STUART THEOBALD: SAA deal is the next best for all parties

Posted in: Economics, i-Blog, Politics, SOEs on June 21, 2021


That is, if the deal — which was hammered out behind closed doors — can fly at all.


This column was first published in Business Day.

Politics, the cliché goes, is “the art of the possible…”. But the Otto von Bizmarck quote goes on, “… the attainable — the art of the next best”. In the SA Airways deal, it is very much the next best that we have. If, that is, the deal is possible at all.

All sides of the political spectrum will feel it is less than they wanted. The ANC, in the form of most of the national executive committee, wanted the state to retain control. As I have written here before, that was simply impossible.

There is no way a commercial partner would put its capital at risk while the state, with its long history of erratic non-commercial decisions, retained control. The 51% interest that has now been put on the table for the Takatso consortium to buy is certainly next best from an ANC perspective.

But the state will retain 49%, and a golden share that ensures it can never fall below 33% in the event of dilution. So maybe that will be grudgingly accepted as the only possible outcome.

But even those who have long argued (including me) that SAA should be privatised, given it serves no public interest that can’t better be met through other means, will see this deal as next best. It was hammered out behind closed doors.

There has been no public scrutiny of other offers put on the table or the conditions that were attached to the invitations to bid. I was surprised at the announcement by public enterprises minister Pravin Gordhan that 51% of the airline was to be sold, given that he had never suggested that a controlling stake may be available.

The sale of state assets can easily be abused, as most postcommunist states can attest to. Processes that govern them must meet the highest standards of public scrutiny. Has the National Treasury been informed of the details, given the Public Finance Management Act requires any public body to submit details to it before concluding a sale?

But I am also sympathetic. This was a very difficult asset to sell amid a toxic political atmosphere and the disastrous impact of Covid-19 on the travel industry. There are huge unknowns about what assets the airline has — are its previous international and regional routes still its to fly? Or has business rescue meant those and other agreements have been severed? No-one seems to know the answers.

It may be that this untransparent process was the only way a buyer could be cajoled into a commitment. Despite the department of public enterprise’s claims to the contrary, I do not believe it was flooded with realistic offers — rather it has been somewhat desperately hunting for someone to catch a hospital pass.

The consortium has Gidon Novick as the main executive in resuscitating the airline. Novick was founder of Kulula.com, arguably the most successful airline SA has had. He knows what he is doing. He was busying himself with co-founding a new airline called Lift, which he started in 2020 along with former Uber executive Jonathan Ayache.

He had assembled a team of top aviation execs for that. That team could now be repurposed to relaunch SAA. The question he must have pondered is whether there is enough value in the SAA he will be getting, with the government as a very present partner, compared to the clean new airline he was starting.

The consortium also has infrastructure private equity firm Harith as the financial brains. Harith’s role is unusual, given it is not using the private equity funds it manages to finance the airline. Instead it seems Harith will have a stake in the consortium in its own right.

The minister referred the consortium having “a substantial balance sheet”, but this is unclear. The consortium still must raise the finance it will need to restart the airline. Harith’s announcement referred to listing the airline.

The department referred to R3bn as the amount the consortium will put into the restart, but this number is a thumb suck — the finance to get the airline going will only be known once a comprehensive business plan is drawn up. Harith also referred to itself as “the owner of Lanseria airport”.

This is also misleading — in fact, Harith manages a fund invested in Lanseria, and many other infrastructure assets, on behalf of a series of investors. Harith is known as an able and talented investor in infrastructure, but it is the investors who are the owners, not Harith. This conflating of Harith and the funds it manages seems to have been done on both sides of the deal.

There are still big unknowns. For instance, what is the consortium actually paying for SAA? No-one knows. None of the announcements refers to a price. I guess it will be R1, with the deal structured so that the state guarantees all liabilities and hands over a completely clean balance sheet.

The R3bn number put about was anchored in some minds as a kind of price being paid, but it is far from it. In theory a business rescue plan was agreed by all creditors in 2020 allowing it to emerge from business rescue.

This required an additional R3.5bn to be contributed by the state to getting the airline up and running. Is this number actually being contributed by the government? Again, no-one knows. When the answers become clear, this may not be a deal that can be done.

So perhaps we should not see this as the attainment of second best. It may not be possible, after all.

 

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