| Thu 21 Oct 2010, 15:52 | | SOV - Sovereign - Announcement regarding a fully subscribed proposed capital |
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SOV
SOV
SOV - Sovereign - Announcement regarding a fully subscribed proposed capital
raising of R150 million by way of a rights offer
Sovereign Food Investments Limited
Incorporated in the Republic of South Africa
Registration number 1995/003990/06
JSE code: SOV
ISIN: ZAE 000009221
("Sovereign" or "the Company")
ANNOUNCEMENT REGARDING A FULLY SUBSCRIBED PROPOSED CAPITAL RAISING OF R150
MILLION BY WAY OF A RIGHTS OFFER
1 INTRODUCTION
During the past three years Sovereign embarked on an expansion programme
("the Expansion"), the key objectives of which were to:
* increase production capacity to approximately 1 million birds per week;
* eliminate bottlenecks from the existing production processes; and
* install high technology plant and equipment to introduce further operating
efficiencies.
The Expansion was completed at a capital cost of approximately R600 million and
resulted in the achievement of the key objectives.
The Expansion was funded principally through third party bank debt which
resulted in significantly increased levels of gearing for Sovereign.
Sovereign initiated a capital and debt restructuring programme ("the
Restructuring") during 2009, mainly to reduce the Company`s third party debt.
The Restructuring achieved the following:
* R126 million of new equity was raised;
* R77 million of the new equity was applied to reduce third party bank debt
and to address various debt covenant concerns;
* the balance of the new equity was used to partially fund the remaining
committed capital expenditure relating to the Expansion and to strengthen
the Company`s treasury position; and
* Sovereign obtained better financing terms (including more relaxed debt
covenants and lower effective interest rates) from certain of its third
party financiers.
At the time of the Restructuring, Sovereign was careful not to overcapitalise
the Company.
Subsequent to the implementation of the Restructuring, the entire South African
poultry industry has come under strain, inter alia in the following areas:
* Selling price deterioration - the average selling prices of poultry
products have suffered for some time and have decreased by approximately
9.5% across the board since 2008;
* Increased import levels - international over supply, coupled with a
significant strengthening of the Rand, has led to increased levels of
imports which in turn have influenced local selling prices; and
* Input costs - feed costs for the most part have been stable but recent
volatility has raised concern and current indicators suggest a potential
increase in feed costs in the near future. Non-feed costs have continued to
escalate, partly as a result of external cost pressures such as electricity
tariff increases, leading to further constraints on operating margins.
The collective impact of these external factors has been to place increasing
downward pressure on operating margins within the industry as a whole and
Sovereign. Consequently, the Company has been unable to take full advantage of
increased operational efficiencies (arising inter alia from the Expansion) and
the benefits stemming from the Restructuring.
The Company, along with most of the poultry industry participants, expect these
external pressures to continue into the foreseeable future and the board of
directors ("Board") has resolved to take decisive pre-emptive action in order to
address the risks associated with the general broader economic climate, the risk
factors specific to the poultry industry and the potential future impact thereof
on Sovereign.
In this regard, the Board has resolved to implement the following actions:
* No further capital expenditure will be permitted for the foreseeable
future, save for an amount of approximately R17 million relating to capital
projects which have already been committed to and partially executed during
the current financial year. Following completion of these capital projects,
no further capital expenditure other than critical maintenance capital
expenditure will be approved/permitted.
* Sovereign will propose to raise R150 million in new equity (as more fully
explained below) to address the Company`s remaining gearing concerns ("the
Capital Raising").
* All the proceeds received from the Capital Raising will be applied towards
reducing third party interest bearing debt.
* Renewed and focused cost cutting by the Company in order to align its
operations with the current economic climate and the challenges facing the
poultry industry.
* Maintaining and, where applicable, further increasing operational
efficiencies to position the Company so as to endure the industry`s
potentially slow recovery.
2 THE RIGHTS OFFER
2.1 Terms of the Rights Offer and Shareholder Undertakings
The Capital Raising, will be implemented by way of a proposed rights offer
("Rights Offer") in terms of which Sovereign will offer to its shareholders
("Shareholders") the right to subscribe for a maximum of 31 578 947 new
ordinary shares in Sovereign ("Ordinary Shares") ("the Rights Offer
Shares") at a subscription price of 475 cents per Rights Offer Share ("the
Subscription Price") in order to raise a total of R150 million in new
capital ("the Rights Offer Amount"). The Rights Offer Shares will be
offered in the ratio of 66.04155 Rights Offer Shares for every 100 Ordinary
Shares held at the record date of the Rights Offer.
The Subscription Price represents a 5% discount to the 30 day volume
weighted average traded price of Sovereign`s shares on the securities
exchange operated by the JSE Limited ("JSE") as at 19 October 2010 and a 3%
discount to the closing price on the same date.
Prudential Portfolio Managers (South Africa) (Pty) Limited ("Prudential")
and Orthogonal Investments (Pty) Limited ("Orthogonal") (collectively "the
Subscribers") have agreed to follow their rights in terms of the Rights
Offer and/or apply for excess Rights Offer Shares to the extent of R20
million and R17 million respectively, thereby collectively committing R37
million ("the Subscribed Amount") to the Rights Offer. Coronation Asset
Management (Pty) Limited ("Coronation" or "the Underwriter") has agreed to
partially underwrite the Rights Offer to the extent of R113 million
("Underwriting Amount"). The Subscribed Amount and the Underwriting Amount
shall hereinafter be collectively referred to as the "Capital Commitments".
Sovereign has accordingly received Capital Commitments in respect of the
full Rights Offer Amount.
In addition to securing the Capital Commitments, Sovereign has received
undertakings from existing Shareholders which currently hold (directly or
indirectly through funds under management), approximately 80% of
Sovereign`s issued share capital, to vote in favour (or, where applicable,
to recommend to the holders of the shares under management to do so) of the
resolutions required to implement the Rights Offer ("Voting Undertakings").
Further information pertaining to the Capital Commitments and Voting
Undertakings is set out in paragraph 2.3 below.
Shareholders will be permitted to apply for excess Rights Offer Shares
("Excess Shares"), being those Rights Offer Shares not taken up by rights
holders who do not follow all or some of their rights in terms of the
Rights Offer or allocated to the Underwriter, in excess of their pro rata
entitlement in terms of the Rights Offer, as more fully explained in
paragraph 2.3 below.
2 .2 Rationale
Further to the rationale for the Capital Raising and the resultant Rights
Offer as set out in paragraph 1 above, the application of the proceeds
received from the proposed Rights Offer will result in an additional cash
flow saving (inclusive of an interest saving and a reduction in terms of
Sovereign`s existing debt repayment profiles) of approximately R2,5 million
per month, allowing Sovereign to, inter alia,:
achieve a more sustainable gearing ratio and to significantly strengthen
its balance sheet;more effectively match its debt repayment profile with
its operating cash generation capacity in terms of the current poultry
industry and general economic climate; and sustain its current borrowing
capacity on commercially acceptable terms and conditions.
2.3 Underwriting and Shareholder Undertakings
In terms of the agreements entered into between Sovereign, the Underwriter
and the Subscribers on or about 20 October 2010 ("the Capital Agreements"),
Sovereign will pay to the Underwriter and Subscribers a fee equal to 3% of
the amount of the Capital Commitments.
The Capital Commitments and Voting Undertakings are summarised below:
Capital Voting Undertakings
Commitment
R`000
No of % of
Ordinary issued
Shares share
capital
Old Mutual Investment Group - 20 760 43.42
(South Africa) (Pty) Limited 103
("OMIGSA")
Prudential 20 000 9 006 213 18.83
Orthogonal 17 000 4 758 748 9.95
Coronation 113 000 - -
Further Voting Undertakings - 3 737 396 7.82
from Shareholders
Total 150 000 38 262 80.02
460
The Capital Agreements and Voting Undertakings ("the Agreements") are
subject, inter alia, to the following conditions precedent -
* a general meeting of Shareholders ("General Meeting") being held within 3
months of the date of the Agreements for the purpose of proposing and, if
deemed fit, passing the resolutions necessary to implement the Rights
Offer;
* the Board adopting a resolution, by no later than 15 November 2010, that
all the funds raised pursuant to the Rights Offer, before making provision
for costs, shall be applied by Sovereign to reduce its interest bearing
debt within 5 days of the receipt of such funds by Sovereign and the Board
providing written confirmation to the relevant parties that such resolution
was duly passed, by 20 November 2010; and
* the Shareholders` resolutions required to implement the Rights Offer shall
provide that the gross proceeds received by Sovereign pursuant to the
Rights Offer shall be used solely for the reduction of interest bearing
debt,
(collectively "the Conditions Precedent").
In addition to the Conditions Precedent, the parties which have provided
Capital Commitments and Voting Undertakings (other than the Underwriter)
may, at their election, withdraw from their Voting Undertakings and/or
Capital Commitments (as the case may be), in certain circumstances should a
firm intention to make an offer for the entire issued share capital of
Sovereign be received by the Board or submitted directly to Shareholders.
Rights Offer Shares not taken up by rights holders who do not follow all or
some of their rights in terms of the Rights Offer will first be allocated
to the Underwriter to the extent of the Underwriting Amount and any
remaining Rights Offer Shares will then be allocated, in an equitable
manner as determined by the Board, to those rights holders which applied
for Excess Shares.
2.4 Suspensive conditions
The Rights Offer remains conditional upon the fulfilment of the following
suspensive conditions -
* at the General Meeting, Shareholders passing -
* a special resolution authorising the increase of the Company`s authorised
ordinary share capital by 100 million Ordinary Shares; and
* an ordinary resolution placing sufficient authorised Ordinary Shares under
the control of the Board for purposes of the Rights Offer.
* the necessary regulatory documentation including, inter alia, the Rights
Offer circular incorporating revised listing particulars and renounceable
nil paid letters of allocation being approved and registered by the JSE and
the Companies and Intellectual Property Registration Office; and
* the JSE approving the listing of the Rights Offer Shares.
An announcement will be released on SENS and published in the press once
the suspensive conditions have been fulfilled and the Rights Offer becomes
unconditional.
2.5 Pro forma financial effects of the Rights Offer
These unaudited pro forma financial effects are provided for illustrative
purposes only to provide information about how the Rights Offer may impact
on Sovereign`s results and financial position. Due to the nature of the
unaudited pro forma financial information, it may not provide a fair
presentation of the Group`s results and financial position after the Rights
Offer.
The unaudited pro forma financial effects are based on the unaudited
financial information for the six months ended 31 August 2010, as announced
on SENS on 23 September 2010, and have been prepared in accordance with the
accounting policies of Sovereign at that date.
The unaudited pro forma financial effects have been included in compliance
with the JSE Listings Requirements. The Board is responsible for the
preparation of the unaudited pro forma financial effects.
Unaudited Unaudited Percentag
results Pro forma e
for the after the Change
six months Rights (%)
ended Offer
31 August 31 August
2010 2010
(1)
Earnings per share (cents) (2) 2.7
8.5 214.8
Headline earnings per share 2.7
(cents) (2) 8.5 214.8
Diluted earnings per share 2.6
(cents) (2) 8.5 226.9
Diluted headline earnings per 2.6
share (cents) (2) 8.5 226.9
Net asset value per share
(cents) (3) 876.60 706.8 (19.4)
Net tangible asset value per
share (cents) (3) 876.60 706.8 (19.4)
Weighted average number of 47 79
shares in issue 816 787 395 734 66.0
Diluted weighted average 48 79
number of shares in issue 246 579 825 526 65.5
Shares in issue 47 79
816 787 395 734 66.0
Notes:
1 The unaudited pro forma financial effects on the statement of comprehensive
income were prepared on the basis that the Rights Offer was fully
subscribed and completed on 1 March 2010 and the unaudited pro forma
financial effects on the statement of financial position were prepared on
the basis that the Rights Offer was fully subscribed and completed on 31
August 2010.
2 Earnings, headline earnings per share and diluted earnings and diluted
headline earnings per share are based on the weighted average number of
shares in issue and diluted weighted average number of shares in issues at
31 August 2010 respectively, and have been adjusted to take into account an
interest saving of R7,65 million (before taxation) based on the repayment
of interest bearing debt of R150 million at the weighted average cost of
the debt to be repaid of 9.9% for the six month period.
3 Net asset value per share and net tangible asset value per share have been
adjusted to include the net cash proceeds of the Rights Offer, assumed to
be R142 million, the reduction of debt by R150 million and the increase in
share capital and share premium arising from the issue of 31 578 947
ordinary shares of 1 cent each at an issue price of 475 cents per share.
Estimated costs of R8 million pertaining to the Rights Offer (inclusive of
fees paid to the Underwriter and Subscribers) have been written off against
share premium.
3 GENERAL MEETING AND CIRCULAR TO SHAREHOLDERS
In order to implement the Rights Offer a general meeting will be held where
Shareholders will be requested to:
* approve a special resolution increasing the authorised ordinary share
capital of Sovereign by 100 million new Ordinary Shares; and
* place sufficient authorised Ordinary Shares under the control of the Board
for the purposes of the Rights Offer.
A circular, containing further details of the resolutions necessary to implement
the Rights Offer, will be posted to Shareholders in due course.
21 October 2010
Port Elizabeth
Sole Bookrunner, Corporate Advisor and Sponsor:
One Capital
Attorneys:
Cliffe Dekker Hofmeyr Inc.
Date: 21/10/2010 15:52:12 Produced by the JSE SENS Department.
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