| Mon 20 Aug 2007, 17:01 | | ELH - Ellerine Holdings - Proposed Acquisition By |
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ELH ABLP
ELH
ELH - Ellerine Holdings - Proposed Acquisition By ABIL Of The Entire Issued
Ordinary Share Capital Of Ellerines And Cautionary Announcement
AFRICAN BANK INVESTMENTS LIMITED ELLERINE HOLDINGS LIMITED
(Incorporated in the Republic of (Incorporated in the Republic
South Africa) of South Africa)
(Registration number: (Registration number:
1946/021193/06) 1968/013402/06)
(Registered bank controlling Share code: ELH ISIN:
company) ZAE000022752
Ordinary share code: ABL ("Ellerines")
ISIN: ZAE000030060
Preference share code : ABLP
ISIN: ZAE000065215
("ABIL")
PROPOSED ACQUISITION BY ABIL OF THE ENTIRE ISSUED ORDINARY SHARE CAPITAL OF
ELLERINES AND CAUTIONARY ANNOUNCEMENT
1. Introduction
ABIL and Ellerines shareholders ("shareholders") are advised that ABIL has
submitted a letter to the board of directors of Ellerines wherein ABIL has
expressed its interest in acquiring the entire issued ordinary share capital of
Ellerines ("the Transaction"). The Board of Ellerines has considered the letter,
is supportive of the strategic rationale, and believes there is merit in
progressing the Transaction. Accordingly, both Ellerines and ABIL have permitted
due diligence investigations to commence on each other.
Shareholders should note that the abovementioned letter does not constitute a
notice of firm intention to make an offer. The making of such an offer will be
dependent inter alia upon the successful outcome of the due diligence exercises.
2. Purchase consideration
The proposed purchase consideration for the Transaction has been based on an
offer price of R85.00 per Ellerines ordinary share, which translates into R9.85
billion. ABIL intends to settle the purchase consideration by way of an issue of
new ABIL ordinary shares.
Based on the 30-day volume weighted average price ("VWAP") of ABIL, as at close
of business on 17 August 2007, of R32.10, the purchase consideration translates
into an exchange ratio of 265 ABIL ordinary shares per 100 Ellerines ordinary
shares.
In order to maintain the current level of BEE ownership in ABIL, after the new
issue of shares, ABIL is proposing to reserve 3.75% of the purchase
consideration ("BEE reserved shares"). These shares are to be used to
facilitate a BEE programme (similar to ABIL`s Eyomhlaba programme) targeted at
the Ellerines business, its preferred BEE partners and its other stakeholders,
which will be implemented shortly after the conclusion of the Transaction.
Accordingly, after deducting the BEE reserved shares, Ellerines shareholders
would receive a net purchase consideration of 255 ABIL ordinary shares per 100
Ellerines ordinary shares.
The following table sets out the details of the purchase consideration
Value Exchange ABIL shares to
Ratio be issued
R Millions Note 1 Millions
Gross valuation 9 850 265 307
BEE reserved shares (372) (10) (12)
Net consideration 9 478 255 295
Note 1 - number of new ABIL ordinary shares per 100 Ellerines ordinary shares
The purchase consideration of R85.00 (R81.81 after the BEE reserved shares)
results in the following premiums to Ellerines shareholders:
Premium Premium
based on net of
gross BEE
considerat reserved
ion shares
Based on Ellerines closing price of 47% 41%
R58.00 on 17 August 2007
Based on Ellerines 30 day VWAP to 17 32% 27%
August 2007 of R64.28
3. ABIL`s rationale for the Transaction
ABIL believes that the recent introduction of the National Credit Act ("NCA")
will have a profound effect on the landscape of the credit markets in South
Africa, particularly within ABIL`s target market. ABIL believes that, over
time, the NCA will result in greater competition, a wider variety of choice and
utility, and generally a lower cost of credit to consumers, which in turn will
grow the size of the market.
It is ABIL`s intention to continue to grow its business to significant scale so
that it can further lower the cost of credit to its clients and accelerate the
innovation of new credit products and risk underwriting models to be a
frontrunner in the changing landscape of the credit markets. To this end ABIL
has been pursuing a growth strategy in terms of the number of clients it
services, and the size of its advances book. To date, this has been achieved
largely through ABIL`s risk segmentation and price differentiation strategy,
(which, particularly for lower risk clients, has resulted in larger loans for
longer terms being offered), the lowering of the cost of credit to its clients
and an expanded distribution network of branches.
ABIL believes that the credit furniture retail market offers attractive growth
opportunities, and that Ellerines offers a strong strategic fit to pursue these
strategies. The Ellerines group is a successful and established retail business
operating a number of well known household brands through some 1 300 outlets.
In its retail credit divisions, the Ellerines group sells furniture, appliances
and electronic goods largely on credit to clients that fit within the market
that ABIL targets. ABIL estimates that approximately 70% of Ellerines` profits
are derived from its financial services activities (credit and insurance) and
30% from its retail activities.
It is ABIL`s belief that over time the credit activities of retailers will
become increasingly disintermediated. At present however, the retailing of
furniture and the provision of related credit are inextricably linked.
Furthermore, whilst vulnerable to change under the credit markets, the furniture
retailers have a strong point-of-sale advantage and a loyal client base.
The joining of the two businesses under a single ownership structure will
optimise the opportunities to play a leading role in the reshaping of the retail
and financial services offering to this market. Ellerines has a proven and
experienced retail expertise, and ABIL is confident that the retail business
will continue to grow and increase its market share, powered by an enhanced
financial services offering.
4. Ellerines` rationale for the Transaction
Expansion of financial services is a stated strategic priority of Ellerines and
the Ellerines group has spent the past 30 months exploring numerous
possibilities in this regard. Identification of an ideal partner and an optimal
structure has proven to be extremely difficult. Ellerines believes that
financial services forms the backbone of its "customer for life" strategy and
that the retail business can benefit significantly by complementary financial
services offerings.
Ellerines` vision has for some time contemplated the creation of a powerful
consumer finance organisation, capable of offering a wide range of consumer
finance, insurance and banking products. At the same time, the Ellerines group
has been highly concerned about the ongoing loss of its traditional credit
retail customers to the banking sector, and has been actively seeking ways of
taking advantage of this movement.
The Ellerines Board believes that this Transaction with ABIL offers the perfect
opportunity to fulfil its strategic objectives, stem the loss of retail credit
customers and provides the ideal platform, to address the growing burden of
regulatory compliance and to rapidly expand the Ellerines group`s reach and
range of financial services products. ABIL`s proven expertise in credit risk
optimisation and its highly effective analytics expertise will provide a
significant boost to Ellerines` credit capabilities. Ellerines also shares
ABIL`s views in striving to lower the cost of credit. The Ellerines` board
believes that ABIL provides an excellent fit with the group.
5. Benefits from the Transaction
The major opportunities and advantages that emerge from the combining of the two
groups are as follows:
- greater critical mass for the financial services business of the combined
group. The combining of the two groups will double the joint client base to
more than two million active credit clients and increase the gross advances book
to approximately R16 billion. The benefits of this critical mass will allow the
group to become more cost efficient and thereby allow it to further reduce the
cost of credit to the market;
- a greater distribution footprint with over 1 900 branches and outlets,
compared to ABIL`s existing 600 branches and outlets, improving client
accessibility and service;
- the ability to introduce ABIL`s greater price and risk differentiation
underwriting models into the Ellerines distribution channel. This creates
greater credit capacity for lower risk clients, which in turn creates greater
purchasing power and increased market share;
- improved product offerings and flexibility for Ellerines clients. ABIL
intends to implement and further innovate its card-based technology to offer
retail clients a more flexible credit offering with greater convenience. This
will also give ABIL the opportunity to achieve critical mass in its card
operations;
- Ellerines operates in a wider target market than ABIL and unlike ABIL has
gained experience in lending to clients that are informally employed and/or who
do not have bank accounts. This will enable ABIL to expand its target market
through the increased distribution footprint and gain experience in these areas;
and
- ABIL estimates that there is approximately R2 billion of surplus capital in
Ellerines that can over time be more effectively funded via debt and Tier 2
capital instruments. This in turn will lower the weighted average cost of
capital, enabling more competitive product pricing to the credit markets.
6. Conditions precedent
A notice of firm intention to make an offer by ABIL will be subject to the
satisfactory completion of due diligence investigations by ABIL and Ellerines on
each other`s businesses and the initial support of the Transaction by the Board
of Ellerines.
The parties have agreed that there would be no price adjustment if the results
of either due diligence investigation reflect a decrease in the most recent
reported net asset value of either of the respective businesses of 5% or less of
such reported values. In the case of Ellerines this would amount to
approximately R250 million and in the case of ABIL approximately R100 million.
In the event that ABIL and Ellerines proceed with the Transaction, it will be
subject to, inter alia, the fulfilment or waiver of the following conditions
precedent:
- the independent external adviser to Ellerines expressing an opinion that
the offer is fair and reasonable to Ellerines shareholders
- obtaining the requisite shareholder approvals;
- obtaining the requisite regulatory approvals to the extent necessary from,
inter alia:
- the Registrar of Banks, who has already given an "in principle" approval
for the Transaction;
- the Financial Services Board;
- the JSE Limited and the Securities Regulation Panel;
- the South African Reserve Bank; and
- the competition authorities.
7. Further announcement and cautionary
A further announcement containing details of the Transaction will be released on
SENS and published in the press in due course.
Shareholders are advised to exercise caution when dealing in their ABIL and/or
Ellerines shares until a further announcement is made.
Midrand Bedfordview
20 August 2007
Merchant Bank and transactional sponsor for ABIL
RAND MERCHANT BANK (A division of FirstRand Bank Limited)
Attorneys to ABIL
Prinsloo, Tindle & Andropoulos Inc.
Investment Bank and transactional sponsor for Ellerines
Investec Corporate Finance
Attorneys to Ellerines
Cliffe Dekker
Sponsor to Ellerines
Nedbank Capital
Date: 20/08/2007 17:01:05 Produced by the JSE SENS Department.
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