| Wed 19 Aug 2009, 17:44 | | HPA/HPB - Hospitality - Proposed acquisition of Hospitality Property Fund |
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HPA HPB
HPA
HPA/HPB - Hospitality - Proposed acquisition of Hospitality Property Fund
Managers (Proprietary) Limited and cautionary announcement
Hospitality Property Fund Limited
(Incorporated in the Republic of South Africa)
(Registration number 2005/014211/06)
Share code for A-linked units: HPA
ISIN for A-linked units: ZAE000076790
Share code for B-linked units: HPB
ISIN for B-linked units: ZAE000076808
("Hospitality" or "the company")
PROPOSED ACQUISITION OF HOSPITALITY PROPERTY FUND MANAGERS (PROPRIETARY) LIMITED
("HOSPITALITY MANCO") AND CAUTIONARY ANNOUNCEMENT
INTRODUCTION
Linked unitholders are advised that Hospitality has reached an agreement with
the shareholders of Hospitality Manco, being Grapnel Property Asset Managers
(Proprietary) Limited and Hotel Tourism and Leisure Asset Management
(Proprietary) Limited (collectively the "sellers") to acquire all of the issued
shares of and shareholders` claims against Hospitality Manco (the "transaction")
with effect from the date on which the transaction is implemented (the
"effective date"). Hospitality Manco is the external asset manager of
Hospitality in terms of a management contract concluded between Hospitality, HPF
Properties (Proprietary) Limited (Hospitality`s wholly-owned subsidiary) and
Hospitality Manco on 15 January 2006 (the "asset management agreement").
RATIONALE FOR THE TRANSACTION
Over the past few years there has been a significant shift from externally to
internally managed property companies, both internationally and in South Africa.
Hospitality has been externally managed since its listing in February 2006 and
the appointment of an experienced external asset manager with the requisite
skills and expertise has enhanced Hospitality`s performance and growth over this
period. However, the board and management of Hospitality believe that the
company is now at a stage where it is preferable to internalise its asset
management.
The advantages of internalising Hospitality`s asset management include:
- the yield enhancement that will result from the lower costs of internal
management;
- the elimination of the perceived conflicts of interest inherent in an
external asset management arrangement; and
- the further alignment of the interests of the key management of Hospitality
with the interests of the Hospitality linked unitholders.
TERMS OF THE TRANSACTION
In terms of the asset management agreement, Hospitality has an option to acquire
all the issued shares of and shareholder claims` against Hospitality Manco for a
price essentially arrived at by escalating the after tax cash flow from
Hospitality Manco`s operations for the previous 12 months by CPI for a six year
forecast period and discounting the forecast cash flows by the average yield of
Hospitality over the previous 12 months (the "option formula").
If the option formula was applied in respect of the 12 months ended 30 June 2009
it would result in a price of approximately R175.8 million for all the issued
shares of and shareholders` claims. However, the parties have agreed to apply an
amended pricing formula that is not based on the results for a single 12 month
period but takes into account the sustainable results of Hospitality Manco on
the following basis:
- a value for Hospitality Manco will be calculated in respect of each of the
12 months ended 30 June 2009, 2010, 2011 and 2012 (the "2009, 2010, 2011
and 2012 values") on essentially the same basis as that of the option
formula; and
- the purchase price for all the issued shares of and shareholders` claims
against Hospitality Manco shall be an amount equivalent to the average of
the 2009, 2010, 2011 and 2012 values, provided that this will be subject to
a minimum purchase price of R123 million and a maximum purchase price of
R180 million (escalated at CPI between the effective date and 30 June
2012).
The purchase price shall be discharged as follows:
- the minimum purchase price of R123 million (the "minimum price") will be
paid to the sellers in cash after the fulfilment of the conditions
precedent and after the implementation of any issue of Hospitality linked
units for cash, required to fund the payment of the minimum price. The
sellers shall be obliged to utilise R41 million of the minimum price to
subscribe for A and B linked units in Hospitality at the volume weighted
average price of the linked units over the 30 days preceding the effective
date ("30 day VWAP");
- the balance of the purchase price, if any, (the "top up payment")will be
paid to the sellers in cash within 30 days of the issue of the audited
financial statements of Hospitality for the 12 months ending 30 June 2012.
As part of the transaction, the Hospitality CEO, Gerald Nelson has undertaken to
remain the CEO of Hospitality at least until 30 June 2012 and both Gerald Nelson
and Youseph Aminzadeh (executive director and former deputy CEO) are restrained
from forming any other listed or unlisted hotel property fund in South Africa
until 30 June 2015.
RELATED PARTY TRANSACTION
Hospitality`s CEO Gerald Nelson and executive director Youseph Aminzadeh,
between them have a 70% indirect beneficial interest in Hospitality Manco.
Accordingly, in terms of the Listings Requirements of the JSE Limited, the
transaction is a related party transaction, requiring an independent fairness
opinion and the approval of linked unitholders, other than the related parties
and their associates.
In this regard, the board has appointed Java Capital, subject to JSE Limited
approval, to provide an independent opinion as to the fairness of the
transaction to linked unitholders. Details of Java Capital`s opinion will be
included in the circular to be posted to unitholders in relation to the
transaction.
CONDITIONS PRECEDENT
The transaction is subject to fulfilment or, where permitted, waiver of the
following conditions precedent:
- the requisite approval by linked unitholders to implement the transaction
and to issue the requisite linked units to fund the minimum price and, if
due, the top up payment;
- the receipt by the company of a tax ruling or a tax opinion acceptable to
the board, in relation to the structuring of the transaction; and
- all regulatory approvals required for the implementation of the
transaction.
HHMC and C-Corp
The sellers also hold the issued share capital of Hospitality Hotel Management
Company (Proprietary) Limited ("HHMC") and Majormatic 194 (Proprietary) Limited
("C-Corp").
HHMC manages certain of Hospitality`s hotels. This function is distinct from the
asset management function conducted by Hospitality Manco and HHMC is,
indirectly, an important service provider to Hospitality.
The board is of the view that external hotel management (where the company can
choose between hotel managers depending upon the hotel and the circumstances) is
in line with international best practice and is a preferable model to
internalised hotel management. In order to reduce any potential conflicts of
interest in the HHMC relationship and to ensure that HHMC retains the management
skills and capacity to provide the requisite hotel management services to
Hospitality after the implementation of the transaction:
- Gerald Nelson has agreed to resign as director of HHMC and C-Corp and have
no further executive role in HHMC and C-Corp for so long as he is CEO of
Hospitality; and
- Youseph Aminzadeh will no longer be an executive director of Hospitality
(although he will remain a non-executive director of the board) and will
take an executive role within HHMC until 30 June 2012 in order to build the
long term management capacity within HHMC.
C-Corp is a tenant of the Hospitality group in respect of the so-called "C-Corp
leases". As part of the transaction, Hospitality will undertake a comprehensive
review of the C-Corp relationship in order to remove any potential conflicts of
interest that may result from the C-Corp arrangement. In order to facilitate any
steps that the board may elect to take in this regard, the sellers have granted
Hospitality an option to acquire all of their shares in and shareholders` claims
against C-Corp at any time prior to 30 June 2012 at a price equal to the net
asset value of the shares and face value of the shareholders` claims.
FURTHER DOCUMENTATION
A circular containing further details of the transaction, including the
independent fairness opinion referred to above and a notice convening a general
meeting, will be sent to Hospitality linked unitholders in due course.
FINANCIAL EFFECTS AND CAUTIONARY ANNOUNCEMENT
The financial effects of the transaction have not been finalised and will be
published in due course. Pending further announcements, unitholders are advised
to exercise caution when dealing in their linked units.
19 August 2009
Transaction sponsor and independent advisor
Java Capital (Proprietary) Limited
Sponsor
RAND MERCHANT BANK (A division of FirstRand Bank Limited)
Legal advisor to Hospitality
Mkhabela Huntley Adekeye Inc.
Date: 19/08/2009 17:44:13 Produced by the JSE SENS Department.
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