| Tue 1 Dec 2009, 11:00 | | ARH - ARB Holdings - Acquisition of the Business of Paragon Electrical as a |
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ARH
ARH
ARH - ARB Holdings - Acquisition of the Business of Paragon Electrical as a
Going Concern
ARB HOLDINGS LIMITED
(Incorporated in the Republic of South Africa)
(Registration Number 1986/002975/06)
Share Code: ARH ISIN: ZAE000109435
("the Company")
ACQUISITION OF THE BUSINESS OF PARAGON ELECTRICAL AS A GOING CONCERN
1. INTRODUCTION
Further to the cautionary announcements published by ARB on 4 September
2009 and 19 October 2009, ARB and ARB Electrical Wholesalers (Pty) Ltd
("ARB Electrical"), a subsidiary of ARB, have entered into agreements
with, inter alia, Paragon Electrical Wholesalers (Pty) Ltd, Paragon
Electrical Wholesalers North (Pty) Ltd, Paragon West Electrical
Wholesalers (Pty) Ltd, Paragon East Electrical Wholesalers (Pty) Ltd,
Belmax Wholesalers (Pty) Ltd and Paragon Electrical Distributors CC
(together "the Paragon Group"), as well as the trustees for the time
being of the Gezina Property Trust, the Wolmer Property Trust, the MVO
Property Trust and the Erf 849 Centurion Trust (together "the Paragon
Group Trusts") on 27 November 2009 to acquire:
- The electrical wholesaling business of the Paragon Electrical
Group ("Paragon") as a going concern from the Paragon Group ("the
Paragon Business"); and
- Certain immovable properties used by Paragon, together with all
improvements thereon, from the Paragon Group Trusts ("the Paragon
Properties")
as one indivisible transaction ("the Paragon Acquisition").
2. THE PARAGON BUSINESS
Paragon is one of the leading electrical and lighting wholesalers in
the greater Pretoria and Centurion areas. The business was started over
40 years ago in 1969 by Max van Os with a single branch in the centre
of Pretoria. Today, the Paragon Business comprises five electrical
wholesaling branches and a specialist cable trading division.
Paragon`s branches are located as follows:
- Frederika Street in Gezina (just north of the Pretoria CBD);
- Corobay Avenue in Pretoria East;
- Soutter Street in Pretoria West;
- President Steyn Street in Pretoria North; and
- Larch Close in Centurion (just south of Pretoria).
Paragon employs approximately 100 staff.
3. RATIONALE FOR THE PARAGON ACQUISITION
The Paragon Acquisition, the first since ARB`s listing on the JSE in
November 2007, marks a significant milestone in the ongoing growth and
development of the ARB Group. The Paragon Acquisition provides ARB
Electrical with an immediate and well-established presence in the fast
growing Pretoria and Centurion markets and extends its national
footprint in line with its stated growth strategy.
Following the Paragon Acquisition, ARB Electrical will have 12 branches
located throughout South Africa (Durban, Johannesburg, Cape Town, East
London, Pietermaritzburg, Richards Bay, Nelspruit and now, Pretoria and
Centurion).
Several opportunities exist to unlock further value (which have not
been taken into account in calculating the pro forma financial effects
set out in 5 below) including:
- Improved operational efficiencies and enhanced economies of scale
to be achieved through the integration of the Paragon Business
into ARB Electrical and leveraging ARB Electrical`s centralised
IT, finance, credit control, administration and human resources
functions;
- Combining Paragon`s and ARB Electrical`s buying power;
- Utilising Paragon`s well-established market presence in Pretoria
as a base from which to service the nearby, high growth regions of
Witbank and Rustenburg;
- Leveraging ARB Electrical`s BEE status to allow Paragon to target
local government, municipalities and parastatals in the greater
Pretoria area;
- Providing ARB Electrical with access to the significant "walk-in"
trade in the Gauteng region. ARB Electrical`s Johannesburg based
branch is focused on the distribution of power cable and overhead
line equipment and as such, is the only branch within ARB
Electrical which does not have a trade counter. Each of the five
Paragon branches, by contrast, trade extensively over the counter;
- Providing the Paragon Business with access to growth funding; and
- Combining the complimentary focuses of ARB Electrical (in power
cable and overhead line equipment) with Paragon (in general
electrical contracting materials) to provide a holistic electrical
products supply solution to contractors, industry and parastatals
throughout Gauteng.
4. THE PARAGON ACQUISITION
4.1 Vendors
The vendors of the Paragon Business are Paragon Electrical Wholesalers
(Pty) Limited, Paragon Electrical Wholesalers North (Pty) Limited,
Paragon West Electrical Wholesalers (Pty) Limited, Paragon East
Electrical Wholesalers (Pty) Limited, Belmax Wholesalers (Pty) Limited
and Paragon Electrical Distributors CC.
The vendors of the Paragon Properties are The Gezina Property Trust,
The Wolmer Property Trust, The MVO Property Trust and The Erf 849
Centurion Property Trust.
4.2 Transaction structure
In terms of the agreement, the following forms part of the Paragon
Acquisition:
- Fixed assets and vehicles, stock, certain standard contracts, all
intellectual property rights including but not limited to the
Paragon and Belmax trade names and all associated goodwill ("the
Paragon Business Assets"), although no value has been placed on
the intellectual property rights and goodwill for purposes of
determining the purchase consideration as set out in 4.3 below;
- All Paragon staff as at the effective date; and
- The Paragon Properties, being the properties from which Paragon`s
North, West, Centurion and Gezina branches operate.
Consistent with ARB`s current asset ownership structure:
- ARB Electrical will acquire the Paragon Business Assets, with the
exception of the vehicles, as going concerns; and
- ARB will acquire the Paragon Properties and vehicles and will in
turn lease these to ARB Electrical in terms of arms-length rental
agreements.
4.3 Purchase consideration
The maximum purchase consideration for the Paragon Acquisition is R30
000 000 made up as follows:
- R19 300 000 in respect of the Paragon Business Assets, as going
concerns; and
- R10 700 000 in respect of the Paragon Properties.
The purchase consideration in respect of the Paragon Business Assets
will be reduced on a rand-for-rand basis in the event that the
aggregate net stock value, after provision has been made for any and
all obsolete, slow-moving, unsaleable, unusable, damaged and surplus or
excessive stock, on the effective date is less than R17 500 000. No
upward adjustment to the purchase consideration shall be made in the
event that the aggregate net stock value on the effective date exceeds
R17 500 000.
The purchase consideration will be discharged in cash out of ARB`s
existing cash resources as follows:
- R19 300 000 (subject to any adjustment as set out above) on the
closing date; and
- R10 700 000 on the date of registration of transfer of the Paragon
Properties into the name of ARB, regardless of the closing date.
4.4 Effective and closing date
The effective date of the Paragon Acquisition is 1 March 2010.
The closing date of the Paragon Acquisition is the third business day
after the date on which the last suspensive condition is fulfilled or
waived, unless that falls on a date before the effective date, in which
event it will be the effective date.
4.5 Suspensive conditions
The Paragon Acquisition is subject to, inter alia, the fulfilment of
the following suspensive conditions:
- Obtaining the approval of the Competition Commission with regards
to the Paragon Acquisition; and
- The deeds of sale in respect of the Paragon Properties
acquisitions becoming unconditional in all respects.
4.6 Restraint, non-compete and non-solicitation undertakings
Comprehensive restraint, non-compete and non-solicitation undertakings
have been provided by each of the vendors and exiting employees who are
shareholders in, or members or beneficiaries of, any of the vendors.
4.7 Warranties
The vendors have provided standard warranties for a transaction of this
nature.
5. PRO FORMA FINANCIAL EFFECTS
The table below sets out the unaudited pro forma financial effects of
the Paragon Acquisition on ARB. These pro forma financial effects are
the responsibility of the company`s directors and are presented for
illustrative purposes only to show how the Paragon Acquisition may have
affected ARB`s financial performance and position for the year ended 30
June 2009. The pro forma financial effects which, due to their nature,
may not provide a fair reflection of ARB`s financial performance or
position after the Paragon Acquisition, are based on the assumptions
that:
- For the purpose of calculating earnings per share (basic and
diluted) and headline earnings per share (basic and diluted), the
Paragon Acquisition was implemented on 1 July 2008; and
- For the purpose of calculating net asset value per share and net
tangible asset value per share, the Paragon Acquisition was
implemented on 30 June 2009.
(cents) Before the After the % change
Paragon Paragon
Acquisition1 Acquisition2
Earnings per share 30,92 33,53 +8,4
(basic)4, 5
Earnings per share 30,84 33,44 +8,5
(diluted)4, 5
Headline earnings per 30,91 33,53 +8,5
share (basic)4, 5
Headline earnings per 30,83 33,44 +8,5
share (diluted)4, 5
Net asset value per 195,59 195,55 0,0
share5, 6
Net tangible asset 194,85 194,81 0,0
value per share5, 6
Notes
1. The "Before the Paragon Acquisition" information has been extracted,
without adjustment, from ARB`s published audited results for the year
ended 30 June 2009.
2. The "After the Paragon Acquisition" was determined using information
for the Paragon Group extracted from its audited financial statements
for the year ended 28 February 2009.
3. Existing cash resources of R30 000 000 will be utilised for the purpose
of discharging the purchase consideration.
4. Adjustments to earnings per share (basic and diluted) and headline
earnings per share (basic and diluted) have been made on the assumption
that:
(a) the Paragon Acquisition was implemented on 1 July 2008;
(b) interest was foregone on the maximum purchase consideration of R30 000
000 at an average call rate of 7% per annum (pre-tax);
(c) the Paragon Group reported an aggregate net profit after tax of R8 510
816 for the year ended 28 February 2009. This amount was reduced by the
26% minority interest in ARB Electrical for purposes of calculating the
pro forma financial effects set out above;
(d) estimated once-off transaction costs of R185 000 (pre-tax and minority
interests) were incurred by ARB Electrical;
(e) ongoing rental income in respect of the Paragon Properties amounting to
R1 527 120 (pre-tax) was earned by ARB. Due to the minority interest in
ARB Electrical only 74% of this rental income is eliminated on
consolidation; and
(f) ARB Electrical`s portion of the purchase consideration, amounting to
R18 100 000, was funded by way of a loan from ARB bearing interest at
10.5% per annum (pre-tax). Due to the minority interest in ARB
Electrical only 74% of this interest is eliminated on consolidation.
5. The (actual and weighted average) number of shares in issue used for
purposes of calculating the earnings per share (basic), headline
earnings per share (basic), net asset value per share and net tangible
asset value per share is 235 000 000 shares and the weighted average
number of shares in issue used for purposes of calculating the earnings
per share (diluted) and headline earnings per share (diluted) is 235
620 000 shares.
6. Adjustments to net asset value per share and net tangible asset value
per share have been made on the assumption that the Paragon Acquisition
was implemented on 30 June 2009 and that net assets with a value of R30
000 000 were acquired (ie no goodwill arose as a result of the Paragon
Acquisition). A further adjustment was made for the transaction costs
as set out in 4(d) above after adjusting for tax and minority
interests.
6. TRANSACTION CATEGORISATION
The Paragon Acquisition represents a Category 2 transaction in terms of
the JSE Limited`s Listings Requirements and therefore does not require
ARB shareholder approval.
7. WITHDRAWAL OF CAUTIONARY
Shareholders are advised that caution is no longer required to be
exercised when dealing in their ARB securities.
Durban
1 December 2009
Sponsor: PSG Capital (Pty) Limited
Legal Advisor: Brink Cohen Le Roux
Date: 01/12/2009 11:00:01 Produced by the JSE SENS Department.
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