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Kersaf Investments Limited - Proposed disposal by Kersaf
KERSAF INVESTMENTS LIMITED
ISN NUMBER - ZAE000003844
SHARE CODE - KER
("KERSAF")
ANNOUNCEMENT TO KERSAF SHAREHOLDERS REGARDING:
THE PROPOSED DISPOSAL BY KERSAF AND ITS SUBSIDIARIES ("THE GROUP") OF THE
MAJORITY PORTION OF ITS KERZNER INTERNATIONAL LIMITED ("KZL") SHARES ("THE
PROPOSED DISPOSAL");
THE AGREEMENT CONCLUDED BETWEEN THE GROUP AND KZL ("THE KZL AGREEMENT"); AND
THE ACQUISITION BY A WHOLLY-OWNED SUBSIDIARY OF KERSAF OF THE 26,7% OF SUN
INTERNATIONAL MANAGEMENT LIMITED ("SIML") THAT IS NOT ALREADY INDIRECTLY OWNED
BY KERSAF ("THE SIML ACQUISITION").
1. INTRODUCTION
Pursuant to the Group`s ongoing assessment of its structure and various
investments and operations:
* the Group will endeavour to conclude the proposed disposal, subject to Kersaf
shareholder approval;
* the Group has concluded the KZL agreement; and
Kersaf has concluded the SIML acquisition with Cement Merchants SA ("CMSA").
The conclusion of the proposed disposal, the KZL agreement and the SIML
acquisition are consistent with Kersaf`s objectives of unlocking shareholder
value. Furthermore these actions will enable the Group to more rapidly implement
further strategies the objective of which is to simplify the Group`s structure
and enhance shareholder value.
2. THE PROPOSED DISPOSAL
2.1 Introduction
In terms of restructuring agreements concluded between the Group and KZL on
3 July 2001 ("the restructuring agreements"), the Group undertook to sell
2 000 000 KZL (formerly Sun International Hotels Limited) shares by 30 June
2002 ("the compulsory sale"). The compulsory sale date was initially
extended to 30 October 2002 and a further extension to 28 February 2003 has
now been agreed.
The Group now proposes to sell up to a maximum of 4 025 000 KZL shares
indirectly owned by Kersaf and Kersaf intends convening a general meeting
of its shareholders for the purpose of considering the ordinary resolution
necessary to approve the proposed disposal.
2.2 Information on KZL
KZL is a leading developer and operator of premier casinos, resorts and
luxury hotels and is listed on the New York Stock Exchange ("the NYSE").
KZL`s flagship destination is Atlantis, a 2 317 room, ocean-themed resort
located on Paradise Island, The Bahamas. Atlantis is a unique destination
casino resort featuring three interconnected hotel towers built around a 7-
acre lagoon and a 34-acre marine environment that includes the world`s
largest open-air marine habitat. KZL also developed the Mohegan Sun in
Uncasville, Connecticut from which it receives certain revenues. Following
the completion of a US$1 billion expansion, the Native American-themed
Mohegan Sun has become one of the premier casino resort destinations in the
United States of America ("United States"). In the luxury resort hotel
business, KZL operates nine luxury resorts in the Bahamas, Mauritius,
Dubai, the Maldives and Mexico, and has entered into a management and
development agreement for a tenth property in the Maldives.
The closing market price of KZL shares on 5 November 2002 was US$21,75 per
share (approximately R215 per KZL share). As at 5 November 2002, Kersaf
effectively held 19.16% (5 230 677 shares) in KZL, at which date the value
of its effective shareholding amounted to US$ 113,8 million (approximately
R1 126 million).
2.3 Rationale for the proposed disposal
2.3.1 The compulsory sale
The Group is obliged, in terms of the compulsory sale, to sell at
least 2 000 000 shares in KZL in terms of the public offering in the
United States to be arranged by KZL on its behalf ("the public
offering"). The shares will be registered for sale in a public
offering with the United States Securities and Exchange Commission
("the SEC").
2.3.2 Rationale for increasing the public offering
Investment bankers and potential underwriters to the proposed public
offering in the United States have indicated that it would be
advantageous to the Group to make available a higher number of KZL
shares in the public offering than was envisaged in the compulsory
sale. The higher number of shares should increase the interest of
potential investors by improving liquidity in KZL shares on the NYSE
and by removing a greater proportion of the potential overhang
resulting from the Group`s stated intention of disposing of its
holdings in KZL over time. Consequently, Kersaf proposes to increase
the size of the public offering to include the sale of up to a maximum
of 4 025 000 of Kersaf`s indirectly held KZL shares.
2.4 Proceeds from the proposed disposal
US$32 million of the proceeds from the proposed disposal will be utilised
to discharge the Group`s obligations in terms of the KZL agreement. The
balance will be utilised to settle certain other liabilities of the Group,
to partly fund the SIML acquisition and to distribute excess funds to
Kersaf. The Board of Kersaf will consider the distribution of excess cash
to Kersaf shareholders. Such distribution will to a large extent be
determined by the relative success of the public offering.
2.5 Number of KZL shares
The number of KZL shares to be disposed of by the Group will, depending on
the interest shown in the shares by potential investors, be up to a maximum
of 4 025 000 KZL shares which includes 525 000 KZL shares that may be
required to be sold in the event that the underwriters exercise their
overallotment option. The underwriters` overallotment option is the
mechanism that allows the underwriters of the public offering to provide
price support for the shares. Typically, an overallotment option gives the
underwriters the right to purchase up to an additional 15% of the shares to
be sold to buyers in the public offering. The underwriters fill the
additional allocation in the event that the price holds at or above the
public sale price after pricing and allocation or alternatively is filled
by shares acquired by the underwriters in the market in the event that the
share price weakens after pricing and allocation.
The sale of the increased number of KZL shares will discharge the Group`s
obligation in terms of the compulsory sale.
2.6 Kersaf shareholders approval
Although the compulsory sale in itself does not require approval from
Kersaf shareholders, the sale of up to a maximum of 4 025 000 KZL shares
will require the approval of Kersaf`s shareholders in terms of the Listings
Requirements of the JSE Securities Exchange South Africa.
The pricing of the proposed disposal cannot be determined at this stage but
will be determined after the shares have been registered with the SEC in
discussion among the underwriters and Kersaf. Kersaf may withdraw from the
proposed disposal if the public offering does not realise sufficient
interest or realistic pricing. The Board of Kersaf will therefore request
Kersaf shareholders to approve the proposed disposal and give the Board of
Kersaf the authority to dispose of as many KZL shares as it deems
appropriate, but limited to a maximum of 4 025 000, at the most favourable
possible prices. In this regard the Board of Kersaf intends calling a
general meeting of Kersaf shareholders to obtain the requisite approvals.
2.7 Financial effects of the proposed disposal
The table below sets out the financial effects of the proposed disposal on
a Kersaf shareholder on the basis that the proposed disposal was effective
1 July 2001 for the calculation of headline earnings per share and was
effective on 30 June 2002 for the calculation of net asset per share:
Before Adjustments After Change
(5)
Earnings per share (330) (140) (470) (42%)
(cents) (1) (3)
Headline earnings per 58 55 113 95%
share (cents)(1) (3)
Net asset value per 3 207 (195) 3 012 (6)%
share (cents)(2) (4)
Notes:
(1) Based on the weighted average number of Kersaf shares in issue of
90 050 000 for the twelve month period ended 30 June 2002.
(2) Based on the number of Kersaf shares in issue of 90 050 000 at 30 June
2002.
(3) Assumes 3 500 000 KZL shares indirectly owned by Kersaf are sold for
US$21,75 each on 1 July 2001 and that an after-tax interest rate of 7%
was earned on the proceeds in South Africa. US$ amounts have been
translated into Rand amounts using the 30 June 2002 R/US$ exchange rate
of R10,225/US$1. It has also been assumed that share realisation costs
of 5,5% were incurred on the disposal of KZL shares.
(4) Assumes 3 500 000 KZL shares indirectly owned by Kersaf are sold for
US$21,75 each on 30 June 2002. US$ amounts have been translated into
Rand amounts using the 30 June 2002 R/US$ exchange rate of
R10,225/US$1,00. It has also been assumed that share realisation costs
of 5,5% were incurred on the disposal of KZL shares.
(5) Based on the Kersaf Annual Financial Statements for the year ended 30 Jun
2002 ("Kersaf 2002 AFS") referred to in paragraph 5 below.
The table above has been prepared for illustrative purposes only. The financial
effects of the proposed disposal will be announced to the shareholders of Kersaf
on the completion of the public offering by KZL on behalf of the Group.
2.8 United States Securities Laws Legend
This announcement and the information contained herein is not an offer of
the KZL shares for sale in the United States, and the KZL shares may not be
offered or sold in the United States absent registration with the SEC or an
exemption from registration. Any public offering of the KZL shares to be
made in the United States will be made by means of a prospectus that may be
obtained from KZL or Kersaf and will contain detailed additional
information about KZL and its management as well as financial statements.
3. THE KZL AGREEMENT
3.1 Introduction
Pursuant to the Group`s decision to conclude all the outstanding issues
with KZL, the KZL agreement has been concluded, in terms of which SIML has
agreed to pay KZL an amount of US$32 million. In terms of the KZL agreement
the annual KZL payment will terminate with immediate effect, KZL will waive
its rights under the Egypt project and KZL has agreed to terminate the
litigation and to release and discharge the Group from, inter alia, all
actions and claims in terms of the litigation or any related actions.
3.2 Annual KZL payment
Kersaf stated in the Reviewed Preliminary Profit Announcement for the year
ended 30 June 2002, published in the press on 30 August 2002, that SIML had
an onerous contractual obligation to KZL, which arose as part of the
formation of KZL in 1993 at which date the Group received shares in KZL.
During the 2002 financial year the Group raised a long-term liability in
respect of this contractual obligation. The contractual obligation was for
approximately US$3,2 million per annum (escalating by 3,3% per annum) until
2008 ("the KZL payment"), the present value of which was US$18,7 million at
30 June 2002. Based on further advice and reassessment the Group has reason
to believe that the termination date of 2008 is not certain and is likely
to be disputed by KZL on the grounds that such annual payment to KZL, or a
portion thereof, may continue indefinitely. This could have the impact of
significantly increasing this liability above the US$18.7 million.
3.3 The Egypt project
As part of the restructuring agreements SIML and KZL agreed to share the
proceeds arising from the management agreement that SIML has secured for a
resort on the Red Sea Coast in Egypt, which is expected to be completed in
2005. In terms of the Group`s intention to terminate the various
outstanding issues and arrangements with KZL, SIML has, in terms of the KZL
agreement, acquired ownership of 100% of the fee flows from the Egypt
project.
3.4 Litigation
In terms of an announcement published on SENS on 17 October 2002 Kersaf
shareholders were advised that the legal action that was initiated by KZL
against the Group was dismissed by the Supreme Court of the State of New
York on the basis of New York not being the appropriate forum in which to
hear the matter. In terms of the ruling the Group has confirmed its earlier
consent to the High Court of England having jurisdiction over the matter.
The litigation was based on alleged contractual contraventions and other
alleged wrongful conduct on the part of the Group. Following the decision
handed down by the Supreme Court of the State of New York and reported to
shareholders on 17 October 2002, KZL has given notice of its intention to
appeal the decision and has also indicated that it intends bringing an
action in the United Kingdom.
3.5 Rationale for the KZL agreement
The Group concluded the KZL agreement primarily due to the fact that it
will:
* enable SIML to settle the KZL payment on commercial terms;
* provide certainty to SIML and the Group in relation to the KZL payment;
* enable the Group to terminate the litigation without a prolonged,
acrimonious and costly court battle with KZL;
* enable the Group to consider all restructuring and future opportunities
without the impediments and negative effects of the litigation and the
uncertainty regarding the KZL payment; and
* enable Kersaf management to focus on the core activities of the Group.
3.6 Funding of the KZL agreement
Upon the successful implementation of the proposed disposal or
alternatively the compulsory sale, it is intended that part of the proceeds
from the sale of the KZL shares will be used to fund the US$32 million
payment. In the event that the public offering is not successfully
implemented by 2 December 2002, SIML will discharge the obligation by
issuing a promissory note ("the note") to KZL. The note will be due on the
earlier of the successful implementation of the public offering or 2
December 2003. The note may be discharged in whole or in part and the
outstanding portion of US$32 million shall bear interest at a rate of seven
percent for the period from 2 December 2002 to 31 May 2003 and at a rate of
ten percent for the period from 1 June 2003 to 2 December 2003.
4. THE SIML ACQUISITION
4.1 Background to the SIML acquisition
Kersaf, through Royale Resorts Holdings Limited ("Royale") has an effective
73,3% interest in SIML, a company that manages the Group`s resort and
casino operations. CMSA (a company controlled by the von Rantzau family)
indirectly owns the remaining 26,7% of SIML through Royale in which CMSA
exercises joint control over all significant decision making. Kersaf has
entered into a binding "Heads of Agreement" with CMSA in terms of which a
wholly-owned subsidiary of Kersaf will, subject to certain conditions
precedent, conclude the SIML acquisition. In addition, this agreement gives
Kersaf the right to unilaterally deal with all of the KZL shares it
indirectly owns through Royale.
4.2 Rationale for the SIML acquisition
Kersaf concluded the SIML acquisition due to the fact that:
* the SIML acquisition will bring about a simplification of the Group
structure which should enhance Kersaf`s value;
* it represents an additional investment in the Group`s core gaming and
resorts activities;
* Kersaf will have full control over the cash flows and operations of SIML;
* Kersaf supports a number of assets managed by SIML (by standing surety
and issuing guarantees) and yet only receives 73,3% of the benefits of
the related management contracts. If Kersaf is required to invest equity
and support projects, it should derive 100% of the benefits of the
support by receiving 100% of the benefits of the management contracts;
and
* it creates the ability to significantly restructure the Group which in
the past was significantly hampered by the joint control and "lock-up" of
the KZL shares in the Royale structure.
4.3 Purchase consideration for the SIML acquisition
The purchase consideration for the SIML acquisition is US$ 9,0 million and
450 000 KZL shares owned by Kersaf which equates to approximately US$ 18,8
million at the current market price of KZL shares ("the purchase
consideration"). If, for whatever reason, the public offering is not
successful, the purchase consideration will be 850 000 KZL shares
(approximately US$ 18,5 million at the current market price of KZL shares).
4.4 Mechanics of the SIML acquisition
The SIML acquisition will be implemented by a wholly owned subsidiary of
Kersaf acquiring 100% of SIML from subsidiaries of Royale for the purchase
consideration and Royale distributing the purchase consideration to its
shareholders.
4.5 Financial effects of the SIML acquisition
The financial effects of the SIML acquisition on a Kersaf shareholder based
on the 2002 Kersaf AFS will not be material.
5. ADJUSTING POST BALANCE SHEET EVENT
In terms of the applicable accounting standards, the KZL agreement detailed in 3
above represents an adjusting post balance sheet event and consequently the
US$18.7 million liability has been increased to US$30 million at 30 June 2002 to
include the additional costs of the onerous contract in the form of the KZL
payment and termination of the litigation. The acquisition of the Egypt fee
flows for US$2 million will be dealt with in the 2003 financial year. The
increase in the liability as at 30 June 2002 has resulted in no change in
headline earnings per share at 58 cents per share, and the basic loss per share
increasing from 227 cents per share to 330 cents per share and the net asset
value per share decreasing from R33,10 per share to R32,07 per share. The Kersaf
2002 AFS will be incorporated in the circular referred to in paragraph 7 below.
6. PUBLICATION OF THE KERSAF ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2002
The publication of the full Kersaf annual report for the year ended 30 June 2002
has been delayed as a consequence of the significance of the transactions
outlined in this announcement. It is intended that publication and posting of
the Kersaf annual report will take place during December 2002.
7. GENERAL MEETING OF KERSAF SHAREHOLDERS
A general meeting of Kersaf shareholders will be held on or about Wednesday, 27
November 2002 for the purpose of considering the ordinary resolution necessary
to approve the proposed disposal. A circular incorporating a notice of the
general meeting and a form of proxy is in the process of being prepared and will
be sent to Kersaf shareholders on or about 12 November 2002.
Sandton
6 November 2002
Merchant Bank Corporate Law advisers
Investec Corporate Finance Edward Nathan Friedland
Sponsor
Investec Bank Limited
Date: 06/11/2002 02:00:00 PM Produced by the JSE SENS Department
