| Mon 15 Mar 2010, 17:47 | | UCS - UCS Group Limited - Firm intention by UCS to Argility and cautionary |
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UCS
UCS
UCS - UCS Group Limited - Firm intention by UCS to Argility and cautionary
announcement
UCS Group Limited
(Incorporated in the Republic of South Africa)
(Registration Number: 1993/002253/06)
Share Code:UCS ISIN: ZAE000016150
("UCS" or "the Company")
Argility Limited
(Incorporated in the Republic of South Africa)
(Registration Number: 2007/010401/06)
("Argility")
ANNOUNCEMENT OF A FIRM INTENTION BY UCS TO MAKE AN OFFER TO ACQUIRE THE ENTIRE
ISSUED ORDINARY SHARE CAPITAL OF ARGILITY NOT CURRENTLY BENEFICIALLY OWNED BY
UCS AND ITS SUBSIDIARIES AND CAUTIONARY ANNOUNCEMENT
1. INTRODUCTION
Shareholders of UCS ("UCS shareholders") and Argility ("Argility
shareholders") (collectively "Shareholders") are referred to the further
cautionary announcement released by UCS on 24 November 2009 and subsequent
renewals dated 13 January 2010 and 02 March 2010 respectively, whereby UCS
shareholders were informed that UCS had submitted an expression of interest
to the board of directors of Argility ("the Argility Board") regarding the
possible acquisition by UCS of the entire issued ordinary share capital of
Argility, other than those shares already owned by UCS and its subsidiaries
("the UCS Group").
Shareholders are advised that UCS has formally submitted to the Argility
Board a notice of its firm intention to make an offer to Argility
shareholders, other than the UCS Group, ("Scheme Members") to acquire,
subject to the fulfilment and/or waiver (where possible) of the suspensive
conditions set out in paragraph 4.3 below, the issued ordinary shares in
Argility held by them by way of a scheme of arrangement in terms of section
311 of the Companies Act No. 61 of 1973, as amended ("Companies Act"), to
be proposed by UCS between Argility and the Scheme Members ("the Scheme")
or, in the event of the Scheme not being implemented and at the election of
UCS, an offer to acquire such shares in terms of section 440 of the
Companies Act, or otherwise (collectively "the Offer").
2. BACKGROUND INFORMATION AND RATIONALE
On 15 May 2007, UCS announced its intention to dispose of certain of its
proprietary products and related intellectual property to a wholly owned
subsidiary company, Argility, and subsequent to such disposal, to unbundle
the shares in Argility to UCS shareholders ("the Unbundling").
The Unbundling was implemented and UCS distributed all of the issued shares
in Argility to the UCS shareholders recorded in the register of UCS on 21
September 2007, by way of a dividend in specie in terms of section 90 of
the Companies Act.
Argility`s shares were distributed in the ratio of one Argility share for
every holding of ten UCS ordinary shares held by each UCS shareholder at
the relevant date. The exchange ratio was based on 281 641 304 UCS ordinary
shares in issue and the then enterprise value of Argility, being R163 672
000 at the time of the Unbundling, which equated to a value for Argility of
-
- R0.58 for every UCS share; or
- R5.81 for every Argility share.
Following the Unbundling, an over the counter trading platform was created
to facilitate trading in Argility shares. However, such trading activity
has been limited in that less than 5% of Argility`s shares have traded on
this platform to date.
Currently, at least 90% of UCS shareholders are also Argility shareholders.
Unfortunately, and with hind sight, the timing of the initial set-up of
Argility and the Unbundling could not have been worse, given the global
credit crisis and resulting financial turmoil. This has had a material
negative effect on most retailers internationally and as a consequence the
replacement decisions for their in-store point of sale solutions, being the
focus of Argility`s business. Activity in this area of the market froze
during the financial crisis and any decisions by retailers regarding
investment in their future in-store trading platforms appear to have been
deferred. Whilst management have managed the costs as prudently as
possible, the timing of a recovery in trading conditions remains uncertain.
In reviewing its overall group strategy for the software and intellectual
property owned by the UCS Group, the board of directors of UCS ("the UCS
Board") has resolved to consolidate the ownership, management, development
and commercial exploitation of these assets, including the product sets and
business of Argility, which should result in significant cost benefits and
other synergies across all effected businesses.
3. THE RELATED PARTY TRANSACTON
The JSE Listings Requirements defines a related party as, inter alia, a
material shareholder (shareholding of 10% of more) or any person that is,
or within the twelve months preceding the date of the transaction was, a
director of UCS or any of its subsidiaries ("the related parties").
Mr John Bright and Mr Duncan Coles (directors of UCS), RMB Asset Management
and Oasis Funds (who in aggregate hold in excess of 10% in UCS) are
Shareholders who currently hold (either directly or indirectly) 10% or more
of the issued share capital of UCS and Argility. Furthermore, Mr John
Bright and Ms Josephine Fortuin are currently appointed as directors of UCS
and Argility.
Other than indicated above, the following directors of UCS also hold
ordinary shares in Argility:
- Neil Michelson;
- Dean Sparrow;
- Josephine Fortuin;
- Richard Goodman;
- Joseph Claasen; and
- Bryan Hattingh.
Accordingly, the Offer is classified as a related party transaction ("the
Related Party Transaction" or "the Transaction") and requires approval by
UCS shareholders and an independent opinion relating to the fairness
thereof.
3.1 EFFECTIVE DATE OF THE RELATED PARTY TRANSACTION
The Related Party Transaction will be effective from the 1st day of
the month in which the South Gauteng High Court, Johannesburg ("the
Court") sanctions the Scheme which is currently expected to be on or
about 1 May 2010.
3.2 SUSPENSIVE CONDITIONS TO THE RELATED PARTY TRANSACTION
The Related Party Transaction is subject to the fulfilment and/or
waiver (where applicable), as the case may be, of the following
suspensive conditions:
- the passing by the requisite majority of UCS shareholders,
excluding the related parties, at a UCS general meeting of the
ordinary resolutions required to implement the Related Party
Transaction;
- the Scheme being approved, with or without modification, by a
majority representing not less than three-fourths (75%) of the
votes exercisable by Scheme Members present and voting, either in
person or by proxy, at the Argility Scheme meeting; and
- the Court granting an order sanctioning the Scheme in terms of
section 311 of the Companies Act and such order being registered
with the Companies and Intellectual Property Registration Office
("CIPRO").
3.3 UNAUDITED PRO FORMA FINANCIAL EFFECTS OF THE RELATED PARTY TRANSACTION
The table below sets out the unaudited pro forma financial effects of
the Related Party Transaction on UCS for the twelve months ended 30
September 2009. The unaudited pro forma financial effects are
presented for illustrative purposes only and, because of their nature,
may not fairly present UCS`s results or financial position after the
Transaction. It has been assumed for purposes of the unaudited pro
forma financial effects that the Transaction took place with effect
from 1 October 2008, for income statement purposes, and on 30
September 2009, for balance sheet purposes. The directors of UCS are
responsible for the preparation of the unaudited pro forma financial
effects.
Per UCS share Before the After the Percentage
(cents per
share)
Transac Transac Change (%)
tion(1) tion(3)(4
)
Basic 9.5 20.0
earnings(2) 11.4
Headline 11.4 (1.1) (109.6)
earnings(2)
Net asset 1.2
value 165.0 167.0
Tangible net (22.4)
asset value 53.5 41.5
Notes:
Based on the published audited annual results for the twelve months
ended 30 September 2009.
Basic earnings per share and headline earnings per share are based on 290
147 342 shares, being the weighted average number of shares in issue during
the twelve months ended 30 September 2009.
Included in the "After the Transaction" earnings and headline earnings are
the following adjustments and related assumptions:
(a) The fair value adjustment of the Argility intangible assets,
comprising the Active Retail & Argility Merchandising product suites
and associated intellectual property by R65.4 million to R44.4 million,
for financial effects purposes on the basis the Transaction is
effective 1 October 2008, net of the deferred tax effect thereon.
Based on Argility`s audited results as at 30 September 2009, which
includes the amortisation and impairment of intangible assets of R24.5
million and R24.4 million respectively, the fair value adjustment of
the Argility intangible assets is estimated to be a loss of R24 million
if the Transaction were considered effective 30 September 2009.
Consequently, the amortisation of the intangible assets post the
Transaction is estimated to be R9 million per annum.
(b) The realisation of a gain through profit and loss on Transaction of
Argility totaling R42.0 million in accordance with International
Financial Reporting Standards 3, Business Combinations ("IFRS3");
(c) The reversal of the outsourced product development ("OPD") contract
between Argility and UCS Software Manufacturing (Proprietary) Limited
("UCSSM") and the accounting for the product development expenditure
incurred on the Argility product suites as research and development
and/or development costs capitalised net of the margin earned by UCSSM on
the OPD contract;
(d) The reversal of the outsourced finance, administration and treasury
fee of R2.5 million for the year under review;
(e) The reversal of the cost of sales related to the license fees payable
to Argility by UCS as distributor of Argility
products against the revenue of Argility, which amounted to R6.6million
for the year under review (i.e. 60% of the
end user license fees in accordance with the Value Added
Reseller arrangements);
(f) The reversal of the cost of sales related to the royalty fees payable
to UCSSM by Argility in accordance with the
OPD contract which amounted to R1.9million for the year under review
(i.e. 10% of the end user license fee on the
products
earned);
(g) The reversal of the amortisation on the products and associated
intellectual property in Argility as a consequence
of the fair value adjustment referred to in note
(a) above;
(h) The reversal of the impairment on the products and associated
intellectual property in Argility as a consequence
of the fair value adjustment referred to in note
(a) above;
(i) The reversal of the interest expense related to the loan payable to
Argility by UCS which amounts
to R1.3 million for the
year under review;
(j) The investment income forfeited by UCS on the cash consideration for
the Transaction at prevailing UCS call rates of 5.25%
(k) The assumption that a deferred tax asset would not be raised on
acquisition related to the accumulated estimated
tax losses in Argility. The deferred tax effect of the estimated losses
may be recognised in future when the utilization of the estimated tax
losses are considered probable; and
(l) In accordance with the revised IFRS3 treatment, Transaction costs
of R1.0 million being expensed, which are once-off in nature.
The net asset value per share and tangible net asset value per share are
based on the Transaction having been effected on 30 September 2009.
3.4 FAIRNESS OPINION REGARDING THE RELATED PARTY TRANSACTION
As required in terms of section 10.4(f) of the JSE Listings
Requirements, the UCS Board has appointed KPMG Services (Proprietary)
Limited ("KPMG") to provide a fairness opinion as to whether the terms
and conditions of the Related Party Transaction are fair to UCS
shareholders.
Their opinion will be set out in the circular to UCS shareholders
relating to the Related Party Transaction which will be issued in due
course ("the Circular").
3.5 UCS BOARD OF DIRECTORS
An independent sub-committee of the UCS Board comprising of the
following non-executive directors, Messrs P Terblanche, M Morojele and
Ms V Chetty, none of whom hold any shares in Argility, was formed to
consider the terms and conditions of the Related Party Transaction.
The UCS Board, after having considered the opinion of KPMG and the
recommendations of the independent sub-committee, will advise UCS
shareholders of their recommendation in due course.
4. THE OFFER
4.1 TERMS AND MECHANICS OF THE OFFER
In terms of the Offer, UCS is proposing to acquire the issued ordinary
shares in Argility`s share capital, currently not already beneficially
owned by the UCS Group, by way of a scheme of arrangement in terms of
section 311 of the Companies Act, to be proposed by UCS between
Argility and all of the Scheme Members, subject to the fulfilment
and/or waiver (where possible) of the suspensive conditions set out in
paragraph 4.3 below.
The Offer will be made at a consideration of R1.55 ("Scheme
Consideration" or "Offer Price") per Argility ordinary share ("Scheme
Share"), which consideration will be payable in cash to each Scheme
Member ("Scheme Participant").
The Scheme Consideration is a 210% premium on the trading price of
Argility ordinary shares on the over the counter market as at the
close of business on 12 March 2010 (being the last practicable date
prior to the date of this announcement).
Should Scheme Participants vote in favour of the Scheme and the Scheme
become operative, the resulting effect will be that:
- each Scheme Participant shall be deemed to have disposed of (and
shall be deemed to have undertaken to transfer) 100% of the
Argility shares held by it as at the Scheme Consideration record
date, to UCS, which shall acquire ownership of such Argility
shares; and
- in consideration for its disposal of each Scheme Share, each
Scheme Participant will become entitled to receive the Scheme
Consideration of R1.55 per Argility share, from UCS.
Following the implementation of the Scheme, the UCS Group will own
100% of the issued ordinary shares in Argility.
4.2 FINANCIAL EFFECTS OF THE SCHEME
Save for the costs associated with the Scheme and the consideration of
the Argility intangible asset values against the Offer Price, there
are no financial effects on Argility as a result of the implementation
of the Scheme.
The current status and uncertain outlook with delayed revenue
expectations, together with funding available for the Argility
business, have materially changed the valuation parameters to that
which was relevant at the time of the Unbundling. At an Offer Price
of R1.55 per share compared to the current over the counter trading
price of R0.50 per Argility share (i.e. a premium of 210%), it is
believed that the Scheme is favourable for Argility shareholders and
reflects UCS`s cognisance of the three areas of value that Argility
management believe exist, being a -
- product set that has continued to undergo development post
Unbundling, which has included development to "localise" the
products for the company`s chosen markets (currently UK, USA and
the Middle East);
- channel of certified and appointed resellers in those respective
markets; and
- brand (Argility) that has started to gain some recognition in its
chosen markets as one of the suppliers of competitive EPOS
(electronic point of sale or the in-store system) products.
All of these areas of value are however negatively impacted if there
is no access to funding beyond the next 6 to 12 months.
4.3 SUSPENSIVE CONDITIONS TO THE SCHEME
The Scheme is subject to the fulfilment and/or waiver (where
possible), as the case may be, of the following suspensive conditions:
- the Scheme, being a related party transaction between UCS and
certain of the Scheme Members, being approved by the requisite
number of UCS shareholders, as required in terms of the JSE
Listings Requirements;
- the Scheme being approved, with or without modification, by a
majority of Argility Scheme Participants representing not less
than three-fourths (75%) of the votes exercisable by Scheme
Participants present and voting, either in person or by proxy, at
the Argility scheme meeting; and
- the Court granting an order sanctioning the Scheme in terms of
section 311 of the Companies Act and such order being registered
with CIPRO.
4.4 SPECIAL ARRANGEMENTS
No arrangements exist between UCS, Argility, or any parties acting in
concert with UCS or with Argility, in relation to the Scheme.
4.5 CONFIRMATION OF FINANCIAL RESOURCES
The Securities Regulation Panel ("SRP") has been provided with written
confirmation, furnished by Nedbank Limited, that, in the event of all
the suspensive conditions to the Scheme being fulfilled and/or waived
(where possible) and the Scheme being implemented, sufficient cash
resources will be available to UCS to discharge the entire Scheme
Consideration payable in terms of the Scheme.
4.6 FAIRNESS OPINION RELATING TO THE SCHEME
Barnard Jacobs Mellet Corporate Finance (Proprietary) Limited ("BJM
Corporate Finance") has been appointed by the Argility Board in terms
of Rule 3.1 of the Securities Regulation Code on Takeovers and Mergers
("SRP Code") and Rules of the SRP to advise the Argility Board on the
financial terms of the Scheme.
BJM Corporate Finance`s opinion will be set out in the Scheme circular
to Argility shareholders relating to the Scheme, which will be issued
in due course.
4.7 ARGILITY BOARD OF DIRECTORS
The Argility Board has convened a sub-committee, comprising of the
independent non-executive chairman, Mr. I Bowater and two executive
directors, Messrs L Aderem and A Blatherwick, to consider the Scheme.
The Argility Board, after having considered the opinion of BJM
Corporate Finance and the recommendations of the sub-committee, will
advise Argility shareholders of their recommendation in due course.
5. RELATED PARTY TRANSACTION AND SCHEME DOCUMENTATION
The circular to UCS shareholders containing details of the Related Party
Transaction and incorporating a notice in respect of the general
shareholders` meeting to consider and, if deemed fit, pass the requisite
resolutions, will be posted to UCS shareholders in due course.
The circular to Argility shareholders containing details of the Scheme
meeting and incorporating a notice in respect of the Scheme meeting will be
posted to Argility shareholders in due course.
A further announcement will be released setting out the salient dates and
times of the Related Party Transaction and the Scheme.
6. CAUTIONARY ANNOUNCEMENT
UCS shareholders are referred to the cautionary and renewal announcements
dated Tuesday, 24 November 2009, Wednesday, 13 January 2010 and Tuesday, 02
March 2010 respectively in respect of the Transaction. Further to the
above, UCS shareholders are advised that they no longer need to exercise
caution when dealing in their UCS securities in terms of this Transaction.
However, UCS shareholders are advised that UCS has entered into discussions
in terms of a further transaction which, if successfully concluded, may
have a material effect on the price of the Company`s shares.
Accordingly, UCS shareholders are advised to exercise caution when dealing
in the Company`s shares until a further announcement is made in this
regard.
Johannesburg
15 March 2010
Independent Expert Attorneys Independent
to Argility Glyn Marais Professional Expert
BJM Corporate Incorporated to UCS
Finance KPMG Services
(Proprietary) (Proprietary)
Limited Limited
Auditors to Argility Sponsor to UCS Independent sponsor
Kaplan and Kaplan BJM Corporate to UCS
Finance Deloitte & Touche
(Proprietary) Sponsor Services
Limited (Pty) Limited
Reporting
accountants and
auditors to UCS
Deloitte & Touche
Date: 15/03/2010 17:47:01 Produced by the JSE SENS Department.
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