| Tue 3 Jul 2012, 7:30 | | AGREED EXIT OF ARROW CREEK AS A BEE SHAREHOLDER AND THE CONSEQUENTIAL RESTRUCTURING OF THE INITIAL BEE TRANSACTION |
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AGREED EXIT OF ARROW CREEK AS A BEE SHAREHOLDER AND THE CONSEQUENTIAL RESTRUCTURING OF THE INITIAL BEE TRANSACTION
ITALTILE LIMITED
Registration number 1955/000558/06
Incorporated in the Republic of South Africa
Share Code: ITE ISIN: ZAE000099123
(a??the Companya?? or a??Italtilea?? or a??the Italtile Groupa??)
AGREED EXIT OF ARROW CREEK AS A BEE SHAREHOLDER OF ITALTILE AND THE CONSEQUENTIAL RESTRUCTURING
OF THE INITIAL BEE TRANSACTION
1. Background
At a general meeting on Thursday, 12 July 2007, Italtile shareholders approved the
implementation by Italtile of a transaction that would introduce a strategic BEE
shareholding to Italtile (a??Initial BEE Transactiona??). In terms of this approval, Italtile was
authorised to issue 88.0 million Italtile shares, equating to approximately 10.7% of the
entire issued ordinary share capital of Italtile, to The Italtile Empowerment Trust (a??BEE
Trusta??), Four Arrows Investments 256 Proprietary Limited (a??Four Arrowsa??) and Arrow
Creek Investments 74 Proprietary Limited (a??Arrow Creeka??), as follows:
a?? 26.4 million Italtile shares to Arrow Creek for a total price of R120.6 million
(a??Arrow Creek Sharesa??);
a?? 35.2 million Italtile shares to Four Arrows for a total price of R160.8 million (a??Four
Arrows Sharesa??); and
a?? 26.4 million Italtile shares to the BEE Trust for a total price of R120.6 million.
In terms of subscription agreements, dated 7 June 2007, between Italtile and Arrow
Creek and Italtile and Four Arrows (a??Four Arrows Preference Share Subscription
Agreementa??), respectively, immediately following the issue of Arrow Creek Shares and
the Four Arrow Shares, Italtile subscribed for 600 000 preference shares in Arrow Creek
for an aggregate subscription price of R120.6 million (a??Arrow Creek Preference Sharesa??)
and 800 000 preference shares in Four Arrows for an aggregate subscription price of
R160.8 million (a??Four Arrows Preference Sharesa??) on the basis that:
a?? the Arrow Creek Preference Shares and the Four Arrows Preference Shares
would yield an annual cumulative dividend equal to 70% of the prime lending rate
from time to time; and
a?? the Arrow Creek Preference Shares and the Four Arrows Preference Shares
must be redeemed by no later than the tenth anniversary of the date upon which
they were subscribed for by Italtile and may be redeemed by Arrow Creek and/or
Four Arrows, at their instance, at any time after the date upon which they were
subscribed for by Italtile and may further be redeemed at the option of Italtile at
any time after the 8th anniversary of the date upon which they were subscribed
for by Italtile.
2. Agreed exit of Arrow Creek as a BEE shareholder of Italtile
Italtile shareholders are advised that Italtile and Aka Capital Proprietary Limited (a??Aka
Capitala??) have reached an agreement dated 28 May 2012 (a??Arrow Creek Sale
Agreementa??) in terms of which Aka Capital and the trustees for the time being of The
Aka Capital Education Trust (a??the Trusta??) will exit the investments which they hold in
Italtile through Arrow Creek. In terms of the Arrow Creek Sale Agreement, Italtile
Ceramics Limited (a??Italtile Ceramicsa??), a wholly owned subsidiary of Italtile, will acquire
100% of the issued ordinary share capital of Arrow Creek for a total consideration of
R100.
As Arrow Creek holds the Arrow Creek Shares as its only asset, the acquisition of 100%
of the issued share capital of Arrow Creek by Italtile Ceramics constitutes a specific
repurchase of the Arrow Creek Shares by Italtile Ceramics (a??Arrow Creek Specific
Repurchasea??) in terms of in terms of section 48 (2)(b) of the Companies Act, 2008 (Act
71 of 2008), as amended (a??the Acta??) and paragraph 5.67 of the Listings Requirements of
the JSE Limited (a??JSEa??).
The Arrow Creek Sale Agreement is subject to the following condition precedent:
a?? Italtile shareholders in general meeting passing a special resolution approving
the Arrow Creek Specific Repurchase in compliance with section 48 of the Act.
3. Consequential restructuring of the initial BEE transaction as it related to
Arrow Creek
i. Purpose of the restructuring of the initial BEE transaction as it
related to Arrow Creek
Italtile requires the Arrow Creek Shares to continue to be owned by a BEE
shareholder. Accordingly, The Italtile Foundation Trust (a??Foundation Trusta??)
has been created in order to acquire the Arrow Creek Shares. The
Foundation Trust is registered as a public benefit organisation and its
objective is to carry on one or more public benefit activities as determined by
its trustees from time to time for the benefit of the Foundation Trust
beneficiaries. At least 85% of all distributions made by the Foundation Trust
will be for the benefit of black people.
In terms of the Foundation Trust deed, at any point in time there shall be
three trustees of the Foundation Trust of whom at least one shall be
appointed by Italtile.
The Foundation Trust will be independent of Italtile and will constitute a non-
public shareholder in terms of the JSE Listings Requirements.
ii. Mechanics of the acquisition of the Arrow Creek Shares by the
Foundation Trust
Arrow Creek and the Foundation Trust have entered into an agreement
dated 28 May 2012 and an addendum thereto dated 25 June 2012 (a??Arrow
Creek Shares Sale Agreementa??) in terms of which, immediately following the
implementation of the Arrow Creek Sale Agreement, the Foundation Trust
will acquire the Arrow Creek Shares from Arrow Creek for an aggregate
purchase consideration of R120.6 million. The price of R4.57 per Arrow
Creek Share is at a 15.03% discount to the 30-day volume weighted average
price of the Italtile shares on 29 June 2012.
The sale of the Arrow Creek Shares to the Foundation Trust constitutes a
specific issue of shares for cash by Italtile Ceramics (a??Specific Issuea??) in
terms of paragraph 5.50(a) of the JSE Listings Requirements.
The Arrow Creek Shares Sale Agreement is subject to, inter alia, the
following conditions precedent:
a?? the shareholders of Arrow Creek passing a special resolution in terms of
section 115 of the Act authorising the sale of the Arrow Creek Shares,
which shares constitute the whole or greater portion of the assets of
Arrow Creek; and
a?? Italtile shareholders in general meeting passing an ordinary resolution
approving the Specific Issue. The ordinary resolution requires approval
by a 75 per cent majority of the votes cast in favour of such resolution by
all Italtile shareholders present or represented by proxy at the general
meeting.
iii. The Italtile Loan
In order for the Foundation Trust to acquire the Arrow Creek Shares, it will
require the necessary funding to pay the R120.6 million purchase
consideration due to Arrow Creek. Such funding will be provided to the
Foundation Trust by Italtile in the form of a loan amounting to R120.6 million
(a??Italtile Loana??).
In terms of the agreement dated 28 May 2012 between the Foundation Trust
and Italtile (a??Italtile Loan Agreementa??), the Italtile Loan is interest free and is
repayable in full on the tenth anniversary of the advance date. Such
repayment shall be made either out of funds available to the Foundation
Trust (other than dividends received by it in respect of any Italtile shares held
by the Foundation Trust whether acquired pursuant to the Arrow Creek Sale
Agreement or otherwise (a??Foundation Trust Sharesa??)) or through the disposal
by the Foundation Trust of all or some of the Foundation Trust Shares
(a??Italtile Loan Settlementa??) subject to pre-emptive rights in favour of Italtile or
its nominee (a??Pre-emptive Rightsa??).
The advance of the Italtile Loan to the Foundation Trust constitutes the
provision of financial assistance (a??Provision of Financial Assistancea??) in
terms of section 44 of the Act.
The Italtile Loan Agreement is conditional upon, inter alia, the following:
a?? Italtile shareholders in general meeting passing a special resolution to
authorise Italtile, in terms of section 44 (3)(a)(ii) of the Act, to provide
financial assistance to Foundation Trust by way of the advance of the
Italtile Loan; and
a?? the implementation of the sale of 100% of the share capital of Arrow
Creek to Italtile Ceramics in terms of the Arrow Creek Sale Agreement.
As security for its obligations to Italtile under the Italtile Loan Agreement, the
Foundation Trust has agreed in terms of an agreement dated 28 May 2012
(a??Pledge Agreementa??) to pledge the Foundation Trust Shares acquired from
Arrow Creek and cede all of its rights, title and interest in and to such
Foundation Trust Shares to Italtile (a??Pledgea??).
The Pledge Agreement is conditional upon the implementation of the Arrow
Creek Sale Agreement.
The Italtile Loan Settlement, Pre-emptive Rights and Pledge all constitute a
specific repurchase of shares (a??Italtile Specific Repurchasea??) in terms of
paragraph 5.69 of the Listings Requirements.
Arrow Creek wishes to use the consideration of R120.6 million received from
the Foundation Trust to redeem the Arrow Creek Preference Shares. Italtile
and Arrow Creek have agreed that the redemption of the Arrow Creek
Preference Shares shall take place for a consideration equal to the
subscription price paid by Arrow Creek for the Arrow Creek Preference
Shares, being R120.6 million.
4. Proposed amendments to the terms and conditions of the Four Arrows
Preference Share Subscription Agreement, which amendments constitute a
related party transaction
iv. Purpose of the proposed amendments
The primary purpose of the proposed amendments to the terms and
conditions of the Four Arrows Preference Share Subscription Agreement
(a??Amendmentsa??) is to facilitate the servicing of the obligations of Four Arrows
towards Italtile under the Four Arrows Preference Share Subscription
Agreement so that Four Arrows may be in a position to enjoy the full benefit
of the Four Arrows Shares which it acquired in terms of the Initial BEE
Transaction. This is intended to be achieved by:
a?? amending the rate at which dividends are calculated on the Four Arrows
Preference Shares, from a variable rate equal to 70% (seventy percent)
of the prime rate based on the Four Arrows subscription price to a fixed
rate of 5% on the Four Arrows subscription price; and
a?? extending the date for the mandatory redemption by Four Arrows of the
Four Arrows Preference Shares to the fifteen year anniversary of the
date upon which they were subscribed for by Italtile.
In addition, Italtile and Four Arrows wish to make provision in the Four
Arrows Preference Share Subscription Agreement for the dividends on the
Four Arrows Preference Shares to be paid to Italtile on the first business day
following the date on which ordinary dividends are declared and paid to Four
Arrows as an ordinary shareholder in Italtile rather than on each anniversary
of the date of issue of the Four Arrows Preference Shares.
v. Related party transaction
The proposed Amendments will qualify as a related party transaction in
terms of Section 10 of the JSE Listings Requirements due to the fact that the
Amendments are a variation of an existing agreement and Mr SI Gama is a
director of Italtile as well as a director of Mafumbuka Investment Holdings
Proprietary Limited (a??Mafumbukaa??), which is the 100% shareholder of Four
Arrows, and an associate of The Phithikeza Trust which is the major
shareholder of Mafumbuka.
The Board has briefed PKF Corporate Finance Proprietary Limited to
prepare an opinion as to whether the Amendments are fair to Italtile
shareholders.
5. Pro forma financial effects
For purposes of the pro forma financial effects the Arrow Creek Specific Repurchase,
Specific Issue, Provision of Financial Assistance, Italtile Specific Repurchase and the
Amendments are referred to as the Transactions.
The table below sets out the unaudited pro forma financial effects of the Transactions on
Italtile. The unaudited pro forma financial effects are presented for illustrative purposes
only and because of their nature may not give a fair reflection of Italtilea??s financial
position and results of operations after the Transactions. It has been assumed for
purposes of the unaudited pro forma financial effects that the Transactions took place
with effect from 1 July 2011 for statement of comprehensive income purposes and 31
December 2011 for statement of financial position purposes. The directors of Italtile are
responsible for the preparation of the unaudited pro forma financial effects.
Per Italtile share Before the After the Percentage change
Transactions Transactions
Basic earnings (cents) 21.7 21.6 (0.46%)
Headline earnings (cents) 21.4 21.3 (0.47%)
Net asset value (cents) 204.9 204.8 (0.05%)
Net tangible asset value (cents) 204.2 204.1 (0.05%)
Weighted average number of shares in issue (million) 919 919 -
Number of shares in issue (million) 919 919 -
Notes:
1. The a??Before the Transactionsa?? basic earnings, headline earnings, net asset value and net tangible asset value
per Italtile share have been extracted without adjustment from the reviewed, published results of Italtile for the six
months ended 31 December 2011.
2. Basic earnings, headline earnings, net asset value and net tangible asset value per Italtile share have been
adjusted for the following:
a. Transaction costs amounting to R0.9 million. The transaction costs will not have a continuing effect on
Italtilea??s statement of comprehensive income;
3. There is no IFRS 2 charge as a result of the Transactions due to the fact that the proposed Transactions result in
amendments to the Initial BEE Transaction which was valued on the inception date, rather than a cancellation of
the Initial BEE Transaction. IFRS 2 requires that the amended Transactions be valued and the IFRS 2 expense
incurred in terms of the amended conditions be compared to the IFRS 2 expense incurred under the original
conditions. Only the incremental IFRS 2 cost need be expensed. Based on an assessment of the primary drivers
of the actuarial valuation, the IFRS 2 expense in terms of the amended conditions is not materially different to the
IFRS 2 expense, amounting to approximately R25.0 million, incurred under the original conditions and, therefore,
no incremental IFRS 2 expense has been recognised in the pro forma financial effects.
6. Proposed amendments to the Italtile long-term incentive plan (a??LTIPa??) and
the Italtile share appreciation rights scheme (a??SARSa??)
The provisons of Schedule 14 of the Listings Requirements were amended with effect
from 15 October 2008. As a result of these amendments it has become necessary to
amend certain rules of the LTIP and the SARS.
At the general meeting convened for the purpose of approving the resolutions relating to
the Arrow Creek Specific Repurchase, the Specific Issue, the Provision of Financial
Assistance, the Italtile Specific Repurchase and the Amendments, Italtile shareholders
will be asked to approve the proposed amendments to the LTIP and the SARS.
7. Documentation
A circular containing the information required in terms of the JSE Listing Requirements
and incorporating a notice convening an Italtile general meeting to approve the
implementation of the Transactions detailed above will be posted to beneficial Italtile
shareholders on or about Friday, 13 July 2012.
8. Salient dates and times
2012
Record date to be entitled to receive notice of the general meeting Friday, 6 July
Circular posted to Italtile shareholders on Friday, 13 July
Last day to trade Italtile shares in order to be eligible to participate and vote at the Friday, 27 July
general meeting
Record date to be entitled to participate in and vote at the general meeting Friday, 3 August
Forms of proxy for the general meeting to be received by 11:30 on Friday, 10 August
General meeting to be held at 11:30 on Tuesday, 14 August
Results of the general meeting released on SENS on Tuesday, 14 August
Notes
1. These dates and times are subject to amendment. Any such amendment will be released on SENS.
Bryanston
2 July 2012
Sponsor Legal advisor
KPMG Services (Pty) Limited Eversheds
Independent expert Reporting accountant and auditor
PKF Corporate Finance (Pty) Limited Ernst & Young Inc
Date: 03/07/2012 07:30:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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