Northam’s staggering R250m advisory fee stuns investors

A staggering corporate advisory fee to implement Northam Platinum’s new BEE deal has left critics gobsmacked.

Boutique corporate finance group One Capital Advisory was paid R250m, higher than any other fee it has received in the past, for work in which it helped the miner implement a new transaction designed to benefit employees and the communities around Northam’s mines.

Albie Cilliers, activist investment manager at Cilandia Capital, says: "I like to look through circulars, because things companies get up to are often hidden away in those. I have never seen such an extreme fee being paid in SA for advisory work."

The total fee expenses were R330m, with the lion’s share going to One Capital. Northam’s legal firm, Cliffe Dekker Hofmeyr, was paid R45m. The remaining R35m was paid to accounting advisers and other parties for administrative work.

The Finance Ghost, an online persona who provides commentary about corporations here and abroad — having worked for a number of years in corporate finance — laid into Northam and One Capital on social media.

"A R250m corporate finance fee is beyond shocking. Truly. I have never seen anything like it, let alone [one] payable to a boutique firm like One Capital," he tweeted.

But Northam has defended the fee, saying it is in line with the sophisticated work required and the time it took to complete the transaction.

"The fees payable to Northam’s transaction advisers are commensurate with a transaction of this size, complexity and innovation, considering the number of parties involved, the timeline from the inception to the implementation of the transaction and the size of the deal teams involved," Northam spokesperson Marion Brower tells the FM.

"The company believes this promises to be the most successful BEE transaction to date and [that it] not only delivers on empowerment imperatives but also creates unprecedented shareholder value. The company is satisfied that it has received fair value from its advisers," she says.

The transaction was created to replace the company’s original Zambezi empowerment structure.

In a nutshell, Northam ended the Zambezi transaction four years early and has replaced it with a new deal, worth R33bn, to bring in higher levels of employee and community ownership for the next 15 years.

The original empowerment deal was struck in 2015, and One Capital was paid R90m at the time for its advisory work and for helping to raise the funds.

A new empowered company, Zambezi Platinum, was formed through the first transaction and listed on the JSE.

It was led by former Anglo American SA CEO Lazarus Zim and became a R6.6bn black empowerment vehicle. It ended up with 31.4% of Northam, financed by the issue of preference shares to Northam shareholders. These preference shares were freely tradable on the JSE and were supposed to vest in 2025 when interest and capital had been paid.

But the deal was confusing, and all parties agreed to unwind the structure in favour of something more effective that served more people.

Now, in terms of the new deal, the owners of the Zambezi structure will leave with 30.9-million unencumbered Northam shares, worth about R7.6bn, as well as R760m cash from selling the listed company its shares. If the Zambezi parties hold onto their shares until May 2025, they will not have to repay a R400m lock-in fee to Northam.

Northam also wanted to bring forward the maturity of the decade-long Zambezi deal to lock in a sixfold share price increase and to ensure the large gains in the structure were passed on to its empowerment partners, instead of risking those values being eroded.

CEO Paul Dunne says the transaction will empower Northam’s employees and communities by providing them with 23% ownership in the company, and that other historically disadvantaged people, including women and youth groups, will participate in the balance through a new empowerment vehicle, to be listed on the bourse.

Dunne says close to 10,000 employees and community members will participate in the extended deal.

But Cilliers maintains it’s not clear how this transaction warrants such a high corporate advisory fee. He says the details of what One Capital brought to the deal are scarce in the circular.

Northam calls it an "interconditional composite transaction" comprising a number of parts. The first is the "acceleration of the maturity of the Zambezi BEE transaction". This entails, among other things, the offer by Northam to Zambezi preference shareholders to buy all the Zambezi preference shares in issue that are not already held by Northam; and the acquisition by Northam of Northam shares held by Zambezi and the employee stock ownership plan, by way of a scheme of arrangement.

Ultimately, Northam will spend R19.3bn to remove Zambezi, which includes the R12.5bn it spent buying preference shares and R2bn more to buy the rest it doesn’t own.

If it sounds complex, that’s probably because it is, though Dunne describes it as nothing more than a share buyback. The transaction, however, needs at least 75% shareholder approval, with investors set to have voted on the deal by the time the FM appears in print.

Says Cilliers: "The transaction looks overly complicated, and I can’t understand the necessity of it. I understand that the company wants to benefit a broader group of people through broad-based BEE, but Northam’s shareholders are funding this deal. The same assets are involved."

He adds: "It’s like shuffling papers. We are even more confused now. What has the company achieved that is new? I struggle to understand the rationale. It baffles the mind."

The Finance Ghost, meanwhile, argues that an advisory the size of One Capital would normally have a minimum fee of about R3m and that this would be capped at about R40m.

"I don’t know if this deal went to tender at all, but I’m sure big investment banks would have snapped up an opportunity to do the transaction and would have done so for R50m."

So, what fees do capital advisers typically collect?

Mining group Exxaro’s replacement BEE transaction in 2017, for example, collected fees of R108.9m, with Rand Merchant Bank receiving R98m. One Capital itself advised on a BEE transaction for Sovereign in 2015 and was paid R12m. The fees amounted to R16.797m in total.

Efforts to reach One Capital Advisory for comment proved unsuccessful.

Cilliers says: "Mining is a costly business as it is. This fee is massive, and I think shareholders should be questioning it. How was it calculated, and did a bidding process take place?"