| Wed 28 Oct 2009, 12:16 | | ERB - Erbacon - Circular Pro Forma Financial Effects Notice Of General Meeting |
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ERB
ERB
ERB - Erbacon - Circular, Pro Forma Financial Effects, Notice Of General Meeting
And Withdrawal Of Cautionary
Erbacon Investment Holdings Limited
(Incorporated in the Republic of South Africa)
(Registration number 2007/014490/06)
Share code: ERB & ISIN: ZAE000111571
("Erbacon" or "the company")
CIRCULAR, PRO FORMA FINANCIAL EFFECTS, NOTICE OF GENERAL MEETING AND WITHDRAWAL
OF CAUTIONARY
1. BACKGROUND
Shareholders are referred to the SENS announcement of 22 September 2009 whereby
shareholders were informed, inter alia, that:
1.1 Erbacon had entered into a sale of shares agreement with the vendors of
Civcon, dated 21 September 2009, to acquire the entire issued share capital of
and all claims on shareholders` loan account against Civcon ("the Civcon
acquisition"); and that
1.2 Erbacon had also entered into a preference share subscription agreement
("subscription agreement") with Medu Capital Fund II (Pty) Limited ("Medu
Capital") in terms of which Medu Capital, on behalf of its funds under
management, will subscribe for 67 410 000 fully paid-up convertible, redeemable
and participating preference shares at an issue price of R1.68 per preference
share ("the Erbacon preference share issue").
(the "Civcon acquisition" and "Erbacon preference share issue" hereinafter
collectively referred to as "the transaction")
1.3 At the time of the announcement on SENS on 22 September 2009, the unaudited
pro forma financial effects of the transaction were not available. The pro forma
financial effects of the transaction are now set out in paragraph 2 below.
2. PRO FORMA FINANCIAL EFFECTS OF THE TRANSACTION
2.1 The unaudited pro forma financial effects on Erbacon and its subsidiaries
before and after the transaction, as set out in the table below, are the
responsibility of the company`s directors and have been prepared for
illustrative purposes to reflect how the transaction may have affected Erbacon`s
results for the year ended 28 February 2009, based on the assumptions that:
- for the purpose of calculating earnings per share and headline earnings per
share, the transaction was effected on 1 March 2008; and
- for the purpose of calculating net asset value per share and net tangible
asset value per share, the transaction was effected on 28 February 2009.
Hence, taking the above factors into consideration and because of their nature,
the unaudited pro forma financial effects may not fairly reflect Erbacon`s
financial performance and position post the implementation of the transaction.
Audited (1) Unaudited
28 February pro forma Change
2009 after
transaction
(cents) (cents) (%)
Earnings per share 40.64 55.60 (2) 36.83%
Headline earnings per 40.11 56.23 (2) 40.21%
share
Diluted earnings per 40.64 37.80 -6.97%
share (2)(3)
Diluted headline 40.11 38.20 -4.75%
earnings per share (2)(3)
Net asset value per 155.33 226.16 (4) 45.60%
share
Net tangible asset 117.11 86.98 (4) -25.73%
value per share
Notes and assumptions:
1. Extracted from the consolidated audited financial statements of Erbacon for
the year ended 28 February 2009.
2. Earnings per share and headline earnings per share were adjusted to include
the following:
2.1 It has been assumed that prior to the implementation of the transaction
that Erbacon will declare a special dividend of 21.93 cps. Secondary tax on
companies ("STC") has been calculated at 10%. The total dividend paid including
STC amounted to R 33 million. The reduction in interest income (adjustment with
continuing effect) arising from the payment of the dividend has been calculated
at an average pre-tax rate of 7% per annum for the full year representing the
interest that can be earned on a deposit balance. Taxation has been calculated
at 28% thereon.
2.2 The convertible redeemable and participating preference shares issued to
Medu Capital is a compound financial instrument, which has been split into a
liability and an equity portion. The liability portion has been calculated at
R52 704 158. The discount rate applied in determining the carrying value of the
liability component is 16.53% per annum, representing the market related
interest rate for a liability of this nature. The equity portion has been
calculated at R 43 592 142 after taking account of deferred tax of R16 952 500,
calculated at 28% on issue of the preference shares. The interest expense
(adjustment with continuing effect) on the liability portion of the convertible
preference share is calculated at 16.53% per annum.
2.3 It has further been assumed that the deferred tax raised on issue of the
convertible redeemable and participating preference shares at 1 March 2008 was
R16 952 500. At 28 February 2009 the deferred taxation was calculated at
R14 513 141 reflecting an income statement adjustment of R 2 439 359 (adjustment
with continuing effect).
2.4 The total proceeds from the issue of the preference shares to Medu Capital
is R 113 248 800 of which R 85 286 040 will be utilised to settle the initial
purchase consideration. The balance of the purchase consideration will be
settled from Erbacon`s existing cash resources. The further capital injection
by Medu Capital will result in excess cash in Erbacon of R 17 830 540. Pre-tax
interest at 7% per annum, representing the current bank deposit rate, will be
earned on the excess cash of R 17 830 540 not utilised by Erbacon to fund the
acquisition. Tax at 28% per annum has been calculated on the interest portion
(adjustment with continuing effect).
2.5 It has been estimated that the deal expenses in respect of the transaction
is R 4 000 000 of which R 3 622 499 has been capitalised as part of the cost of
acquisition, R 177 501 in respect of the issue of Erbacon ordinary shares has
been written off against share premium and R200 000 has been expensed
(adjustment with no continuing effect). No taxation has been raised in respect
of the deal expenses as they are deemed to be of a capital nature.
2.6 Civcon is entitled to declare a dividend of up to R 25 000 000 plus STC of
10%. For purposes of the pro-forma financial information it has been assumed
that the total dividend and STC amounts to R 27,5m. The reduction in interest
income (adjustment with continuing effect) arising from the payment of the
dividend has been calculated at an average pre-tax rate of 7% per annum for the
full year, representing the current deposit rate. Taxation has been calculated
at 28% thereon.
2.7 A provisional purchase price allocation has been performed resulting in an
estimated goodwill value of R 191 525 475 arising from the transaction. The
value of the contract based intangible assets identified amount to R 5 033 652
which will be amortised over its estimated useful life of 1 year. Deferred
taxation has been calculated at 28% of the intangible assets identified. The
purchase price allocation will be reviewed in terms of IFRS 3: Business
Combinations within 12 months of the effective date of this transaction. This
may result in the amount currently allocated to goodwill being adjusted for the
identification and measurement of the assets acquired and liabilities assumed.
Any additional intangible assets identified will be amortised over their
estimated useful lives.
2.8 The BEE expense, in terms of AC 503: Accounting for Black Economic
Empowerment (BEE) Transactions, to account for the BEE equity credentials
introduced by Medu Capital has been calculated at Rnil (adjustment with no
continuing effect) as there is no difference between the fair value of the
preference shares issued and the issue price of R1.68 per share. This is based
on an Erbacon share price of R1.40 per share, being the share price at the date
of finalisation of the circular. Should the Erbacon ordinary share price
increase to R1.68 per share at the date of issue of the convertible, redeemable
and participating preference share, with all other assumptions remaining
unchanged, the BEE expense would amount to R 13 952 317.
2.9 Erbacon has not early adopted IFRS3: Business Combinations (revised). This
accounting standard is applicable to all business combinations for which the
acquisition date is on or after the first reporting period commencing on or
after 1 July 2009. Based on the aforementioned, there will be no impact on
Erbacon in respect of the implementation of this transaction when IFRS 3
(revised) becomes applicable, as the latest date for the fulfilment or waiver of
the remaining suspensive conditions in terms of the transaction is 31 January
2010.
2.10 The income statement of Civcon, used in determining the pro forma financial
effects has been extracted from the audited financial statements of Civcon for
the year ended 28 February 2009.
3. Diluted earnings per share and diluted headline earnings per share were
adjusted to include the following:
3.1 The number of shares used in diluted earnings per share and diluted
headline earnings per share is based on the current weighted average number of
shares in issue of 131 517 332, the 25 020 876 shares issued on the effective
date, the 22 893 232 contingently issuable shares relating to the profit
warranty and the preference shares issued to Medu Capital that are convertible
into ordinary shares i.e. 67 410 000 preference shares are convertible into
Erbacon ordinary shares on a one for one basis. The contingently issuable shares
of 22 893 232 is based on Civcon adjusted profit for the year of R 49 139 283.
The interest charge on the preference shares and the related deferred tax
adjustments, as set out in note 2.2 above, have been removed in determining the
diluted earnings per share and diluted headline earnings per share.
4. Net asset value per share and net tangible asset value per share were
adjusted to include the following, including such adjustments as set out in note
2.1, 2.2, 2.5 ,2.6, 2.7, 2.8 and 2.9 above:
4.1 In terms of the subscription agreement Medu Capital subscribes for
67 410 000 convertible redeemable participating preference shares at R1.68 per
share thereby capitalising Erbacon to the extent of R 113 248 800.
4.2 This total purchase consideration calculated in terms of IFRS 3: Business
Combinations is R 238 179 986. Details of this are set out as follows: The
initial portion of the purchase consideration has been settled by the payment of
R 95 418 260 in cash and by the issue of 25 020 876 Erbacon ordinary shares at
R1.40 per ordinary share, being the Erbacon share price at the time of
finalisation of the pro forma financial effects. The issue price assumed in
terms of the Civcon acquisition agreement is R 1.6807 per Erbacon ordinary
share. The contingent purchase consideration of 76 951 786 shares is valued at
R1.40 per share being the Erbacon ordinary share price at the time of
finalisation of pro forma financial effects as required in terms of IFRS 3:
Business Combinations. The contingent purchase consideration of R107 732 500 is
treated as equity to be issued. The purchase price in terms of the agreement is
R 266 804 410. This is based on the Erbacon ordinary share price of R1.6807 per
share.
4.3 The acquisition of Civcon for a total purchase consideration of R 238
179 986 as set out in note 4.2 above gives rise to goodwill on acquisition of R
191 525 475 after taking into account costs of R 3 622 499 directly attributable
to the business combination.
4.4 The balance sheet of Civcon, used in determining the pro forma financial
effects has been extracted from the audited financial statements of Civcon for
the year ended 28 February 2009.
3. CIRCULAR TO SHAREHOLDERS AND NOTICE OF GENERAL MEETING
Erbacon shareholders are advised that in accordance with the JSE Limited Listing
Requirements, a circular to shareholders incorporating revised listings
particulars, together with a notice of a general meeting of Erbacon
shareholders, to be convened at 10h00 on Thursday, 19 November 2009 at the
registered offices of Erbacon, 2 Montreal Road, Glen Anil, 4051, was posted to
shareholders today.
4. DECLARATION OF INTERIM DIVIDEND
Erbacon shareholders are further advised that an interim dividend number 2 of
21.93 cents per Erbacon ordinary share was declared on 28 October 2009, payment
of which is subject to the fulfilment, as the case may be, of all suspensive
conditions to the transaction as set out in the announcement on SENS on 22
September 2009. A dividend distribution timetable will be disclosed to
shareholders once all suspensive conditions to the transaction have been
fulfilled.
5. WITHDRAWAL OF CAUTIONARY
Erbacon shareholders are advised that caution is no longer required to be
exercised when dealing in Erbacon shares.
Glen Anil
28 October 2009
Designated Adviser
Questco Sponsors (Pty) Limited
Corporate adviser
PSG Capital (Pty) Limited
Legal adviser to Erbacon
Cliffe Dekker Hofmeyr Inc.
Legal adviser to Medu Capital
Read Hope Phillips Thomas & Cadman Inc.
Legal adviser to Civcon
Fluxmans Inc.
Date: 28/10/2009 12:16:00 Produced by the JSE SENS Department.
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