| Mon 21 Jul 2008, 8:40 | | BWK - Buildworks Group Limited - Proposed acquisition of consolidated power |
|
BWK
BWK
BWK - Buildworks Group Limited - Proposed acquisition of consolidated power
projects (PROPRIETARY) limited ("CONCO") by Buildworks and withdrawal of
cautionary announcement
Buildworks Group Limited
(Incorporated in the Republic of South Africa)
(Registration number 2007/004935/06)
Share Code: BWK ISIN:ZAE000110219
("Buildworks" or "the Company")
PROPOSED ACQUISITION OF CONSOLIDATED POWER PROJECTS (PROPRIETARY) LIMITED
("CONCO") BY BUILDWORKS AND WITHDRAWAL OF CAUTIONARY ANNOUNCEMENT
1 INTRODUCTION
Shareholders are referred to the Company`s interim results, published on 2 April
2008, in terms of which Buildworks stated that it would continue to identify and
assess value enhancing acquisition opportunities in the construction and
infrastructure related industries. In accordance with this strategic intention,
the directors of Buildworks are pleased to announce that Buildworks has
concluded an agreement ("the Agreement"), subject to the fulfilment of the
Conditions Precedent set out in paragraph 2.6 below, to acquire the entire
issued ordinary share capital in and shareholders` claims against CONCO ("the
Proposed Acquisition"), one of South Africa`s foremost suppliers of power-
related services to the electricity supply industry.
The Proposed Acquisition represents a unique and exciting opportunity for
Buildworks to realign its portfolio of assets. Furthermore, the Proposed
Acquisition significantly enhances the Company`s ability to benefit from the
parastatals` and publics` planned roll-out of infrastructure development and
related spend in South Africa specifically in relation to South Africa`s power
generating capacity and the distribution and transmission thereof - two areas in
which CONCO is considered an industry leader.
2 DETAILS OF THE PROPOSED ACQUISITION
2.1 CONCO - NATURE OF THE BUSINESS
CONCO is a leading provider of industry expertise in turnkey solutions and power
services for the electricity supply industry. CONCO`s expertise in the design,
project management, construction and commissioning of high voltage switchyards,
substations and overhead power lines and Green Energy Projects has resulted in
CONCO gaining a reputation as an established market leader with a proven track
record achieved from over 21 years of industry experience. To date CONCO has
completed in excess of 450 projects throughout South Africa and on the African
continent, including:
- the design, project management, procurement, site management, construction,
testing, commissioning and quality control of high voltage switchyards and
substations;
- the design, project management, procurement, site management, construction,
testing, commissioning and quality control of overhead power lines;
- the design and construction of the electrical infrastructure for wind farms
(Green Energy);
- the design, manufacture and implementation of advanced protection and
automation schemes; and
- the auditing, maintenance, refurbishment and extension of high voltage
substations and transmission lines.
CONCO is ideally positioned in a high growth market with relatively few
competitors offering high voltage solutions. The key drivers that set CONCO
apart from its competitors include:
- offering a completely engineered product;
- the ability to produce detailed and accurate costing schedules which
facilitate an accurate tender and pricing process;
- an outstanding track record of project delivery in remote regions;
- experienced, competent and dedicated specialists, including Project
Managers, Engineers and Technicians;
- an ISO 9001 Quality Assurance certification;
- a Construction Industry Development Board rating of 9;
- CONCO has an overall BBBEE level 5 status; and
- strong branding and the ability to offer turnkey solutions throughout South
Africa, Africa and the Middle East.
CONCO currently has a presence in South Africa, Angola, Botswana, Namibia,
Lesotho, Ghana, Mauritius, Swaziland, Mozambique, Sudan, Democratic Republic of
Congo ("DRC") and Tanzania with approximately 50% of its revenues currently
earned from outside South Africa.
CONCO`s key client base currently comprises the following:
- governments
- municipalities
- mining houses
- power utilities
2.2 RATIONALE FOR THE PROPOSED ACQUISITION
The Proposed Acquisition will provide Buildworks with an opportunity to benefit
from:
- The planned Gross Fixed Capital Expenditure in South Africa
Eskom has initiated a capital expansion programme in an endeavour to double
South Africa`s power generating capacity, a key component to position South
Africa to achieve its high growth forecasts. ESKOM has committed to spend
approximately R340 billion over the next 5 years both directly and indirectly
through the various local municipalities. Approximately R37 billion of this
expenditure will be spent on distribution and transmission, an area in which
CONCO is favourably positioned to be the direct beneficiary thereof as a result
of its estimated 50% market share in the development of turnkey switchyards and
substations.
It is anticipated that the regional electricity distributors will spend 10% of
their revenues they derive from electricity tariffs, estimated to be between R25
billion and R30 billion per year, in expanding their power distribution
infrastructure.
Over the previous 5-year period CONCO has achieved a compound annual growth rate
in turnover of 52%. It is in this area of high voltage switchyards, substations
and overhead lines that CONCO has built its reputation for return business and
engineering expertise. Accordingly, based on the above forecasts, CONCO is
optimistic about its future prospects.
- Expanding its exposure to infrastructure expenditure throughout the African
continent
Net Fixed Direct Investment into Africa is now the third highest among emerging
markets after emerging Europe and the Middle East. The DRC, Angola and
Mozambique are likely to see investments of up to USD 100 billion over the next
5-year period as the commodity bull market continues. The World Bank estimates
that 2000MW per annum or more of generating capacity is required to keep pace
with demand in Africa.
- Diversifying from its existing portfolio of assets
The Proposed Acquisition provides Buildworks with an opportunity to realign its
portfolio of assets and provides a favourable product mix with a weighting
towards the construction and engineering industries in general and the power
supply sector specifically as set out below:
Revenue breakdown before the Proposed Revenue breakdown after the Proposed
Acquisition Acquisition
Residential Infrastructure and Residential Infrastructure Power
building related building and related
construction construction
51% 49% 9% 8% 83%
The Proposed Acquisition will further enable Buildworks to leverage off the
planned parastatal and public sector infrastructure expenditure. In this
context, Buildworks, through its aggregates division will have extensive
exposure to the planned roads expansion and pursuant to the implementation of
the Proposed Acquisition the new expenditure programme on power generation,
which expenditure is largely unaffected by short-term market uncertainties and
interest rate volatility, thereby enhancing Buildwork`s annuity income
potential.
- Expand its existing business and enter into new markets
CONCO has successfully operated in 14 African countries. CONCO`s experience and
reputation in international markets provides an opportunity for Buildworks to
leverage off the experience and platform developed by CONCO. It currently
derives 50% of its turnover in Africa. It is anticipated that USD 91.2 billion
will be spent on power generation capacity in Africa and the Middle East over
the next 10 years.
The recent worldwide growth of renewable energy presents an additional
opportunity for CONCO. CONCO was previously involved in South Africa`s first
Wind Generation Plant at Darling in the Western Cape. The project was
successfully completed in April 2008 and CONCO`s share of project spend was 17%.
This involvement in the provision of eco-friendly power is a further growth
opportunity as it is anticipated that Eskom will spend 2% of its capital
expenditure in the area of renewable energy.
- Provide its shareholders with a unique investment opportunity
The Proposed Acquisition will provide Buildworks shareholders with a unique
opportunity to benefit from the planned roll-out of power related
infrastructural spend in South Africa and Africa, an area to which there is
limited direct investment opportunities in South Africa.
2.3 SHAREHOLDERS AND VENDORS OF CONCO
The current shareholders of CONCO are: (%)
Consolidated Power Holdings (Proprietary) Limited,
represented by Bernard Hyman Berelowitz 64.5%
Phatsima Industrial (Proprietary) Limited 17.0%
Sweetman Siluleko Gesha 11.0%
Chantilly Trading 52 (Proprietary) Limited 7.5%
Total 100.0%
The above named shareholders together with Consolidated Power Investments
(Proprietary) Limited which has a claim on loan account against CONCO which
Buildworks is acquiring, are referred to hereinafter collectively as "the
Vendors".
2.4 EFFECTIVE DATE
Under the terms of the Agreement the effective date of the Proposed Acquisition
is 1 March 2008, with an anticipated fulfilment date of all the Conditions
Precedent, as set out in paragraph 2.6 below, of 31 October 2008.
2.5 TERMS OF THE PROPOSED ACQUISITION
Subject to the Conditions Precedent in 2.6 below, Buildworks will acquire the
entire issued ordinary share capital in and shareholders` claims (which shall be
deemed to include the claim of Consolidated Power Investments (Proprietary)
Limited against CONCO referred to in 2.3 above) against CONCO for a purchase
consideration of between R420 million and R670 million ("Purchase Consideration
Range") subject to the profit warranty and earn-out provisions as described in
this paragraph 2.5.
The Purchase Consideration Range will be determined and settled in accordance
with the provisions set out below:
2.5.1 On the delivery date:
A consideration of R420 million will become due and payable by Buildworks to the
Vendors to be settled as to:
2.5.1.1 a cash consideration of R270 million; and
2.5.1.2 the fresh issue of 150 million new Buildworks ordinary shares, at an
issue price of R1.00 per ordinary share, by way of a vendor placement.
2.5.2 First warranty period ending 28 February 2009:
On finalisation of CONCO`s audited financial statements for the year ending 28
February 2009, Buildworks is required to:
2.5.2.1 Pay the Vendors an additional R150 million, through the issue of new
Buildworks shares at a subscription price of R1.00 per share, provided CONCO`s
audited profit after taxation for the year ending 28 February 2009 ("2009 PAT")
is not less than R60 million.
2.5.2.2 Should the 2009 PAT not exceed R60 million, Buildworks will reduce the
additional payment to the Vendors in terms of paragraph 2.5.2.1 above, by an
amount of R9.50 for each R1.00 that the 2009 PAT is below R60 million, subject
to a maximum reduction of R150 million.
2.5.2.3 In addition to the payment set out in paragraph 2.5.2.1 above, should
CONCO achieve a 2009 PAT equal to, or exceeding R66.25 million, Buildworks will
pay the Vendors an additional amount of R50 million, subject to the following:
2.5.2.3.1 Should the 2009 PAT be less than R66.25m, Buildworks will reduce the
payment in terms of paragraph 2.5.2.3 above, by an amount of R8.00 for each
R1.00 that the 2009 PAT is less than R66.25 million, subject to a maximum
reduction of R50 million.
2.5.2.3.2 The adjusted additional payment set out in paragraph 2.5.2.3 above
will be discharged by the payment in cash of 50% of the adjusted amount and the
issue of such number of ordinary shares, at a subscription price of R1.00 per
share, as will be sufficient to discharge the remainder of the purchase price,
set out in paragraph 2.5.2.3 above.
2.5.3 Second warranty period ending 28 February 2010:
On finalisation of CONCO`s audited financial statements for the year ending 28
February 2010, Buildworks is required to:
2.5.3.1 Pay the Vendors an additional R50 million, should the 2009 PAT have
exceeded an amount of R72.5 million.
2.5.3.2 Should the 2009 PAT not exceed an amount of R72.5 million, Buildworks
will reduce the payment to the Vendors in terms of paragraph 2.5.3.1, by an
amount of R8.00 for each R1.00 that the 2009 PAT is less than R72.5 million,
subject to a maximum reduction of R50 million.
2.5.3.3 The payment in terms of paragraph 2.5.3.1 is subject to CONCO`s
audited profit after taxation for the year ending 28 February 2010 ("2010 PAT"),
being equal to or exceeding R83.375 million or being at least 15% higher than
the 2009 PAT, if the 2009 PAT equals or exceeds R66.25 million, but does not
exceed R72.5 million.
2.5.3.4 Should the condition set out in paragraph 2.5.3.3 not be fulfilled,
the purchase consideration referred to in paragraph 2.5.3.1 shall not be payable
to the Vendors.
2.5.3.5 The adjusted additional payment as referred in paragraph 2.5.3.1, to
the extent required, will be discharged by the payment in cash of 50% of the
adjusted amount and the issue of ordinary shares at the issue price of R1.00 per
share as will be sufficient to discharge the remainder of this element of the
purchase price.
2.6 CONDITIONS PRECEDENT
The Proposed Acquisition is subject, inter alia, to the following Conditions
Precedent, which are required to be fulfilled as follows:
2.6.1 by no later than 31 July 2008:
- Buildworks concludes, to its satisfaction, a comprehensive financial, legal,
taxation and operational due diligence;
2.6.2 by no later than 31 October 2008:
- Approval of the Proposed Acquisition by the shareholders of Buildworks in
general meeting;
- Receipt of requisite regulatory approvals, to the extent legally necessary,
from appropriate regulatory authorities including the Competition
Authorities, the JSE Limited ("JSE") and the Securities Regulations Panel;
and
- Buildworks being in receipt of sufficient funds, pursuant to a vendor
placement at R1.00 per share and/or capital raising, for the payment of the
purchase price to the sellers in respect of the Proposed Acquisition, on
terms and conditions acceptable to Buildworks in its sole discretion.
3 FINANCIAL EFFECTS ON BUILDWORKS SHAREHOLDERS
The unaudited pro forma financial effects set out in the table below have been
prepared to assist the shareholders of Buildworks to assess the impact of the
Proposed Acquisition on the earnings per share, headline earnings per share,
diluted earnings per share, the net asset value ("NAV") and tangible net asset
value ("TNAV") per Buildworks share for the 12 month period ended 29 February
2008. The pro forma financial effects set out in the "Scenario 1" and "Scenario
2" columns, have been prepared for illustrative purposes only and because of
their nature, may not fairly present Buildworks` financial position and results
after the Proposed Acquisition.
The preparation of the financial effects of the Proposed Acquisition is the
responsibility of the directors of Buildworks.
Per Buildworks share (cents) Before Scenario % Change Scenario % Change
(1) 1 (2,3) 2 (2,4)
Earnings (3) 9.93 8.24 (16.98)% 6.17 (37.88)%
Headline earnings (3) 9.93 8.24 (16.98%) 6.17 (37.88%)
Fully diluted earnings 8.85 7.77 (12.18%) 5.88 (33.55%)
Net asset value (5) 51.14 73.02 42.78% 75.44 47.51%
Tangible net asset value (5) 27.45 17.51 (36.22%) 10.42 (62.05%)
Number of shares in issue 470,000 890,000 89.36% 1,090,000 131.91%
(`000)
Weighted number of shares 418,729 838,729 100.30% 1,038,729 148.07%
(`000)
Notes:
1. The earnings and headline earnings per share, for the 12 month period ended
29 February 2008, as set out in the "Before" Column, have been extracted from
the column headed "Pro-forma after the listing restructure" in Buildworks`
pro forma income statement for the 6 months ended 31 August 2007, provided to
shareholders in the Company`s pre-listing statement, dated 16 November 2007
and the Buildworks unaudited interim results ended 29 February 2008
("Buildworks 12 Months Historic").
2. Both the "Scenario 1" and "Scenario 2" pro-forma columns have been based on
Buildworks 12 Months Historic and CONCO`s unaudited 12 month period ended 29
February 2008. For this purpose it is assumed that the acquisition was
effective from 1 March 2007 for income statement purposes and 29 February
2008 for balance sheet purposes.
3. Scenario 1 has been based on the following assumptions:
3.1. 420 million new Buildworks shares, reflecting the minimum price
payable in terms of paragraph 2.5.1 above, were in issue for the
period commencing 1 March 2007.
3.2. Earnings and headline earnings effects have been calculated based on
CONCO`s unaudited earnings for the 12 months ended 29 February 2008 of
R30 154 000 and not the warranted profit in terms of 2.5.3 above.
3.3. The shares to be issued in terms of the Proposed Acquisition have been
credited to equity, as required in terms of IFRS, at their fair value,
being the 30-day VWAP at 16 July 2008 of 93 cents per share.
3.4. Estimated transaction costs of R8 000 000 have been added to the cost
of the Proposed Acquisition and debited to goodwill.
3.5. Interest incurred on cash borrowed to fund the Proposed Acquisition
has been accrued for at a rate of 12% per annum.
3.6. Earnings and headline earnings have not been adjusted to take into
account the respective additional CONCO earnings in terms of paragraph
2.5 above.
4. Scenario 2 has been based on the following assumptions:
4.1. The cash component of R50 000 000 and 620 million new Buildworks
shares, reflecting the maximum price payable in terms of paragraph
2.5.3 above, were in issue for the period commencing 1 March 2007.
4.2. Earnings and headline earnings effects have been calculated based on
CONCO`s unaudited earnings for the 12 months ended 29 February 2008 of
R30 154 000 and not the warranted profit in terms of 2.5.3 above.
4.3. The deferred portion of the cash portion of the purchase price has
been present valued at a discount rate of 12% per annum.
4.4. The shares to be issued in terms of the Proposed Acquisition have been
credited to equity, as required in terms of IFRS, at their fair value,
being the 30-day VWAP at 16 July 2008 of 93 cents per share, and
furthermore, those shares to be issued in terms of the first and
second warranty periods have been fair valued at a discount rate of 7%
per annum.
4.5. Earnings and headline earnings have not been adjusted to take into
account the respective additional CONCO earnings in terms of paragraph
2.5 above.
4.6. Estimated transaction costs of R8 000 000 have been added to the cost
of the Proposed Acquisition and debited to goodwill.
4.7. Interest incurred on cash borrowed to fund the Proposed Acquisition
has been accrued for at a rate of 12% per annum.
5. NAV and TNAV per share are based on Buildworks` 12 Months Historic and
CONCO`s unaudited 12 month period ended 29 February 2008.
6. The difference between the purchase consideration and the carrying value of
the tangible assets acquired is assumed to be allocated to goodwill. A
purchase price allocation exercise in terms of IFRS 3: Business Combinations
will be required as at the effective date of the acquisition, which may
result in different values being assigned to the tangible and intangible
assets and goodwill acquired.
4 CONCO`S ORDER BOOK
As part of the scope of the due diligence, Buildworks has reviewed CONCO`s
management accounts for the 4 month period ended 30 June 2008, which reflect
invoiced revenue of R347 million and additional orders which have been awarded
and not yet invoiced of R967 million. This compares with revenue for the full
year ended 29 February 2008 of R545 million. As would be expected in a business
of CONCO`s nature new orders are negotiated and tendered for on a continuous
basis. The growth in CONCO`s order book further enhances the investment position
of the Proposed Acquisition and CONCO`s favourable growth prospects.
5 BLACK ECONOMIC EMPOWERMENT ("BEE")
Subsequent to the Proposed Acquisition, Buildworks will have a BEE shareholding
of approximately 30%.
6 JSE MAIN BOARD LISTING
Subject to the receipt of the requisite JSE approval and the fulfilment of the
Conditions Precedent set out in paragraph 2.6 above, Buildworks intends
migrating its listing from the AltX to the Main Board of the JSE.
7 REVERSE TAKE-OVER
The implementation of the Proposed Acquisition will result in a reverse take-
over of the Company. The JSE will only permit the Company to retain its listing,
following the reverse take-over, should the JSE be satisfied that the Company
will continue to qualify for a JSE listing in terms of the Listings Requirements
of the JSE ("Listings Requirements"). The directors are confident that the
Company will continue to qualify for listing after the implementation of the
Proposed Acquisition and the reverse take-over.
8 RELATED PARTY TRANSACTION
In terms of the Listings Requirements of the JSE, Mr Herman Mashaba is a
director and has an indirect beneficial shareholding in Buildworks and is also a
director holding an indirect beneficial shareholding in CONCO and accordingly is
a related party in relation to the Proposed Acquisition. Consequently the board
of directors of Buildworks will appoint an independent expert, acceptable to the
JSE, to provide an independent opinion on the fairness of the Proposed
Acquisition to Buildwork`s shareholders.
Mr Mashaba and the company through which he holds his indirect beneficial
shareholding, will recuse themselves from voting at the general meeting of
Buildworks shareholders to be convened for Buildworks shareholders to consider
and, if deemed appropriate, to approve the Proposed Acquisition.
9 DOCUMENTATION
In terms of the Listings Requirements, the Proposed Acquisition is categorised
as a reverse take-over and as a result, a circular incorporating revised listing
particulars, a fairness opinion in terms of paragraph 8 above and a notice of
the general meeting will be posted to Buildworks shareholders in due course,
subject to JSE approval.
10 WITHDRAWAL OF CAUTIONARY ANNOUNCEMENT
Shareholders are referred to the cautionary announcement released on SENS on 16
April 2008, 26 May 2008 and 9 July 2008 and hereby advised that pursuant to the
conclusion of an agreement between Buildworks and the Vendors, as set out in
paragraph 1 above, caution is no longer required to be exercised by shareholders
when dealing in their securities.
21 July 2008
Investment bank to Buildworks
Investec Corporate Finance
Designated advisor to Buildworks
Java Capital (Proprietary) Limited
Legal advisor to Buildworks
Edward Nathan Sonnenbergs
Reporting accountants to Buildworks
PKF (Jhb) Inc.
Legal advisor to CONCO and the Vendors
Cliffe Dekker Inc.
Legal adviser for the Proposed Acquisition
TW Ferguson
Date: 21/07/2008 08:40:02 Produced by the JSE SENS Department.
The SENS service is an information dissemination service administered by the
JSE Limited (`JSE`). The JSE does not, whether expressly, tacitly or
implicitly, represent, warrant or in any way guarantee the truth, accuracy or
completeness of the information published on SENS. The JSE, their officers,
employees and agents accept no liability for (or in respect of) any direct,
indirect, incidental or consequential loss or damage of any kind or nature,
howsoever arising, from the use of SENS or the use of, or reliance on,
information disseminated through SENS.
