When the China Petroleum and Chemical Corporation (Sinopec) agreed in March to buy the 75% of Chevron’s South African business that the US parent had put up for sale, it was a significant moment for relations between SA and China. The $900m deal was the largest acquisition by a Chinese firm of a controlling stake in a South African business and was one of Sinopec’s largest global deals.
Sinopec, a Fortune 500 firm and the world’s second-largest oil refiner, undertook to use its resources and experience in modernising oil infrastructure to upgrade Chevron’s Cape Town refinery, enabling it to meet new cleaner fuel standards.
The deal seemed to be in line with China’s Belt and Road initiative to expand its global leadership by building infrastructure and trade links. SA is one of the countries that has signed up to support the initiative. Just last month, President Jacob Zuma and his Chinese counterpart, Xi Jinping, were cosying up on the sidelines of the Brics meeting in Shanghai.
So, it was all the more curious when Glencore announced on Friday it had done a deal to buy 75% of Chevron SA for $973m. In reality, Glencore hasn’t bought the Chevron business at all, at least not yet — nor has it any right to do so. Sinopec has a signed contract with Chevron it can’t just walk away from. It has put up cash and guarantees and is presumably far along in the process of obtaining competition authority approval.
What has happened, however, is that the empowerment shareholders who hold the other 25% of Chevron SA have exercised their pre-emptive right to buy the rest of the company on the same terms as Sinopec offered. Normally, when minority shareholders exercise their pre-emptive right in such circumstances, it’s because they want to take control of the company themselves rather than letting in a new majority shareholder.
That would surely have been the intention when the clause was written into the original shareholder agreement between Chevron and the empowerment consortium, which is led by Mashudu Ramano’s African Legend Investments.
In this case, however, Ramano’s men are exercising their pre-empt just so that they can flip the stake to somebody else – Glencore.
The first big question the deal raises is: what’s in it for the empowerment shareholders? If they want Glencore, not Sinopec, it has to be because it pays them to make that choice. With nothing but a loud silence from the empowerment camp, there’s no way of knowing whether they stand to make a profit on flipping the asset or have been made an offer that would ensure them future commercial benefits.
An intriguing piece of the puzzle is that Glencore doesn’t plan to keep the whole stake but wants to bring in another partner, enabling Glencore to limit its own investment to $500m, as indicated in its announcement.
A second big question is: what’s in it for Glencore? Like some of its competitors, the company says it wants to expand downstream so that it can sell the oil it trades, ships and stores to retailers and perhaps refiners. Glencore produces coal and alloys in SA and those close to the deal are keen to pitch it as a vote of confidence in the country.
The Chevron business is a valuable one, with $140m in annual profit and a filling station network that is SA’s second-largest.
Industry sceptics have speculated that Glencore might be more interested in closing down Chevron’s Caltex refinery in Cape Town and using it for storage than in undertaking the investment required for the clean fuels upgrade. However, that is unlikely. Glencore has committed to retaining the local management team and workforce. More to the point, SA’s regulators would surely never agree to this.
That touches on a third key question: how will regulators respond? The two back-to-back deals – the acquisition by the empowerment shareholders and the on-sale to Glencore – will require the approval of the competition authorities. These days that also means negotiating with Economic Development Minister Ebrahim Patel. He is responsible for competition regulation and increasingly uses the provisions of the competition legislation to intervene in cross-border mergers and acquisitions to ensure they include conditions that serve the public interest.
Glencore has said it expects the deal to close in mid-2018 and Glencore insiders seem confident the deal will gain the required approval, arguing that it poses no competition issues.
If the empowerment shareholders and Glencore want to get their deal approved, they will surely have to provide Patel and the Competition Commission with at least as much comfort on the public interest issue as Sinopec is presumably doing. If they can’t get those approvals, the prize could still go to Sinopec.
If it doesn’t, what might Zuma say to Xi the next time they meet?
• Joffe is editor-at-large.
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