| Wed 31 Oct 2007, 17:00 | | CRM - Ceramic Industries - Announcement Regarding |
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CRM
CRM
CRM - Ceramic Industries - Announcement Regarding Black Economic Empowerment
Transactions And Cautionary Announcement
CERAMIC INDUSTRIES LIMITED
(Registration number 1982/008520/06)
Incorporated in the Republic of South Africa
Share code: CRM & ISIN: ZAE000008538
("Ceramic Industries" or "Group"- being Ceramic Industries and its
subsidiaries")
Announcement regarding Black Economic Empowerment transactions and cautionary
announcement
1. Introduction
Further to the announcement made on 11 September 2007, Ceramic Industries is
pleased to announce that it is in the process of finalising a number of
transactions relating to Black Economic Empowerment ("BEE").
Ceramic Industries operates in a highly competitive global industry. The
industry ranges from up-market, fashionable producers (primarily in Italy and
Spain) through to low-cost, commodity producers, of whom China is the most
prominent. In order to compete effectively, Ceramic Industries has to be a low-
cost producer.
The Group has a long record of continuous improvement in quality, productivity
and cost reduction, achieved through a focus on developing the skills of
employees and by an ongoing investment in the latest technologies. Evidence of
this is seen in both Pegasus and Betta, which are world-class factories
employing leading technology.
Ceramic Industries is furthermore committed to the ongoing transformation of
South Africa and supports the principles embodied in the BEE Code and the Mining
Charter ("the Charter"). The Group has achieved substantial success in its
employment equity plans, and a black executive runs the group`s award winning
factory, Vitro. In addition, staff are encouraged to think as owners of their
respective divisions or factories by a profit sharing scheme through which
approximately 7% of divisional or factory pre-tax profit is distributed to
factory employees, the majority of whom are historically disadvantaged South
Africans ("HDSA").
The Board of Directors of Ceramic Industries (the "Board") is committed to
improve the Group`s performance across the Department of Trade and Industry`s
generic scorecard for Broad Based Black Economic Empowerment (the "BEE
Scorecard") and has therefore engaged with BEE groups who are able to assist the
Group to meet this commitment.
The purpose of this announcement is to inform shareholders of initiatives
regarding the empowerment of the Group`s clay quarries through employees ("the
Quarry Transaction"), as well as updating shareholders on progress in
empowerment at ownership level ("the BEE Partners Transaction") (collectively,
the "Transactions").
2. Ceramic Industries` clay quarries
2.1 Background
Clay is a low-price product and, excluding transport costs to the factories, is
not a material cost input for the factories. In addition, given the Group`s
focus on minimising costs, the clay quarries do not operate as profit centres.
However, the provision of clay is an integral part of the Ceramic Industries`
business and, without the security of clay supplies, the Group would not have
invested over R1 billion in its production facilities in South Africa. The
Group`s clay quarries, which are "wasting assets", have a value of less than 1%
of the market capitalisation of Ceramic Industries.
Quarries are defined as mines in the Charter and, as a result, are required to
have 26% HDSA ownership by 2014.
2.2 Empowerment of Ceramic Industries` quarries
Ceramic Industries proposes to establish a new company ("QuarryCo") to acquire
all of the Group`s quarries at fair value, funded by Ceramic Industries by way
of an interest-free loan account. All employees of the Group who do not
participate in any share incentive schemes ("Employees") will be entitled to
acquire units in a trust which will acquire 60% of the shares in QuarryCo the
balance being held by Ceramic Industries. HDSA employees will then effectively
own a majority interest in QuarryCo. Based on current employee numbers,
Employees through the trust will own 60% of QuarryCo, of which 55% will be HDSA
employees.
Because QuarryCo is a wasting asset and is strategic to the Group, this
transaction will allow Employees to exchange their interest in QuarryCo for
shares in Ceramic Industries in 2017. This proposal will also entail Ceramic
Industries retaining the financial responsibility for the ongoing rehabilitation
obligations at all quarries as required by the Department of Minerals and
Energy.
It is proposed that the Group will purchase the requisite number of Ceramic
Industries shares in the market in order to hedge its exposure to Employees.
Ceramic Industries` Employees will therefore collectively be entitled to all the
growth in the value of and the dividends from the Ceramic Industries shares over
the period of the Quarry Transaction, while the Group will retain a contractual
right to access and mine the necessary raw materials from the quarries to supply
its operating divisions.
Based on the current estimated value of QuarryCo of R20 million, and a market
price of a Ceramic Industries share of R180, the Group`s Employees will have a
collective interest in approximately 67 000 Ceramic Industries shares with a
value of approximately R12 million.
This transaction will:
- acknowledge the individual contributions made by Employees towards the success
of Ceramic Industries;
- allow Ceramic Industries to comply with the Charter shareholding requirements
in respect of the quarries;
- provide Employees with a risk-free investment in the quarries, which is
convertible into a JSE Limited ("JSE") listed share; and
- allow Ceramic Industries to continue to prosper as a low cost producer.
3. Selection of BEE partners to assist the Group to meet its commitment across
the BEE Scorecard
The Group has entered into negotiations with Peotona Group Holdings
(Proprietary) Limited ("Peotona") and Aka Capital (Proprietary) Limited ("Aka")
(collectively the "Corporate BEE Partners"), based on their ability to assist
the Group to meet its commitment across the BEE Scorecard, with an initial
emphasis on transformation, skills development, preferential procurement and
enterprise development. In addition, the Corporate BEE Partners will make a
substantial contribution to developing relationships with municipalities and
communities with whom the Group interacts.
Peotona, which was established in 2005 by Cheryl Carolus, Wendy Lucas-Bull,
Dolly Mokgatle and Thandi Orleyn, is committed to the development of solutions
for sustainable community-based enterprises in disadvantaged communities through
`smart partnerships` to provide strategic advantage to businesses.
Aka is a private equity and investment holding company that was founded in 2001
by Reuel Khoza, Sam Nematswerani and Gary Morolo. Aka identifies and invests in
growth-industry opportunities to create shareholder value. Aka`s mission
statement is "To create a model for sustainable Black Economic Empowerment in
order to contribute towards the economic transformation of South Africa". Aka
applies innovative and appropriate strategies to widen the participation of
black people in its ventures and provides transformation and empowerment
expertise to its investee companies.
Detailed discussions with the Corporate BEE Partners have identified ways in
which the elements of the scorecard can be covered, for example:
- Rural areas are under-serviced with the distribution and sales of tiles, given
limited access to finance, the small scale and logistical difficulties. The
Corporate BEE Partners will use their networks to identify women entrepreneurs
who can fill this need. Italtile Limited has also offered to assist with this
project, which will also encompass the training of artisans to install tiles and
sanitaryware; and
- Peotona has identified a project that could capture the CO2 produced by
burning natural gas in the Group`s kilns, by growing spirulina. This project
could create job opportunities and the chance to raise skills in communities
adjoining the Group`s factories, and the spirulina could be used as a food
supplement to improve health and boost the immune response for the benefit of
disadvantaged communities;
Ceramic Industries recognises the need to create a broad-based vehicle that will
act for the benefit of HDSA communities surrounding the Group`s factories (and,
in particular, the women of these communities). This vehicle will most likely be
a public benefit organisation ("PBO Trust") and will administer the projects
outlined above for the benefit of HDSA participants, as well as additional
projects identified by the trustees of the PBO Trust or HDSA communities with
whom the Group interacts. Peotona will, conjunction with the trustees take the
lead in managing the PBO Trust.
Given the importance of employees to the ongoing success of the Group, Employees
will participate in the BEE transaction, in addition to their ongoing share in
divisional profits and ownership of the quarries. The Employees` participation
in the Group`s empowerment transaction will be through a special purpose vehicle
created for the sole purpose of holding the shares on behalf of Employees.
The Corporate BEE Partners, the PBO Trust and Employees are collectively defined
as "BEE Partners".
4. Broad terms of the proposed BEE Partners Transaction
The Board has agreed to issue 2 029 283 Ceramic Industries shares ("the specific
issue") to the BEE Partners, such that their interests in the capital of the
Ceramic Industries after the specific issue will be as follows:
PBO Trust 4%
Employees 2%
Peotona 2%
Aka 2%
Subject to the approval of Ceramic Industries shareholders and requisite
regulatory approvals, the shares will be issued to the BEE Partners at a nominal
value, and the BEE Partners will be entitled to all the risks in and benefits of
the shares. A notional capital account will be established, based on the market
value of the shares at inception.
Notional interest on this loan account will be calculated as follows:
- In the case of the PBO Trust and Employees - 90% of the prime rate;
- In the case of the Corporate BEE Partners, either 75% or 120% of the prime
rate - the preferential rate will apply if the relevant Corporate BEE Partner
meets its undertakings to assist the Group in achieving its targets in terms of
the BEE Scorecard.
The BEE Partners will be entitled to sell their shares after the seventh
anniversary of the transaction`s implementation and will be required to sell
sufficient shares (valued at the then market price) back to Ceramic Industries,
at the same nominal price at which they were issued, in order to settle the
amount on the notional capital account.
In the event that the BEE Partners have not settled the notional capital account
on the eighth anniversary, Ceramic Industries will be entitled to purchase
sufficient shares from them, on the same basis as above, to settle the account.
The BEE Partners will retain any shares not repurchased by Ceramic Industries,
for their own account.
5. Appointments to the Board
Subject to the Transactions being implemented, the Board will be strengthened by
the appointment of Thandi Orleyn and Sam Nematswerani as non-executive
directors.
6. Conditions precedent to the transactions
Further to the signature of transaction agreements, it is proposed that the
Transactions will be subject to, inter alia, the following conditions precedent:
- the passing of all necessary resolutions by the requisite majority of
shareholders at a general meeting of Ceramic Industries;
- the approval of the JSE to the extent required; and
- the approval of other regulators to the extent required, including the
Department of Minerals and Energy, of the Transactions set out in this
announcement.
7. Documentation
A circular containing the full details of the Transaction, including a notice of
general meeting, will be posted to Ceramic Industries shareholders in due
course.
8. Cautionary announcement
Ceramic Industries shareholders are advised to exercise caution when dealing in
Ceramic Industries securities until a further announcement regarding the
signature of the transaction agreements and the disclosure of the financial
effects of the Transactions is made.
Vereeniging
31 October 2007
Financial adviser
Morgan Stanley South Africa (Pty) Ltd
Legal adviser
MJ King Inc.
Mining Law adviser
Hofmeyr Herbstein & Gihwala Inc.
Sponsor
Nedbank Capital
Date: 31/10/2007 17:00:01 Produced by the JSE SENS Department.
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