At first glance it all looked too good to be true. Under the deal,  a private equity firm and an airline entrepreneur will take control of South African Airways, SAA, from the state. With that, there were promises of no more bailouts, and it all seemed to show a government change of heart on privatisation. 

It was all too good to be true. The proposed deal leaves so much unanswered that it looks like an underhanded way to further bail out a failing airline, enrich a few, maintain state control, and make the exercise look like a privatisation. 

The state will have a minority stake of 49 percent in the airline, yet has a “golden share” giving it an extra 33 percent in voting rights. And a big question remains over how the private equity firm will source the R3.5 billion it needs to invest in the new entity. Will it be from state-connected institutions?

Under the deal the Takatso Consortium, made up of Harith General Partners, a Johannesburg-based empowerment private equity fund, and Global Airways will have a 51 percent stake. Harith is close to government and the initial alarm sounded over whether the Public Investment Corporation, PIC, which runs about R2 trillion in civil servants’ pension money, would fund the deal. This has been denied. Global Airways, a local aircraft leasing and charter company, is run by Gidon Novick, who recently launched Lift, co-founded Kulula, and served as chief executive of Comair.

Certain things appear certain about the deal. It is a give-away, that comes with SAA’s government-guaranteed debt wiped off the balance sheet courtesy of the National Treasury which will repay the R16.4 billion over three years. And prior to the give-away, the airline will receive a R10 billion bailout when a Special Appropriations Bill is passed by Parliament. 

According to the statement issued by the Takatso Consortium, they will invest R3.5 billion in the new entity. It is not clear if this is their only obligation. 

In the absence of key information, we cannot judge what would be a fair valuation for SAA. There has been endless obfuscation by government over SAA for some time. The last annual financial statements released by SAA were in 2016/17 and these came with a qualified auditor’s opinion. The airline is a public entity and should report annually, even in business rescue. Without financial statements and a detailed schedule of assets, any valuation that is put before us lacks credibility.  

Importantly, we do not yet know if the SAA subsidiaries, Mango, the distressed airline, Air Chefs, and SAA Technical are part of the deal. Under an additional special allocation passed by Parliament last week, R2.7 billion is being used to bail out the subsidiaries. Mango will receive R819 million, and the remainder will go to SAA Technical and Air Chefs.  

One issue is whether or not Novick wants Mango in the package as it could be a potential rival to his own Lift airline. It could be up to the Competition Commission to resolve this issue. 

It does seem that even with Takatso having to come up with R3.5 billion, there is little downside risk and much potential upside gain for the consortium. We still don’t know how the deal will be funded.

With the adverse publicity since the deal was announced, the PIC has had to come clean and said earlier this week that it owns 30% of Harith General Partners. It has insisted that its money will not be used to fund the R3.5 billion. The Mpathi Inquiry found that all was not clear in the relationship between Harith and the PIC, but did not recommend action against the company. Harith’s Group Executive Director, Tshepo Mahloele, was a head of corporate finance at the PIC and other officers have also worked for the state investment manager. 

The question remains as to how the consortium will raise R3.5 billion, an amount which would far outstrip the funding Harith has been able to raise so far. 

Mahloele told Business Day the R3.5 billion would be raised from private sources and pension funds. But with the government as a large partner in the new airline, the question arises as to whether there is much market appetite to invest in the new entity.  Government interference equates with lower returns and airlines often battle to succeed. 

Might Takatso have to resort to seeking funds from a government-owned development finance facility like the Development Bank or the Industrial Development Corporation?  

Far greater transparency would be needed if these funds were to be raised through a listing on the Johannesburg Stock Exchange. The close connection with the government does raise serious questions about whether the SAA deal is an arms-length transaction and the valuation fair. One way of resolving this would be to hire an accounting or law firm to look into whether this is an arms-length and fair transaction.

It is questionable whether government adhered to the Public Finance Management Act, which requires a Request for a Proposal and a proper bidding procedure. Instead Minister of Public Enterprises Pravin Gordhan has said the government has chosen its “Strategic Equity Partners”. 

UDM President Bantu Holomisa wants an inquiry by Parliament’s Special Committee on Public Accounts. Alf Lees, a DA MP who sits on the Committee, says it is vital that there is a clear understanding of how the R3.5 billion in funding will be raised, and if any state resources will be used. But Lees says that with Parliament in recess, the deal might sail through without adequate time for deep scrutiny. 

First prize would have been to sell to an international airline like Emirates, Turkish Airlines, or a US or European carrier with a sizeable route network into which SAA could feed. A merger with Ethiopian Airlines could create the basis for an African continental super-carrier. There were talks with Ethiopian Airlines, but these went nowhere. The basis of the success of Ethiopian Airlines, which is state-owned yet widely regarded as well managed, has been its operational independence. It is highly likely that these airlines turned away from a deal because they did not like the idea of the South African government as a partner.

Although board representation, under the deal, will reflect the shareholding split, the government’s “golden share” will permit it an extra 33 percent of the entity’s voting rights. That means effective control. The Department of Public Enterprises says this is to “ensure that that the flag is retained, that it remains domiciled in the country and issues such as transformation goals remain uppermost.”

If this deal goes ahead the government may be emboldened to make this the model when dealing with failing state enterprises. The model is to back empowerment groups to take assets off the hands of the state, yet maintain behind-the-scenes control through “golden shares”. The greater the degree of state control, the less the chance of turnarounds and any likelihood that these deals will fly in the markets. 

[Photo: AFP via Getty Images]

The views of the writer are not necessarily the views of the Daily Friend or the IRR