| Mon 29 Sep 2008, 12:35 | | ESR - Esor Limited - Acquisition And Withdrawal Of Cautionary Announcement |
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ESR
ESR
ESR - Esor Limited - Acquisition And Withdrawal Of Cautionary Announcement
ESOR LIMITED
(Incorporated in the Republic of South Africa)
(Registration number: 1994/000732/06)
JSE code: ESR & ISIN: ZAE000078408
("Esor")
ACQUISITION OF SHEARWATER PLANT HIRE (PROPRIETARY) LIMITED ("SHEARWATER"),
FINANCIAL EFFECTS OF THE SHEARWATER AND PATULA CONSTRUCTION (PROPRIETARY)
LIMITED ("PATULA") ACQUISITIONS AND WITHDRAWAL OF CAUTIONARY ANNOUNCEMENT
1. INTRODUCTION
Shareholders are referred to the cautionary announcements dated 9 July
2008, 20 August 2008 and the announcement dated 22 September 2008
relating to the Patula transaction and are advised that, subject to
certain conditions precedent, Esor entered into agreements on 26
September 2008 to acquire the entire issued share capital of and all
shareholders` claims in Shearwater from Shearwater Group Holdings
(Proprietary) Limited ("the Shearwater vendor"), as well as the claim of
Shearwater Construction (Proprietary) Limited ("Shearwater Construction")
against Shearwater for payment of the purchase price payable by
Shearwater for the business of Shearwater Construction pursuant to the
acquisition by Shearwater of such business (either "the Shearwater
acquisition" or "the Shearwater transaction").
2. BACKGROUND INFORMATION TO SHEARWATER GROUP
Shearwater and Shearwater Construction (collectively, "the Shearwater
Group") was founded early in 2002 by Andrew Toy and Patrick Delamere who
have a combined experience of 38 years in the pipeline construction
industry. Shearwater focuses on the construction and rehabilitation of
onshore pipelines and associated works and operates mainly in the gas and
petrochemical, water, stormwater and sewerage sectors.
Shearwater provides the following general services:
- pipeline earthworks;
- installation of piping, valves and specials;
- wrapping and coating of completed pipeline sections;
- construction of pump stations, chambers and other pipeline
associated works;
- testing and pigging of completed pipeline sections;
- in situ and stack-yard lining of pipelines or pipe lengths; and
- control over environmental and safety aspects.
Shearwater has specialist skills in the laying and welding of steel
pipelines and particularly pipeline welding techniques applicable mainly
in the gas, petrochemical and water sectors.
3. RATIONALE FOR THE TRANSACTION
3.1. Esor is the largest specialist geotechnical and civil engineering
contractor in South Africa and the only one-stop geotechnical provider.
Esor provides the mining, civil engineering and construction industries
with pipe-jacking, piling, soil improvements, dynamic compaction, marine
services and lateral support services needed to construct the sub-surface
foundations for all major non-residential buildings, mines,
infrastructure and marine construction projects. Esor also offers field
investigation, design and testing capabilities.
3.2. Shearwater is a civil engineering company that focuses on the
construction and rehabilitation of onshore pipelines and associated works
mainly for the gas and petrochemical, mining and Government sectors. The
Shearwater acquisition will contribute towards Esor increasing its
participation in the overall large infrastructural spend anticipated by
Government and the private sector. Furthermore:
- the Shearwater acquisition will expand Esor`s product and service
offerings, diversify revenue streams and add critical mass to Esor;
- Shearwater is an established profitable operation with a presence
and track record and can operate as a stand-alone and self-
sufficient business unit; and
- Shearwater has experienced management with a track record, who will
bring further depth and diversity of management to the Esor group
and who will also become Esor shareholders.
4. PURCHASE CONSIDERATION
Subject to the provisions set out below, the purchase consideration payable by
Esor for the Shearwater transaction is the aggregate of:
4.1. an initial amount ("initial payment") of R200 million, which amount
includes the consideration payable in respect of the claim of Shearwater
Construction for payment for the business conducted by Shearwater
Construction ("acquisition claim"); and
4.2. a maximum final payment ("final payment") of R20 million determined as
follows:
- If the 2009 headline earnings shall exceed R40 million, the final
payment will be an amount equal to R2.00 for every R1.00 by which
the 2009 headline earnings shall exceed the sum of R40 million,
provided that such final payment shall not exceed the sum of R20
million.
5. PAYMENT OF PURCHASE CONSIDERATION
5.1 The purchase consideration as set out above will be discharged in the
following manner:
5.1.1. 50% of the initial payment will be discharged on the closing
date (as described in 6 below) by the issue and allotment by
Esor to the Shearwater vendor and Shearwater Construction of
Esor ordinary shares at an issue price of R6.00 per ordinary
share;
5.1.2. the balance of the initial payment will be payable in cash,
which cash payment will be financed through borrowings, on the
closing date;
5.1.3. 50% of the final payment will be discharged on the later of 1
September 2009 or the date upon which the 2009 headline
earnings are finally determined, by the issue and allotment by
Esor to the Shearwater vendor of Esor ordinary shares at an
issue price of R6.00 per ordinary share;
5.1.4. the balance of the final payment will be payable in cash at the
same time as the issue of the ordinary shares in terms of
5.1.3.
5.2. Restrictions on the disposal of the Esor ordinary shares to be issued to
the Shearwater vendor and Shearwater Construction
Neither the Shearwater vendor nor Shearwater Construction shall be
entitled to sell:
- any of the Esor ordinary shares issued to them in terms of 5.1.1.
prior to the first anniversary of the effective date;
- more than 50% of the Esor ordinary shares issued to them in terms of
5.1.1. prior to the second anniversary of the effective date;
- more than 75% of the Esor ordinary shares issued to them in terms of
5.1.1. prior to the third anniversary of the effective date,
Similar restrictions will apply to the shares to be issued to the
Shearwater vendor in terms of 5.1.3.
6. EFFECTIVE DATE AND CLOSING DATE
The Shearwater transaction will become effective on the first day of the
month following the month in which all the conditions precedent (as set
out in 7 below) have been fulfilled or waived. The closing date of the
transaction will be the later of 21 business days after the effective
date or the 5th business day after the date upon which the effective date
net tangible asset value ("NTAV") and effective date headline earnings
have been finally determined.
7. CONDITIONS PRECEDENT
The Shearwater acquisition is conditional, inter alia, upon:-
7.1. all necessary regulatory approvals being obtained, including approval in
terms of the Competition Act 89 of 1998;
7.2. the implementation of the acquisition by Shearwater of the Shearwater
Construction business;
7.3. the effective date NTAV of the Shearwater Group being not less than
R50 million plus the amount of the effective date headline earnings of
the Shearwater Group;
7.4. the shareholders of the Shearwater vendor passing a special resolution in
terms of section 228 of the Act approving the sale by the Shearwater
vendor of the shares and claims in Shearwater to Esor, and the
registration by CIPRO of such special resolution; and
7.5. the Shearwater vendor, being the sole shareholder of Shearwater
Construction, passing a special resolution in terms of section 228 of the
Companies Act approving the sale by Shearwater Construction of the
acquisition claim to Esor, and the registration by CIPRO of such special
resolution.
8. OTHER MATTERS
8.1. Warranties and indemnities as are normal in transactions of this nature
have been provided for in the agreements recording the Shearwater
transaction.
8.2. Andrew Toy and Patrick Delamere have entered into standard service
agreements, which incorporate restraint of trade clauses.
8.3. The Shearwater vendor and Shearwater Construction have provided restraint
of trade undertakings for a period of five years from the effective date.
8.4. The Shearwater vendor has provided further undertakings regarding
Shearwater KwaZulu-Natal (Proprietary) Limited and Shegowane Construction
(Proprietary) Limited.
8.5. To ensure the retention of second tier management, Esor will make 1 750
000 Esor share options available to certain Shearwater employees in terms
of the Esor Share Incentive Scheme.
8.6. Esor has completed a satisfactory due diligence review of the Shearwater
Group.
9. FINANCIAL EFFECTS OF SHEARWATER TRANSACTION
The unaudited pro forma financial effects of the Shearwater transaction
set out below are provided for illustrative purposes only in order to
assist Esor shareholders to assess the impact of the Shearwater
transaction on the earnings, diluted earnings, headline earnings, diluted
headline earnings, NAV and NTAV per share of Esor. These unaudited pro
forma financial effects have been disclosed in terms of the Listings
Requirements and because of their nature may not give a fair presentation
of Esor`s results and financial position after the Shearwater
transaction. The unaudited pro forma financial effects are the
responsibility of the directors of Esor and are presented in a manner
consistent with the accounting policies adopted by Esor.
Notes Audited Unaudited % change
Before the pro forma
Shearwater After the
transaction Shearwater
transaction
Earnings per share 1 and 2 51.7 70.3 36.0
(cents)
Headline earnings per 1 and 2 51.3 70.0 36.5
share (cents)
Diluted earnings per 1 and 2 50.7 68.7 35.5
share (cents)
Diluted headline 1 and 2 50.4 68.4 35.7
earnings per share
(cents)
NAV per share (cents) 3 160.3 188.9 17.8
NTAV per share (cents) 3 121.4 100.9 (16.9)
Weighted average number 2 224 560 241 455 -
of shares in issue (000)
Diluted weighted average 2 228 677 247 239 -
number of shares in
issue (000)
Shares in issue at 2 243 019 259 914 -
period end (000) *
* Net of 4 884 908 treasury shares held by the Esor Share Incentive Trust.
Notes:
1. The earnings, diluted earnings, headline earnings, diluted headline
earnings, NAV and NTAV per share, as set out in the "Before the
Shearwater transaction" column, are extracted from Esor`s audited results
for the year ended 29 February 2008.
2. Earnings, headline earnings, diluted earnings and diluted headline
earnings per share effects, as set out in the "Unaudited pro forma after
the Shearwater transaction" column are based on the following assumptions
and information:
- the Shearwater transaction was effective 1 March 2007;
- the initial payment was settled on 1 March 2007 by way of the issue
of 16 666 667 Esor ordinary shares at R6.00 per share and a cash
payment of R100 million, which cash payment was financed through
borrowings of R53.6 million and the balance from existing cash on
hand. The interest rates assumed on interest foregone is 9% per
annum (pre tax) and on borrowings 12.5% per annum (pre tax);
- a notional interest charge of R0.2 million (pre tax) assuming an
interest rate of 12.5% per annum (pre tax) was included relating to
the cash portion of R2 million of the total deferred contingent
purchase consideration of R4 million which is based on expected
headline earnings for the Shearwater group for the year ending
February 2009;
- pre tax amortisation charges of R0.7 million, R0.8 million and R6.3
million relating to the revaluation of property, plant and equipment
("PPE"), Shearwater trade name and open contracts acquired are
included. The revaluations and allocations that may arise from the
application of IFRS 3: Business Combinations ("IFRS 3") have been
made on an indicative basis and the indicative values of the PPE,
Shearwater trade name and open contracts acquired were determined to
be R3.5 million, R16.8 million and R12.6 million, respectively. The
PPE, Shearwater trade name and open contracts acquired recognised in
terms of IFRS 3 is amortised over their estimated useful lives,
being five, twenty and two years, respectively. Taxation has been
adjusted to reflect the deferred tax charge on the amortisation of
the PPE and intangible assets at a rate of 29%;
- the adjustment for share based payments that may arise from the
application of IFRS 2: Share Based Payments ("IFRS 2") has been made
on an indicative basis and was determined to be R1.1 million per
annum;
- the estimated transaction costs of R5.0 million have been
capitalised and included in the effective cost of the acquisition
and were paid on 1 March 2007 in cash and by the issue of 228 462
Esor ordinary shares at R6.00 per share, financed through existing
cash on hand on which interest was assumed foregone at 9% per annum
(pre tax); and
- the total after tax profit attributable to the Shearwater group is
R65.7 million for the year ended 29 February 2008 as per the audited
financial statements.
3. NAV and NTAV effects, as set out in the "Unaudited pro forma after the
Shearwater transaction" column are based on the following assumptions and
information:
- the Shearwater transaction was effective 29 February 2008;
- the purchase price was settled on 29 February 2008 in the manner
described in note 2 above; and
- the revaluations and allocations that may arise from the application
of IFRS 3 have been made on an indicative basis. The financial
effects have been prepared on the basis that the excess of the
effective purchase price over the NAV of the Shearwater group of
R83.7 million and the indicative value of the Shearwater trade name
of R16.8 million (gross of the related deferred taxation of R4.9
million) and open contracts acquired of R12.6 million (gross of the
related deferred taxation of R3.7 million) will comprise goodwill of
R104.8 million, which is not amortised.
10. FINANCIAL EFFECTS OF PATULA TRANSACTION
The unaudited pro forma financial effects of the Patula transaction set
out below are provided for illustrative purposes only in order to assist
Esor shareholders to assess the impact of the Patula transaction on the
earnings, diluted earnings, headline earnings, diluted headline earnings,
NAV and NTAV per share of Esor. These unaudited pro forma financial
effects have been disclosed in terms of the Listings Requirements and
because of their nature may not give a fair presentation of Esor`s
results and financial position after the Patula transaction. The
unaudited pro forma financial effects are the responsibility of the
directors of Esor and are presented in a manner consistent with the
accounting policies adopted by Esor.
Notes Audited Unaudited pro % change
Before the forma
Patula After the
transaction Patula
transaction
Earnings per share (cents) 1 and 2 51.7 56.3 8.9
Headline earnings per 1 and 2 51.3 55.7 8.6
share (cents)
Diluted earnings per share 1 and 2 50.7 55.4 9.3
(cents)
Diluted headline earnings 1 and 2 50.4 54.7 8.5
per share (cents)
NAV per share (cents) 3 160.3 188.2 17.4
NTAV per share (cents) 3 121.4 85.3 (29.7)
Weighted average number of 2 224 560 241 007 -
shares in issue (000)
Diluted weighted average 2 228 677 245 124 -
number of shares in issue
(000)
Shares in issue at period 2 243 019 259 466 -
end (000) *
* Net of 4 884 908 treasury shares held by the Esor Share Incentive Trust.
Notes:
1. The earnings, diluted earnings, headline earnings, diluted headline
earnings, NAV and NTAV per share, as set out in the "Before the Patula
transaction" column, are extracted from Esor`s audited results for the
year ended 29 February 2008.
2. Earnings, headline earnings, diluted earnings and diluted headline
earnings per share effects, as set out in the "Unaudited pro forma after
the Patula transaction" column are based on the following assumptions and
information:
- the Patula transaction was effective 1 March 2007;
- the initial payment was settled on 1 March 2007 by way of the issue
of 16 000 000 Esor ordinary shares at R6.00 per share and a cash
payment of R144.0 million, which cash payment was financed through
borrowings of R99.4 million and the balance from existing cash on
hand. The interest rates assumed on interest foregone is 9% per
annum (pre tax) and on borrowings 12.5% per annum (pre tax);
- pre tax amortisation charges of R11.1 million, R1.4 million and R7.2
million relating to the revaluation of the PPE, Patula trade name
and open contracts acquired are included. The revaluations and
allocations that may arise from the application of IFRS 3 have been
made on an indicative basis and the indicative values of the PPE,
Patula trade name and open contracts acquired were determined to be
R55.5 million, R28.6 million and R14.3 million, respectively. The
PPE, Patula trade name and open contracts acquired recognised in
terms of IFRS 3 is amortised over their estimated useful lives,
being five, twenty and two years, respectively. Taxation has been
adjusted to reflect the deferred tax charge on the amortisation of
the intangible assets at a rate of 29%;
- the adjustment for share based payments that may arise from the
application of IFRS 2 has been made on an indicative basis and was
determined to be R2.2 million per annum;
- the estimated transaction costs of R8.0 million have been
capitalised and included in the effective cost of the acquisition
and were paid on 1 March 2007 in cash and by the issue of 446 538
Esor ordinary shares at R6.00 per share financed through existing
cash on hand on which interest was assumed foregone at 9% per annum
(pre tax); and
- the total after tax profit attributable to the Patula group is R47.6
million the year ended 29 February 2008 as per the audited financial
statements.
3. NAV and NTAV effects, as set out in the "Unaudited pro forma after the
Patula transaction" column are based on the following assumptions and
information:
- the Patula transaction was effective 29 February 2008;
- the purchase price was settled on 29 February 2008 in the manner
described in note 2 above; and
- the revaluations and allocations that may arise from the application
of IFRS 3 have been made on an indicative basis. The financial
effects have been prepared on the basis that the excess of the
effective purchase price over the NAV of the Patula group of
R113.1 million and the indicative value of the Patula trade name of
R28.6 million (gross of the related deferred taxation of R8.3
million) and open contracts acquired of R14.3 million (gross of the
related deferred taxation of R4.2 million) will comprise goodwill of
R120.4 million, which is not amortised.
11. FINANCIAL EFFECTS OF THE SHEARWATER AND PATULA TRANSACTIONS
The unaudited pro forma financial effects of both the Shearwater
transaction and the Patula transaction set out below are provided for
illustrative purposes only in order to assist Esor shareholders to assess
the combined impact of the Patula and Shearwater transactions on the
earnings, diluted earnings, headline earnings, diluted headline earnings,
NAV and NTAV per share of Esor. These unaudited pro forma financial
effects have been disclosed in terms of the Listings Requirements and
because of their nature may not give a fair presentation of Esor`s
results and financial position after the Patula and Shearwaters
transactions. The unaudited pro forma financial effects are the
responsibility of the directors of Esor and are presented in a manner
consistent with the accounting policies adopted by Esor.
Audited Unaudited %
Before the pro forma change
Patula and After the
Shearwater Patula and
transactions Shearwater
transactions
Earnings per share 51.7 72.9 41.0
(cents)
Headline earnings per 51.3 72.4 41.1
share (cents)
Diluted earnings per 50.7 71.3 40.6
share (cents)
Diluted headline earnings 50.4 70.8 40.5
per share (cents)
NAV per share (cents) 160.3 213.4 33.1
NTAV per share (cents) 121.4 68.1 (43.9)
Weighted average number 224 560 257 902 -
of shares in issue (000)
Diluted weighted average 228 677 263 685 -
number of shares in issue
(000)
Shares in issue at period 243 019 276 361 -
end (000) *
* Net of 4 884 908 treasury shares held by the Esor Share Incentive Trust.
Notes:
1. The earnings, diluted earnings, headline earnings, diluted headline
earnings, NAV and NTAV per share, as set out in the "Before the Patula
and Shearwater transactions" column, are extracted from Esor`s audited
results for the year ended 29 February 2008.
2. Earnings, headline earnings, diluted earnings, diluted headline earnings,
NAV and NTAV per share effects, as set out in the "Unaudited pro forma
after the Patula and Shearwater transactions" column are based on the
assumptions as detailed in paragraphs 9 and 10 above. On a combined
basis the cash portion of the initial payments equal R244.0 million,
which cash payments were financed through borrowings of R202.9 million
and the balance from existing cash on hand. The interest rates assumed
on interest foregone is 9% per annum (pre tax) and on borrowings 12.5%
per annum (pre tax).
12. CLASSIFICATION OF THE TRANSACTION
The Shearwater transaction is classified as a Category 2 transaction in
terms of the JSE Listings Requirements.
13. WITHDRAWAL OF CAUTIONARY ANNOUNCEMENT
The further cautionary announcement of 22 September 2008 is hereby
withdrawn.
14. FURTHER ANNOUNCEMENT
Shareholders will be notified once the Shearwater and Patula transactions
become unconditional.
Johannesburg
29 September 2008
Designated Adviser
Exchange Sponsors
Transaction Adviser
Vunani Corporate Finance
Legal Advisers to Esor
Fluxmans Inc.
Competition Law Advisers
Brink Cohen Le Roux Inc.
Independent Valuation Adviser
Moore Stephens Corporate Finance
Date: 29/09/2008 12:35:23 Produced by the JSE SENS Department.
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