| Mon 13 Dec 2010, 8:10 | | GEN - General - Kansai Paint Co. - Offer announcement by Kansai in respect of |
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JSE
GEN
GEN - General - Kansai Paint Co. - Offer announcement by Kansai in respect of
its firm intention to make a cash offer to acquire all the issued shares of
Freeworld, not already owned by Kansai at R12 per share
Kansai Paint Co., Ltd.
(Incorporated in Japan)
(Registration number 1402-01-001093)
(Tokyo Stock Exchange share code: 4613)
(ISIN: JP3229400001)
("Kansai")
Offer announcement by Kansai in respect of its firm intention to make a cash
offer to acquire all the issued shares of Freeworld Coatings Limited
("Freeworld") not already owned by Kansai at R12 per share
1. INTRODUCTION
1.1 The shareholders of Freeworld are advised that, on 13 December 2010, Kansai
delivered a letter to the board of directors of Freeworld ("Freeworld Board")
stating its firm intention to make a cash offer ("Offer") to acquire all the
issued and to be issued shares of Freeworld not already owned by Kansai ("Target
Shares") at a price of R12 per Target Share ("Offer Price").
1.2 As at the close of business on 10 December 2010, Kansai owned 56 193 664
ordinary shares in the issued share capital of Freeworld ("Freeworld Shares"),
representing an ownership interest of 27.56% of the entire issued share capital
of Freeworld (based on Freeworld`s issued share capital being 203 871 939
Freeworld Shares).
1.3 Kansai has obtained irrevocable undertakings to accept the Offer, or to
recommend the Offer, from certain fund managers representing in aggregate
approximately 42.3% of Freeworld`s issued share capital and 58.4% of the Target
Shares. Further details of these undertakings can be found in 11 of this
announcement.
2. INFORMATION ON KANSAI
Kansai, headquartered in Osaka, Japan, is one of the top ten coatings companies
in the world. Listed on the Tokyo Stock Exchange, Kansai had a market
capitalisation of Y209.9 billion/R17.2 billion (as at 10 December 2010, using a
conversion exchange rate of 12.20 Yen per Rand). Kansai operates and supplies
coatings in Japan, South-East Asia, China, India and the Middle East. Kansai
produces a broad cross-section of coatings for automotive, industrial, marine,
protective and decorative applications and employs approximately 8 000 people at
44 factories across 18 countries.
3. ENGAGEMENT WITH THE FREEWORLD BOARD
3.1 Prior to 13 December 2010, Kansai has on a number of occasions sought to
engage constructively with the Freeworld Board directly in respect of making an
offer recommended by the Freeworld Board to acquire all Target Shares, and its
implications for Freeworld.
3.2 Kansai initially submitted an expression of interest to make an offer for
Freeworld on 6 May 2010. Following the failure of a scheme of arrangement in
terms of which Saphirefield Investments (Proprietary) Limited proposed to
acquire all Freeworld Shares ("Brait Offer") on 14 June 2010, Kansai again
approached the Freeworld Board with a view to the making of a recommended offer,
and sought to engage on a variety of topics, particularly in relation to
Freeworld`s preliminary concerns around competition- related aspects of a
combination with Kansai. Preliminary discussions did not result in any
significant engagement between Freeworld and Kansai.
3.3 On 24 August 2010, having sought to address a number of Freeworld`s
concerns, Kansai submitted a further conditional indicative proposal to make a
recommended offer for all the Freeworld Shares which it hoped would elicit a
more constructive approach to engagement from the Freeworld Board. However, the
Freeworld Board consistently declined to engage on the basis that its
competition-related concerns first needed to be definitively assessed in order
to determine whether the proposed merger would be capable of execution.
3.4 Between 24 August 2010 and the date of this announcement, Kansai approached
the Freeworld Board on multiple occasions in order to understand the Freeworld
Board`s views on competition-related concerns. Other than what was disclosed by
the Freeworld Board in its 24 November statement regarding the approach by
Kansai and the renewal of its cautionary, Kansai has, to date, been unable to
obtain details from the Freeworld Board on its views relating to Kansai`s desire
to make an offer to acquire all the Target Shares, which would ultimately have
been required in order to enable a recommended offer to be presented to
Freeworld shareholders.
3.5 As a consequence of the reluctance of the Freeworld Board to engage, Kansai
believes that Freeworld`s shareholders should be given the opportunity to
consider, as set out herein, the Offer, and has therefore decided to proceed
with the Offer without the co- operation of the Freeworld Board.
4. SHAREHOLDER VALUE
Kansai believes that the Offer will provide Freeworld shareholders with an
opportunity to realise significant and attractive value for their Freeworld
Shares, representing:
4.1 a 17.1% premium to R10.25, being the price of Freeworld Shares as at 10
December 2010;
4.2 a 44.4% premium to R8.31, being the 30-day volume weighted average market
price per Freeworld Share prior to the initial cautionary announcement issued on
16 February 2010 in relation to the Brait Offer, this period being the last
period during which Freeworld Shares traded unaffected by the impact of
potential or actual corporate action;
4.3 a 27.7% premium to R9.39, being the 30-day volume weighted average market
price of Freeworld Shares in the period to 10 December 2010;
4.4 a 22.3% premium to R9.81, being the 26-day volume weighted average market
price of Freeworld Shares traded between 23 July 2010 and 30 August 2010 (both
days inclusive), representing the only period during which Freeworld was not
trading under a cautionary announcement since Kansai`s initial expression of
interest to make an offer for Freeworld Shares, submitted to the Freeworld Board
on 6 May 2010; and
4.5 an implied exit price to earnings after tax multiple of 16.2x based on the
provisional results of Freeworld for the financial year ended 30 September 2010.
5. RATIONALE FOR THE OFFER
5.1 Kansai is committed to expanding its overseas operations, in particular in
emerging markets and has identified expansion in Africa as a strategic priority.
Kansai also has a desire to extend its capabilities and reach in the decorative
coatings industry globally, which will further enhance Kansai`s offering and
diversify its earnings more broadly across the various segments of the coatings
industry.
5.2 In line with this strategy, Kansai has spent considerable time assessing a
combination with Freeworld and believes there is strong strategic and commercial
merit to the combination, as it would combine a high-quality South African
business with strengths in decorative coatings, with the capabilities and
resources of Kansai. Kansai believes that Freeworld is an attractive business
and provides a strong platform from which to grow and develop further in South
Africa and sub-Saharan Africa.
6. BENEFITS OF THE OFFER FOR FREEWORLD
6.1 Kansai believes that the proposed combination will be beneficial to
Freeworld`s long- term strategic development and will bring further scale and
opportunities for Freeworld`s management and employees, and is expected to have
positive effects for a wide range of Freeworld`s stakeholders (including the
South African economy in general).
6.2 In general terms, Kansai believes that Freeworld will benefit significantly
from being part of the enlarged Kansai group, in terms of capital resources,
technology and products that will be made available to Freeworld, thereby
supporting its longer term growth ambitions.
6.3 More specifically, Kansai believes that the proposed combination, if
successfully implemented, will benefit Freeworld, inter alia, from product
broadening and growth potential perspectives, as follows:
6.3.1 Heavy duty and protective coatings: with increasing infrastructure
development in both South Africa and other African countries, Kansai anticipates
a greater requirement for heavy duty and protective coatings. Kansai intends to
supplement Freeworld`s product portfolio to enhance its offerings in the heavy
duty and protective coatings segment.
6.3.2 Broader industrial product portfolio: as the South African economy grows,
Kansai anticipates an increasing requirement for industrial coatings, including
those for construction vehicles, industrial machines, agricultural equipment,
home electronics, beverage cans, pre-coated metals, and various types of
building materials. Kansai is able to further supplement Freeworld`s industrial
coatings product portfolio by providing specialised applications to the
telecommunications, electronics and biotechnology fields, as well as waterborne
and environmentally friendly coatings. To complement Freeworld`s own product
range, Kansai will be able to contribute its own products for these markets in
Africa.
6.3.3 Access to automotive technology: Freeworld will have access to Kansai`s
automotive coatings portfolio. Kansai invests approximately USD65 million per
year in research and development, allowing it to remain at the forefront of
automotive coatings technological innovation. Kansai believes that access to
these products should help Freeworld to compete more effectively in a market
where automotive original equipment manufacturers ("OEMs") (with substantial
purchasing power) maintain global relationships with automotive coatings
producers.
6.3.4 Development platform for Africa: Kansai sees the opportunity to leverage
Freeworld`s experience, management capabilities and local knowledge to identify
further growth opportunities in South Africa. In the longer term Kansai intends
to use Freeworld as a platform for accelerated expansion into sub-Saharan
Africa. Freeworld`s local presence and Kansai`s international experience make a
strong combination for successfully developing Freeworld`s business in the
growing economies of Africa. In due course, Kansai also intends to expand
Freeworld`s research and development centre to facilitate greater technology
transfer and enhance the skills and intellectual property within Freeworld.
6.3.5 Career development opportunities: Freeworld`s management and employees
will become part of the geographically diverse businesses of Kansai in India,
the Middle East, South-East Asia, China and Japan. Kansai intends to extend to
Freeworld its current practice of international exchange and training
programmes, which Kansai believes will bring benefits and enhancements to the
management, employees and operations of Freeworld.
7. BENEFITS FOR THE SOUTH AFRICAN ECONOMY AND SOUTH AFRICA
7.1 The Offer represents a further vote of confidence in the South African
economy by a Japanese and major global coatings company. As at 10 December 2010,
the latest figures from the Embassy of Japan indicate that there are 86 Japanese
companies operating in South Africa compared to 72 in 2006. Foreign direct
investment ("FDI") by Japanese companies has increased from just over R6 billion
in 2003 to approximately R16 billion in 2008.
7.2 Kansai believes the Offer, if successfully implemented, will have a number
of benefits for South Africa, including enhanced product offerings to users of
coatings products, such as the construction, automotive and other industries.
Further, Kansai anticipates being able to increase the volume of locally
manufactured coatings products, particularly those referred to in 6.3 of this
announcement, which Kansai believes will lead to increased local employment.
7.3 The South African National Treasury is taking steps to encourage the
entrenchment of South Africa as the "Gateway into Africa", as outlined in its
medium term budgetary policy speech, as well as its related statement on
exchange control. While Kansai does not have any plans to take advantage of the
related exchange control relaxations, Kansai views this government initiative as
consistent with its intentions, particularly in relation to 6.3.4 of this
announcement.
8. MECHANISM AND TERMS OF THE OFFER
8.1 The Offer will be made pursuant to a tender offer in terms of chapter XVA of
the Companies Act, 1973 ("Companies Act") and in accordance with the Securities
Regulation Code on Takeovers and Mergers and the Rules included therein
("Code"), at a price of R12.00 per Target Share.
8.2 The Offer Price will be paid in cash.
8.3 The Offer Price will be adjusted downward for any dividends declared or paid
(other than in respect of the dividend announced by Freeworld in its 2010 annual
results announcement, on 24 November 2010, being 7 cents per Freeworld Share,
which will not result in any adjustment to the Offer Price), any Freeworld
Shares issued or any Freeworld Share options granted or exercised (beyond what
is assumed in 10 of this announcement), or any binding agreement to do any of
the foregoing, prior to completion of the Offer.
8.4 The Offer will be made to all shareholders of Freeworld (other than Kansai)
as required under Rule 8 of the Code. All Freeworld shareholders will be given
an equal opportunity to accept the Offer.
8.5 Should the Offer be accepted by offerees in respect of nine-tenths or more
of the Target Shares, Kansai reserves to right, in its sole and absolute
discretion, to invoke the provisions of section 440K of the Companies Act to
compulsorily acquire all such Target Shares in respect of which the Offer was
not accepted and, if so, to apply for the termination of the listing of
Freeworld`s Shares on the exchange operated by the JSE Limited.
9. CONDITIONS TO THE OFFER
9.1 The Offer will be subject to fulfilment of the following suspensive
conditions (collectively, the "Conditions"):
9.1.1 valid acceptances of the Offer, in accordance with the terms and subject
to the conditions of the Offer, being received from Freeworld shareholders in
relation to such number of Freeworld Shares which is at least equal to 90% of
all the Target Shares (although Kansai reserves the right to reduce this minimum
acceptance threshold);
9.1.2 unconditional approval, or approval subject to conditions that will not
result in a material adverse change (equating to greater than 5% of Freeworld`s
consolidated EBITDA or total assets) to Freeworld, in terms of the Competition
Act, 1998 ("Competition Approval") for the implementation of the Offer is
obtained (although Kansai reserves the right to accept any condition that does
result in a material adverse change as aforesaid); and
9.1.3 Kansai obtains all approvals which might be required from the Financial
Surveillance Department of the South African Reserve Bank or one of its
authorised dealers, in terms of the Exchange Control Regulations promulgated
under the Currency and Exchanges Act, 1933 and in accordance with the
requirements of those regulations and accompanying directives and rulings, for
the implementation of the Offer.
9.2 The Conditions must be fulfilled by no later than 30 April 2011 ("Long-Stop
Date"). Notwithstanding this, Kansai has reserved the right, in its sole and
absolute discretion, but in accordance with the requirements of the Code and any
other applicable laws, to extend the Long-Stop Date. In the event that the Long-
Stop Date is extended, the amended date will be released on SENS and published
in the South African press.
10 ASSUMPTIONS UNDERLYING THE OFFER
The Offer is made on the basis of the following assumptions:
10.1 Freeworld has 203 871 939 ordinary shares in issue and no more than 4 672
065 additional Freeworld Shares will be issued pursuant to any Freeworld staff
or management incentive schemes as a consequence of the implementation of the
Offer;
10.2 the Freeworld Shares are the only class of securities issued by Freeworld
and no person has a right to be issued any other class of securities by
Freeworld. Notwithstanding this assumption, Kansai acknowledges its
responsibilities in terms of Rules 11 and 12 of the Code in the event that any
other class of securities is in issue or is to be issued; and
10.3 until the Offer closes, the business of Freeworld will continue to be
conducted in the ordinary course and in accordance with its approved business
plans and budgets.
11. IRREVOCABLE UNDERTAKINGS TO ACCEPT THE OFFER
11.1 Kansai has obtained irrevocable undertakings from, or on behalf of, the
following Freeworld shareholders, in terms of which (amongst other things) they
have irrevocably undertaken, with respect to the following Freeworld Shares
beneficially owned by such shareholders or held by them on a discretionary basis
for clients, and on the terms and subject to the conditions of such
undertakings, to accept the Offer on its terms and subject to its conditions:
Shareholder/Fund Percentage of Percentage of
Manager Holding Freeworld Shares Target Shares
Argon Asset Management 14 697 934 7.21% 9.95%
Element Investment Managers 28 500 000 13.98% 19.30%
Franklin Tempelton Investments 16 557 534 8.12% 11.21%
Public Investment Corporation 13 437 570 6.59% 9.10%
Total 73 193 038 35.90% 49.56%
11.2 Furthermore, Kansai has received an irrevocable undertaking from the
following fund manager to recommend to its clients to accept the Offer, on its
terms and subject to its conditions, in respect of those Freeworld Shares in
respect of which it has the discretion to recommend that its clients sell or
transfer:
Percentage of Percentage of
Fund Manager Holding Freeworld Shares Target Shares
Public Investment Corporation 13 117 127 6.43% 8.88%
Total 13 117 127 6.43% 8.88%
12. KANSAI`S INTENTIONS REGARDING FREEWORLD MANAGEMENT AND EMPLOYEES
12.1 Kansai views the commitment of Freeworld`s management and employees as
important to the ongoing success of the combined businesses. Given the strategic
nature of the potential combination, Kansai will seek to ensure that, as is the
case with most of its international operations, Freeworld`s management and
employees are given the financial and operational support necessary to manage
and grow Freeworld`s business.
12.2 At this time, Kansai sees no need and has no plans for any form of
rationalisation of Freeworld`s business in the context of the Offer. However,
insofar as the successful implementation of the Offer results in any adverse
effect on the continued employment of Freeworld employees, arising from early
termination of existing contractual arrangements (as a result of conditions
imposed by the competition authorities or otherwise), Kansai will take all
practical measures to mitigate such adverse effects.
13. COMPETITION ASPECTS OF THE OFFER AND PUBLIC INTEREST GAINS AND PRO-
COMPETITIVE GAINS
13.1 The parties meet the asset and turnover thresholds prescribed for an
intermediate merger in terms of the Competition Act, 1998 and the proposed
transaction is therefore subject to Competition Approval.
13.2 Kansai has been advised that the merger between Kansai and Freeworld may be
characterised as having significant pro-competitive and public interest merits,
and that any areas of concern to the competition authorities can be dealt with
in a manner acceptable to Kansai.
13.3 The main purpose of the proposed merger is to secure for Kansai a
decorative coatings business in South Africa, a market segment in which it is
not currently present, and a base for further expansion in sub-Saharan Africa.
The impact of the merger will be to enhance the competitiveness of Freeworld`s
offering in the decorative coatings market.
13.4 Kansai will further acquire Freeworld`s automotive coatings business, a
segment of the market in which Kansai currently has only a marginal presence in
South Africa. It bears emphasis that the only products that Kansai currently
supplies into South Africa are two types of coatings products used by automotive
OEM`s ("OEM Automotive Coatings"), which it supplies to a single customer
through an independent distributor. The OEM Automotive Coatings market is,
therefore, the only relevant market that may be affected, from a competition
perspective, by the merger.
13.5 The effect is likely to be minimal as the proposed merger is primarily
vertical in nature:
13.5.1 Kansai and Freeworld operate at different levels of the supply chain in
South Africa;
13.5.2 Kansai supplies the technology used to produce OEM Automotive Coatings
that are sold into South Africa but does not manufacture in South Africa or
handle the distribution of its products in South Africa;
13.5.3 Freeworld does not own any OEM Automotive Coatings technology. It only
manufactures OEM Automotive Coatings using the OEM technology of E.I. du Pont
Nemours and Company or its subsidiaries, joint ventures, associates or
investments ("DuPont") and is involved in their distribution through a joint
venture, DuPont Freeworld (Proprietary) Limited, which is understood to be
controlled by DuPont; and
13.5.4 the merger, therefore, will bring together an upstream supplier of
technology and a downstream manufacturer of OEM Automotive Coatings.
13.6 Vertical mergers are generally considered to be pro-competitive. As a
result, it is not anticipated that the merger will give rise to significant
competition concerns.
13.7 The likely competition effects of the merger are pro-competitive in that
it, inter alia:
13.7.1 will enhance Kansai`s ability to compete in the supply of OEM Automotive
Coatings in South Africa, principally against DuPont, by far the largest of the
current suppliers; and
13.7.2 will result in the creation of a more effective competitor in South
Africa and, potentially, the rest of Africa, through technology transfer by
Kansai combined with access to Freeworld`s local knowledge.
13.8 From a public interest perspective, the merger:
13.8.1 will result in FDI;
13.8.2 is intended to provide a base for Kansai to expand into Africa, which is
likely to have a positive effect on long-term national employment and to promote
exports from South Africa; and
13.8.3 is expected to benefit the relevant industrial sectors in South Africa as
a result of, amongst others, the development of infrastructure and introduction
of Kansai`s specialised heavy duty and protective coatings in South Africa and
Africa as a whole.
14. KANSAI`S INTENTION WITH REGARDS TO BBBEE
Kansai understands and respects the commercial and social importance of broad-
based black economic empowerment ("BBBEE"), both in the wider context and for
Freeworld. Kansai would like to support Freeworld in its continued efforts to
enhance its BBBEE status (which would include supporting the implementation of a
BBBEE equity transaction), and would like to work with Freeworld to determine
appropriate ways to adopt and implement Freeworld`s wider objectives in relation
to BBBEE.
15. CASH CONFIRMATION
The Standard Bank of South Africa Limited has provided an irrevocable guarantee
to the Securities Regulation Panel, in favour of the offerees under the Offer,
confirming that Kansai has sufficient cash resources available to satisfy the
full cash consideration payable in terms of the Offer, as required by Rule
2.3.2(b) and Rule 21.7 of the Code.
16. DIRECTORS` RESPONSIBILITY STATEMENT
The board of directors of Kansai, having considered all information contained in
this announcement, accepts full responsibility for the accuracy of such
information and certifies that, to the best of its knowledge and belief (having
taken all reasonable care to ensure that this is the case), the information
contained in this document is in accordance with the facts and that nothing that
is likely to affect the import of this information has been omitted.
17. POSTING OF THE OFFER DOCUMENT
Kansai intends on posting the Offer document within the 30-day time period of
Freeworld`s firm intention announcement, as specified by the Code. Kansai will
make a further announcement on SENS with respect to the posting of the Offer
document in due course.
18. RESTRICTIONS ON SALE AND TRADE
Offerees are advised that, should they notify their CSDPs or brokers, as the
case may be, of their acceptance of the Offer in the case of dematerialised
shareholders, or should they surrender documents of title of their Freeworld
Shares and accept the Offer, in the case of certificated shareholders, on or
before the closing date of the Offer (as such date is defined in the Offer
document), or any revised closing date, they are not permitted to sell or trade
such shares until the date the contract of sale and purchase contemplated by the
Offer does not come into effect due to the conditions not being fulfilled and,
in the case of certificated shareholders, the documents of title are returned.
Enquiries
Kansai
Nauman Malik
Head of Corporate Strategy
+603 3341 5333
Nomura
Andrew McNaught
+44 (0)207 102 3475
Jason Hutchings
+44 (0)207 102 1699
Newman Lowther & Associates
Jan Newman
+27 (0)21 673 7000
Ben Lowther
+27 (0)21 673 7000
Financial Dynamics
Grant Henry, +27 (0)11 214 2406 or +27 (0)82 561 7172
Ravin Maharaj, +27 (0)11 214 2410 or +27 (0)83 447 5158
Financial advisors
NOMURA
NEWMAN LOWTHER & ASSOCIATES
Legal advisors
BOWMAN GILFILLAN
PR advisors
FD
Date: 13/12/2010 08:10:02 Produced by the JSE SENS Department.
