| Fri 19 Dec 2003, 17:31 | | Introduction of a Black Economic Empowerment ("BEE |
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Sail Group Limited - Introduction of a Black Economic Empowerment ("BEE") into
SSE and repurchase of a put option
SAIL GROUP LIMITED
(Incorporated in the Republic of South Africa)
(Registration number: 1941/014601/06)
Share Code: SIL ISIN Code: ZAE000039962
("SAIL" or "the Company")
Introduction of a Black Economic Empowerment ("BEE") into SSE
and repurchase of a put option
1. Introduction
Further to the cautionary issued by SAIL on 11 November 2003 Nedbank Corporate
Finance is authorised to announce that SAIL has entered into:
- an agreement regarding the introduction of BEE into SAIL Sport and
Entertainment (Proprietary) Limited ("SSE"), a wholly owned subsidiary
of SAIL, in terms of which SAIL disposed of an effective 50% plus one
share in the issued share capital of SSE to a wholly owned subsidiary
of SACTWU Investments Group (Proprietary) Limited ("SACTWU") ("the
disposal");
- certain put and call arrangements relating to the disposal that could
result in SACTWU swopping its interest in SSE for an effective 25%
holding in SAIL post the exercise of the put or call arrangement; and
- a related party agreement with SSE management regarding the partial
repurchase of the existing management put obligation, which arose at
the time of the Vodacom Sport and Entertainment (Proprietary) Limited
acquisition ("VSE acquisition") by SAIL;
(jointly "the transaction"). The transaction mechanics are set out in detail
below, and the transaction is subject to the fulfilment of the suspensive
conditions listed below.
2. Introduction of BEE
SAIL"s primary objective is to embrace meaningful empowerment in the SSE
business. In addition, SAIL has recognised the need to achieve meaningful
empowerment in the SEE business in order to secure the retention and growth of
market share in South Africa. The Company has also taken cognisance of existing
BEE charters and guidelines and has given specific consideration to the market
within which it operates. An industry specific charter is expected to be
introduced in the foreseeable future and is expected to address issues of
empowerment in the broad areas of equity ownership, employment equity and
procurement. SAIL has entered into the disposal with the dual objective of
achieving its own BEE initiatives and fulfilling the specific requirements of
the anticipated Broad Based Black Economic Empowerment Bill ("BEE Bill").
3. The disposal
3.1 Rationale for the disposal
SAIL currently has a number of BEE initiatives that relate to its
employment equity targets, procurement strategies and product
distribution channels. The achievement of BEE equity ownership
requirements will meaningfully improve SAIL"s positioning in relation
to its competitors and significantly enhance SAIL"s potential for
improved participation in public and private sector opportunities,
thereby providing an enhanced platform for growth.
Whilst SAIL is desirous to find a long term sustainable solution for
empowerment at group level, it has, as an immediate interim measure
decided on the facilitation of BEE directly within the SSE business,
inter alia, for the following reasons:
- The SSE business is cash generative and more likely to deliver
dividend flow to the BEE partner in the short term that is
required to service the debt/funding structure utilised to fund
the BEE partner; and
- A structure has been developed whereby SACTWU will be able to
switch its holding in SSE into a 25% interest in SAIL equity in
terms of a predetermined mechanism approved by SAIL shareholders
now, thus providing the company with a long term sustainable
empowerment solution at a SAIL level.
The benefits of the transaction to SAIL can be summarised as follows:-
- It allows for SAIL and SEE to meaningfully empower and transform
its business at shareholder level;
- It allows implementation of a defensive strategy for SSE, i.e.
the retention of current market share and clients, particularly
in relation to business at risk in the absence of BEE ownership;
- It allows implementation of a growth strategy through the
expansion of market share into further government and
parastatals, and corporates having regard to their respective
procurement strategies;
- It ensures compliance with national and sectoral BEE
transformation requirements;
- It increases SAIL and SSE"s local visibility and brand
recognition;
- It allows for the introduction of BEE into SAIL; and
- It potentially improves SAIL"s market rating.
SAIL has always been fully supportive and committed to the concept of BEE, which
is a South African national and business imperative, and has positioned itself
to meet the requirements of the BEE Bill.
3.2 Terms, disposal consideration, settlement and vendor funding
SAIL will, subject to the fulfilment of the conditions set out in 3.5
hereunder, dispose of 50% plus one share of SSE to SATWU, with effect
from 1 January 2004. The consideration in respect of the disposal
shall be an amount of R31 350 000 ("the disposal consideration"),
which will be discharged in cash by SACTWU on the seventh business day
after fulfilment of the conditions precedent. The disposal
consideration has been based on SSE assuming R33 000 000 of current
SAIL debt and SAIL will provide R13 100 000 of the disposal
consideration as vendor funding to SACTWU.
3.3. Preferred empowerment partner to SAIL
SAIL has undertaken to SACTWU that it will afford SACTWU the first
opportunity and pre-emptive rights to participate in any future
empowerment transaction that would result in SAIL shares being issued
to an empowerment partner in terms of any empowerment transaction.
3.4 The put and call arrangement
In order to provide SAIL with a long term sustainable empowerment
solution, the equity stake of SACTWU in SSE will be capable of being
converted into SAIL equity in accordance with a predetermined formula
that will result in 91 284 000 new SAIL shares being issued to SACTWU
representing an effective 25% interest in SAIL, post the conversion.
In this regard SAIL shall have a call option exercisable at any time
between the disposal closing date and the fifth anniversary of the
disposal closing date to swap SACTWU"s interest in SSE for 91 284 000
new SAIL shares (subject to adjustment in certain circumstances) at
the election of SAIL.
SACTWU will have a put option exercisable within 30 days from the
fifth anniversary of the disposal closing date should SAIL not have
exercised the call option to swap its interest in SSE for 91 284 000
new SAIL shares (subject to adjustment in certain circumstances) at
the election of SACTWU.
In the event of a successful change of control in SAIL, other than by
any of its current existing material shareholders, being Nedbank
Limited, Venfin Media Investments (Pty) Limited, Luna Corporation
(Pty) Limited, SAIL management and Newinvest 235 (Pty) Ltd, SACTWU
shall have the right to exercise the put option to swap its interest
in SSE for 91 284 000 new SAIL shares (subject to adjustment in
certain circumstances).
In the event of the exercise of the put or call option, it will result
in the issue of new SAIL shares and as such SAIL shareholders will be
required to approve by special resolution, the put and call option, at
the same general meeting at which the disposal is to be approved.
3.5 Conditions precedent
The disposal is subject to the fulfilment of, inter alia, the
following conditions precedent, which must be fulfilled by 31 March
2004 (or such later date as may be agreed in writing by the parties):
- SACTWU confirming that it has secured appropriate funding to
enable it to discharge its obligation in regard to the disposal;
- the approval of the requisite ordinary and special resolutions by
SAIL shareholders in general meeting to give effect to the
disposal, the put option and the call option;
- approval of the JSE Securities Exchange South Africa ("JSE") and
Securities Regulation Panel ("SRP"); and
- approval of the Competition Commission.
3.6 Warranties
SAIL has given the normal warranties to SACTWU for a disposal of this
nature.
3.7 Effective date of the disposal
The effective date of the disposal shall be 1 January 2004.
3.8 Categorisation
The disposal constitutes a category 1 disposal in terms of the JSE
Listings Requirements and is accordingly subject to the approval of
SAIL shareholders in general meeting. The requisite notice convening
the general meeting will be included in the circular to shareholders
to be dispatched in terms of paragraph 7 hereunder.
3.9 Irrevocable commitments
SAIL has received irrevocable commitments from SAIL shareholders
representing approximately 48% and in principle support from
shareholders holding a further 31% of the votes exercisable at the
general meeting to approve the ordinary and special resolutions to
approve the disposal and put and call arrangements.
4. Related party agreement on the partial repurchase of the management put
option
4.1 Introduction
With effect from 1 September 2001 SAIL acquired 100% of the issued
shares of SSE as follows:
- 51% from Vodacom (Proprietary) Limited for a total cash
consideration of R 45 million ("the VSE cash acquisition"); and
- 49% from VSE management that was discharged through the issue of
28 823 529 new SAIL shares ("the consideration shares") at an
issue price of 150 cents per share ("the VSE management
acquisition").
4.2 The VSE management acquisition
The terms of the management acquisition were:
- VSE management may sell 25% of the consideration shares after the
expiry of a period of 1 year from the VSE transaction date;
- VSE management must retain the remaining 75% of the consideration
shares up to 31 March 2006; and
- VSE management may put the consideration shares to SAIL within a
period of thirty days after 31 March 2006, at a price of 200
cents per share.
4.3 The management put option and potential repurchase
SAIL has warranted to VSE management that the SAIL share price at 31
March 2006 will be at least 200 cents per share. The warranty has been
given by way of a put option granted by SAIL to VSE management, in
terms of which VSE management has the right to put the consideration
shares to SAIL within a period of 30 days after 31 March 2006, at a
price of 200 cents per share.
Should management put the consideration shares to SAIL in 2006, SAIL
will be obligated to repurchase the acquisition shares from management
in terms of a specific repurchase at 200 cents per share for a total
consideration of R57 647 058.
The method whereby the company was to repurchase the VSE consideration
shares, the effect of the repurchase on the earnings, net asset value
and tangible net asset value per SAIL share and a statement by the
directors of SAIL on the effects of the repurchase would be published
in an announcement in 2006, should SAIL repurchase all or a portion of
the acquisition shares.
The potential repurchase was approved by SAIL shareholders in general
meeting on 14 January 2002.
4.4 Rationale for the management put option settlement agreement
The current contingent liability as reflected in the annual financial
statements of SAIL, relating to the management put option is a maximum
of R57 647 058. The contingent liability currently has a negative
impact on both the SAIL share price and the appetite of potential
investors to acquire SAIL shares due to the unknown quantum of the put
option and the potential effect that the put option would have on
SAIL.
With effect from 1 April 2003 Messrs Selwyn Nathan and Brand de
Villiers, who have significant interests in the management put option,
were appointed as CEO and managing director of SAIL respectively.
The board has resolved that the interest of SAIL and its shareholders
will be best served through the alignment of the interests of the
Company, management and its shareholders through the partial
settlement of the management"s right in relation to the put option,
which significantly reduces the contingent liability of the Company
and achieves appropriate incentivisation, through management retaining
all the VSE consideration shares.
4.5 Terms of the related party agreement
SAIL and VSE management have agreed that SAIL shall acquire 73,1% of
the rights to the management put option from the VSE management in
exchange fora cash payment of R16 000 000.00. VSE management members
will retain a portion of their respective Put Options not exceeding
26.9% thereof, which will entitle the members of VSE management in
question to put his/her retained Consideration Shares to SAIL at 200
cents per share for a period of 30 (thirty) days after 31 March 2006
as provided in the sale agreement. The value of the cash payment of
R16 000 000 has been determined by using market related discount rates
applied to the value of the put option of 200 cents per share on 31
March 2006 less a deemed value of the SAIL shares retained by the VSE
management.
If the cash payment of R16 000 000 is not paid on or before 31 January
2004 the consideration shall bear interest at 2 percentage points
below the prime rate, from 31 January 2004 to date of actual payment,
both days inclusive.
4.6 Conditions precedent
The settlement of the put option is subject to the conclusion of a
comprehensive agreement and the comprehensive agreement in turn will
be subject to the fulfilment of a number of suspensive conditions
including, inter alia, the following:
- SAIL obtaining funding to settle the put option;
- approval of the requisite ordinary and special resolutions by
SAIL shareholders in general meeting to give effect to the
settlement agreement; and
- regulatory approvals, including the JSE, to the extent required.
5. Fair and reasonable opinions
In the event of the exercise of the put and call option detailed in paragraph
3.4, it would result in an issue of shares for cash to a related party (SACTWU).
In terms of the JSE Listings Requirements SAIL must obtain a fair and reasonable
statement from an independent professional expert, indicating whether or not the
terms of the put and call arrangement are fair and reasonable to SAIL
shareholders.
In terms of the JSE Listings Requirements, SAIL must also obtain a fair and
reasonable opinion from an independent professional expert indicating whether or
not the terms of the related party agreement set out in paragraph 4 above, are
fair and reasonable to SAIL shareholders.
Deloitte & Touche Corporate Finance has been appointed to provide the requisite
fair and reasonable statements in terms of the JSE Listings Requirements.
6. Financial effects of the disposal, put and call arrangements and settlement
of the management put option
The pro forma financial effects of the disposal, put and call arrangements and
settlement of the management put option are disclosed for illustrative purposes
only and that:
- it may not fairly present SAIL"s financial position, changes in
equity, results of operations or cash flow; and
- all adjustments are expected to have a continuing effect.
The table below sets out the pro forma financial effects of the disposal on SAIL
based on its unaudited interim results for the six months ended 30 June 2003,
using the following assumptions:
- the disposal had been effective on 1 January 2003 for earnings and
headline earnings per share purposes and on 30 June 2003 for net asset
value per share purposes;
- transaction costs of R2 200 000 were incurred in terms of the
disposal;
- the cash received was utilised to repay existing debt at an after tax
rate of interest of 8.4% per annum; and
- the vendor funding of R13 100 000 million earned an after tax rate of
8.4% per annum.
6 months ended 30 June 2003 Unaudited Pro forma
Before After Change Change
(cents) (cents) (cents) (%)
Earnings per share (7.8) 1.4 9.2 117.7
Headline earnings per share 1.1 1.2 0.1 11.7
Net asset value per share 34.8 43.9 9.2 26.3
Tangible net asset value per (5.2) 21.7 27.0 514.5
share
Weighted number of shares in 273 854 273 854 - 0.0
issue (000 s)
Actual number of shares in 273 854 273 854 - 0.0
issue (000 s)
The table below sets out the pro forma financial effects of the call and put
option in terms of the disposal on SAIL based on its unaudited interim results
for the six months ended 30 June 2003, using the following assumptions:
- the call or put option was exercised on 1 January 2003; and
- the cash raised was utilised to repay existing debt at an after tax
rate of interest of 8.4% per annum.
6 months ended 30 June 2003 Unaudited Pro forma Change Change
Before After (cents) (%)
(cents) (cents)
Earnings per share (7.8) (5.5) 2.3 29.8
Headline earnings per share 1.1 1.2 0.1 7.2
Net asset value per share 34.8 34.9 0.1 0.4
Tangible net asset value per (5.2) 5.0 10.2 195.3
share
Weighted number of shares in 273 854 366 238 92 384 33.7
issue (000 s)
Actual number of shares in 273 854 366 238 92 384 33.7
issue (000 s)
The table below sets out the pro forma financial effects of the settlement of
the management put option on SAIL based on its unaudited interim results for the
six months ended 30 June 2003, using the following assumptions:
- the put option was settled on 1 January 2003; and
- the debt raised to repay the settlement had an after tax cost of 8.4%
per annum.
6 months ended 30 June 2003 Unaudited Pro forma
Before After Change Change
(cents) (cents) (1) (cents) (%)
Earnings per share (7.8) (8.9) (1.1) (14.7)
Headline earnings per share 1.1 0.9 (0.2) (22.1)
Net asset value per share2 34.9 33.6 (1.1) (3.3)
Tangible net asset value per (5.2) (11.3) (6.1) (116.1)
share
Weighted number of shares in 273 854 273 854 - 0.0
issue (000 s)
Actual number of shares in 273 854 273 854 - 0.0
issue (000 s)
Note (1) The VSE management put option granted by SAIL to VSE management has
not been included in previous years financials as it had been
disclosed as a contingent liability in the notes to the financial
statements and accordingly did not have an effect on historic earnings
per share, headline earnings per share, net asset value and tangible
net asset value per share.
Note (2) Goodwill of R16 000 000 has been accounted for in terms of the put
option and no impairment of the goodwill has been recognised.
7. Documentation
A circular containing full details of the transaction and a notice of general
meeting will be posted to SAIL shareholders in due course.
8. Withdrawal of cautionary announcement
As the terms and financial effects in respect of the transactions have been
announced, shareholders no longer need to exercise caution when dealing in their
SAIL shares.
Johannesburg
19 December 2003
Investment bank and sponsor to SAIL Attorneys to SAIL
Nedbank Corporate Cliffe- Dekker Inc
Reporting accountants Corporate Advisors to SACTWU
Deloitte and Touche HJS Advisory Services
Independent Adviser
Deloitte and Touche Corporate Finance
Date: 19/12/2003 05:30:14 PM Supplied by www.sharenet.co.za
Produced by the JSE SENS Department
