SAA's future is no longer their worry but taxpayers will still cover past debt, while takeover risks rest on government workers' pensions.
Many South Africans breathed a sigh of relief on Friday morning, when it was announced that South African Airways (SAA) would henceforth be run by a private equity partner, but some have questioned whether SAA 2.0 is really all it’s cracked up to be.
The announcement left questions over who would be responsible for servicing the company’s remaining mountains of debt, and where exactly the funding for the 51% takeover of the floundering airline would come from.
ALSO READ: Black consortium takes 51% of SAA, government holds 49%
It now appears that while taxpayers will not have to foot the bill for future bailouts, the Public Investment Corporation (PIC) and Government Employees’ Pension Fund (GEPF) are footing a major part of the risk associated with the takeover, through one of its investment vehicles – which is providing the capital for the takeover.
Public Enterprises Minister Pravin Gordhan announced SAA 2.0 at a media conference on Friday morning.
He said a majority stake in the ailing state-owned airline was finally hived off to a consortium binding Global Aviation and Harith Investments, ending the three-year wait for the state’s imminent announcement of a “strategic equity partner” (SEP).
Under the deal, Global and Harith have come together to form a broad-based black economic empowerment (BB-BEE) special purpose vehicle, the Takatso Consortium. Government retains a “golden share” of 33% of voting rights while board representation will follow shareholding. Conclusion of the deal rests on the completion of a due diligence process.
ALSO READ: SAA 2.0: Equity partnership has ‘a decent chance’ of succeeding
Former Comair joint chief and founder of fledgling budget airline, Lift, Gidon Novick will serve as the Takatso boss. Joining words with bedmate, Harith’s Tshepo Mahloele, the pair said in a statement that they did not doubt that SAA could be built into an efficient airline that provides a catalyst for growth in the South African economy, especially tourism.
They say that the consortium brings a “unique combination of skills and infrastructure funding and aviation operator experience”.
“This will ensure the development of SAA into a viable and agile commercial airline.”
Harith counts Lanseria International Airport among its assets, which it acquired from private hands a few years ago.
Harith and its chief executive Tshepo Mahloele were the subject of serious allegations by Bantu Holomisa in late 2019, with accusations of impropriety aimed at Mahloele and non-executive director of Harith, Jabu Moleketi.
They were accused of leveraging Mahloele’s previous position and influence at the PIC to improperly benefit financially from a series of transactions.
Justice Lex Mpati, who was charged with leading an investigation into the matter, concluded in his report, just before lockdown last year, that:
“When going through the story of Harith, these words resonate. The layering of legal entities (state-owned corporations, pension funds, banks, companies and trusts and partnerships etc), when applied by financiers and corporate structure experts, can make finding the substance, and not form, of a transaction or series of transactions complex and quite perplexing. These layers also give the players in such a formation the ability to use ‘plausible deniability’ most effectively, as looking through all the conduits is challenging and time consuming.”
There was no conclusive evidence implicating either party in malfeasance.
SAA and family’s R10.5 billion bailout is on the way and the R3 billion balance is reportedly being funded by Takatso.
The Democratic Alliance’s (DA’s) Alf Lees has questioned the legitimacy of the entire SAA 2.0 deal.
“The question of the source of the R3 billion that Gordhan referred to is of major concern given the connection of Harith to the PIC as highlighted by the Mpati Commission. The DA will oppose any funding from the PIC being wasted on the ANC-SAA vanity project.”
The Organisation Undoing Tax Abuse’s (Outa’s) Wayne Duvenage added in a statement that “Minister Gordhan was quick to announce that the taxpayer will not have to foot the bill for future bailouts, however much of the risk would be carried by the PIC and Government Employees’ Pension Fund through Harith General Partners, who will provide the R3 billion capital for the transaction, together with the R2 billion committed to the relaunch of SAA by the government. Government’s pension funds will have to top up the additional funds required in future.”
The PIC, which manages several trillion rand of public-sector employee pension funds, has held investments in both Harith funds – Harith General Partners and Harith Fund Managers. The deal also leaves SAA 2.0 free of any historical financial obligations as noted in the Department of Public Enterprises (DPE) statement, with the taxpayer picking up the tab along with SAA’s creditors.
Former chief strategy officer for SAA, Barry Parsons – who was the initial architect of SAA’s SEP strategy nine years ago – said: “At first look the deal looks sound and I can only wish the new SAA well.
“Critical details, such as the shareholders agreement and what powers are reserved for the government will be critical to how the business is ‘allowed’ to run. There seems to be some smart people involved in the consortium, but I hope they have done their risk-reward calculations well, as the government has proved a very unreliable counter-party.”
Parsons was likely referring to the massive losses in revenue and forward sales incurred by Airlink, following what has been called SAA’s “extended and corrupt business rescue process” that has allowed government to ultimately walk away from creditors such as Airlink sans future obligations.
In its statement, DPE also indicated some of the mandate pressure that SAA 2.0 may have to absorb as de facto flag carrier. It alludes to what may lie ahead.
The statement reads that the deal intends to “build a model public-private partnership that leverages the commercial skills of the consortium, build on the brand name and positive image of SAA, which together will serve the national interests of South Africa; To build an airline that propels the growth of the South African economy, especially the tourism industry”.
What is critical to understand is SAA 2.0’s social licence to operate and how it will be played out in the mandate that the shareholders agreement is yet to reveal.
Apart from getting their hands on what is left of SAA, Novick and Takatso reel in a bundle of messy subsidiaries: Mango, Air Chefs and SAA Technical, along with loyalty programme Voyager.
However, while the value of SAA Technical or loyalty programme Voyager is evident, the future value of catering operation Air Chefs or operating two low-cost brands, Mango and Lift, is questionable. The deal places Mango’s 749 staff complement in an extended limbo after months of pay cuts, grounding and stop-starting.
ALSO READ: Mango has ‘no idea what the hell is going on’ after SAA 2.0 deal announced
Mango is expected to receive an R819 million bailout soon, but it is not enough to cover reported debt of around R2.5 billion.
At the end of April, the airline was grounded for two days by Airports Company of South Africa (Acsa) due to non-payment of its bills, with lessors in the wings seeking aircraft returns. Throughout all of this, Mango’s staff took voluntary pay cuts, part funding its survival.
Aviation analyst Guy Leitch has welcomed the deal.
“The news that Gidon Novick has been appointed as CEO of the operation is heartening for investors,” he said but doubted that the R3 billion would be sufficient.
“The airline has to regain market share while competing on price and will likely burn through R5 billion in cash during its first year,” says Leitch.
However, he added that Novick and the “Global team are good operators and there is a decent chance of success”.
Outa’s Duvenage added: “Whilst many issues around the restart of SAA within the domestic market, the continued operation Mango and Lift and possible consolidation of these brands, need to be clarified, the impact of private-sector individuals in the due diligence process may hopefully result in a commercial business approach for the new airline.”