| Wed 17 Jun 2009, 17:26 | | RAC - Racec Group - Investment by an empowerment entity in Racec and group |
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RAC
RAC
RAC - Racec Group - Investment by an empowerment entity in Racec and group
restructure
RACEC GROUP LIMITED
Incorporated in the Republic of South Africa
(Registration number 1998/006153/06)
Share code: RAC ISIN: ZAE000105409
("RACEC" or "the company" or "the group")
INVESTMENT BY AN EMPOWERMENT ENTITY IN RACEC AND GROUP RESTRUCTURE
1 INTRODUCTION
The board of directors of RACEC is pleased to announce that Solethu
Investments (Proprietary) Limited ("Solethu Investments") will acquire a
25% stake in RACEC.
Solethu Investments is an empowerment investment group with specific
expertise that complements RACEC`s own skill set and which will
significantly strengthen RACEC`s black economic empowerment ("BEE")
credentials.
This relationship will allow for the creation of numerous synergies between
RACEC and Solethu Investments and will result in additional business
opportunities for the entities within the group.
Furthermore, RACEC will restructure two of its operating subsidiaries by
acquiring the minority interest for a combination of cash and shares.
2 THE TRANSACTIONS
RACEC has entered into an agreement with Solethu Investments whereby
Solethu Investments, through its recently established wholly-owned
subsidiary and special purpose vehicle, Solethu Civils (Proprietary)
Limited ("Solethu Civils"), will acquire a 25% interest in the increased
share capital of the company by way of subscription for 34 615 384 ordinary
shares ("specific issue shares") in the issued share capital of the company
at an issue price of R1.30 per share for an aggregate subscription price of
R45 million ("specific issue"). In terms of the agreement, shareholders
will be required in the general meeting to:
- approve the specific issue;
- authorise the company to provide any financial assistance to Solethu
Civils for the purpose of and in connection with the specific issue
("provision of financial assistance"); and
- approve the potential exercise of a put option for the specific
repurchase of up to 26 923 077 specific issue shares for cash from
Solethu Civils at R1.30 per share for an aggregate repurchase price of
up to R35 million ("specific repurchase").
Hereinafter, the specific issue, the provision of financial assistance and
the specific repurchase are referred to as the "Solethu transaction".
Furthermore, the board of directors of RACEC ("the board") has entered into
agreements with the minority shareholders of its subsidiaries, Greenbro
(Proprietary) Limited ("Greenbro") and Northern Electric (Cape)
(Proprietary) Limited ("Northern Electric"), to acquire the remaining 20%
shareholding in Greenbro and the remaining 5% shareholding in Northern
Electric, that it does not already own ("acquisition of the minority
interests").
Hereinafter, the Solethu transaction and the acquisition of the minority
interests are referred to as the "transactions".
3 THE SOLETHU TRANSACTION
3.1 The nature of Solethu Investments
Solethu Investments is a BEE investment company which is strategically
placed in the rail logistics industry. Established in 2001 by Ted Zulu
as RRL Holdings (Proprietary) Limited, Solethu Investments is a 95%
black controlled and 80% black owned and managed investment group
whose core investments are focused on road, rail, sea and related
industries, with operations that range from manufacturing, repairs and
maintenance to logistics services. This focus ensures that Solethu
Investments is able to meaningfully add value to its investments and
enables the Solethu group to leverage off its knowledge and reputation
within these industries.
Solethu Investments` shareholding structure ensures that it is a black
controlled empowerment entity with a sustainable black shareholding base.
Solethu Civils is a newly established special purpose vehicle designed to
house Solethu Investments` shareholding in RACEC and to facilitate the
funding of the Solethu transaction.
3.2 The rationale for the Solethu transaction
It has been the intention of the board that RACEC creates a platform for
strong growth through the cross-selling of products and services currently
offered by the group into a broader range of infrastructure related
solutions. In addition, an increase in BEE shareholding within the group
has been a key objective of the board. The proposed Solethu transaction
will ensure that the BEE shareholding objective is addressed as subsequent
to the Solethu transaction, 25% of the issued share capital of the company
will be held by Solethu Civils.
The improved BEE shareholding will significantly strengthen the group`s BEE
credentials, reinforcing the group`s commitment to a multi-faceted approach
to BEE, which aims to increase the number of previously disadvantaged
individuals that manage and own the company. The Solethu transaction will
also provide a cash injection to the company.
The benefits that will accrue to the company as a result of the Solethu
transaction and the company`s ongoing relationship with Solethu Investments
include:
- the creation of numerous synergies between RACEC and Solethu
Investments;
- additional business opportunities for the company`s subsidiaries;
- an enlarged customer base and geographical spread; and
- increased exposure to expertise, resources and other business
relationships.
3.3 Terms
Subject to the fulfilment or waiver of the conditions precedent set out in
paragraph 3.5 below, Solethu Civils will subscribe for 34 615 384 new
ordinary shares in RACEC at R1.30 per share for an aggregate subscription
price of R45 million. Such shares shall rank pari passu with all other
issued ordinary shares in the share capital of the company and shall
constitute 25% of all shares in the increased issued share capital of
RACEC.
In the event however, that the product of the normalised earnings per share
(headline earnings per share adjusted for the consolidation entries
pertaining to Solethu Civils and any IFRS/fair value adjustments pertaining
to the put option and any other IFRS adjustments relating to the Solethu
transaction) of RACEC for the financial year ended 30 September 2010,
multiplied by a factor of five ("the relevant product") is less than R1.30,
then the subscription price of the specific issue shares shall be adjusted
downwards. This is achieved by way of the subscription by RACEC of a single
"B" class ordinary share in the issued share capital of Solethu Civils with
a par value of R1.00 at a compulsory subscription price equal to:
the product of 34 615 385 shares multiplied by the difference between
R1.30 and the product of normalised earnings per share multiplied by
five.
The "B" class ordinary share in Solethu Civils shall:
- carry no right to dividends or other distributions of whatsoever
nature;
- not be entitled to any return of share premium under any
circumstances;
- on a winding-up of Solethu Civils, be solely entitled to a return of
the par value thereof;
- in relation to any resolution proposed to the holders of the ordinary
shares in the share capital of Solethu Civils (whether on a show of
hands or on a poll), be entitled to one thousandth of the votes
attaching to an ordinary share in the issued share capital of Solethu
Civils.
3.4 Funding of the specific issue
In order to fund the specific issue, Solethu Civils will obtain funding for
an aggregate amount of R45 million as follows:
- R35 million from a 3rd party funder ("the funder"), the terms of which
are set out in the written agreement entered into between Solethu
Civils, Solethu Investments and the funder ("first tranche funding
agreement"), to be utilised by Solethu Civils in respect of the
subscription for 26 923 077 specific issue shares; and
- R10 million from the company, the terms of which are set out in the
written agreement entered into between Solethu Civils, Solethu
Investments and RACEC ("second tranche funding agreement"), to be
utilised by Solethu Civils in respect of the subscription for 7 692
307 specific issue shares.
3.5 Conditions precedent and effective date
In terms of the agreement, the Solethu transaction is subject to the
fulfillment or waiver of the following on or before 30 September 2009:
- the first tranche funding agreement becoming unconditional;
- the requisite majority of RACEC shareholders in general meeting
approving the specific issue, the provision of financial assistance
and the specific repurchase; and
- the procurement of approval from all regulatory authorities, including
but not limited to JSE Limited ("JSE").
The effective date of the Solethu transaction will be the first business day
succeeding the date on which all the conditions precedent have been fulfilled or
waived.
3.6 Put option
Terms of the put option
RACEC has irrevocably granted Solethu Civils the right, on written notice
to the company, to require RACEC to purchase from Solethu Civils, 26 923
077 of the specific issue shares ("the put shares"), for an aggregate
purchase consideration of R35 million.
The put option shall only be capable of being exercised on a single
occasion in full and then only:
- if there is a breach by Solethu Civils of any of its obligations under
the first tranche funding agreement which results in the funder
demanding that amounts owing under the first tranche funding agreement
be paid or repaid in advance of their originally stipulated payment or
repayment dates; or
- at any time during the period commencing on the fifth anniversary of
the effective date and ending on the ninetieth business day
thereafter; or
- the suspension or termination of RACEC`s listing on the JSE.
The aggregate purchase consideration of R35 million set out in paragraph
3.6.1 above shall be paid by RACEC to Solethu Civils in one lump sum and
without any deductions, set-off or exchange.
All securities transfer tax arising from or relating to the repurchase of
the put shares by RACEC shall be borne by the company.
Solethu Civils has the right on written notice to RACEC to cede and
delegate its rights and obligations in terms of the put option to the
funder, as security under the first tranche funding agreement and
furthermore, on written notice to RACEC, to re-acquire such rights and
obligations from the funder at any time.
3.6.2 Deemed subscription
In the event that the put option is exercised by Solethu Civils, then
simultaneously with such exercise, Solethu Civils, in the event that actual
12 month rolling profit before tax is less than the forecast profit before
tax for the same period, shall be deemed to have subscribed for RACEC
ordinary shares at a deemed consideration =
- the actual 12 month rolling profit before tax prior to exercise of the
option
- / the forecast 12 month rolling profit before tax prior to exercise of
the option as agreed between RACEC and Solethu Civils
- x R18 038 462.
However, in the event that actual 12 month rolling profit before tax
exceeds forecast profit before tax for the same period, then deemed
consideration equals R18 038 462.
The number of shares to be issued to Solethu Civils will be determined by
dividing the consideration by the 30 day Volume Weighted Average Price
preceding the date of the exercise of the put option.
3.7 Funding of the specific repurchase
The capital raised through the specific issue will be used to eliminate the
group`s bank overdraft, which currently forms part of the group`s permanent
working capital structure and to inject surplus cash into the business.
Should the possible future exercise of the put option occur, the specific
repurchase will be funded through cash and the partial utilisation of the
group`s facilities.
Should the put option be exercised by Solethu Civils, the simultaneous
exercise by RACEC of the deemed subscription clause would result in RACEC
having to return (from the R35 million received by way of the specific
issue) R17 million possibly increased by the deemed subscription formula
detailed above if profit forecasts are not met. This potential outflow is
considered to be an acceptable risk.
4 THE ACQUISITION OF THE MINORITY INTERESTS
4.1 Terms
RACEC has concluded agreements in respect of the acquisition by the company
of the remaining 20% shareholding in Greenbro and the remaining 5%
shareholding in Northern Electric that it does not own. The remaining
shares in Greenbro will be acquired from Mr J Greenlees, a director of
Greenbro, for a purchase consideration of R4.77 million payable in cash.
The remaining shares in Northern Electric will be acquired from Mr R
Savill, a director of Northern Electric, for a purchase consideration of
R466 112 of which R233 056 is payable in cash and the remainder being paid
by way of an issue of 179 273 RACEC ordinary shares at an issue price of
R1.30 per share.
Mr J Greenlees and Mr R Savill are directors of Greenbro and Northern
Electric respectively, and are therefore deemed to be "related parties" in
accordance with paragraph 10.1(b) of the Listings Requirements of the JSE.
"Related party transactions" normally require a fairness opinion from an
independent professional expert. However, the categorisation of the
acquisition of the minority interests in accordance with paragraph 9.6 of
the Listings Requirements of the JSE results in a percentage ratio of less
than 10%. Such percentage is less than the categorisation threshold of a
"related party transaction" for an AltX listed company and therefore the
acquisition of the minority interests is not regarded as a related party
transaction. Consequently no fairness opinion is required.
4.2 Rationale
The board believes that Greenbro and Northern Electric will provide strong
revenue streams to the group in the short to medium term. The acquisition
of the remaining minority shareholdings will result in increased earnings
attributable to the group.
4.3 Conditions precedent
The acquisition of the minority interests in Greenbro and Northern Electric
is subject to the implementation of the Solethu transaction as RACEC will
utilise a portion of the cash raised by way of the specific issue to fund
the cash portions of the acquisition of the minority interests.
5 FURTHER DOCUMENTATION
A circular containing full details of the transactions and incorporating a
notice to convene a general meeting of RACEC shareholders in order to
consider and, if deemed fit to pass, the resolutions necessary to approve
the specific issue, the provision of financial assistance and the specific
repurchase, will be sent to RACEC shareholders in due course.
6 PRO FORMA FINANCIAL EFFECTS OF THE ACQUISITION
The pro forma financial effects of the transactions will be disclosed in
due course.
7 CAUTIONARY ANNOUNCEMENT
Shareholders are referred to the announcements released on SENS on 20 April
2009 and 5 June 2009 and are advised to continue to exercise caution when
dealing in the company`s securities until a final announcement detailing
the pro forma financial effects of the transactions is made.
17 June 2009
Corporate and Designated Adviser
Merchantec (Proprietary) Limited
Auditors and reporting accountants
BDO Spencer Steward (Cape) Inc.
Legal adviser
C&A Friedlander Inc.
Date: 17/06/2009 17:26:04 Produced by the JSE SENS Department.
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