South African Airways (SA, Johannesburg O.R. Tambo) has no cash value and will be sold off for ZAR51 rand (USD3) to the private sector Takatso Consortium, but the transaction remains unfinalised with no indication of when it is likely to be completed.
In return for a 51% stake, Takatso will inject ZAR3 billion (USD185 million) in working capital over two years (reduced from three years as initially stated) and pay the ZAR51 as its share of the nominal transaction fee required under South African law.
This is according to a clarification of the financial aspects of the privatisation deal provided by Public Enterprises Minister Pravin Gordhan, who said an independent expert valuation had placed the total consideration due to the government at “ZAR3,000,000,051 (USD185,201,801)”.
For its part, Takatso, in a statement on May 12, said: “Structures of this nature are usually characterised by a low purchase price and significant future funding commitments and are typically used for distressed assets such as SAA, which require extensive restructuring and recapitalisation to ensure a sustainable business model”.
The purchase price details were disclosed for the first time during the Finance and Public Enterprises Ministers’ joint May 10 briefing to the country’s public spending watchdog Standing Committee on Public Accounts (SCOPA) and in a subsequent “clarification” statement. SCOPA had called the two Ministers to account and provide a status report with details of the transaction.
In an apparent dial-back on a February 24 announcement that the sales and purchase agreement with Takatso had been concluded pending regulatory approval, Gordhan now told SCOPA the transaction “was still with the lawyers” with no visibility of when it would be finalised.
The Takatso consortium comprises black-empowerment investment fund manager Harith General Partners and ACMI specialist Global Aviation Operations (GE, Johannesburg O.R. Tambo), which owns the domestic Lift Airlines brand. SCOPA lawmakers pointed out to the ministers that any alteration to SAA’s ownership structure required the amendment or repeal of the SAA Act, under which terms the airline was incorporated and established. The political process for this, including public comment and parliamentary debate, has not yet begun.
In a previous SCOPA meeting on May 4, representatives of the Auditor-General and National Treasury revealed they had not been consulted on the selection of an SAA strategic equity partner, the sale of the 51% stake in the airline, or its terms and conditions, including:
the disposal of SAA’s low-cost carrier subsidiary, Mango Airlines (JE, Johannesburg O.R. Tambo); the issue of preference shares to the Department of Public Enterprises (DPE); DPE’s commitment to settle all of SAA’s historical liabilities; the continuance of SAA’s government guarantees against its loans; DPE’s insistence that SAA become the preferred provider of air services for all the state’s air transport needs; risks associated with the transaction raised in a due diligence report by attorneys Norton Rose Fulbright; SAA’s continued reliance on government and taxpayer support.
These concerns arose as National Treasury previously acceded to a special appropriation of ZAR10.5 billion (USD648.3 million) to rescue SAA on the basis that it was a final bail-out of the airline.
DPE still requires Treasury to release another ZAR3.5 billion (USD216 million) to fund the remaining elements of SAA’s business rescue. This is after DPE left SAA with a shortfall after using some of the special appropriation funds to recapitalise SAA’s subsidiaries, Mango, SAA Technical and AirChefs, which were excluded from SAA’s business rescue process.
The Auditor-General, Treasury, and SCOPA have also raised concerns over the continued delays in finalising SAA’s financial reports for 2018-19, 2019-20, 2020-21, and 2021-22. Civil society group, the Organisation Undoing Tax Abuse (OUTA), and some SCOPA members have questioned how Takatso could conduct proper due diligence of SAA in the absence of audited financials.
According to Gordhan’s presentation, the Strategic Equity Partnership (SEP) deal will see Takatso acquire the majority shareholding in the South African Airways Group, along with its brand, airport slots, route licences, airport lounges, the Voyager frequent flyer programme, and bilateral air traffic treaty benefits in Africa. In return, Takatso will provide operational expertise and working capital for SAA.
Other Details Disclosed By Gordhan Are That:
Funding needed for the new venture shall be provided or procured by Takatso (in a combination of debt and equity to be agreed with the DPE); the government will not be obliged to fund the business in the future, but it may subsidise loss-making routes SAA services upon a government directive or request; all historical liabilities, except for SAA’s unflown ticket liability, will be accountable to the government and will not burden the SEP; the transaction will establish SAA as a joint venture between the South African government and Takatso, but should the venture fail, the government will retain ownership of the SAA name and brand; both parties will be represented on SAA’s board and management.
The approval and making of dividends (assuming the venture is profitable), along with “several designated matters’” will require both shareholders’ unanimous consent; should it be necessary to raise capital and the government decides not to participate, its equity interest will dilute accordingly; however, the government will retain a non-dilutable “Golden Share” of SAA’s voting and veto rights, securing a long-term national strategic interest in the airline and preventing the consortium from selling the airline without the government’s consent.
Should the government want to increase or maintain its stake, then additional investment will be required; pre-emptive rights and rights to match bids and offers will be included for the benefit of both parties, e.g. if Takatso wants to sell a stake to an outsider; Takatso is looking into the possibility of including Mango in the partnership, even though initially it had indicated no interest in Mango due to its financial distress; conclusion of the process was dependent on the government providing the ZAR3.5 billion required to complete the SAA business rescue plan implementation.
SAA is currently operating flights from Johannesburg O.R. Tambo to Cape Town, and Durban King Shaka (South Africa), Kinshasa N’Djili (DRC), Lusaka (Zambia), Harare Int’l (Zimbabwe), Accra (Ghana), Lagos (Nigeria) and Mauritius. It recently launched a tender for power-by-the-hour leases of two A320-200s and an A330-300, all to be provided at the identical specification of the aircraft it used to operate before going into business rescue.
