Lessons from the Vodacom YeboYethu deal for black investors

Gradidge-Mahura Investments turns ten this month. On June 26, 2008, Cipro (as the Companies and Intellectual Property Commission was known back then) confirmed that the business had been registered.

My business partner Kagisho Mahura and I went for dinner that evening to celebrate this milestone. All the talking, planning and dreaming was now kicking into action. It was an exciting time in South Africa in general.

Markets had been going up strongly for almost five years, the economy was growing, property prices were soaring. Fast forward a few months – President Thabo Mbeki is recalled, the global financial crisis hits 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 broad-based black economic empowerment (B-BBEE) deal, YeboYethu. It 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 YeboYethu 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 YeboYethu would also be oversubscribed. It was, but many investors were so disillusioned by their Inzalo experience that they didn’t bother with YeboYethu.

In the end, over 102 000 investors received 100 shares each, and had the rest of their subscription refunded if they applied for more. There was 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, with MTN’s Zakhele deal receiving far less interest than it should have.

A lot happened in YeboYethu’s ten-year empowerment period. South Africa got a new president, we had World Cup 2010 and World Cup 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 within ANC circles to becoming a household name. The Guptas 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 B-BBEE share space, MultiChoice’s Phuthuma Nathi and PSG Group’s Thembeka Capital schemes would reward their shareholders with massive returns as they reached the end of their respective empowerment periods – R10 000 invested in Phuthuma Nathi in 2007 would have yielded over R73 000 in dividends and be worth around R100 000 today, while R30 000 invested in Thembeka Capital 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. African Bank’s two deals – Eyomhlaba and Hlumisa – would lose investors all their capital, and Media24’s Welkom Yizani would have to be bailed out and only reward investors with a windfall late in 2017, essentially growing a R10 000 investment to about R35 000 over 11 years. MTN 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% in the last ten years.

YeboYethu surprises the market

Imagine my surprise when I read the YeboYethu announcement last week. As an investor, I will be getting a massive dividend and I will keep my YeboYethu shares and I will get exposure to Vodacom Limited and I will be able to trade my YeboYethu 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 YeboYethu shares were worth something, and potentially will be worth a lot more in a few months’ time. There is the small matter of YeboYethu shareholders having to vote to agree to the deal on the table. Only a fool would vote against it in my opinion.

In essence, YeboYethu is currently worth around R7.5 billion. Of that, R3 billion will be paid to shareholders in the form of a dividend (R67 per share before dividends tax; R54 afterwards) and the remaining R4.5 billion will be reinvested in the ‘new deal’. This new deal sees the underlying Vodacom SA asset in YeboYethu being swopped for Vodacom Ltd (JSE: VOD) shares. There will be some facilitation (financial assistance) from Vodacom and a bit of debt funding in the new deal, which results in YeboYethu owning as much as 6.2% of Vodacom and lifts its overall black ownership to around 20%. Investors will have a sense of the value of the new deal once the price at which it is struck is known.

Lessons in YeboYethu for black shareholders

I have been reflecting on this entire YeboYethu deal a lot over the past few 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 October 8. But I am saddened at the fact that more than 15 000 YeboYethu shareholders threw in the towel over the last ten years. They missed their payday. 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 YeboYethu investors. They really can be proud of the YeboYethu deal and everything they have done to support shareholders.

I looked at all the e-mail, tweets, sms’s and WhatsApp messages around YeboYethu over the years. The disappointment at only getting 100 shares features a lot. I too got 100 shares. But once YeboYethu 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 B-BBEE deals on many occasions over the years. My usual refrain when it came to YeboYethu 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 YeboYethu, but Phuthuma Nathi or Thembeka Capital 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 Buffett’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. YeboYethu is yet another example of investors being well rewarded for biding their time and waiting. The usual objection I hear is ‘But ten 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 will have gone. Develop a long-term perspective – it’s a necessary mindset if you wish to create real wealth and financial freedom in your lifetime. 

Craig Gradidge is the co-founder of Gradidge-Mahura Investments.

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