| Thu 14 Aug 2008, 11:42 | | UCS - UCS - Acquisition of the business of Computer Software Consultants |
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UCS
UCS
UCS - UCS - Acquisition of the business of Computer Software Consultants
(Proprietary) Limited as a going concern and withdrawal of cautionary
announcements
UCS GROUP LIMITED
(Registration number 1993/002253/06)
JSE Code: UCS ISIN: ZAE000016150
(Incorporated in the Republic of South Africa)
("UCS" or "the UCS Group")
ACQUISITION OF THE BUSINESS OF COMPUTER SOFTWARE CONSULTANTS (PROPRIETARY)
LIMITED ("CSC") AS A GOING CONCERN AND WITHDRAWAL OF CAUTIONARY ANNOUNCEMENTS
1. Introduction
Further to the cautionary announcements dated 13 May 2008, 20 May 2008 and
1 July 2008 ("the cautionary announcements") shareholders are advised that UCS
has entered into a sale of business agreement with Destiny Electronic Commerce
(Proprietary) Limited ("Destiny") (a wholly owned subsidiary company of
Computerkit Holdings (Proprietary) Limited ("Computerkit") which in turn is a
wholly owned subsidiary company of UCS), CSC, the trustees for the time being of
the Chris Leal Family Trust, Mr Chris Leal, Mr Llewellyn Walters and Mr Gregory
Leal in terms of which Destiny will acquire the business of CSC ("the CSC
business") as a going concern ("the acquisition" or "the transaction").
As part of the transaction, Mr Llewellyn Walters and Mr Gregory Leal, through
their respective trusts ("the management shareholders"), will invest in 30% of
the CSC business by subscribing for ordinary shares in Destiny in terms of a
shareholders` and subscription agreement concluded between, inter alia, Destiny,
Computerkit and each of the management shareholders. The management shareholders
will be responsible for the day to day running of the CSC business bringing with
them invaluable experience, relationships and expertise which will most
certainly impact positively on the UCS Group and its value added services
strategy into the future.
2 Background
UCS is an IT business with a primary focus on the provision of Software,
Solutions and Services for selected markets. UCS has achieved a leadership
position in the retail market sector in South Africa and is well positioned for
further growth locally and internationally through a number of defined
initiatives.
Destiny provides transaction switching solutions which include real time medical
aid verification and authorisation, real time debit and credit card switching as
well as loyalty transaction switching with back-end data base functionality. The
company supports an extensive wide area (value-added) network which connects
pharmacies and other retailers to the on-line medical aid schemes and banking
community respectively.
CSC is a leading provider of secure payment technologies, services and solutions
at point of sale. Its business is primarily focused on the development of
software relating to card-based transactions and it has been supplying,
delivering and servicing high speed secure terminals to the African market for
over 15 years. CSC is a VeriFone International Partner ("VIP") and has
developed and implemented a number of integrated payment solutions utilising
VeriFone devices for leading banks and retailers in Africa. The business
currently supports and services in excess of 50,000 terminals.
3 Rationale for the acquisition
UCS announced in 2007 the intention to set-up a value added services division as
part of its strategic objectives. The transaction represents the foundation of
the value added services division and the commencement of a specific focus on
servicing a portion of the financial services sector to complement and assist in
diversifying the UCS Group`s current software, solutions and services offerings
to the retail and government sector.
The CSC business and the Destiny switching business will operate alongside one
another as separate divisions within the same company (Destiny). The CSC
business enhances UCS`s ability to provide its customer base (retailers,
government and banks), post the acquisition, with seamless point-of-sale and
payment solutions together with other integrated value added services.
4 Effective Date
The effective date of the acquisition is 1 June 2008 ("the effective date")
but the transaction remains subject to the fulfillment of the remaining
condition precedent detailed below.
5 Purchase consideration
The purchase price payable for the CSC business as a going concern is an
amount of R67,605,000 ("the upfront purchase consideration") which becomes due
on closing (i.e. 3 days after the fulfillment of the final condition precedent)
and is subject to an upward adjustment to the extent that the CSC business
achieves or exceeds certain growth profit targets:
* up to R8,795,000 will be payable for the 11 months ended 30 April 2009
("the 2009 PBIT period");
* a further R17,700,000 will be payable for the 12 month period ended 30
April 2010 ("the 2010 PBIT period"); and
* finally if at the expiry of the 2010 PBIT period, and in relation to a
value added services initiative, the CSC business is able to achieve
certain defined milestones and profitability, there will be an additional
payment due of R 4,000,000.
The total purchase consideration is therefore capped at a maximum amount of
R 98,100,000.
Destiny will fund the payment of the upfront purchase consideration with cash
and debt as follows:
* subscription by Computerkit and the management shareholders for
ordinary shares in Destiny in the amount of R10,605,000, resulting
in a 70% shareholding by Computerkit and a 15% shareholding by each
of the management shareholders; the total subscription price payable
by the management shareholders of R3,181,500 will be financed through
loans provided to the management shareholders by UCS at current
commercial rates, which loans are secured by a cession and pledge of
their respective shareholdings in Destiny in favour of UCS for the
term of such loans;
* a loan to Destiny from Computerkit of R4,000,000; and
* a medium term (5 year) amortising loan from a third party financial
institution of R53,000,000.
6 Pro forma financial effects
The unaudited pro forma financial effects, for which the directors are
responsible, are provided for illustrative purposes only to show the effect
of the transaction on earnings, headline earnings, net asset value and net
tangible asset value per UCS share as if the transaction had taken effect on 1
October 2007 and 31 March 2008 respectively. Because of their nature, the
unaudited pro forma financial effects may not give a true picture of the
Group`s financial position and performance. The unaudited pro forma financial
effects have been compiled from reviewed consolidated financial information for
the six months ended 31 March 2008, adjusted as described in the notes below:
Before the After the Movement
transaction transaction
Cents (%)
Headline earnings per share 13.3 13.3 - -
(cents)
Earnings per share (cents) 14.7 14.7 - -
Net asset value per share 150 150 - -
(cents)
Net tangible asset value per 37 10 (27) (73.0)
share (cents)
Weighted average number of 285,022 285,022 - -
shares in issue (000`s)
Notes:
The pro forma financial effects in the "After the transaction" column are
based on the following assumptions:
* Inclusion of six months of earnings from the CSC business as defined in
the sale of business agreement from their most recent audited financial
year ended 30 April 2008 which amounts to R9.5-million (pre tax) for the
six month period.
* The CSC financial information used in these pro forma financial effects
was determined through the due diligence investigation exercise with
reference to the definition of the business as per the sale of business
agreement, the management accounts of the business and the audited
financial information for the year ended 30 April 2008. UCS accordingly
confirms its comfort with this financial information.
* Inclusion of the following interest costs:
* Current prime rate minus 2% on the third party financial institution
debt referred to above which amounts to R 3.5-million for the six
month period; and
* Imputed interest cost based on the after tax cost of debt
(i.e. 9.72%) on the deferred vendor loan raised of R15.4-million in
terms of International Reporting Standards number 3 ("IFRS3") which
amounts to R0.8-million for the six month period.
* The inclusion of an intangible asset amortisation charge for the six
months of R4.1-milllion in respect of the intangible assets separately
identified on acquisition of R 44.6-million in terms of IFRS3 and written
off over their respective estimated useful lives (average of 5.4 years).
* The allocation of 30% of the profit after tax achieved by the CSC business,
after factoring in the above adjustments, to the management shareholders.
* The deduction of the after tax net interest forfeited on UCS cash
utilised to execute payment of the purchase consideration which amounts
to R0.5-million.
* Tax based on the statutory tax rate of 28%.
* Of the maximum purchase price that could become payable (R98.1-million) as
recorded under the "purchase consideration" section above, R67.6-million is
recorded as a payment upfront and based on the financing of such payment
recorded under the "purchase consideration" paragraph, R15.4-million
represents the present value of a portion of the potential purchase price
that could become payable based on profit warranty achievement and finally
R12.9-million will be recorded as a contingent liability representing the
balance of the upside payment that could become payable on achievement of
the warranted profits.
* A deferred tax liability of R12.5-million is raised simultaneously with the
raising of the R44.6-million intangible asset and this deferred tax
liability is reversed as the intangible asset is amortised over its useful
life.
* CSC has a tangible asset value at acquisition of R14.5-million and based
on the maximum purchase price payable less the contingent liability and
after allocating value to the separately identifiable intangible assets
(net of deferred tax) will contribute goodwill to the Group`s balance
sheet of R36.3-million.
Finally unrelated to the pro forma financial effects associated with the
transaction (not factored into the table above) but due to the increased
profitability forecast in the Destiny business and as required in terms of
International Accounting Standards 12 ("IAS12") the estimated tax loss in
Destiny as at 31 July 2008 of R60.9-million is to be raised on the company`s
balance sheet as a deferred tax asset for the year ending 30 September 2008
as the utilisation of such loss is likely in the foreseeable future. The
impact of this recognition will be a credit to the Destiny income statement of
R17.1-million on the taxation line (4.2 cents positive impact on UCS HEPS and
EPS after the outside shareholder`s (management shareholder`s) interest) and a
R17.1-million debit to deferred tax asset on the balance sheet.
7 Condition precedent
The final remaining condition precedent that requires fulfillment in order
for the transaction to be implemented is the preparation by CSC of an effective
date balance sheet and related schedules with any disputes relating thereto
having been finally resolved between the parties.
CSC, UCS and Destiny have agreed to use their best endeavours to ensure the
fulfillment of this final condition precedent by no later than 29 August 2008
or such later date as the parties may agree in writing.
8 Withdrawal of cautionary announcements
As the terms and financial effects of the transaction have now been disclosed
the cautionary announcements are hereby withdrawn.
9 Categorisation of the proposed acquisition
The acquisition is categorised as a category 2 transaction in terms of the
Listings Requirements of the JSE Limited. Accordingly, shareholders` approval
is not required.
Johannesburg
14 August 2008
Sponsor - Barnard Jacobs Mellet Corporate Finance (Proprietary) Limited
Glyn Marais Inc.- Attorneys to UCS
Vani Chetty - Competition Law Advisor to the parties
Metier - advisors to CSC / Vendors and Management Shareholders
Date: 14/08/2008 11:42:13 Produced by the JSE SENS Department.
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