Initial Public Offering for State-Owned Enterprises: Department briefing

Meeting report

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
14 September 2005
INITIAL PUBLIC OFFERING FOR STATE-OWNED ENTERPRISES: DEPARTMENT BRIEFING

Chairperson: Mr Y Carrim (ANC)

Documents handed out:
Department briefing on Initial Public Offerings
Department briefing on Initial Public Offerings Reference Manual (available at http://www.dpe.gov.za)
Transnet Annual Report 2005 (available at www.transnet.co.za)
Arivia.kom Annual Report 2005 (available at www.arivia.com)

SUMMARY
Department officials presented the Telkom case as a valuable example of the successful planning and execution of an Initial Public Offering (IPO) for a large State-owned Enterprise (SOE). They suggested that the IPO Reference Manual would be useful for other SOEs and even private companies. It would however require at least three years to prepare other SOEs such as Eskom, Transnet and Denel for IPOs. Government objectives for the Telkom IPO had been realised to a satisfactory extent.

Members were also given detailed explanations of macro- and meso-economic terms and processes.

MINUTES

Department briefing
Mr J Theledi (Department Deputy Director-General) apologised on behalf of the Director-General for not being able to attend the briefing due to his being overseas.

The only real experience of the Department with an IPO was the Telkom case, which was particularly interesting because Telkom had international partners. The IPO Reference Manual, based on the Telkom case, offered much valuable and detailed information that could be useful to other SOEs and even to private companies. The Telkom IPO reduced public debt by raising R4.3 billion for the National Revenue Fund. Much effort went into informing ordinary South Africans about the benefits of participation in the scheme. The Telkom IPO had been preceded by the restructuring of the South African economy through the Integrated Development Plans and Growth, Employment and Redistribution (GEAR) strategy aimed at encouraging overseas investors, increasing participation by the South African public and partnerships with private business.

The decision for dual listing (on both the Johannesburg and the New York stock exchanges) was taken to access a broader investor base, and it had the favourable side effect of creating an opportunity of selling South Africa as an investment destination abroad. The sale of most of the government’s shareholding in Telkom meant that its sole control of Telkom came to an end, but through licensing, price control and legislation the government could still prevent excesses. Strong financial muscle was an essential requisite for an IPO to be successful, and Telkom was using global co-ordinators like Deutsche Bank and JP Morgan as well as local banks like Standard Bank. The price at which shares for the IPO had been offered was determined after wide-ranging research in order to achieve objectives and not a sell-out. Black Economic Empowerment (BEE) was successfully advanced by employing Black firms, syndicates and legal teams with incentives like bonuses for exceptional delivery, which attracted huge interest. Key State Owned Enterprises (SOEs) such as Transnet, Eskom and Denel, were embarking on huge capital investment and other initiatives that would hopefully get them ready for an IPO after three years.

Mr C Letsoalo (Department Chief Director of Corporate Finance) stressed that meticulous planning stretched over many years, and included many role-players. The process for the implementation of the Telkom IPO took two years that included the uncertainties created by the Iraqi war. Government objectives were attained by selling shares at discount to historically disadvantaged individuals, supporting the capital market in South Africa and by injecting market discipline into Telkom. Any investor in Telkom, including the government, could realise its investment by selling its shares on the stock exchange.

Discussion
Ms D Ngcengwane (ANC) asked what advantages the poor people in South Africa derived from the listing of Telkom on the New York stock exchange. Mr Theledi replied that more money from overseas invested in South Africa strengthened the local economy. Initially the international price offered for Telkom shares was higher than that of domestic investors, which put pressure on domestic investors and encouraged Telkom to set a higher strike price.

In reply to Mr P Hendrikse (ANC) asking whether individuals who were shareholders in Telkom had sold their shares, Mr Letsoalo said that most had, making a substantial profit.

The Chairperson enquired about the determining factors for share price levels. Mr Letsoalo confirmed that it was the market assessment of the risk around future cash flows.

Ms Ngcengwane asked whether loss of government sovereignty over Telkom by selling its control could lead to collusion of other shareholders to oust the government. Mr Letsoalo replied that shareholders’ minority protection and stock exchange rules would effectively block such hostility.

The Chairperson wanted to know whether the government was continuing its campaign to educate people on the value of shares. Mr Theledi replied that there was not an ongoing campaign and that people could not be locked in.

Mr Hendrikse suggested that in lieu of the current voluminous annual report, a simple one-sheet summary of the company’s and the shareholder’s situation would be far more effective and readable.

Mr Theledi expressed his satisfaction with the raising of the Standard and Poor rating for South Africa which facilitated South Africa’s acquisition of emerging market bonds. Subsidiaries of Denel, such as Denel Aviation, needed funding through partnerships with ‘big players’. Turning around SOEs aimed at acquiring financial muscle, adequate infrastructure, building alliances, being operationally efficient and having the required expertise. Concessions to the private sector such as for managing ports activities meant that operations would improve through higher efficiency while the National Ports Authority (NPA) would retain ownership.

Mr Letsoalo considered that the introduction of a competitor could compel Telkom to undercut and try to kill the opposition, and that the share price might go down.

The meeting was adjourned.