| Thu 25 Mar 2010, 10:41 | | UCS - UCS Group Limited - The Acquisition And Withdrawal Of Cautionary |
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UCS
UCS
UCS - UCS Group Limited - The Acquisition And Withdrawal Of Cautionary
Announcement
UCS Group Limited
(Incorporated in the Republic of South Africa)
(Registration number 1993/002253/06)
JSE code: UCS
ISIN: ZAE000016150
("UCS")
THE ACQUISITION BY UCS OF 56% OF THE ISSUED ORDINARY SHARE CAPITAL AND CERTAIN
SHAREHOLDER LOAN ACCOUNTS IN CQUENTIAL SOLUTIONS (PROPRIETARY) LIMITED
("CQUENTIAL" or "THE COMPANY") AND WITHDRAWAL OF CAUTIONARY ANNOUNCEMENT
1. Introduction
Shareholders of UCS are referred to the cautionary announcement dated 15
March 2010 and are advised that UCS has entered into a Sale of Shares and
Claims Agreement with the Industrial Development Corporation of South
Africa Limited ("the IDC") ("the IDC Agreement") to acquire from the IDC 19
200 ordinary shares in the share capital of CQuential representing 49% of
the issued share capital of CQuential ("the IDC Sold Shares") and all
claims of whatsoever nature and from whatsoever cause arising which the IDC
may have against CQuential on the closing date ("the Sold Claims"), being
three business days after the fulfilment and/or waiver, as the case may be,
of the suspensive conditions ("the Closing Date") as set out in paragraph 5
below for a purchase consideration of R 12 000 001 ("the IDC Purchase
Consideration") with a potential further upside payment based on a defined
formula linked to the company`s retained earnings as at 31 March 2013
capped at R10 000 000 ("the Additional Amount Payable" or "APP") ("the IDC
Transaction").
UCS has further entered into a Sale of Shares Agreement with the remaining
shareholders of CQuential being predominantly management ("The Members")
("the Members` Agreement") whereby UCS will acquire a total of 2 752
ordinary shares in the share capital of CQuential, representing 7% of the
issued share capital of CQuential ("the Members` Sold Shares") from the
Members for a total purchase consideration of R27.5 ("the Members` Purchase
Consideration") ("the Members` Transaction").
Details of the IDC Transaction and the Members` Transaction (collectively
"the Transaction"), are set out below.
2. Background on UCS and Cquential
UCS is an investment holding company with investments in a number of
Information Technology companies that are focused on the provision of
software, services and solutions, predominantly for the retail value chain.
This includes 100% owned investments in a group of companies called Aquitec
which comprises Aquitec UK Limited and UCS USA Incorporated (trading as
Aquitec USA) ("Aquitec").
Aquitec focuses specifically on warehouse management and supply chain
solutions. The business owns and sells a product known as World Wide Chain
Stores, internationally. This product addresses the requirements of the
tier one retailer in so far as it relates to their central distribution
centers or warehouses.
Cquential is a South African domiciled company which commenced business in
2005 when it initiated the development of its supply chain and warehouse
product. Cquential offers a complementary product to that of Aquitec. It`s
product offering is appropriate for retailers across all tiers and has been
structured to be offered as a software as a service.
Having both Aquitec and Cquential within the UCS Group will enable UCS to
offer warehouse and chain store solutions across the retail sector both
locally and abroad.
3. Rationale for the Transaction
The IDC first invested in Cquential during early 2008 and has played the
role of its primary financial partner. The acquisition by UCS of the IDC`s
shareholding is viewed as strategically important for Cquential`s business
growth. The IDC therefore believes that it`s exit is appropriate as it
would have met its objectives of successfully facilitating the development
and commercialisation of unique South African intellectual property.
There are various synergies that exist between UCS and Cquential which
could create significant value for both UCS and Cquential.
The envisaged benefits to UCS resulting from the Transaction are as
follows:
Cquential has a complementary supply chain and warehousing product offering
which is commercially attractive to customers and channel partners due to
the leveraging of a rental styled software as a service commercial model.
This reduces the sell cycle as it obviates the need for a large capital
investment. The system is simple to use and highly effective.
Cquential will also unlock:
- New markets both locally and internationally;
- Economies of scales (from the smallest warehouse or depot to large
scale facilities);
- New vertical markets, including chemical, petro-chemicals and
pharmaceuticals; and
- New offerings from the medium to small end of the retail and fast
moving consumer goods industries.
In addition, Cquential has a mature, innovative and experienced management
team.
Conversely, Cquential will benefit from UCS`s:
- Positioning and experience leveraging a strong leadership capability
and domain knowledge expertise;
- Aquitec`s international footprint and experience in offshore markets,
including North America, Canada, the United Kingdom, Ireland and
Chile;
- Product knowledge and experience in large scale supply chain
operations;
- A network of partners; and
- A unique software development capability.
4. Purchase Consideration of the Transaction
4.1 The IDC Transaction
4.1.1 The consideration payable in terms of the IDC Sold Shares,
is set out as follows:
4.1.1.1 R 1-00, payable on the Closing Date; plus
4.1.1.2 An amount determined as APP = VRI x 26%, where -
- APP is the additional amount of the IDC Purchase
Consideration payable; and
- VRI is the value of the retained income in CQuential (as at
31 March 2013), as accounted for in accordance with
International Financial Reporting Standards,
provided that the purchase price for the IDC Sold Shares, payable
by UCS in cash, shall not exceed an aggregate maximum of R 10 000
000.
This amount will be determined by the auditors and shall be
payable within five business days after it has been determined,
which shall be no later than 31 May 2013.
4.1.2 The consideration payable in terms of the Sold Claims is
R 12 000 000, which shall be payable in six equal bi annual
instalments of R 2 000 000, payable in advance, commencing
on the fulfilment of all suspensive conditions and with the
final instalment payable on 1 October 2012. No interest
shall be attracted by or payable on this amount.
4.2 The Members` Transaction
The consideration payable by UCS in terms of the Members` Transaction
for the Members` Sold Shares is R 27-5 and will be payable in cash on
the Closing Date.
In terms of the Management Agreement entered into between the Members,
UCS and CQuential on 21 March 2010, in return for due and proper
performance by the Members of their obligations in terms of such
agreement for the period commencing 1 April 2010 and ending 31 March
2013, CQuential shall pay an incentive to the Members, collectively,
based on the profitability of CQuential as at 31 March 2013, based on
a defined formula capped at a maximum amount payable by CQuential to
the Members, in aggregate of R80 000 000, provided that no additional
funding apart from the R15 000 000 working capital facility mentioned
below, will be required from UCS in the 3 year period. This incentive
shall reduce at the rate of one-fifteenth of its value for each R1 000
000 (or part thereof) of additional working capital made available to
CQuential.
UCS has committed to fund the business from the effective date, being
close of business on 31 March 2010 ("the Effective Date"), for a
period of three years up to a maximum working capital facility of R15
000 000 which facility will be provided by way of interest bearing
loan funding from UCS.
The Transaction is subject to warranties that are normal for a
transaction of this nature.
5. Suspensive Conditions
5.1 The implementation of the IDC Transaction is subject to the
fulfillment and/or waiver (where possible) of the following suspensive
conditions:
- The approval of the Transaction by the board of directors of UCS;
- IDC providing evidence to UCS`s satisfaction that each
shareholder in CQuential has irrevocably waived, in writing all
and any rights or entitlements arising out of or in connection
with any shareholders` agreement;
- Due and proper execution of the Shareholders` Agreement and
Members` Agreement;
- The successful conduct and favourable outcome of a legal,
financial, operational and technical due diligence by UCS on
CQuential;
- The delivery of management accounts by the IDC to UCS for the
period 1 April 2009 to 31 March 2010, to UCS`s satisfaction;
- UCS providing evidence, to the IDC`s satisfaction, that UCS has
undertaken to make loans to an aggregate maximum of R15 000 000
available to CQuential as working capital during the period from
the closing date to the 3rd anniversary of the Effective Date;
and
5.2 The implementation of the Members` Transaction is subject to the
fulfillment and/or waiver (where possible) of the following suspensive
conditions:
- The approval of the Transaction by the board of directors of UCS;
- Management providing evidence to UCS`s satisfaction that each
shareholder in CQuential has irrevocably waived, in writing all
and any rights or entitlements arising out of or in connection
with any shareholders` agreement;
- Due and proper execution of the Shareholders Agreement and the
IDC Agreement;
- The successful conduct and favourable outcome of a legal,
financial, operational and technical due diligence by UCS on
CQuential;
- The delivery of management accounts by Management to UCS, to
UCS`s satisfaction.
6. Pro forma financial effects of the Transaction
The table below sets out the pro forma financial effects of the Transaction
on the earnings, headline earnings, net asset value and net tangible 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
results or financial position after the Transaction.
The directors of UCS are responsible for the preparation of the pro forma
financial effects.
Per UCS Published Effects of After the Change After3 Change
share audited the Argility (cents) (cents) (%)
annual Argility Transaction
results Transaction and Before
30 (cents) this
September Transaction
20091 2
(cents) (cents)
Basic 9.5 1.9 11.4 (3.8) 7.6 (33.3)
earnings
Headline 11.4 (12.5) (1.1) (3.8) (4.9) (345.5)
earnings
Net asset 165.0 2.0 167.0 - 167.0 -
value
Tangible 53.5 (12.0) 41.5 (10.9) 30.6 (26.3)
net asset
value
Ordinary 284,391 - 284,391 - 284,391 -
shares in
issue
net of
treasury
shares
held
(`000)
Weighted 290,147 - 290,147 - 290,147 -
average
number of
ordinary
shares in
issue
(`000)
Notes and assumptions:
1. Based on the published audited annual results for the twelve months
ended 30 September 2009.
2. Based on the figures as set out in the "After the Transaction" column
in terms of the announcement released on SENS on 15 March 2010
regarding the firm intention by UCS to make an offer to acquire the
entire issued ordinary share capital of Argility Limited ("Argility")
not currently beneficially owned by UCS and its subsidiaries
("Argility Transaction").
The Argility Transaction
The pro forma financial effects in respect of the Argility Transaction are
based on the following assumptions:
- 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 Argility
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 Argility Transaction were considered effective
30 September 2009. Consequently, the amortisation of the intangible
assets post the Argility Transaction is estimated to be R9 million per
annum;
- The realisation of a gain through profit and loss on the Argility
Transaction totalling R42.0 million in accordance with International
Financial Reporting Standards 3, Business Combinations ("IFRS 3");
- 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;
- The reversal of the outsourced finance, administration and treasury
fee of R2.5 million for the year under review;
- The reversal of the cost of sales related to the licence fees payable
to Argility by UCS as distributor of Argility products against the
revenue of Argility, which amounted to R6.6 million for the year under
review (i.e. 60% of the end user licence fees in accordance with the
Value-Added Reseller arrangements);
- 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 R1.9 million for the year under review (i.e. 10% of the
end user licence fee on the products earned);
- The reversal of the amortisation on the products and associated
intellectual property in Argility as a consequence of the fair value
adjustment referred to above;
- The reversal of the impairment on the products and associated
intellectual property in Argility as a consequence of the fair value
adjustment referred to above;
- 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;
- The investment income forfeited by UCS on the cash consideration for
the Argility Transaction at prevailing UCS call rates of 5.25%. 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 utilisation of the estimated tax losses
is considered probable; and
- In accordance with the revised IFRS 3 treatment, transaction costs of
R1.0 million being expensed, which are once-off in nature.
The Transaction
3. Based on the assumption that the Transaction was effected on 1 October
2008 for income statement purposes and on 30 September 2009 for
balance sheet purposes.
4. Included in the "After" earnings and headline earnings are the
following adjustments and related assumptions:
- The inclusion of CQuential`s trading results for the twelve
months ended 30 September 2009, net of 44% Members` non-
controlling interests;
- A total purchase consideration of R18 million comprising:
- The share equity consideration of R29;
- R2 million upfront cash settlement in respect of the IDC
Sold Claims, referred above; and
- The present value of the deferred potential payments of R17
million comprising the potential upside payment (APP) to the
IDC of R8 million and R9 million in respect of the IDC
shareholder loan;
- The inclusion of the following interest costs:
- Imputed interest cost based on the after tax cost of debt
(i.e. 7.6%) on the deferred vendor loan raised of R8 million
in terms of IFRS 3 which amounts to R0.7 million for the
twelve month period;
- Imputed interest cost based on the after tax cost of debt
(i.e. 7.6%) on the IDC shareholder loan account
consideration which amounts to R0.2 million for the twelve
month period;
- The inclusion of an intangible asset amortisation charge for the
twelve months of R4.3 million, net of tax and management non-
controlling interest, in respect of the intangible assets
separately identified on acquisition of R52.8 million in terms of
IFRS 3 and written off over their anticipated useful lives
(average of 5 years);
- The deduction of the after tax net interest forfeited on UCS cash
utilised to execute payment of the upfront purchase consideration
(i.e. R2 million) which amounts to R0.1 million;
- A deferred tax liability of R14.8 million raised simultaneously
with the raising of the R52.8 million intangible asset which is
reversed as and when the intangible asset is amortised over its
useful life.
- The utilization of one third of the available working capital
funding of R15 million within the applicable twelve month period;
- Tax based on a statutory tax rate of 28%
5. 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 30 September 2009.
7. Categorisation
In terms of the Listings Requirements of the JSE Limited, as the IDC
Transaction and the Management Transaction involves the acquisition of
shares in the share capital of CQuential, the transactions have to be
aggregated. Accordingly, after aggregation, the Transaction is categorised
as a category two transaction in terms of the JSE Listings Requirements.
Accordingly, UCS shareholder approval is not required.
8. Withdrawal of cautionary announcement
Further to the above, shareholders are advised that they no longer need to
exercise caution when dealing in their UCS securities.
Johannesburg
25 March 2010
Sponsor
Barnard Jacobs Mellet Corporate Finance (Pty) Limited
Date: 25/03/2010 10:41:01 Produced by the JSE SENS Department.
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