says the move will give the group access to cash and enable it to pursue growth opportunities.  Many BEE firms tend to couch their decision to opt for an equity relationship in this kind of language, but it reveals a weakness in most BEE formations. Having been given shares in many companies on a platter in the wake of increasingly stringent BEE regulations, empowerment companies are often short on business plans.

Furthermore, with the income from their investments needed to pay off debt, BEE companies often lack cash and find themselves forced to dilute equity to pay for overheads and provide working capital. Growth may be a consideration but cash is primarily needed to keep operations going.  Moosa insists that Lereko is motivated by long-term and strategic objectives rather than short-term needs. He says the group is confident that short-term needs will be taken care of in its business model.  Launched in 2004, Lereko was established largely with the personal savings of its founders Moosa, former North West premier Molefe and the late empowerment doyen, Eric Molobi, who also founded Kagiso Trust Investment.

Other members are Airports Company of SA CEO Monhla Hlahla, former Independent Development Trust CEO Lulu Gwagwa, former Strategic Fuel Fund chairman Seth Phalatse , Gauteng department of environment & tourism director Tsheko Ratsheko and advisers in the president's office Murphy Morobe and Titus Mofolo.  The group has walked away with two prime BEE deals in the past few years, apart from its other activities. It led a consortium called Lereko Mobility into the R1,4bn Imperial BEE deal and another consortium called Dinokana into the R600m Sun International transaction. The group was also part of the consortium that bought 25% of forestry and paper group Sappi's SA plantations (360 000 ha) for R224m.

This deal forms part of what Moosa believes will keep Lereko engaged on a day-to-day basis. "The Sappi deal is not a typical BEE transaction," says Moosa. A large portion of Sappi's plantation lies idle and Lereko has to come up with development initiatives to unlock value from the land.  Lereko has also teamed up with specialised financial services group Metier to launch a private equity fund called Lereko Metier Private Capital Growth Fund. Metier was founded by Thierry Dalais, co-founder of private equity house Brait . The fund is targeting commitments of up to R2bn from a small number of investors, and plans to use these funds to make investments of between R50m and R500m each.

Lereko also owns a number of specialist industrial subsidiaries, including Lereko Mining Supplies and Lereko Energy . "We want to capitalise on changes in the energy market and benefit from the emerging market for independent power producers," says Moosa, who is also chairman of Eskom. Lereko formed part of a consortium shortlisted by the minerals & energy department to develop two gas-fired power plants near Cape Town and Mossel Bay.  Moosa adds that apart from these expansion projects, the group will also need cash for other opportunities - hence the urgency to find a new shareholder.

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