ArcelorMittal Deal Pits Investors Against Governance

arcelormittal south africa ltd.’s planned sale of a 9.1 billion rand ($1.3 billion) stake to a group of black investors, including a son of president jacob zuma, is pitting shareholders against united nations principles on good governance, investors say.

the deal, aimed at meeting laws designed to compensate for discrimination during apartheid, is forcing investors to weigh their financial needs against ethical rules set out in the un’s principles for responsible investment, said david couldridge, an investment analyst at element investment managers, which owns shares in the steelmaker. jagdish parekh, who is investing in the company together with zuma’s son duduzane, declined to comment when called yesterday.

under the terms of the deal, arcelormittal south africa is selling a 26 percent stake to black investors. the ayigobi consortium, a group of investors led by sandile zungu, who sits on the boards of south african companies including miners and shippers, will receive 21 percent.

five of the steelmaker’s biggest minority shareholders, including the public investment corp., africa’s largest pension fund manager, and sanlam ltd., have said they’ll oppose the deal because of concerns about corporate governance. the pic, which manages government pensions, “questions the ethics” of the proposal and won’t support it until “perceived irregularities” are resolved, it said on oct. 4.

‘politically sensitive’

arcelormittal, which has a controlling stake in the south african unit, is “monitoring the situation in south africa very closely,” it said in an e-mailed response to questions, declining to comment further.

both sanlam and the pic have signed the un charter, which has 800 members with combined assets of $22 trillion. the rules compel investors to always “be an active shareholder and not sit on the fence,” couldridge said from cape town on oct. 5.

the deal is “politically sensitive” and has been “rushed through,” with buyers able to sell in four years and with no proof it will benefit a broad range of black people, he said.

“a few individuals are receiving the majority of the shares when it should be the other way around,” couldridge said. “apart from influence, what else do they bring?”

duduzane zuma plans to give away 70 percent of his stake in arcelormittal south africa, worth almost 1 billion rand, to disadvantaged south africans, he said in a sept. 12 statement.

disputed mineral rights

the deal hinges on disputed mining rights at sishen, south africa’s largest iron ore mine. imperial crown trading ltd., whose owners form part of ayigobi, was awarded part of the prospecting rights to the mine and deposit after arcelormittal south africa missed a renewal deadline.

duduzane zuma, 28, is also in business with imperial’s biggest shareholder, parekh.

the award to imperial sparked a battle with anglo american plc’s kumba iron ore ltd., sishen’s owner, which demanded the disputed right for itself. kumba also used the conflict to cancel a supply deal that had given the steelmaker most of its ore at a discount.

“how imperial got the mineral rights must be clarified,” said asief mohamed, chief investment officer of aeon investment management, from cape town. “if no-one can sort that out, they shouldn’t even be talking about the empowerment deal. these resources belong to the people of this country.”

‘much cheaper’

arcelormittal south africa said on aug. 10 that it agreed to buy imperial to regain the sishen rights. the deal will be canceled if imperial loses the rights in court.

if the empowerment deal proceeds, even with concerns about governance, it may be “much cheaper” than arcelormittal paying kumba for the full value of the rights, simon hudson-peacock, head of specialist equities at cape town’s cadiz asset management, said by e-mail.

in addition to minority investors, labor unions and political parties have voiced their opposition to the deal. the opposition democratic alliance party said on oct. 6 that it will ask the financial services board to probe the deal if its approved by shareholders, while the congress of south african trade unions, the nation’s largest labor federation, said the transaction is “seriously embarrassing” and should be stopped.

south african regulators, including the financial services board and the securities regulation panel, say the transaction is outside their jurisdiction.

‘against the deal’

“if a significant number of minorities are against the deal, then arcelormittal is going to have to do something,” said john green, director of global business development at investec asset management, from johannesburg.

while investec, another signatory to the un’s code, is still “engaging” the company to improve its understanding of the situation, arcelormittal south africa needs to maintain good relations with investors in case it needs to raise funds in the future, green said.

shares in the steelmaker rose 75 cents, or 0.9 percent, to 81.65 rand as of 1:30 p.m. in johannesburg, reducing the decline since the start of the year to 21 percent.