| Wed 19 Mar 2008, 17:55 | | CLH - City Lodge Hotels - Proposed 15% Black Economic Empowerment ("BEE") |
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CLH
CLH
CLH - City Lodge Hotels - Proposed 15% Black Economic Empowerment ("BEE")
Transaction ("BEE Transaction")
CITY LODGE HOTELS LIMITED
Incorporated in the Republic of South Africa)
Registration number 1986/002864/06)
Ordinary share code: CLH
Ordinary share ISIN: ZAE000001483
("City Lodge" or "the Company")
PROPOSED 15% BLACK ECONOMIC EMPOWERMENT ("BEE") TRANSACTION ("BEE TRANSACTION")
1. INTRODUCTION
City Lodge is pleased to announce that, subject to the fulfilment of the
conditions precedent set out in paragraph 8 below, it has concluded agreements,
as of 19 March 2008, in terms of which it proposes to facilitate the ownership
of a 15% direct black shareholding in the ordinary share capital of the Company
("the BEE transaction").
The BEE transaction will require, pursuant to a scheme of arrangement in terms
of section 311 of the Companies Act, 1973 (Act 61 of 1973), as amended ("the
Companies Act"), each City Lodge shareholder to dispose of 15 ordinary shares
for every 100 ordinary shares held in the Company in exchange for the scheme
consideration ("the scheme").
The total value of the BEE transaction is R485 million, based on the 10 day
volume weighted average price of City Lodge ordinary shares ("City Lodge
shares") on the JSE Limited ("the JSE") up to 18 March 2008 of R76.06 per
ordinary share ("the scheme consideration").
The BEE transaction includes the following participants:
Vuwa Investments (Pty) Ltd ("Vuwa"), which will acquire, through its 100%
shareholding in Vuwa SPV ("Vuwa SPV"), a special purpose vehicle established for
the purpose of holding the City Lodge shares, 6% of the ordinary share capital
of City Lodge;
an entity, to be established by the University of Johannesburg, School for
Tourism and Hospitality ("the Hotel School") for the education of primarily
black students of the Tourism and Hospitality Industry, which will acquire,
through a 100% shareholding in a special purpose vehicle ("the Education SPV"),
3% of the ordinary share capital of City Lodge; and
a staff trust ("the Staff Trust"), named the Injabulo Staff Trust (meaning happy
smiles), formed for the empowerment of current and future employees of City
Lodge, other than those who participate in the executive share incentive scheme,
through a 100% shareholding in a special purpose vehicle ("Staff SPV"), will
acquire 6% of the ordinary share capital of City Lodge,
(collectively, the "BEE participants").
After the implementation of the scheme:
- Vuwa SPV will have acquired 6% of the ordinary share capital of City Lodge,
which currently represents 2,551,740 City Lodge shares, valued at R194 million;
- the Education SPV will have acquired 3% of the ordinary share capital of
City Lodge, which currently represents 1,275,870 City Lodge shares, valued at
R97 million; and
- the Staff SPV will have acquired 6% of the ordinary share capital of City
Lodge, which currently represents 2,551,740 City Lodge shares, valued at R194
million.
In addition to the above, the existing 10th Anniversary Trust, with a
shareholding in City Lodge of 1.7% and which was launched in December 1995, will
be amended appropriately to ensure that it meets the requirements of the
Department of Trade and Industry, Codes of Good Practice on Black Economic
Empowerment, issued under Section 9(1) of the Broad-Based Black Economic
Empowerment Act, 2003 (Act No. 53 of 2003) ("the Codes").
2. RATIONALE FOR THE BEE TRANSACTION
City Lodge firmly supports the South African government`s BEE initiatives and is
actively involved in transforming the hospitality and tourism sector. The
Company recognises that meaningful participation by black people in the
mainstream economy is essential to the future success and prosperity of not only
the country, but City Lodge as well.
The BEE transaction has been structured in a manner that achieves the following
benefits for City Lodge:
- demonstrating City Lodge`s commitment to BEE;
- assisting in motivating and retaining black employees;
- contributing to the education of black students of the hospitality and
tourism industry; and
- embracing the principles of Broad-Based BEE ownership as envisaged by the
Codes and the requirements of the Tourism BEE Charter developed by the
Department of Environmental Affairs and Tourism, whilst bringing value to City
Lodge shareholders by selecting BEE partners that will make a meaningful
contribution to City Lodge and its business in the future.
3. OVERVIEW OF EMPOWERMENT PARTNERS
3.1 Vuwa
Vuwa is an empowerment company led by Mr. Bulelani Ngcuka who is an 18%
shareholder in Vuwa. Vuwa is majority owned and controlled by historically
disadvantaged individuals and includes African Footprint Investment Holdings, an
investment holding company controlled by black women. Vuwa`s shareholders have
previous experience in the empowerment landscape of South Africa, and have been
involved in various transactions as equity investors, empowerment advisors and
consultants. Some of Vuwa`s major investments include Basil Read Holdings
Limited, Top Fix Holdings Limited, Rolfes Technology Holdings Limited, Wesizwe
Platinum Limited and SAIL Group Limited.
3.2 University of Johannesburg School for Tourism and Hospitality
The Hotel School forms part of the University of Johannesburg and focuses its
efforts on the education of students and upskilling of professionals, interested
in pursuing careers in the hotel and leisure industry. The Hotel School was
established by the University of Johannesburg in recognition of the skills
shortage affecting South Africa`s hotel and leisure industry.
3.3 Staff
Staff will be awarded interests in City Lodge shares in accordance with the
Trust deed of the Staff Trust, established for the purposes of the BEE
Transaction. The intention of the Staff Trust is to empower and incentivise
those staff members of City Lodge who do not participate in the Company`s
executive share incentive scheme. City Lodge currently employs approximately 919
people, of which 864 staff will qualify for shares under the Staff Trust.
Currently 75% of City Lodge staff are black persons.
4. THE SCHEME
The sole purpose of Vuwa SPV, the Education SPV and the Staff SPV will be to
acquire City Lodge shares for the purpose of the BEE transaction. Vuwa SPV, the
Education SPV and the Staff SPV in co-operation with City Lodge, will together
propose the scheme for the acquisition of 15% of the ordinary share capital of
City Lodge which currently represents 6,379,350 City Lodge shares on a pro rata
basis from City Lodge shareholders for the scheme consideration of R76.06 per
share, based on the City Lodge 10 day volume weighted average price to the date
of this announcement.
Each City Lodge shareholder pursuant to the scheme and for the scheme
consideration, will dispose of 15 ordinary shares for every 100 ordinary shares
held on the record date of the BEE transaction.
5. KEY TERMS OF THE BEE TRANSACTION
5.1 Vuwa
Vuwa will establish the Vuwa SPV, a wholly owned subsidiary of Vuwa, through
which it will hold its 6% interest in City Lodge. Vuwa will contribute R50
million of equity in cash towards the repurchase of shares in terms of the
Scheme ("Vuwa Scheme Shares").
The disposal of shares by Vuwa will be restricted until 31 December 2017.
Vuwa has undertaken to ensure a minimum contribution to City Lodge`s empowerment
rating which includes a commitment to remaining at least 75% black owned and
remaining 10% owned by black women.
5.2 The Education SPV
The University of Johannesburg will form the Education Entity which will become
the 100% shareholder of the ordinary issued share capital of the Education SPV.
The beneficiaries of the Education Entity will be historically disadvantaged
black students interested in pursuing a career in hotel management and tourism.
Income accruing to the Education Entity will be used to provide bursaries to
historically disadvantaged black students.
10% of the dividends received on the City Lodge shares will flow from the
Education SPV to the Education Entity to be used towards providing financial
assistance to previously disadvantaged individuals for study costs. The balance
of the dividend will be used to service the funding arrangements. Voting of the
Education Scheme Shares will be carried out by the University of Johannesburg
through the board of the Education SPV in the best interests of the
beneficiaries for which the Education Entity was established.
The Education Entity is intended to be a vehicle into perpetuity, the economic
benefits of this vehicle will accrue in the form of dividends only.
5.3 Staff
It is intended that the beneficiaries of the Staff Trust, being eligible current
and future employees of City Lodge, will receive both economic and voting rights
in respect of the City Lodge shares held by the trust ("Staff Scheme Shares").
Such eligible employees will include all current and future black and white
employees of City Lodge who do not qualify to participate in the Company`s
executive share incentive scheme. As at the date of this announcement,
approximately 75% of eligible employees are black.
Capital and dividend distributions from the Staff Trust will take place only
once all funding has been repaid from the dividends accruing to the Staff Scheme
Shares. At that point, dividends will be distributed equally to all eligible
employees (defined as those employees having worked for City Lodge for at least
12 months preceding the distribution). Furthermore, upon conclusion of each
financial year of the Company and after the funding has been repaid, the
Trustees shall distribute as a Growth Distribution for that year, Staff Scheme
Shares to a value of 50% of the amount by which the market value of the Staff
Scheme Shares at the end of the year exceeds the market value of the Staff
Scheme Shares at the start of the year, to the eligible employees in equal
amounts.
The Trustees of the Staff Trust will vote the Staff Scheme Shares in the best
interests of the beneficiaries for whom the Staff Trust was established.
6. FUNDING
The following table is intended to provide a high level overview of the funding
structure of the BEE transaction. The Standard Bank of South Africa Limited
("Standard Bank") will subscribe for A amortising preference shares and B
zero/roll-up preference shares to be issued by each SPV. The A preference shares
are to be amortised over a 7 year period and the B preference shares are due at
the end of year 5 at market related rates.
Equity A preference B preference
share share
Vuwa SPV R50 million R80 million R64 million
Staff SPV R0 R80 million R114 million
Education SPV R0 R35 million R62 million
6.1 Vuwa SPV
The acquisition of City Lodge shares by Vuwa SPV will be partially funded by an
equity contribution of R50 million by Vuwa. Vuwa has provided City Lodge with a
bank guarantee in acceptable form for this amount of equity funding. The balance
of the purchase consideration of R144 million payable by Vuwa SPV for the
acquisition of City Lodge shares will be funded by third party preference share
funding provided by Standard Bank which will be facilitated by City Lodge in the
form of a guarantee provided by the Company in respect of all the preference
share funding.
6.2 The Education SPV
The acquisition of City Lodge shares by the Education SPV will be funded by
third party preference share funding provided by Standard Bank to the value of
R97 million which will be facilitated by City Lodge in the form of a guarantee
provided by the Company in respect of all the preference share funding.
6.3 The Staff Trust
The acquisition of City Lodge shares by the Staff Trust will be funded by
preference share funding provided by Standard Bank to the value of R194 million.
The Company will facilitate the funding of the acquisition of City Lodge shares
by providing guarantees to the funding institutions in respect of the preference
share funding.
7. BEE SCORING OF THE BEE TRANSACTION
Empowerlogic, one of South Africa`s foremost empowerment status verification
agencies, has conducted an initial scoring of the BEE transaction in accordance
with Code 100 of the Codes. It is estimated that the BEE transaction will
translate into a 22.4% black ownership of City Lodge if mandated investments, as
defined in the Codes, are excluded from the Company`s existing shareholding
structure.
8. CONDITIONS PRECEDENT
The BEE transaction is subject to the fulfillment of, inter alia, the following
conditions precedent:
1. The settling and execution of the funding agreements with Standard Bank and
the relationship agreements with the BEE participants
2. the approval, to the extent necessary, of all regulatory authorities having
jurisdiction in regard to the transaction referred to herein;
3. the approval by City Lodge shareholders in a general meeting of the
necessary resolutions required to implement the scheme;
4. the scheme being approved by the requisite majority of scheme members;
5. the High Court of South Africa sanctioning the scheme in terms of the
Companies Act; and
6. a certified copy of the Order of Court sanctioning the scheme being
registered by the Registrar of Companies in terms of the Companies Act.
9. OPINION AND RECOMMENDATION
City Lodge has ensured that the proposed BEE transaction has been structured in
a manner that embraces the principles upon which BEE was based in terms of both
the Codes and the Department of Environmental Affairs and Tourism BEE Charter
("Tourism Charter"). The proposed BEE transaction will enable the Company to
demonstrate its commitment to sustainable BEE and the on-going transformation of
the tourism and hospitality sector.
The board of directors ("the board") is of the opinion that the successful
implementation of the proposed BEE transaction will be to the long-term benefit
of the Company and its shareholders. As a result, the directors (including the
non-executive chairman Hans Enderle) intend to vote, in respect of their
interests constituting approximately 12.7% in the share capital of City Lodge,
in favour of the Scheme. The board further recommends City Lodge shareholders
vote in favour of the Scheme and the resolutions to be proposed at the general
meeting.
10. UNAUDITED PRO FORMA FINANCIAL EFFECTS OF THE BEE TRANSACTION
The unaudited pro forma financial effects of the BEE transaction were prepared
in order to illustrate the financial effects of the BEE transaction on the
published financial results of City Lodge for the six-month period ended 31
December 2007, assuming that the BEE transaction had been fully implemented on 1
July 2007, and are based on the assumptions as set out below. The unaudited pro
forma financial effects are the responsibility of the directors of City Lodge
and were prepared for illustrative purposes only and may not, because of its
nature, fairly present City Lodge`s financial position, changes in equity and
results of its operations or cash flows as a result of the BEE transaction. It
does not purport to be indicative of what the financial results would have been,
had the BEE transaction occurred on a different date. The unaudited pro forma
financial effects are presented in a manner consistent in all respects with City
Lodge`s accounting policies.
Before the BEE After the BEE Percentage
transaction(1) transaction Change (%)
Basic earnings per share (cents) 252.2 150.5(3)/(5)/(6) (40)
Headline earnings per share 252.2 150.5(3)/(5)/(6) (40)
Fully diluted headline earnings
per share (cents) 248.8 148.0(3)/(5)/(6) (41)
Net asset value per share (cents) 1,366 396(4)/(7) (71)
Tangible net asset value per
share (cents) 1,366 396(4)/(7) (71)
Notes
1. Basic earnings per share ("EPS"), Headline earnings per share ("HEPS"),
fully diluted headline earnings per share ("DHEPS"), net asset value per share
("NAV") and tangible net asset value per share ("TNAV") "Before the BEE
transaction" are based on the published financial results of City Lodge for the
six-month period ended 31 December 2007.
2. The weighted average number of City Lodge ordinary shares in issue, the
actual number of City Lodge ordinary shares in issue and the fully diluted
weighted average number of City Lodge shares in issue at 31 December 2007
"Before the BEE transaction" were 42,498,969, 42,523,353 and 43,090,614
respectively.
3. EPS, HEPS and DHEPS "After the BEE transaction" are based on the assumption
that the BEE transaction was implemented on 1 July 2007 and that there is no
additional STC charge for the City Lodge Group arising from the implementation
of the BEE transaction.
4. NAV and TNAV "After the BEE transaction" are based on the assumption that
the BEE transaction was implemented on 31 December 2007 and has been based on a
share price of R76.06 per ordinary share.
5. Earnings "After the BEE transaction" have been reduced by one off charges
in respect of IFRS 2 (Share based payments) and the effect of the preference
dividends in respect of the preference share funding provided by Standard Bank.
The preference dividends paid by the three SPVs will be reflected as an interest
expense on consolidation and has been assumed to be R22.04 million (see note 8
below).
6. The weighted average number of City Lodge ordinary shares in issue, the
actual number of City Lodge ordinary shares in issue and the fully diluted
weighted average number of City Lodge shares in issue at 31 December 2007 "After
the BEE transaction" are assumed to be 36,119,619, 36,144,003 and 36,711,264
respectively.
7. Transaction and other administrative fees of R3 million have been written
off against share premium.
8. Accounting principles and assumptions relating to adjustments:
a. The terms of the funding of the BEE shares are deemed, for accounting
purposes, to constitute the issuance of an option in City Lodge shares granted
to Vuwa SPV, Staff SPV and the Education SPV. Accordingly, the shares held by
the three SPV`s will be recognised as treasury shares for accounting purposes.
b. In terms of IFRS 2 (Share based payments), the fair value of the deemed
option is an expense which will be charged through the income statement of City
Lodge. For the purposes of preparation of the pro forma financial effects, the
fair value of the deemed options for the Vuwa SPV and Education SPV is assumed
to be R30.8 million (0.97% of market capitalisation of R3 168.8 million on 18
March 2008). The option valuation is based on the binomial call option valuation
technique. Various assumptions, including the price at which City Lodge`s shares
traded on the JSE, are taken into consideration.
c. The deemed option value attributable to the Staff Trust will be expensed as
and when shares are distributed from the Staff Trust holding those shares.
d. The deemed option value attributable to the Vuwa SPV and the Education SPV,
which is charged upfront and once off through headline earnings, is assumed to
be R30.8 million.
e. The deemed option value relating to the Vuwa SPV and the Education SPV at
the date of the BEE transaction is reflected on the balance sheet as a share
based payment reserve as part of capital and reserves. The interest of
beneficiaries in the Staff Trust is assumed to be equity settled. The deemed
option value attributable to the Staff Trust will be reflected on the balance
sheet as a share based payment reserve once shares are distributed from the
Staff Trust holding these shares.
f. The actual deemed option value will be finally determined based on
assumptions applying on the date that there is a shared understanding of the
terms and conditions of the transaction between City Lodge and the BEE
participants, subsequent to approval by the City Lodge shareholders and the date
on which the BEE transaction becomes unconditional. Accordingly, the actual
deemed option value charged to the income statement of City Lodge will differ
from the pro-forma calculation.
g. The effect of the A and B preference share funding provided by Standard
Bank on the back of a guarantee provided by City Lodge has been taken into
account as a liability on consolidation of the three SPVs in the calculation of
the TNAV and NAV per share after the transaction.
11. EFFECT ON FUTURE DIVIDEND DECLARATIONS BY CITY LODGE
The above financial effects, some of which are non-recurring, do not have any
cash impact on City Lodge and as such it is the intention that future dividend
declarations will be considered on a pre-transaction basis. The transaction is
therefore not expected to have any effect on future dividend payments.
12. IMPORTANT DATES AND TIMES
The salient dates and times in respect of the BEE transaction are set out below:
2008
Scheme circular posted on Wednesday, 21 May
Notice of scheme meeting published in the
Government Gazette on Wednesday, 28 May
Last day to trade in City Lodge shares in
order to be recorded in the register of City Lodge
shareholders to vote at the scheme meeting on Monday, 02 June
Record date to vote at the scheme meeting Monday, 09 June
Last day for receipt of forms of proxy for the
scheme meeting by 13:00 on Tuesday, 10 June
Last day for receipt of forms of proxy for the
general meeting by 13:00 on Tuesday, 10 June
General meeting of shareholders to be
held at 13:00 on Thursday, 12 June
Scheme meeting to be held at 13:00 or
ten minutes after the conclusion of adjournment
of the general meeting, whichever is the later, on Thursday, 12 June
Results of the general meeting released on SENS on Thursday, 12 June
Results of the scheme meeting released on SENS on Friday, 12 June
Results of the general meeting published in
the press on Friday, 13 June
Results of the scheme meeting published in
the press on Friday, 13 June
Court hearing to sanction the scheme on Tuesday, 24 June
Last day to trade in City Lodge shares to
participate in the scheme on Friday, 4 July
First day ex-entitlement to the scheme
consideration on Monday, 7 July
Record date for the scheme on Friday, 11 July
Pay date for the scheme on Monday, 14 July
Shares may not be dematerialised or rematerialised between Monday, 7 July 2008
and Friday, 11 July 2008, both days inclusive.
The above important dates and times in relation to the scheme meeting and
general meeting are subject to change. Any changes will be released on SENS and
published in the press
FURTHER IMPORTANT DETAILS
A circular setting out the full details of the BEE transaction, the scheme and
the general meeting, will be posted to City Lodge ordinary shareholders in due
course.
Bryanston
19 March 2008
Investment bank and transaction sponsor to City Lodge
Standard Bank
Corporate law advisor to City Lodge
Edward Nathan Sonnenberg
Financial adviser to Vuwa
AMB
Corporate law advisor to Vuwa
STRB Attorneys
Independent reporting accountants to City Lodge
KPMG
Sponsor to City Lodge
JPMorgan
Date: 19/03/2008 17:55:25 Produced by the JSE SENS Department.
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