| Thu 13 Dec 2007, 17:24 | | ERB - Erbacon Investment Holdings - Acquisition Of Davgram Construction (Pty) |
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ERB
ERB
ERB - Erbacon Investment Holdings - Acquisition Of Davgram Construction (Pty)
Ltd T/A Armstrong Construction
Erbacon Investment Holdings Limited
(Incorporated in the Republic of South Africa)
(Registration number 2007/014490/07)
Share code: ERB & ISIN: ZAE000111571
("Erbacon" or "the company")
ACQUISITION OF DAVGRAM CONSTRUCTION (PTY) LTD T/A ARMSTRONG CONSTRUCTION
1. INTRODUCTION
Shareholders are referred to paragraph 16.5, and Annexures 12 and 13, of the
prospectus issued on 29 November 2007 ("the prospectus"). Erbacon has, subject
to the fulfilment of the remaining conditions precedent as set out in 4.6 below,
purchased all of the issued shares in and claims against Davgram Construction
(Pty) Limited t/a Armstrong Construction ("Armstrong Construction") from Messrs
David Graham Armstrong and Wayne Michael Ric-Hansen ("the Armstrong
vendors")("the acquisition").In terms of the JSE Listings Requirements the
acquisition qualifies as a category 2 transaction and the Armstrong vendors are
not related parties, as defined.
2. DESCRIPTION OF ARMSTRONG CONSTRUCTION`S BUSINESS
The services offered by Armstrong Construction include:
- General construction of commercial and industrial buildings
The company specialises in the construction of industrial buildings, including
factories, warehouses and commercial buildings, including office parks, shopping
malls, retail developments and residential developments. Its geographical
presence in the Durban and Pietermaritzburg area, has meant that the company has
built up a successful and impressive private client base in the Kwazulu Natal
area.
- Rural shopping centres
The company has completed numerous rural projects and has built up a good
reputation in respect of these types of projects. At present, the company works
with primarily one client in these areas, but it is well positioned to tap into
the government expansion and investment earmarked for such developments.
- Ancillary services associated with such construction
The company has a skilled team of contract managers, quantity surveyors and
general foremen to ensure that every aspect of any given construction project
can be dealt with. In addition, the workshop situated in Pietermaritzburg is
fully equipped such that all maintenance of plant and machinery is handled on an
in- house basis.
3. RATIONALE FOR THE ACQUISITION
The acquisition fills an important gap in the suite of services as provided by
Erbacon Construction (Pty) Limited and Erbacon Small Plant (Pty) Limited,
Erbacon`s two wholly-owned subsidiaries (collectively referred to as "the
Erbacon group"). With the addition of Armstrong Construction, the Erbacon group
will be able to provide a full range of civil engineering, small plant hire and
construction services. Both Erbacon and Armstrong Construction will therefore
benefit by each providing those services that the other is lacking in its
offering. In this manner, various synergies and cost savings may be exploited
between the companies. Armstrong Construction`s turnover has more than doubled
since 2004 and its presence within the Erbacon group will make a significant
contribution going forward.
4. TERMS AND CONDITIONS OF THE ACQUISITION
4.1 On 11 December 2007 Erbacon and the Armstrong vendors entered into the
disposal agreement in respect of the acquisition in terms whereof, subject to
the fulfilment of the remaining conditions precedent, as set out in 4.6 below,
Erbacon acquired all of the issued shares in and claims against Armstrong
Construction.
4.2 The purchase consideration is a maximum amount of R78 455 000 in aggregate,
subject to certain adjusted audited profits being achieved. This purchase
consideration is to be settled in the form of an initial payment and a deferred
payment, as follows:
4.3 Initial payment:
Upon the acquisition becoming unconditional, an amount of R51 950 000 will
become payable to the Armstrong vendors, with R20 000 000 thereof being payable
in cash, and the balance thereof being payable in Erbacon shares, with such
shares to be issued at an issue price of R2.86 per share, representing
11 171 329 Erbacon shares in total.
4.4 Deferred payment:
The deferred payment will only become payable if (and to the extent that) the
audited after tax profits for Armstrong Construction for the period ending 29
February 2008 adjusted for any unrecoverable bad debt ("adjusted audited
profits")exceeds R7 992 307. The deferred payment will be equal to the adjusted
audited profits multiplied by a p/e ratio of 6.5 and deducting from this amount
the initial payment referred to in 4.3 above, subject to a maximum deferred
payment of R26 505 000 being payable. The deferred payment shall be settled by
way of the issue of Erbacon shares on the same basis as per 4.3 above.
4.5 Should the adjusted audited profits not exceed R10 650 000, then the
purchase consideration as referred to in 4.2 above shall be calculated on a
forward p/e ratio of 6, as opposed to 6.5, such that the maximum deferred
purchase consideration shall be an amount equal to R11 950 000, to be discharged
by way of the issue of Erbacon shares on the same basis as per 4.4 above.
4.6 The conditions precedent to the acquisition that remain to be fulfilled
are:
4.6.1 the approval, and ratification, of the acquisition by the board of
directors of Erbacon on or before 28 February 2008;
4.6.2 approval by the Competition Authorities of the acquisition on or
before 15 April 2008; and
4.6.3. approval by all other regulatory authorities required for the
implementation of the acquisition, including the JSE Limited, for the issue and
listing of the Erbacon shares as referred to in 4.3 - 4.5 above.
All other conditions precedent to the acquisition, including the conclusion of
three-year service and restraint agreements by the Armstrong vendors in favour
of Erbacon and Armstrong Construction, have been fulfilled.
4.7 Upon the acquisition becoming unconditional, each of the Armstrong vendors
will be appointed as non-executive directors to the board of Erbacon.
4.8 Upon the acquisition becoming unconditional, each of the Armstrong vendors
will be restricted in the disposal of their Erbacon shares, such that 25% may be
disposed of each year until 28 February 2011, but subject always to the section
21.3 (g) of the JSE`s Listings Requirements being complied with.
5. UNAUDITED PRO FORMA FINANCIAL EFFECTS OF THE ACQUISITION
Set out below are the unaudited pro forma financial effects of the acquisition
based on the unaudited pro forma results of the Erbacon group as at 28 February
2007 as more fully set out, and extracted from, Annexure 4 of the prospectus.
The unaudited pro forma financial effects of the acquisition have been prepared
for illustrative purposes only so as to provide information as to how the
acquisition might have impacted on the unaudited pro forma results of the
Erbacon group, and, because of their nature may not fairly present Erbacon`s
financial position, changes in equity or results of operations or cash flows
after the acquisition nor of the effect on Erbacon`s future earnings. The
preparation of the unaudited pro forma financial effects is the responsibility
of the directors of Erbacon.
Before After
the the Change
acquisiti acquisiti
on on
(1)(2) (3)(5)(6)
(cents) (cents) (%)
Earnings per share 12.83 14.41 12.32
Headline earnings per share 12.38 13.98 12.99
Diluted earnings per share(5) 12.83 13.44 4.71
Diluted headline earnings per 12.38 13.04 5.33
share(5)
Net asset value per share(6) 65.63 85.00 29.51
Net tangible asset value per 65.63 31.05 (52.69)
share(6)
Number of shares in issue(4) 116,298,0 127,505,6 9.64
00 93
Weighted average number of 116,298,0 127,505,6 9.64
shares in issue(4) 00 93
Diluted number of shares in 116,298,0 136,773,1 17.61
issue(5) 00 75
Diluted weighted average 116,298,0 136,773,1 17.61
number of shares in issue(5) 00 75
Notes
(1) Extracted from the pro forma unaudited results of Erbacon for the year
ended 28 February 2007 as extracted from Annexure 4 of the prospectus, after the
share repurchase.
(2) It is assumed that the private placing of 19 383 000 Erbacon shares at
R2.75 per share, as detailed in the prospectus, was effected on 1 March 2006 and
that the subscription amount of R53.3 million was raised and placed on call.
Interest has been calculated on the subscription amount less the R20 million for
the Armstrong acquisition (being the cash portion of the initial payment as set
out in 4.3 above), at an average pre-tax rate of 8.9% for the full year.
(3) The income statement financial effects per share have been calculated on
the basis that the acquisition was effected 1 March 2006 and that all conditions
precedent have been fulfilled i.e. the initial payment was made on 1 March 2006
as set out in 4.3 above.
(4) In addition to the 19 383 000 Erbacon shares issued in terms of the private
placing as detailed in the prospectus, a further 36 364 Erbacon shares were
issued to D van Huyssteen, in his capacity as an authorised executive of the
designated adviser, in lieu of R100 000 (excl. VAT)of fees in cash. Such shares
were also issued at R2.75 per share.
(5) Diluted earnings and headline earnings have been calculated on the basis
that the profit warranties in respect of the acquisition have been achieved and
that the maximum number of 20 438 811 additional Erbacon shares will be issued
at R2.86 per share in terms of the deferred purchase consideration as set out
in 4.4 above.
(6) The net asset value and net tangible asset value per share have been
calculated on the basis that the acquisition was effected on 28 February 2007
and that the initial number of 11,171,329 Erbacon shares has been issued at
R2.86 per share in terms of the initial payment as set out in 4.3 above. In the
event that the terms for a maximum deferred payment are met as set out in 4.4
above, an additional 9,267,482 shares will be issued. For the purpose of the
calculation the deferred payment has been accounted for as an amount owed to
vendors in current liabilities.
(7) No purchase price allocation in terms of IFRS 3: Business Combinations, has
been conducted for the purposes of determining the pro forma financial effects
of the acquisition. The difference between the maximum purchase consideration
and the historic net asset value of Armstrong at 28 February 2007 has
provisionally been treated as goodwill that is not amortised. Post completion of
the acquisition, Erbacon will analyse the difference further between the fair
value of net tangible assets, identifiable intangible assets that will be
subject to amortisation and goodwill as required by IFRS.
6. ARMSTRONG CONSTRUCTION BECOMING A SUBSIDIARY OF ERBACON
Upon fulfilment of all of the conditions precedent to the acquisition, Erbacon
will take such steps as may be necessary in order to ensure that Armstrong
Construction adopts a JSE compliant set of articles of association.
7. FURTHER ANNOUNCEMENT
Shareholders will be notified once all of the remaining conditions precedent to
the acquisition, as set out in 4.6 above, have been fulfilled.
13 December 2007
Glen Anil
PSG Capital (Proprietary) Limited : Corporate Adviser
BDO Questco (Proprietary) Limited : Designated Adviser
Hofmeyr Herbstein & Gihwala Inc. : Attorneys
PricewaterhouseCoopers Inc. : Auditors and Reporting Accountants
Date: 13/12/2007 17:24:34 Produced by the JSE SENS Department.
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