| Wed 23 Sep 2009, 12:36 | | UCS - UCS Group Limited - Disposal and withdrawal of cautionary announcement |
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UCS
UCS
UCS - UCS Group Limited - Disposal and withdrawal of cautionary announcement
UCS GROUP LIMITED
(Registration number 1993/002253/06)
JSE Code: UCS ISIN: ZAE000016150
(Incorporated in the Republic of South Africa)
("UCS")
DISPOSAL BY UCS SOLUTIONS HOLDINGS (PROPRIETARY) LIMITED OF ITS ENTIRE 60%
SHAREHOLDING IN TSS MANAGED SERVICES (PROPRIETARY) LIMITED AND WITHDRAWAL OF
CAUTIONARY ANNOUNCEMENT
1. Introduction
Shareholders are referred to the cautionary announcement dated 27 August
2009 and are advised that UCS, UCS Solutions Holdings (Proprietary) Limited
("UCS Solutions Holdings") (a wholly owned subsidiary of UCS), Tactical
Software Systems (Proprietary) Limited ("TSS") and TSS Managed Services
(Proprietary) Limited ("TSS Managed Services") have entered into a share
purchase and repurchase agreement on 22 September 2009 ("the Share Purchase
and Repurchase Agreement") whereby UCS Solutions Holdings will dispose of
its entire 60% shareholding in TSS Managed Services by way of the following
composite transactions (collectively "the Transaction"):
* the repurchase by TSS Managed Services of 19 ordinary shares in the
issued ordinary share capital of TSS Managed Services with a par value
of R1-00 each ("the Repurchase Shares"), currently owned by UCS
Solutions Holdings and constituting 19% of the entire issued share
capital of TSS Managed Services ("the TSS Managed Services
Repurchase"); and
* the disposal to TSS of 41 ordinary shares in the issued share capital
of TSS Managed Services with a par value of R 1-00 each ("the Sale
Shares"), currently owned by UCS Solutions Holdings and constituting
41% of the entire issued share capital of TSS Managed Services ("the
Share Sale").
The Transaction is classified as a Category 1 and a related party
transaction in terms of the Listings Requirements of the JSE Limited
("JSE"). Accordingly, UCS is required to obtain shareholder approval for
the Transaction at a general meeting of UCS shareholders.
2 Nature of business
TSS has been operating in South Africa since 1997. They have developed into
a multi-faceted, multi-disciplined ICT Group in response to the diverse and
changing demands of the market place.
It is a true black economic empowerment ("BEE") organization with its
shareholding 100% owned indirectly by black entrepreneurs. TSS ensures its
long-term business success by focusing on client satisfaction, skills and
knowledge transfer and the empowerment of its employees and previously
disadvantaged partners.
During the past 12 years TSS has diversified its operations into 3 core
lines of business, focusing on ICT infrastructure solutions, E-procurement
and digital entertainment.
TSS Managed Services, of which TSS owns 40% following the exercise by UCS
Solutions Holdings of its call option for 6% prior to the effective date of
the Transaction and effectively 51% through it`s shareholding in UCS,
provides IT infrastructure solutions and will, following the implementation
of the Transaction, become a wholly-owned subsidiary of TSS.
3 Rationale for the Transaction
The rationale for the Transaction is that UCS intends focusing on its core
competence of providing software, solutions and services to the retail
value chain. The TSS Managed Services business unit focuses on providing
information technology services specifically into the public sector and is
the largest unit within the UCS portfolio without a retail focus.
The acquisition of TSS Managed Services in July 2006 was part of the UCS
Group strategy of introducing BEE at a subsidiary company level on an
earnings enhancing basis, which was effectively executed. The original
acquisition was also successful in creating an unencumbered and non-
dilutive BEE equity shareholder at UCS level through the subsequent roll-up
of the TSS equity ownership in UCS Solutions Holdings into UCS with effect
from 1 March 2007.
The TSS shareholding in UCS and therefore the UCS empowerment status
remains unchanged as a consequence of this transaction.
On a business level, the TSS Managed Services business provides similar
information technology infrastructure deployment and ongoing support and
maintenance services to that of CEB Maintenance Africa (Proprietary)
Limited, another wholly owned subsidiary company of UCS which provides such
services specifically to the retail market. It was considered at the time
of the initial TSS Managed Services acquisition that there was the
possibility of extracting substantial synergies through merging the two
operations once their respective warranties and/or earn outs were
concluded. However the requirement for the TSS Managed Services business to
remain "black owned" as opposed to empowered, together with the substantial
differences in the respective go-to-market business models and subtle
variations in services provided by the two entities, has led UCS management
to conclude that such a merger is not possible and therefore, having
achieved the original BEE objectives, the proposed disposal and exit from
the TSS Managed Services operation is in the best strategic and operational
interests of both businesses.
4 Related party transaction
TSS is a major shareholder in UCS and as a consequence UCS Solutions
Holdings.
Messrs DCK Mackay and J Mackay are the Trustees of the Kopane ke Matla
Trust, which is the sole shareholder of TSS.
Messrs DCK Mackay and J Mackay are also both directors of UCS Solutions
Holdings and TSS.
In terms of the Listings Requirements, the Transaction is classified as a
related party transaction.
KPMG Services (Proprietary) Limited has been appointed as independent
professional expert by the board of directors of UCS to provide an
independent opinion on the Transaction. Their opinion will be reproduced
in the circular to shareholders.
5 Application of Proceeds
The sale proceeds will be applied partly towards meeting current and future
obligations of the UCS Group and, where appropriate, the UCS board of
directors will determine the optimal utilisation of the proceeds for
acquisitive and organic growth initiatives.
6 Effective Date
The effective date of the Transaction is expected to be on or about
Thursday, 1 October 2009 ("the Effective Date").
7 The Transaction Consideration
The total potential transaction consideration (inclusive of an upside
capped at a maximum further R 45 000 000) could be R 125 000 000 (excluding
interest and dividends) which is comprised as follows:
7.1 The TSS Managed Services Repurchase
In terms of the Share Purchase and Repurchase Agreement, TSS Managed
Services will repurchase the Repurchase Shares from UCS Solutions
Holdings for the following consideration:
7.1.1 an upfront cash amount of R25 000 000 which shall accrue
interest at the Prime Rate from the Effective Date up to
(but excluding) the date of payment thereof by TSS Managed
Services to UCS Solutions Holdings; plus
7.1.2 if applicable, a further amount to be determined with
reference to the achievement by TSS Managed Services of
certain revenue or profits after tax thresholds ("the
Adjustment Amount") which shall not be less than Rnil and
shall be limited to a maximum amount of R 45 000 000.
The Adjustment Amount shall be determined in accordance with
pre-agreed formulae of which full details will be set out in
the circular to shareholders.
7.2 The Share Sale
In terms of the Share Purchase and Repurchase Agreement, TSS will
purchase the Sale Shares from UCS Solutions Holdings for the following
consideration:
7.2.1 an upfront cash amount of R10 000 000 in respect of eight of
the Sale Shares which amount shall accrue interest at the
Prime Rate from the Effective Date up to (but excluding) the
date of payment thereof by TSS to UCS Solutions Holdings;
plus
7.2.2 a further amount of R45 000 000 ("the Remaining
Consideration") in respect of the thirty three remaining
Sale Shares, which amount will be settled by TSS allotting
and issuing 900 redeemable preference shares in the share
capital of TSS with a par value of R1-00 each ("the
Preference Shares") to UCS Solutions Holdings for a total
subscription price equal to the Remaining Consideration in
accordance with the terms and conditions of the subscription
agreement entered into between UCS Solutions Holdings, TSS
and TSS Managed Services on 22 September 2009 ("the
Subscription Agreement").
The full terms of the Preference Shares will be set out in
the circular to shareholders.
7.3 The parties have furthermore agreed that the entering into of a sale
of business transaction by TSS MANAGED SERVICES or the sale by TSS of
the majority of its shares in TSS MANAGED SERVICES, which is subject
to the consent of UCS if it takes place on or before September 2014
(i.e. 5 years from the Effective Date), will trigger an automatic
calculation of a potential upside limited to a maximum amount of R45
000 000. This upside calculation and payment will be in the place and
stead of the amount contemplated in 7.1.2 above and will represent the
only upside calculation based on a defined formula linked to the sale
proceeds realised from such transaction.
8 Pro Forma Financial Effects of the Transaction
The table below sets out the unaudited pro forma financial effects of the
Transaction on the earnings, headline earnings, net asset value and
tangible net asset value per UCS share.
The unaudited pro forma financial effects are prepared for illustrative
purposes only, and due to their nature, may not fairly present UCS`s
financial position. The pro forma financial effects are the responsibility
of the directors of UCS.
Per UCS share Before 1 Change After 2 Change
(cents) (cents) (cents) (%)
Earnings 9.2 (1.3) 7.9 (14.1)
Headline 5.2 (2.0) 3.2 (38.5)
earnings
Net asset value 171.2 (2.2) 169.0 (1.3)
Tangible net 39.4 16.6 56.0 42.1
asset value
Weighted average
number of shares 290,734 - 290,734 -
in issue (000`s)
Notes and assumptions:
1 Based on the figures as set out in the "After the Transaction" column
in terms of the announcement released on SENS on 16 July 2009
regarding the disposal by UCS Solutions (Proprietary) Limited of its
Enterprise Solutions Business to HCL Axon (Proprietary) Limited. For
purposes of the calculations, the weighted average number of shares,
the diluted weighted average number of shares and the actual number of
UCS shares in issue (net of treasury shares) at 31 March 2009 are
290.7 million, 296.1 million and 292.1 million, respectively.
2 Based on the assumption that the Transaction was effected on 1 October
2008 for income statement purposes and on 31 March 2009 for balance
sheet purposes.
3 Included in the "After" earnings and headline earnings are the
following adjustments and related assumptions:
* The reversal of the TSS Managed Services contribution to earnings
and headline earnings for the six months ended 31 March 2009 of
R8.2 million.
* Estimated R65 million transaction proceeds comprising:
- upfront R25 million cash consideration for the repurchase of the
Repurchase Shares;
- upfront R10 million cash consideration in respect of the disposal
of a portion of the Sale Shares;
- deferred R30 million consideration in respect of the balance of
the Sale Shares representing the assumed redemption of 600
redemption shares on the achievement of the performance criteria
defined for the financial years 2012 and 2013 respectively.
Consequently, the remaining number of preference shares is
assumed redeemed at the amount equal to their par value of R1.
* After the realisation of R45.2 million goodwill and intangible
assets of R6 million (net of deferred taxation and outside
shareholders interest), the applicable profit on sale of the 60%
interest in TSS Managed Services by UCS Solutions Holdings
amounting to R5.8 million pre tax and transaction costs.
* Investment income on the upfront cash consideration of R1.1
million at an average call deposit rate of 6%.
* Estimated transaction costs of R0.8 million.
Dividend income on the redeemable preference shares at the annual
coupon rate, currently 7.6%
* The net tax effect of the preceding adjustments of R4.1 million.
4 The net asset value per share and tangible net asset value per
share were calculated to demonstrate the effect of the
Transaction as if it had taken place on 31 March 2009.
Consequently, due to the growth in TSS Managed Services net asset
value and the growth in goodwill associated with the deferred
purchase consideration in respect of the acquisition of TSS
Managed Services in June 2006, the applicable loss on the sale of
the 60% interest in TSS Managed Services by UCS Solutions
Holdings net of tax amounts to R6.5 million.
9 Suspensive Conditions
The implementation of the Transaction is subject to the fulfillment or
waiver (where applicable) of the following suspensive conditions by no
later than 31 October 2009 (or such later date as may be agreed in
terms of the transaction agreements), save for the condition set out
in paragraph 9.8 below, which is subject to fulfillment by no later
than 30 September 2009 (or such later date as may be agreed in terms
of the transaction agreements):
9.1 the Subscription Agreement being concluded and becoming
unconditional in accordance with its terms;
9.2 TSS Managed Services and TSS releasing or procuring the release
of UCS Solutions Holdings and UCS, with effect from the Effective
Date, from all suretyships, guarantees and/or other commitments
made or provided by UCS Solutions Holdings and/or UCS on behalf
of TSS Managed Services and/or TSS;
9.3 the registering of duly adopted special resolutions by the
shareholder of TSS Managed Services approving the TSS Managed
Services Repurchase in accordance with section 85 of the
Companies Act, No. 61 of 1973, as amended ("Companies Act") and
article 32.7 of its articles of association and the financial
assistance contemplated by the security to be granted by TSS
Managed Services for purposes of the Subscription Agreement in
accordance with section 38 of the Companies Act;
9.4 the execution by all the directors of TSS Managed Services of a
solvency test certificate in respect of TSS Managed Services for
purposes of the TSS Managed Services Repurchase;
9.5 TSS Managed Services providing UCS Solutions Holdings with
written proof that it has obtained the requisite funding to
enable it to comply with its payment obligations as set out in
paragraph 7.1 above;
9.6 TSS providing UCS Solutions Holdings with written proof that it
has obtained the requisite funding to enable it to comply with
its payment obligations as set out in paragraph 7.2 above;
9.7 shareholders of UCS approving the Transaction by way of a general
meeting;
9.8 UCS obtaining a fairness opinion from an independent professional
expert acceptable to the JSE;
9.9 TSS Managed Services and UCS Solutions Holdings concluding a
suretyship agreement in terms whereof TSS Managed Services agrees
to become bound, as surety and co-principal debtor, with TSS for
all of TSS`s obligations under the Subscription Agreement and the
Preference Shares and such suretyship agreement becoming
unconditional in accordance with its terms; and
9.10 UCS obtaining written confirmation from Nedbank Limited that the
entering into by it and/or UCS Solutions Holdings of the
Transaction shall not constitute a breach of any of the covenants
contained in the UCS banking facility with Nedbank Limited.
10 Circular to shareholders
A circular, including full details of the Transaction, will be issued to
shareholders on or about Thursday, 15 October 2009.
11 Withdrawal of Cautionary Announcements
Shareholders are advised that they no longer need to exercise caution when
dealing in their UCS securities.
Johannesburg
23 September 2009
Sponsor Independent Transaction Attorneys Independent
BJM Corporate Reporting advisor to Glyn Marais Professional
Finance Accountants TSS Group Incorporated Expert
(Proprietary) to UCS, UCS Ian Dry KPMG Services
Limited Solutions (Proprietary)
Holdings and Limited
TSS Managed
Services
Deloitte &
Touche
Date: 23/09/2009 12:36:01 Produced by the JSE SENS Department.
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