Ernest Kwinda, corporate financier at Rand Merchant Bank, says this approach differs radically from past transactions that were often done using a special-purpose vehicle that was provided with loan finance by the banking institution. The funds were used to purchase shares in the company.

However, these empowerment enterprises tended to be highly geared and did not have access to cash flow, as dividends were utilised to repay the debt.

"These transactions were often not sustainable because they were highly leveraged to share-price performance and were correlated to the performance of the market."

The move towards company-facilitated transactions is having a positive effect on the outcome of empowerment deals, he says.

"Today, many companies are funding or facilitating their empowerment transactions."

He says this approach often takes the route of issuing deferred shares to empowerment partners, with the shares converting to ordinary shares after a specified period of time such as five or 10 years.

The shares are often discounted or issued at par value instead of at market-related prices, and the dividends are used to pay off the shares, says Kwinda.

"Imperial adopted this structure in its transaction with Ukhamba and in its second empowerment transaction with Lereko Mobility.

"In the second deal, Imperial issued preferred ordinary shares, a special class of shares, at par value," he says.

"This gave the shares dividend preference, and the dividend was fixed for a period of time."

He says the difference between the market price and par value is paid by the empowerment company out of dividends.

While this approach does not constitute a loan by the vendor company, it does mimic or synthesise a loan structure and it facilitates the empowerment transaction, he says.

Nampak used a similar structure for its empowerment deal, as did Old Mutual, he says.

"Companies cannot lend money for the purchase of their own shares. Therefore, this approach enables companies to facilitate empowerment without breaching the law in the form of Section 38 of the Companies Act.

"In addition, company-funded transactions cost less for the empowerment company than bank-funded deals, and this makes more deals sustainable," Kwinda says.

He says this approach to facilitation is likely to be used more frequently in the future.

In addition, it is possible that Section 38 may be modified to allow companies to fund empowerment transactions directly, eliminating the need for these complex structures, he says.

William Blackie, director, corporate finance at Standard Bank, says due to the necessity for unencumbered ownership, namely ownership without debt, which has come through strongly in the codes, there is a higher level of vendor facilitation being seen.

"There are many ways in which vendors can facilitate empowerment transactions. This facilitation provides a lot more flexibility in the funding structures.

"You usually have a discount or a capital contribution to work with. This goes to increasing the certainty of the outcome," Blackie says.

Kevin Kerr, joint head of corporate finance at Investec, says a number of deals have been concluded in which companies have issued shares at par value, as opposed to their market value.

"They have used the value inherent in the shares to obtain funding from third party financiers," he says.

Kerr says companies taking this approach have tended to issue a percentage of the company to the empowerment entity - either as an initial amount up front (3% to 4%) or a larger amount (about 10% to 11%) that is clawed back over time to an estimated 3% to 4%.

He says the Primemedia deal Investec worked on used this approach. Mineworkers Investment Company already held a significant investment in the company and committed the value of this existing stake, along with the new par value shares, to build a much larger holding in Primemedia.

Rob Wessels, joint head of corporate finance at Nedbank Capital, says until recently many empowerment deals were funded using special-purpose vehicles, and their success was very dependent on share-price performance.

"People are now structuring deals in a smarter manner that is allowing more funding parties to become involved in the transaction," he says.

"These deals tend to include an element of trickle cash-flow to the empowerment partners," Wessels says.

In the past, dividends were completely devoted to paying off debt incurred in empowerment deals, he says.

Today, most of the cash flow goes to pay off the debt but the balance goes to the empowerment company. In addition, many people have realised that deals cannot be structured on the basis of short-term share-price performance, leading to longer-term deals, often between seven and 10 years, Wessels says.