| Thu 18 Sep 2008, 10:10 | | OLI - O-line Holdings - Acquisition by O-Line of the business and loan |
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OLI
OLI
OLI - O-line Holdings - Acquisition by O-Line of the business and loan
accounts of The Armco Galvanising, Construction, Road Safety and Nameplates
Businesses
O-line Holdings Limited
(Incorporated in the Republic of South Africa)
(Registration number 2006/034685/06)
JSE share code: OLI
ISIN Number: ZAE000110730
("O-line")
Acquisition by O-line of the business and loan accounts of the ARMCO
galvanising, construction, road safety and nameplates businesses
1. Introduction
Further to the Cautionary Announcements published on 29 May, 8 July and 19
August 2008, O-line Support Systems (Proprietary) Limited ("O-line Support
Systems"), a wholly owned subsidiary of O-line, has entered into the following
agreements:
1.1 to acquire the galvanizing and construction products businesses conducted
by ARMCO including the ARMCO Superlite name and brand from Steelwood Africa
(Proprietary) Limited ("Steelwood"), specific assets, specific liabilities,
the contracts and intellectual property of the ARMCO business, as a going
concern ("the ARMCO Business");
1.2 to acquire immovable property used by the ARMCO Business, together with
all permanent improvements thereon, situated at 131 Anvil Road, Isando ("the
Property"), as a going concern from Steelwood; and
1.3 to acquire the entire ARMCO road safety products business from Steelwood
Industrial Holdings (Proprietary) Limited ("SIH"), including assets,
liabilities, the contracts and intellectual property as a going concern ("the
ARMCO RSP Business") accompanied by the Name Plates business purchased by SIH
with effect from 1 July 2008, as a going concern ("the ARMCO NPS Business")
(collectively "the ARMCO RSP and NPS Businesses");
The ARMCO Business, the Property, the ARMCO RSP and NPS Businesses
collectively comprise the entire business of the ARMCO Group and are
collectively referred to as the ARMCO Acquisition.
2. Effective dates
All the risks and rewards of the ARMCO Business, the Property and the ARMCO
RSP Business are transferred to O-line with effect from 1 June 2008 and the
ARMCO NPS Business with effect from 1 July 2008 ("Effective Dates"). The
fulfilment date of the ARMCO Acquisition is the first business day succeeding
the date upon which the last of the conditions precedent set out in paragraph
5 below have been fulfilled ("Fulfilment Date").
3. ARMCO products and operations
ARMCO`s products can be broadly categorized into three separate business
units, ARMCO Construction Products, Road Safety Products and Galvanizing.
3.1 ARMCO Construction Products Division
The ARMCO Construction Products Divisions produces a range of corrugated steel
products which are used in various applications, including, culverts, stream
enclosures, service ducts, bridges and water tanks. The ARMCO Construction
Products Divisions mainly services the mining and road construction industries
and its major clients are local and international mining houses and consulting
engineers.
The application of the products in the mining sector is perfectly suited to be
utilised as stockpile tunnels, haul road crossings, conveyor crossings and
drainage culverts for access roads. Besides the mining sector, the products
are also extensively used in the construction of roads with the core
application being storm water drainage (culverts).
80% of the ARMCO Construction Products Division`s turnover is derived from
exports to other African countries. This market is expected to grow
exponentially over the coming years as mining and road infrastructure spend in
the African continent continues to grow. The ARMCO Construction Products
Division currently sells into numerous African countries including the
Democratic Republic of Congo, Angola, Madagascar, Zambia, Malawi, Mozambique,
Ghana and Botswana.
3.2. ARMCO Galvanizing Division
The ARMCO Galvanizing Division consists of two plants situated in Isando (13
meter bath) an Dunswart (5.2 and 3.0 meter baths). The ARMCO Galvanizing
Division is one of the largest in South Africa and services the fabricators,
mining, mast and towers, piping and lighting industries. The local and
international galvanizing industry is expected to be extremely active for the
next seven years due to infrastructure spend by the mining industry,
petrochemical industry, power stations and telecommunications.
3.3 ARMCO Road Safety Division and Name
The ARMCO RSP Business comprises of the ARMCO Road Safety Division which
produces a range of products which include guardrails, wire rope safety
barriers, road cones, speed ramps and bases. Major clients are SANRAL, major
contractors, municipalities, shopping centres and road marking companies.
ARMCO RSP is the official representative of Quixote (USA), Blue System
(Sweden) and Highway Care (UK). All of the products supplied by ARMCO RSP
conform to international standards.
The ARMCO NPS Business is a signage business which complements the ARMCO RSP
Business and the ARMCO Business providing products to the roads, mining,
petrochemical and all construction related industries.
All the ARMCO Road Safety Division products supplied for use by the ARMCO RSP
Business conform to international standards, namely, CEN1317 or NCHRP350.
Approximately R70 billion has been put aside by the South African Government
for the maintenance and upgrading of the road infrastructure over the next
three years. A further R3 billion has been allocated for the Expanded Public
Works Program for access roads. The Department, through SANRAL, has invested
about R55 billion into the Gauteng Freeway Improvement Scheme. This investment
is divided into three phases, of which the first phase, costing about R12
billion, is due to be completed in 2010.
4. Rationale
The combination of the O-line and the ARMCO Group Businesses creates a group
with combined forecast revenue for the year ending 30 June 2009 of
approximately R500 million with average profit after taxation margins in
excess of 10%. The consolidation of the respective businesses of the ARMCO
Group and O-line ("the New Group") will maximise the economic benefits of
selling a bigger basket of goods, rationalising the production processes and
thereby increase shareholder value.
Expected benefits include:
4.1 utilising O-line`s and ARMCO`s strategic relationships with local and
global mining, construction and engineering houses in order to offer package
deals to larger blue chip companies consisting of both galvanized structural
steel and cable racking accompanied with mechanical support steel. This will
result in increased revenue and profit margins for the New Group and
strengthen the New Group`s competitive position in the local and international
market;
4.2 combining the established marketing and selling networks of the Armco
Group and O-line thereby enhancing their local and international footprint;
4.3 combining the expertise and capabilities of the Armco Group and O-line
resulting in the development and rollout of numerous new products;
4.4 combining the two entities` buying power;
4.5 utilising O-line`s new premises in Maputo to promote the ARMCO RSP
Business and make its products more readily available in other African
countries;
4.6 maximising the benefits of O-line`s welding lines by installing the
equipment closer to the galvanising plant thereby increasing manufacturing
capabilities and efficiencies; and
4.7 maximising logistical savings, utilise space more efficiently and
maximise transport cost savings and savings from a straight line manufacturing
process in line with international trends.
5. Purchase consideration
5.1 The ARMCO Business
The purchase consideration in respect of the ARMCO Business comprises an
aggregate amount of R110 522 550 plus interest from 1 August 2008 to 14 August
2008 in an amount of R250 000 ("the ARMCO Business Purchase Consideration").
Steelwood shall on or before 31 December 2008, reimburse O-line in an amount
of R1 385 690 together with interest thereon, calculated at the prime rate
from 1 November 2008 to the date of payment, in respect of moneys received in
advance by Steelwood in relation to the ARMCO Business and in respect of which
steel has not been purchased by Steelwood as at 31 May 2008.
The ARMCO Business Purchase Consideration will be settled as follows:
- R40.25 million, in cash, on or before 4 September 2008 ("the Signature
Date");
- R33.02 million, in cash, on the Fulfilment Date;
- R11.58 million on the Fulfilment Date to be settled by O-line delivering
to the Seller four renounceable letters of allocation collectively pertaining
to 11 583 750 ordinary shares in the issued share capital of O-line at R1 per
share ("O-line Shares"); and
- R25.92 million on the Fulfilment Date to be settled by O-line delivering
to the Seller one renounceable letter of allocation pertaining to 25 916 250 O-
line shares.
In the event of late payment of the ARMCO Business Purchase Consideration, O-
line will be liable to pay interest to the Seller at the prime rate plus 2%.
5.2 The Property
The purchase price in terms of the Property is an amount of R14 477 450 to be
paid to Steelwood on the date of registration of transfer of the Property into
the name of O-line Support Systems.
5.3 The ARMCO RSP and NPS Businesses
The purchase consideration in respect of the ARMCO RSP and NPS Businesses
amounts to R16.7 million plus interest on an amount of R2.2 million at the
prime rate from the date of payment by Steelwood of this amount to the Thathe
Trust and the Barbarians Trust (in relation to the acquisition by Steelwood of
these two trusts shares in SIH), to the date of payment of this amount by O-
line to Steelwood ("the ARMCO RSP and NPS Businesses Purchase Consideration").
The ARMCO RSP and NPS Businesses Purchase Consideration will be settled as
follows:
- An amount of R14 796 000 shall be paid by O-line to SIH in four equal six-
monthly instalments, payable on 6 January 2009, 1 July 2009, 5 January 2010
and 1 July 2010. The outstanding balance in respect of this amount shall
accrue interest at the prime rate less 2% until the full balance has been
settled, which interest shall be payable together with the payment to be made
on 1 July 2010; and
- An amount of R2.2 million (together with the interest referred to above)
shall be paid by O-line to SIH on or before 31 December 2008. (The payments to
be made on 31 December 2008, 6 January 2009, 1 July 2009, 5 January 2010 and 1
July 2010 are collectively referred to as the "Deferred Purchase
Consideration").
6. Conditions precedent to the ARMCO Acquisition
The ARMCO Acquisition is subject to, inter alia, the fulfilment of the
following conditions precedent:
- obtaining all regulatory consents and approvals with regards to the ARMCO
Acquisition on or before 1 December 2008, including but not limited to, the
Competition Authorities and the JSE Limited ("JSE");
- O-line obtaining the necessary bank funding or raising the required
equity to finance the ARMCO Acquisition; and
- O-line shareholders approving the ARMCO Acquisition in general meeting
and all special resolutions required to implement the ARMCO Acquisition be
registered where required on or before 1 December 2008.
7. Financial effects
The table below sets out the unaudited pro forma financial effects of the
ARMCO Acquisition on O-line. The unaudited pro forma financial effects are
presented for illustrative purposes only and because of their nature may not
give a fair reflection of O-line`s financial position or results of operations
after the ARMCO Acquisition has been implemented. It has been assumed for
purposes of the unaudited pro forma financial effects that the ARMCO
Acquisition took place with effect from 1 July 2007 for income statement
purposes and on 30 June 2008 for balance sheet purposes. The unaudited pro
forma financial effects are the responsibility of the directors of O-line.
Before 1 After % Change
Published Pro forma
Basic Earnings per share 15.42 23.42 (2) 52%
(cents)
Headline earnings per 15.05 23.16 (2) 54%
share (cents)
Net asset value per share 61.31 109.17 (3) 78%
(cents)
Tangible net asset value 61.31 58.60 (3) (4%)
per share (cents)
Number of shares in issue 150 000 201 000 (4) 34%
(000`s)
Weighted average number of 130 738 181 738 (4) 39%
shares in issue (000`s)
Notes:
1. The "Before" financial information has been extracted without adjustment
from the published audited results of O-line for the year ended 30 June 2008.
O-line reported a profit after taxation amounting to R20.1 million.
2. Earnings and headline earnings per share have been adjusted to include
the following:
a. income and expenditure relating to the business of the ARMCO Group ,
extracted from the audited financial statements for the year ended 31 May
2008. The combined after taxation profit of the business of the ARMCO Group
for the year was R26.31 million;
b. a net interest expense of R2.51 million (net of taxation) as a result of
utilising existing cash resources (as at 1 December 2008) and long-term
borrowings to finance the remaining cash payment of the ARMCO Business
Purchase Consideration and the acquisition of the Property (calculated using
an after taxation rate of 10.8%);
c. interest of R1.10 million arising on the Deferred Purchase Consideration
for the ARMCO RSP and NPS Businesses (calculated using an after taxation rate
of 9.72%); and
d. transaction cost before taxation amounting to approximately R400 000 and
1 318 840 new O-line shares at R1 per share.
3. The net asset and net tangible asset values per share have been adjusted
to include the following:
a. the tangible assets and liabilities of the business of the ARMCO Group
acquired at book value;
b. the cash consideration of R40.25 million;
c. the 37 500 000 O-line Shares issued at 100 cents per share;
d. the conversion of the Shareholders Loans of R12.18 million into
12 181 160 O-Line shares at 100 cents per share;
e. the 1 318 840 O-Line Shares issued at 100 cents per share to advisors;
f. the settlement of the R33.2 million of the Business Purchase
Consideration on the Fulfilment Date with the inclusion of the Property
purchase of R14.5 million by way of utilising internally generated cash and
cash equivalents accompanied by an increase in long-term liability; and
g. the estimated goodwill arising amounting to R101 million. The allocation
of the purchase price in terms of IFRS 3: Business Combinations will be
undertaken by O-line within the next 12 months and may result in the amount
allocated to goodwill, in terms of these pro forma financial effects, being
split between goodwill, tangible and intangible assets if any are identified.
This will result in an increase in intangible assets which will be amortised
over their estimated useful lives.
4. The number of shares in issue and weighted average number of shares in
issue have been adjusted to include the following:
a. the 37 500 000 O-line Shares issued at 100 cents per share in respect of
the non-cash portion of the ARMCO Business Purchase Consideration;
b. the conversion of the Shareholders Loans of R12.18 million into
12 181 160 O-Line shares at 100 cents per share; and
c. the 1 318 840 O-Line Shares issued at 100 cents per share to advisors.
8. JSE requirements
The ARMCO Acquisition is a Category 1 transaction for O-line in terms of
section 9.5(b) of the JSE Listings Requirements and a circular containing the
information required in terms of the JSE Listings Requirements and
incorporating a notice convening a O-line general meeting to approve the ARMCO
Acquisition will be posted to O-line shareholders within 28 days of this
announcement.
9. Withdrawal of cautionary
Shareholders are advised that caution is no longer required to be exercised
when dealing in their securities.
10. O-line results announcement for the year ended 30 June 2008
O-line published their results for the year ended 30 June 2008 on SENS on 18
September 2008. O-line reported an audited profit after taxation of R20.1
million (R12.7 million for 30 June 2007) compared to the forecast profit after
taxation amounting to R17.4 million for the year ending 30 June 2008 published
in O-line`s Pre-listing Statement in November 2007.
Johannesburg
18 September 2008
Designated Advisor
QuestCo Sponsors (Pty) Ltd
Date: 18/09/2008 10:10:57 Produced by the JSE SENS Department.
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