| Mon 28 Oct 2002, 17:08 | | Comparex - Statement by the Comparex board |
|
Comparex - Statement by the Comparex board
Comparex Holdings Limited
(Incorporated in the Republic of South Africa)
(Registration number 1994/002506/06)
("Comparex" or "the company")
Share code: CPX
ISIN: ZAE000016812
Statement by the Comparex board
1. Introduction
Comparex shareholders are referred to the various
advertisements and reports concerning Comparex that have
appeared in the press over the past 10 days. These have
contained incorrect and misleading statements that Comparex
wishes to correct.
On Tuesday, 29 October 2002 shareholders will be asked to vote
on a resolution to approve the disposal of the European
operations of Comparex ("Comparex Europe") to Montefiore
Limited ("Montefiore") a company incorporated for the purpose
of acquiring Comparex Europe and in which certain members of
the management of Comparex Europe have an interest ("the
proposed MBO"). The purchase consideration to be paid by
Montefiore in respect of the proposed MBO is Euro10 million
(R103,0 million at an exchange rate of R10,3/Euro1) plus all
the shares in and claims against Mosaic Software Holdings
Limited ("Mosaic") held by Comparex Europe, being
approximately 35% of the issued share capital of Mosaic ("the
increased purchase consideration").
2. Alternatives available to Comparex
Background
Comparex Europe has, since the 2001 financial year,
experienced significant trading difficulties due to the
economic slow-down in the European IT market which has been
exacerbated by increased competition. This has led to
declining margins, especially within its product-focused
businesses. To date Comparex Europe has not yet been
successful in its strategy of repositioning itself as an
integrator of cost efficient IT solutions.
When Comparex Europe started incurring losses, members of the
board of Comparex at the time discussed the possibility of
disposing of Comparex Europe and the chief executive officer
was mandated to discreetly seek opportunities in this regard.
Pending any transaction in this regard, the board at the time
("the former Board") agreed that Comparex Europe should remain
committed to its repositioning strategy and that the cash
resources of Comparex, including the cash resources held in
South Africa should be used prudently to continue to support
and grow Comparex Europe. However, the former Board
instructed management to proceed with extreme caution and any
acquisition would require the approval of the former Board.
This position was communicated to shareholders in an
announcement on 3 June 2002, which announcement also included
a warning that Comparex Europe would report a substantial
trading loss for the second half of the 2002 financial year.
As a result of the above strategy, certain of the major
institutional shareholders of Comparex expressed their desire
to have the board of Comparex reconstituted. Shortly
thereafter, Messrs DC Arnold, RKJ Chambers, DH Erasmus, DW
Henwood and HO Hetz resigned voluntarily from the board and
the remaining directors co-opted 5 new non-executive nominees
to the board on 25 June 2002 ("the reconstituted Board").
Subsequently, one newly appointed director resigned for
personal reasons. No other non-executive director has
resigned since such reconstitution.
The reconstituted Board immediately undertook a review of the
strategy proposed by the former Board. Comparex Europe`s
projections for the current year reflected that Comparex
Europe could lose in excess of Euro 20 million. These
projections anticipated the successful migration of the
Comparex Europe business model to a value added integrator of
cost efficient IT solutions and a significant improvement in
the European IT markets in the second half of the current
financial year.
Having considered all the alternatives, the majority of the
reconstituted Board were of the view that there was no
reasonable prospect of Comparex Europe, as then structured,
returning to profitability in the foreseeable future.
Furthermore the reconstituted Board did not consider that the
prospects of returning to profitability following a
restructuring exercise justified the costs and risks involved.
The reconstituted Board believed that there was a risk that
these projections might not materialise timeously and,
accordingly, that there was a reasonable prospect that
Comparex Europe would incur greater cash losses than those
projected by the management of Comparex Europe (Comparex
Europe had fallen far short of its projections in both of the
prior two years).
Consequently, the majority of the reconstituted Board was not
prepared to commit further cash to the restructuring nor to
fund the continuing trading losses (currently behind Comparex
Europe`s managements projections and expected to be
approximately Euro17 million for the five months to end
October 2002) and therefore resolved that Comparex Europe
should be sold or closure be investigated.
2.2 Closure analysis
An investigation into the impact and financial effects of
closure or liquidation of the business was then carried out.
This evaluation included consultation with legal advisers in
South Africa and Europe. European labour laws and practices
require retrenchment packages substantially in excess of those
which would apply under similar circumstances in South Africa.
The following closure scenarios, inter alia, were investigated
as at 30 June 2002 and presented to the reconstituted Board on
26 August 2002:
A closure of Comparex Europe in terms of which Comparex agreed
to meet all of its obligations to the staff, customers and
suppliers of Comparex Europe, would have consumed all of the
cash in Comparex Europe as well as requiring an additional
Euro153 million, which could only be funded from Comparex`s
South African cash. This alternative was rejected.
The alternative of placing Comparex Europe in liquidation and
seeking to repatriate any cash not forming part of the
liquidated businesses would have resulted in staff only
obtaining the statutory minimum retrenchment package to the
extent cash was available in the respective operating
companies and customers and supplier obligations would not be
met in full. Significant litigation and reputation risk
attached to this alternative. On this basis, it appeared that
approximately Euro32 million could be remitted back to South
Africa assuming no successful litigation against either
Comparex Europe or Comparex. The reconstituted Board believed
this to be highly unlikely. Further, the reconstituted Board
believed that this would be inappropriate as this alternative
would have a profound impact on the staff, suppliers and
customers of Comparex Europe and Comparex Africa. This
alternative was therefore also rejected.
A middle road calculation was performed in terms of which
Comparex Europe met as many of its obligations to its staff
and suppliers as it considered necessary and appropriate for
the avoidance of major disturbance to Comparex Africa ("the
middle road scenario"). It appeared that approximately Euro8,4
million could be remitted back to South Africa under this
scenario. This middle road scenario was the basis used for
evaluating the proposed MBO and is set out in more detail
below.
The key conclusions of this middle road scenario were that:
* as a result of the liabilities that would crystallise on
closure (specifically retrenchment liabilities) Comparex
Nederland BV ("CNBV"), the Dutch operating company and holding
company of all the regional operating companies, and all the
main operating companies under CNBV would be insolvent if
closed and unable to meet their responsibilities to creditors;
* Comparex UKLimited ("Comparex UK") does not trade and
performs management services, including a head office function
for Comparex Europe. It has no capital of its own and would
also be insolvent if closed;
* some of the cash held in PQICC SA ("PQICC") (the European
treasury operation) would be unencumbered by liabilities and
would possibly be available for repatriation to South Africa
if this company was liquidated.
At the time it was estimated that, under the middle road
scenario, although Euro70 million of cash was held in PQICC,
only approximately Euro 8,4 million would be able to be
remitted to Comparex. This would be after settling:
* the repayment of cash held on deposit by PQICC on behalf of
* the operating companies of Comparex Europe;
* the liabilities of Comparex UK to Messrs WA Du Plessis, JR
Cohen, KRM Evans and S Carlin ("the European executive
directors") under long term service contracts entered into by
the remuneration committee of the former Board towards the end
of last year and which had been guaranteed by Comparex and
PQICC; and
* the liabilities of the operating companies within Comparex
Europe to key suppliers.
The payment by Comparex of the obligations to the European
executive directors and key suppliers may be subject to the
approval of the Exchange Control Department of the South
African Reserve Bank ("SARB").
2.3 The current situation
With trading losses continuing (currently estimated at
qEuro3,5 million per month), negative working capital
movements and revised amounts due in respect of certain
obligations, the current position in relation to the "free"
cash in Comparex Europe is as follows:
PQICC free cash estimate as at 21 Euro`000
October 2002
Total cash on hand 21 October 2002 50 690
(Note 2.3.1)
less : deposits held on behalf of (16 982)
operating entities
33 708
Liabilities of PQICC (Note 2.3.2)
- closure costs (creditors, (2 534)
retrenchments and lease termination
costs)
31 174
Group liabilities committed to
- retrenchments in Comparex UK and (1 567)
Comparex Deutscheland Holding GmbH
("CDH") (Note 2.3.3)
Total prior to meeting any group 29 607
liabilities
Retrenchment costs of European (5 837)
executive directors (Note 2.3.4)
Estimated liabilities (of operating (10 000)
companies) to key suppliers (Note
2.3.5)
Total available 13 770
2.3.1 As a result of continuing losses and more
restrictive working capital constraints, the operating
companies have drawn on their deposits with PQICC and the cash
held in PQICC has reduced from qEuro70 million to qEuro50
million.
2.3.2 In any closure scenario, the staff of PQICC would
need to be retrenched, creditors settled and lease obligations
terminated.
2.3.3 Subsequent to the MBO proposal it has been agreed
that PQICC would fund certain retrenchment obligations in
Comparex UK and CDH which retrenchments would have to be
effected irrespective of whether the MBO proposal is accepted
or not.
2.3.4 A material cost attributable to the closure of
Comparex Europe would have been the potential settlement of
the service contracts of the European executive directors.
In October 2001 and at the request of the chief executive
officer, Mr WA du Plessis, the remuneration committee of the
former Board authorised the conclusion of fixed period
employment contracts with all the relocated executives,
including the European executive directors.
In terms of their employment contracts, the cost of
termination and/or retrenchment, with effect from 31 October
2002, for each of the European executive directors would be as
follows:
Amount due as at 31
European executive October 2002
director Euro`000
WA du Plessis 1 899
KRM Evans 1 472
JR Cohen 1 233
S Carlin 1 233
Total 5 837
These employment contracts are fixed term contracts and
therefore reduce as the term of the period runs down.
2.3.5 The reasoning behind the assumption that the
liabilities to key suppliers would have to be met is:
The agreements with the major suppliers are agreements which
cover the liabilities of the entire Comparex Group. These
contracts have Comparex as either the main contracting party
or the guarantor for the Group`s liabilities.
The key suppliers to Comparex Europe are also the key
suppliers to Comparex Africa. It was therefore imperative
that the suppliers would need to be settled in Europe if the
relationships and terms in South Africa are to be maintained.
A closure was therefore considered a much less attractive
alternative than a sale on similar terms. A sale would also
have secured the ongoing employment of a substantial number of
the European staff, a significant factor in the reconstituted
Board`s decision process.
2.4 Sale
2.4.1 Requirement for speed
The period of uncertainty that had arisen from the issue of
the initial trading statement in early June 2002 and the
shareholder dissatisfaction that immediately followed had
exacerbated the ongoing poor performance of Comparex Europe.
This had unsettled staff, suppliers and customers and trading
losses were continuing at qEuro3,5 million per month.
In the light of this, Comparex was required to take urgent
steps to find a potential buyer for Comparex Europe as an
alternative to its closure. The European executive directors
had recommended to the reconstituted Board that it should
continue the business of Comparex Europe with the support and
funding from Comparex. This then led to the reconstituted
Board inviting the European executive directors of Comparex to
table a proposal for the acquisition of Comparex Europe. A
proposal ("the proposed MBO"), as detailed in previous
announcements and the circular to Comparex shareholders dated
14 October 2002, was then presented to the reconstituted
Board, negotiated on an arms-length basis and finally accepted
by the reconstituted Board as a better alternative than
closure.
2.4.2 Search for higher offer
During the period up to 31 October 2002, an ongoing effort
would be maintained to find a third party buyer for Comparex
Europe in an effort to improve upon the purchase consideration
proposed by the MBO team and hence the cash receipt to
Comparex.
Comparex and its advisors have contacted a number of parties,
both international and local, in an attempt to elicit further
bids for Comparex Europe. Where any degree of interest was
shown, preliminary information was disclosed to such parties
under confidentiality agreements.
Pursuant to this process only one party, a private company
with IT and telecom interests in Europe ("the 3rd Party"),
made an indicative offer for Comparex Europe.
The offer was considered attractive and the 3rd Party was
permitted to commence a due diligence investigation. At the
same time the MBO team agreed to increase its purchase
consideration in the context of the 3rd Party`s indicative
offer.
Negotiations are continuing with the 3rd Party in an attempt
to clarify and confirm a firm offer before the proposed MBO
must be voted upon. Comparex shareholders will be notified of
the outcome of these negotiations at the general meeting to be
held on 29 October 2002.
3. Cash available to Montefiore
The proposed MBO agreement does not enable the transfer of
Euro70 million "free cash" to Montefiore as soon as the deal
is approved. Paragraph 2.3 above sets out the remainder of the
cash available in PQICC at this stage.
Further, in terms of the proposed MBO agreement, Montefiore
has undertaken that it will not for a period of twelve months
place any or all of Comparex Europe`s companies into a
members` voluntary liquidation or permit or procure that any
of the Comparex Europe companies makes a distribution of
either capital or income to Montefiore without paying this to
Comparex.
However, Montefiore is able to receive, either by way of a
distribution of either capital or income to Montefiore, the
following amounts:
* the amount to be paid to Comparex, being the increased
purchase consideration, plus interest thereon; and
* that amount as is required to settle the obligations to the
European executive directors under their employment contracts
to the extent that this amount is not settled to the European
executive directors in any other way.
4. Detail on Montefiore
Montefiore is a company newly incorporated and registered in
Jersey. As it is a private company, annual financial
statements are not available to the public. Comparex has been
informed that:
* the equity of Montefiore will be owned by Messrs WA du
Plessis, JR Cohen, R Krieger and Dr K Elsbacher as well as
other members of the staff of Comparex Europe;
* an appropriate percentage of the equity (approximately 20%)
has been reserved for and will be allocated to a financier;
and
* Messrs WA du Plessis and JR Cohen will respectively hold 15%
and 10% of the equity in Montefiore and Messrs KRM Evans and S
Carlin will have no direct or indirect interest in the equity
of Montefiore.
5. Potential liabilities
Montefiore has given an undertaking that Comparex would be
released from any guarantees given by Comparex to suppliers or
staff of Comparex Europe. Montefiore has further indemnified
Comparex against all claims that are made against Comparex
within 12 months from the effective date that are based upon
primary liabilities of Comparex Europe.
Comparex has received legal advice to the effect that any
claims against Comparex from creditors ofComparex Europe (in
the case of a potential liquidation of Comparex Europe after
the implementation of the proposed MBO disposal) are highly
unlikely to succeed.
6. Attitude of Comparex employees
It has been reported that the proposed MBO has received a vote
of no confidence by Comparex employees in that the employee
share option schemes ("the Schemes") propose to vote against
the proposed MBO.
The trustees of the Schemes are, inter alia, Messrs R Marnitz,
RKJ Chambers and DW Henwood, all members of the former Board.
Although they hold no office in Comparex, they have not
resigned as trustees of the Schemes. In exercising their votes
against the proposed MBO they have not consulted with Comparex
employees, nor the reconstituted Board.
7. Directors opinion statement
Comparex shareholders are again referred to the opinion of the
reconstituted board detailed in the circular to shareholders
dated 14 October 2002 in which the board, excluding the
European executive directors, has considered the terms of the
proposed MBO and is of the opinion that the terms are fair and
reasonable to Comparex shareholders. It is the view of the
board, excluding the European executive directors, that the
proposed MBO is likely to yield the best outcome to Comparex
shareholders bearing in mind the alternatives available and
the continuing difficult trading conditions experienced by
Comparex Europe. The European executive directors recused
themselves from considering and voting on the proposed MBO
disposal.
8. Conditions precedent
The proposed MBO is still subject to the fulfilment or waiver,
on or before 31 October 2002, of, inter alia, the following
conditions precedent:
* the approval of the proposed MBO by Comparex shareholders in
general meeting;
* the written consent from Merrill Lynch under three existing
agreements between Comparex International (Pty) Limited
("CI"), Merrill Lynch South Africa (Pty) Limited and Merrill
Lynch Capital Markets Bank Limited dated 25 September 1998 and
4 October 1998 in terms of which CI obtained a loan facility
of R380 million from Merrill Lynch Capital Markets Bank
Limited and deposited an amount of R380 million with Merrill
Lynch South Africa (Pty) Limited, insofar as such consent is
required; and
* the approval of the proposed MBO by SARB.
9. General meeting
Comparex shareholders are reminded that the circular in
respect of the proposed MBO and the notice of general meeting
to be held on Tuesday, 29 October 2002 was posted to
shareholders on Monday, 14 October 2002.
The general meeting of Comparex shareholders will be held in
the auditorium at Block Q, Comparex Park North, 789 16th Road,
Randjespark, Midrand at 09h30 on Tuesday, 29 October 2002 for
the purpose of considering and, if deemed fit, passing with or
without modification, the necessary resolution to approve and
implement the proposed MBO.
Comparex shareholders are urged to attend this important
meeting.
Midrand
28 October 2002
Date: 28/10/2002 04:55:00 PM Produced by the JSE SENS Department
