| Thu 18 Feb 2010, 10:06 | | HCI - Hosken Consolidated Investments - Proposed merger of Tsogo and Gold Reef |
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HCI
HCI
HCI - Hosken Consolidated Investments - Proposed merger of Tsogo and Gold Reef
and Withdrawal of Cautionary Announcement
Hosken Consolidated Investments Limited
(Incorporated in the Republic of South Africa)
(Registration number 1973/007111/06)
(Share code: HCI ISIN: ZAE000003257)
("HCI" or "the Company")
PROPOSED MERGER OF TSOGO SUN HOLDINGS (PROPRIETARY) LIMITED ("TSOGO") AND GOLD
REEF RESORTS LIMITED ("GOLD REEF") AND WITHDRAWAL OF CAUTIONARY ANNOUNCEMENT
1. Introduction
The board of directors of HCI are pleased to advise shareholders that Gold Reef
and Tsogo, a 51% subsidiary of Tsogo Investment Holdings Company (Proprietary)
Limited ("TIH"), which in turn is a 74.67% subsidiary of HCI, have entered into
an agreement (the "Exchange Agreement") detailing the terms and conditions of a
merger of their respective gaming and hotel businesses (the "Proposed
Transaction"), to form a combined business referred to as the "Merged Entity".
2. Details of the Proposed Transaction and Exchange Agreement
In terms of the Exchange Agreement and subject to the fulfillment or waiver
(where appropriate) of the conditions precedent detailed in paragraph 5 below:
- The Proposed Transaction will be effected through the sale of the entire
issued share capital of Tsogo (the "Tsogo Shares") by the shareholders of
Tsogo ("Tsogo Shareholders"), being TIH (51% shareholding in Tsogo) and
SABSA Holdings (Proprietary) Limited ("SABSA") (49% shareholding in Tsogo)
to Gold Reef in exchange for the issue and allotment of a minimum of 888
261 028 new shares in the issued share capital of Gold Reef (the "Gold Reef
Consideration Shares") ranking pari passu with the existing issued Gold
Reef ordinary shares of 2 cents each (the "Gold Reef Shares");
- TIH will receive a minimum of 453,013,124 Gold Reef Consideration Shares,
representing 41.3% of the Merged Entity. As set out in paragraph 5.4, a
condition precedent to the Proposed Transaction is the waiver by the
Securities Regulation Panel ("SRP") of the requirement for TIH and SABSA to
make a mandatory offer to the shareholders of Gold Reef (the "Gold Reef
Shareholders") as a consequence of the implementation of the Proposed
Transaction and/or by reason of the conclusion of a shareholders` agreement
entered into by the Tsogo Shareholders;
- HCI will hold an indirect effective interest of 30.8% in the Merged Entity
prior to the implementation of the Nafhold transaction referred to in the
announcement released on the Stock Exchange News Service ("SENS") on 14
December 2009. Following the implementation of the Nafhold transaction, HCI
will hold an indirect effective interest of 41.1% in the Merged Entity;
- The closing price of Gold Reef of R19.25 per Gold Reef Share on Friday, 29
January 2010, being the last trading day prior to the release of the HCI
and Gold Reef cautionary announcements on SENS, implies an equity value for
Tsogo of R17.1 billion, and an equity value of TIH`s 51% stake in Tsogo of
R8.7 billion;
- The Tsogo Shareholders will be entitled to receive the final dividend in
respect of the Tsogo financial year ending 31 March 2010, while current
Gold Reef shareholders will be entitled to receive the final dividend in
respect of the Gold Reef financial year ended 31 December 2009.
3. Rationale
HCI has stated its intention to increase its investment in gaming related
activities, and the Proposed Transaction will assist the HCI group, in achieving
this objective. In addition, the motivation for the Proposed Transaction
includes the following:
3.1 Creation of a pre-eminent gaming and hotel business
The merger will create not only a premier gaming and hotel company in
South Africa but a business of significant ranking amongst EMEA`s
(Europe, Middle East and Africa) largest listed gaming and hotel
groups. The Merged Entity will have an improved ability to attract new
talent and resources and to capture opportunities that present
themselves in the local and international gaming and hotel sectors
both in terms of organic growth and acquisition.
It is estimated that the Merged Entity will be the 36th largest
company by market capitalisation on the JSE Limited ("JSE") as at
Friday, 29 January 2010, and one of the largest hotel and gaming
companies amongst its listed EMEA peers.
3.2 Listing of Tsogo
The listing of HCI`s indirect interest in the merged entity provides a
listed reference price for the fair value of its largest investment,
which assists in determining the intrinsic value of HCI.
4. Background and rationale
4.1 Information on Gold Reef
Gold Reef is a gaming and entertainment company with interests in the
following resorts around South Africa: (Gold Reef`s percentage ownership is
indicated in brackets):
- Gold Reef City Casino and Theme Park, Gauteng (100.00%)
- Silverstar Casino, Gauteng (100.00%)
- Golden Horse Casino, KwaZulu-Natal (100.00%)
- Goldfields Casino, Free State (100.00%)
- Garden Route Casino, Western Cape (85.00%)
- Mykonos Casino, Western Cape (70.36%)
- Queens Casino, Eastern Cape (25.10%)
Gold Reef generated R1.1 billion in revenue and R0.4 billion in earnings
before interest, tax, depreciation, amortisation and rentals ("EBITDAR")
for the six months ended 30 June 2009.
Gold Reef is listed on the securities exchange operated by the JSE with a
market capitalisation (excluding treasury shares) of R5.3 billion as at
Friday, 29 January 2010.
4.2 Information on Tsogo
Tsogo is a hotel, gaming and entertainment company with operations
throughout Africa, the Middle East and the Seychelles. Tsogo`s operations
are held through two wholly-owned subsidiaries, Tsogo Sun Gaming
(Proprietary) Limited ("Tsogo Sun Gaming"), representing Tsogo`s gaming
interests, and Southern Sun Hotels (Proprietary) Limited ("Southern Sun"),
representing Tsogo`s hotel interests (collectively the "Tsogo Group").
Tsogo Sun Gaming has an interest in the following resorts (Tsogo`s
percentage ownership is indicated in brackets).
- Montecasino, Gauteng (100.00%)
- Suncoast Casino and Entertainment World, KwaZulu-Natal (73.50%)
- The Ridge Casino, Mpumalanga (100.00%)
- Emnotweni Casino, Mpumalanga (100.00%)
- Caledon Casino, Western Cape (100.00%)
- Century Casino Newcastle, KwaZulu-Natal (100.00%)
- Hemmingways Casino, Eastern Cape (80.00%)
Southern Sun is one of the largest hotel groups in South Africa and is also
one of the largest timeshare operators in South Africa. By the end of
2010, the Tsogo Group expects to operate 90 hotels with 14,438 rooms in 9
countries across Africa and the Middle East. Southern Sun is the only South
African hotel group to operate across the deluxe to budget segments of the
hotel market with brands including Southern Sun, Garden Court, Sun Square
and StayEasy.
For the six months ended 30 September 2009, Tsogo generated revenue of R2.9
billion and EBITDAR of R1.1 billion.
4.3 Tsogo`s existing interest in Gold Reef
In addition to the gaming assets set out above, as at Friday, 29 January
2010, Tsogo Sun Gaming, owned 69,205,093 Gold Reef Shares through its
wholly owned subsidiary Tsogo Sun Expansion No 1 (Proprietary) Limited
("Tsogo Sun Expansion") (previously Main Street 581 (Proprietary) Limited),
representing a 24.9% economic interest in Gold Reef (the "Tsogo Sun
Expansion Shares").
Furthermore, Tsogo Sun Gaming controls 34.9% (which includes the 24.9%
economic interest referred to above) of the voting interest in Gold Reef in
terms of a voting pool agreement entered into between certain Black
Economic Empowerment ("BEE") Gold Reef Shareholders, which voting pool
agreement was initially entered into as part of the Gold Reef BEE
transaction implemented in July 2007 (to which Tsogo Sun Expansion has
bound itself a party).
5. Conditions precedent
The Proposed Transaction is subject, inter alia, to the fulfillment or waiver
(where appropriate) of the following conditions precedent, including:
5.1 The passing by the Gold Reef shareholders (excluding, in certain
instances, Tsogo Sun Expansion and its associates) of the following
ordinary and special resolutions and registration by the Companies and
Intellectual Property Registration Office ("CIPRO") of the special
resolutions (where applicable):
5.1.1 an increase in Gold Reef`s authorised share capital from
590,000,000 to 1 200 000 000 Gold Reef Shares;
5.1.2 the placement of a sufficient number of Gold Reef`s
authorised, unissued share capital under the control of the
board of directors of Gold Reef ("Gold Reef Directors") for
the purposes of implementing the Proposed Transaction;
5.1.3 approval, in terms of the JSE Listings Requirements, of the
category 1 acquisition by Gold Reef of the Tsogo Shares;
5.1.4 the passing by a majority of independent votes of the Gold
Reef Shareholders of a resolution waiving any right the Gold
Reef Shareholders have to require the Tsogo Shareholders to
make them a mandatory offer in terms of Rule 8.1 of the
Securities Regulation Code on Takeovers and Mergers (the
"Code"). The granting of the waiver contemplated in this
paragraph is a condition precedent which is capable of being
waived by TIH and SABSA
5.1.5 approval of the indirect buyback of the Tsogo Expansion
Shares in terms of Section 85 of the Companies Act, 193 (Act
61 of 1973, as amended (the "Companies Act");
5.2 The passing by TIH in general meeting of a special resolution in terms
of section 228 of the Companies Act, approving the disposal by TIH of
its Tsogo Shares to Gold Reef and registration thereof with CIPRO;
5.3 The passing by the shareholders of HCI in general meeting of the
following special resolution and ordinary resolution respectively
approving:
5.3.1 the disposal by TIH of its Tsogo Shares to Gold Reef in
terms of section 228 of the Companies Act; and
5.3.2 the category 1 disposal by TIH (as a subsidiary of HCI) of
its Tsogo Shares to Gold Reef in terms of the JSE Listings
Requirements;
and registration of the special resolution with CIPRO;
5.4 The Securities Regulation Panel ("SRP") having dispensed, in writing,
with the obligation on the part of the Tsogo Shareholders to make a
mandatory offer to the Gold Reef shareholders in terms of Rule 8.1 of
the Code as a consequence of the implementation of the Proposed
Transaction, and/or by reason of the conclusion of a shareholders`
agreement entered into by the Tsogo Shareholders;
5.5 All applicable regulatory and statutory approvals having been granted
including from:
5.5.1 The Competition Authorities;
5.5.2 The relevant Gambling Boards;
5.5.3 The JSE for the implementation of the Proposed Transaction,
including, inter alia, the approval of a listing of the Gold
Reef Consideration Shares;
5.5.4 the SRP; and
5.6 The written consent for the Proposed Transaction being obtained from
each of the financiers of Gold Reef and Tsogo.
6. Section 228 disposal, Category 1 transaction and fairness opinion
HCI`s investment in TIH represents the majority of the assets of HCI, and as a
result the sale by TIH of its shares in Tsogo represents a transaction for HCI
in terms of Section 228 of the Companies Act, which requires approval by HCI
shareholders in terms of a special resolution. In addition, the Proposed
Transaction is a category 1 transaction in terms of the JSE Listings
Requirements. The resolutions required to be approved by the HCI shareholders
will be set out in the notice of the general meeting which will form part of the
circular to be posted to HCI shareholders in due course.
Furthermore, the Section 228 disposal referred to above is an "affected
transaction" in terms of the Code, and as a result, an independent opinion
relating to the fairness of the Proposed Transaction is required. HCI have
appointed PKF Corporate Finance to provide it with advice as to the fairness of
the terms and conditions of the Proposed Transaction. The full text of the
fairness opinion to be provided by PKF Corporate Finance will be included in the
circular to be posted to HCI shareholders in due course.
7. Board and management composition of the Merged Entity
The Board and management team of the Merged Entity are currently under
consideration. Further details thereof will be published in the circular to be
posted to HCI shareholders in due course.
The Proposed Transaction is not expected to result in any operational
redundancies at either Gold Reef or Tsogo.
8. Pro forma financial effects of the Proposed Transaction on HCI shareholders
The table below sets out the financial effects of the Proposed Transaction on
HCI shareholders based on the unaudited interim results of HCI for the six
months ended 30 September 2009. The unaudited pro forma financial effects have
been prepared for illustrative purposes only, in order to provide information
about how the Proposed Transaction might have affected HCI shareholders had the
Proposed Transaction been implemented on the dates indicated in the notes below.
Due to the unaudited nature, the pro forma financial effects may not give a true
reflection of the financial effects of the Proposed Transaction. The HCI
directors are responsible for the preparation of the unaudited pro forma
financial information.
As After the % Change After the % Change
reported Nafhold Proposed
30 transaction Transaction
September (9) (2)(3) (4)
2009 (1) (5) (6)
Earnings per 100.09 115.37 15.3% 4,654.12 3,934.2%
HCI share
(cents)
Headline 104.02 119.30 14.7% 109.25 -8.4%
earnings per
HCI share
(cents) (5)
(7)
Net asset 3,324.16 3,324.16 0.0% 7,197.52 116.5%
value ("NAV")
per HCI share
(cents) (8)
Net tangible 1,620.81 1,152.17 -28.9% 6,614.74 474.1%
asset value
("NTAV") per
HCI share
(cents)
Weighted 124,916 124,916 0.0% 124,916 0.0%
average number
of HCI shares
(thousands")
Actual number 125,239 125,239 0.0% 125,239 0.0%
of HCI shares
(thousands")
Notes:
The unaudited pro forma financial information of the transactions are
indicative only and have been based on the assumptions set out below:
1. The unaudited consolidated interim results of HCI for the six month
period ended 30 September 2009 have been used.
2. The transactions were effected on 1 April 2009 for income statement
purposes and on 30 September 2009 for balance sheet purposes.
3. The effects of the Gold Reef transaction have been calculated using
the unaudited consolidated interim results of Gold Reef for the six
month period ended 30 June 2009.
4. It has been assumed that after the implementation of the Gold Reef
transaction HCI will hold an effective 41% of Gold Reef (which is
HCI`s effective holding post the implementation of the Nafhold
transaction) and will exert significant influence over Gold Reef. As a
result, it is assumed that Tsogo is accounted for as an associate and
will no longer be consolidated as a subsidiary of HCI.
5. Transaction costs of R41.3 million, which are once-off in nature. If
the effect of these once-off transaction costs are excluded the
transaction would result in a 2.9% increase in headline earnings per
share.
6. A market value of R19.25 per Gold Reef share, being the closing price
on 29 January 2010 which is the day the HCI cautionary announcement
was released, has been used to calculate the pro forma gain on the
loss of control ("pro forma gain") of Tsogo. A corporate tax rate of
28% with the Capital Gains Tax inclusion rate of 50% is assumed.
7. The pro forma gain arises as a result of Tsogo no longer being
consolidated, and the investment in the associate being accounted for
at its fair value at the transaction date. The pro-forma gain is
calculated as the difference between the fair value of the Gold Reef
shares received as consideration for the net asset value of TSH which
is no longer consolidated as a subsidiary. The pro forma gain is
excluded from headline earnings per share and accounts for the
difference in the effect on earnings and headline earnings per share.
8. The increase in NAV is attributable to the net effect of the pro forma
gain and the deconsolidation of Tsogo.
Notes relating to the Nafhold transaction:
9. Separate disclosure of the effects of the Nafhold transaction are
shown based on assumptions which are consistent with those used in the
announcement released on SENS on 14 December 2009:
a. The cash portion of the TIH repurchase consideration would
otherwise have been invested with financial institutions at daily
call rates. An average call rate of 7.53%, after deducting
taxation of 28%, was used for the period.
b. The coupon on the preference shares to be issued as part of the
TIH repurchase consideration has been assumed to be 8.27%. It has
been assumed that TIH will have sufficient STC credits at the
relevant dividend dates.
9. Circular to HCI shareholders
A circular to HCI shareholders containing full details of the Proposed
Transaction and incorporating a notice of general meeting of HCI shareholders
and the various resolutions to be passed will be posted to HCI shareholders in
due course.
10. Salient dates and times
Shareholders should note the following important dates and times:
Salient dates and times 2010
Detailed terms announcement Thursday, 18 February
Last day for the receipt of proxy forms for Wednesday, 7 April
the HCI General Meeting by 09:00 on
HCI General Meeting on Thursday, 8 April
Results of the HCI General Meeting Thursday, 8 April
released on SENS on
Results of the HCI General Meeting Friday, 9 April
published in the South African press on
Further applicable dates will be notified to HCI shareholders once the
applicable regulatory approvals referred to in paragraph 5.5 have been obtained.
Notes:
1. All times shown above are South African local times.
2. These salient dates and times are subject to amendments. Any such
relevant amendments will be released on SENS and published in the
South African press.
11. Gold Reef announcement
HCI shareholders are also referred to the separate announcements released by
Gold Reef and SABMiller plc on SENS today, Thursday, 18 February 2010 relating
to the Proposed Transaction.
12. Withdrawal of cautionary
The HCI cautionary announcement released on SENS on Friday, 29 January 2010 and
published in the press on Monday, 1 February 2010 is hereby withdrawn.
Accordingly, HCI shareholders are no longer required to exercise caution when
dealing in HCI Shares.
Cape Town
18 February 2010
Advisers to HCI
Sponsor to HCI
Investec Bank Limited
Investment bank to HCI and Tsogo
Investec Corporate Finance
Independent expert to HCI
PKF Corporate Finance
Independent reporting accountants to HCI
PKF (Jhb) Inc.
Legal adviser to Tsogo
Tabacks
Advisers to Gold Reef
Financial adviser to Gold Reef
Deutsche Securities (SA) (Proprietary) Limited
Legal advisers to Gold Reef
Edward Nathan Sonnenbergs Inc
Date: 18/02/2010 10:06:05 Produced by the JSE SENS Department.
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