| Tue 6 Apr 2004, 8:19 | | Proposed Introduction of Empowerment Shareholders |
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Absa Group Limited - Proposed Introduction of Empowerment Shareholders into Absa
Absa Group Limited
(Incorporated in the Republic of South Africa)
(Registration number 1986/003934/06)
JSE code: ASA Issuer code: AMAGB
ISIN: ZAE000013389
("Absa")
Proposed Introduction of Empowerment Shareholders into Absa
1. INTRODUCTION
1.1 Absa"s stated purpose is "to be partners in growing South Africa"s
prosperity by being South Africa"s leading financial services group, serving all
our stakeholders".
Absa accordingly believes that meaningful black participation at all levels
of the South African economy is a national priority in order to ensure
sustainable socio-political, financial and economic stability for all. South
African economic growth will largely depend on the extent to which black South
Africans participate in the economy. To this end and as Absa is essentially a
South African institution, Absa aims to facilitate significant participation by
enhancing its engagement with black individuals and black-owned businesses
- as shareholders, customers, employees, suppliers and members of the community.
1.2 Absa was an active participant in the development of the Financial
Sector Charter ("the Financial Charter") and is intent on meeting its direct
shareholder obligations by facilitating the introduction of 10% direct black
ownership at the Absa holding company level. This together with the estimated
indirect black shareholdings of between 12% and 14%, as independently surveyed
by the Business Map Foundation on behalf of the South African Banking Council in
2003, should enable Absa to substantially comply with the Financial Charter
requirement of a 25% level of black ownership.
1.3 The Absa board of directors has accordingly proposed, subject to the
fulfilment of, inter alia, the suspensive conditions set out in 8 below, the
introduction of new shareholder groupings consisting of:
- broad-based black economic empowerment ("BEE") groupings ("BEE groupings")
which will between them subscribe in cash for new shares representing 10% of the
enlarged issued share capital of Absa ("the BEE ownership transaction"); and
- a once-off Absa employee share ownership programme ("ESOP") which will
through a new trust ("the Absa ESOP Trust") subscribe in cash for new shares
representing up to 1% of the enlarged issued share capital of Absa ("the Absa
ESOP transaction"),
(collectively, "the proposed transactions").
2. ABSA"S RATIONALE FOR THE PROPOSED TRANSACTIONS
2.1 Absa"s approach to black economic empowerment
Absa"s BEE policy, based on a long-term strategy with short-term and medium-
term objectives, is guided by economic imperatives and statutory requirements
and includes a process of consultation with all role-players.
The goal of this strategy is to be a partner in sustainable social and
economic upliftment, and the objectives have been formulated with Absa"s
respective BEE stakeholders in mind. They are:
BEE stakeholders Objective
Shareholders To realign the existing shareholding and directorships
to include a meaningful proportion of black
shareholders and directors.
Customers To grow a profitable BEE customer base.
Employees To enhance Absa"s ability to value and grow diversity
within the group.
Suppliers To establish a significant BEE supplier base.
Community To grow partnerships by providing financial and other
resources to disadvantaged communities so as to ensure
their sustainable development.
By introducing empowerment shareholders in terms of the proposed BEE
ownership transaction, Absa will have achieved the shareholder objective
stated above.
2.2 Ongoing development of Absa
The proposed transactions represent important milestones in Absa"s ongoing
development. The BEE groupings will materially assist in enhancing the company"s
growth prospects, for the benefit of its current and future shareholders. They
will assist in positioning Absa as an entity with the profile and capacity to
deliver quality services to key segments of the South African business
community, including corporates, government and parastatals.
They will provide the catalyst to sustain and provide further advances in each
stakeholder component (being shareholders, customers, employees, suppliers and
members of the community) of Absa"s broader BEE strategy. The proposed
transactions demonstrate not only Absa"s continuing commitment to grow its
business, but also its resolve towards meaningful transformation at all levels
of its business.
2.3 Absa employee diversity
Absa acknowledges that one of its strengths lies in its employees and has
therefore committed itself to creating a positive, supportive, healthy and
diversity-friendly working environment, where employees can achieve their full
potential through development opportunities and challenging work, with the
assurance of being recognised and rewarded for excellence. Accordingly, the
directors of Absa believe it is important for all employees of all South
African wholly-owned subsidiaries of Absa - including South African employees on
secondment elsewhere within the group, but excluding executive directors of Absa
and Absa Bank Limited ("Absa Bank") - to participate in the Absa ESOP
transaction. At 29 February 2004, the total employee complement of Absa was 29
865 of whom 12 513 (or 41,9%) were black South Africans, Coloureds and Indians.
2.4 The Financial Charter
2.4.1 The entire financial sector committed itself to the development of a BEE
Charter at the Nedlac Financial Sector Summit in August 2000. Absa was an active
participant in the writing of the Financial Charter, that was released on 17
October 2003. Its introduction notes:
- "BEE is a mechanism aimed at addressing inequalities and mobilising the
energy of all South Africans. It will contribute towards sustained economic
growth, development and social transformation in South Africa;
- inequalities also manifest themselves in the country"s financial sector. A
positive and pro-active response from the sector through the implementation of
BEE will further unlock the sector"s potential, promote its global
competitiveness, and enhance its world-class status;
- equally, the financial stability and soundness of the financial sector and
its capacity to facilitate domestic and international commerce is central to the
successful implementation of BEE."
Clause 10.1 of the Financial Charter provides that "each financial
institution will have a minimum target of 25% black ownership, measured at the
holding company level, by 2010". Clause 10.2 states that a minimum of 10% has to
be direct black ownership, the balance being indirect ownership. An independent
survey, commissioned by the South African Banking Council and conducted by the
Business Map Foundation in January 2003, estimated that Absa then had between
12% and 14% indirect black ownership.
2.4.2 Absa is confident that the proposed BEE ownership transaction will
result in Absa"s compliance with the Financial Charter in terms of direct
ownership.
3. BROAD-BASED EMPOWERMENT GROUPINGS
3.1 Selection process
In order to maximise its objectives in selecting the broad-based BEE
groupings to be introduced as its new shareholders, Absa selected Mr Tokyo
Sexwale as lead promoter who in turn appointed Mrs Nthobi Angel and Mr Leslie
Maasdorp ("the Promoters") to assist Absa in:
- formulating criteria for the composition of appropriate groupings, which
formulated criteria required that:
- participants should immediately be able to add meaningful value to Absa;
- participants should be groups rather than individuals;
- the respective groups should have strong leadership and a wide base of
shareholders;
- the combined groups should have appropriate national representation;
- the groups should represent a broad range of BEE shareholders; and
- proposing, sourcing and forming appropriate BEE groupings, in line with the
formulated criteria.
The selected BEE groupings, comprising members who will contribute a wide
range of skills and attributes, shall be:
- broad-based (i.e. members representing broad-based empowerment companies,
community-based development trusts or foundations, and empowerment groupings for
women and youth); and
- representative of a countrywide spectrum of empowerment parties, thereby
being fully representative of the geographical spread of the Absa group across
all provinces in South Africa.
Mr Tokyo Sexwale has been a non-executive director of Absa since 2001. His
entrepreneurial and leadership qualities and his standing in the business
community, together with his contribution and understanding of the Absa
business, ideally placed him in the position to lead the Absa empowerment
initiative. Mr Tokyo Sexwale, in turn and with the support of the Absa board,
appointed two further business co-leaders - Mrs Nthobi Angel and Mr Leslie
Maasdorp - to assist in this initiative.
3.2 Establishment of Newco
The BEE groupings" interest in Absa is structured and will be held via an
intermediate holding company, Main Street 169 (Proprietary) Limited ("Newco")
- see 4.1 below.
3.3 The BEE groupings (to be known as the Batho Bonke consortium)
A brief summary of the proposed members and their Newco shareholdings are set
out below:
Description Shareholdings
1. Mvelaphanda Holdings (Proprietary) Limited
Leslie Maasdorp grouping
Nthobi Angel grouping
Community trusts
Business people
Charities
2. Regional groupings 50%
Regional community trusts
BEE companies
Women"s groupings
Rural-based formations
Business associations 50%
100%
Absa is of the view that the proposed BEE groupings comply with the criteria
set out in 3.1 above.
Newco, the Promoters and the initial members of the BEE groupings, being the
three Promoters" companies and the nine regional co-ordinators, shall procure
that the future members" shares in Newco are transferred to such members by 30
September 2004, the additional time being required in order to ensure that each
and every grouping is individually dealt with as part of the process of
achieving the objective of broad-based empowerment (refer 4.5 below for further
details). Absa and Newco shall remain intimately involved with this process,
ensuring that such shares are transferred in accordance with the above objective
and to eligible historically disadvantaged South Africans ("HDSA"s") (being
HDSA"s as defined in the Financial Charter).
3.4 BEE groupings" rationale for the proposed BEE ownership transaction
3.4.1 The proposed BEE ownership transaction presents an attractive
opportunity to secure a material interest in Absa, with critical mass and scale.
It also presents the BEE groupings with an opportunity to assist Absa in growing
its business, and in so doing increase the value of their investment.
3.4.2 The implementation of the proposed BEE ownership transaction, as
described in 4.2 below, will have the following benefits for the BEE groupings:
- the BEE groupings will immediately have full voting rights in Absa and will
participate with all issued ordinary Absa shares;
- the BEE groupings will be entitled to nominate two directors, in addition to
Mr Tokyo Sexwale who shall remain on the Absa board as a non-executive director
and shall not be regarded as a nominee of Newco, for appointment to the Absa
board and will therefore be able to add meaningful input and value at board
level;
- the dividend yield and redemption terms of the redeemable preference shares
should support initial funding arrangements for the BEE groupings to subscribe
for the redeemable preference shares as described in 4.3 below;
- the option-period terms of the redeemable preference shares will afford the
BEE groupings sufficient time to raise the further funding needed to exercise
the options for the purpose of subscribing for new ordinary shares in
Absa, as described in 4.3 below; and
- the BEE groupings are afforded a measure of downside protection in the event
of an adverse market movement in the Absa ordinary share price.
4. KEY TERMS OF THE PROPOSED TRANSACTIONS
4.1 Structure of the proposed BEE ownership transaction and the Absa ESOP
transaction
The BEE groupings" interest in Absa is to be structured and held via an
intermediate holding in Newco. The purpose of utilising the Newco structure,
other than certain administrative convenience, is to:
- provide a conduit for easy communication between Absa and the BEE groupings;
- facilitate as widespread a BEE initiative as possible without losing the
benefit of the value these groups can add throughout the Absa business;
- ensure that the newly issued Absa shares remain in BEE hands - as Newco will
remain controlled by HDSA"s - in order to ensure Financial Charter compliance;
- facilitate funding arrangements for the individual BEE groupings; and
- facilitate a meaningful combined shareholding in Absa in order to allow
nomination for appointment of the BEE directors to the Absa board and to vote a
meaningful block of 10% of the voting rights in Absa.
The Absa employees" new interest in Absa will be facilitated through a newly
created employee share ownership administrative trust ("the Absa ESOP
Trust"), which will be established for the purpose of implementing and
administering the Absa employee share ownership programme set out in the trust
deed in an efficient and cost-effective manner. Whilst the Absa ESOP Trust will
be the sole registered shareholder of the new shares, the participating Absa
employees will be the beneficial owners of the new shares and the trustees will
administer the new shares as nominee for the employees.
4.2 Mechanics of the proposed BEE ownership transaction and the Absa ESOP
transaction
The proposed transactions will be implemented as follows:
- Absa is to create a new class of share, namely a redeemable cumulative
option-holding preference share with a par value of R2,00 ("redeemable
preference share").
- Absa is, with appropriate shareholder approval, to issue by way of specific
issues for cash ("specific issues"):
- a total of 73 152 300 new redeemable preference shares at R2,00 each to
Newco. Newco will be the sole beneficial and registered holder of the redeemable
preference shares. All the Newco shareholders (that is, the BEE groupings) and
directors of Newco will be HDSA"s and Newco will therefore qualify as a black
company for the purposes of the Financial Charter; and
- a maximum of 7 315 200 new redeemable preference shares at R2,00 each to the
Absa ESOP Trust.
- Each redeemable preference share has one option attached to it, entitling
its holder to subscribe (on redemption of the relevant redeemable preference
share) for one Absa ordinary share at the option strike price.
- When the options attached to the redeemable preference shares are exercised
(in lots of 100 only), the redeemable preference shares will be
redeemed (in lots of 100) at R2,00 per share and the option holder will be
entitled to subscribe for new Absa ordinary shares at the option strike price.
- Any options not exercised will lapse on the fifth anniversary of the date of
issue of the redeemable preference shares, and the redeemable preference
shares shall be redeemed at R2,00 per share.
- Newco will raise the funding required for the subscription of 73 152 300
redeemable preference shares at R2,00 each, totalling R146,3 million.
- The relevant Absa employer companies will pay a once-off taxable bonus
(estimated at a maximum amount of R19,8 million) to eligible Absa employees,
such that each eligible employee will be entitled to a net cash bonus of
R400,00 to fund the subscription (via the Absa ESOP Trust) of 200 redeemable
preference shares at R2,00 each.
4.3 Salient terms of the redeemable preference shares
Issue price
R2,00 per redeemable preference share.
Dividend
Cumulative preferential cash dividend ranking in priority to any dividend
declared in respect of the Absa ordinary shares.
Dividend calculated on the par value of the redeemable preference share at
a rate of 72% of the prime overdraft rate charged by Absa Bank to its most
favoured customers.
Payable six-monthly in arrear on 30 September and 31 March of each year.
Options
- Option strike price
Each redeemable preference share confers on its holder the right and option to
subscribe for one Absa ordinary share in terms of the following pricing formula.
If the
30-day volume-weighted average trading price on the JSE Securities Exchange
South Africa ("JSE") of an Absa ordinary share on the date of exercise of the
option is:
- less than or equal to R70,00, then the option strike price is R48,00;
or
- greater than R70,00 but less than or equal to R100,00, then the option
strike price is R48,00 plus R0,70
(70 cents) for each complete R1,00 increment in the share price over R70,00;
or
- greater than R100,00, then the option strike price is R69,00.
The option strike price may be changed at the election of Absa, after
consultation with Newco, if there is a change in interpretation of accounting
standards and/or a change of and/or new accounting standards, which have the
effect of any adjustments having to be made to the existing or any prior income
statements and/or balance sheets and/or earnings per ordinary share
and/or prior years profits of Absa, to a fixed price of R58,00.
- Option period and option exercise dates
Options may be exercised in lots of 100 at any time during the option period -
being the period commencing on the first business day after the third
anniversary of the date of issue of the redeemable preference shares and ending
on the fifth anniversary of the date of issue - by notice in writing to the
secretary (accompanied by payment of the option strike price). Such exercise and
notice will be deemed to be effective only on 1 March, 1 June, 1
September or 1 December of each year (or if that day is not a business day, then
the immediately succeeding business day, or if that day falls within an Absa
"closed period", then the first business day following the expiry of the
relevant closed period).
- Lapse of options
Options not exercised by the fifth anniversary of the date of issue will lapse
("the final option exercise date").
Redemption
- Redemption dates
The redeemable preference shares are automatically redeemable on the option
exercise date immediately following the exercise of the option or on the fifth
anniversary of the date of issue when it lapses:
- if the option is exercised, then the underlying redeemable preference
share is redeemable on the relevant option exercise date; or
- if the option lapses, it is redeemable on the final option exercise
date.
- Redemption price
Redeemable by Absa at par value (i.e. R2,00 per redeemable preference share).
Transfer of redeemable preference shares
Redeemable preference shares can be transferred only to eligible HDSA"s.
Ranking pari passu with Absa ordinary shares
Save for the rights attached to the redeemable preference shares (as regards
dividends, redemption and the options), each redeemable preference share shall
rank pari passu with the Absa ordinary share in all respects, and in particular
holders of the redeemable preference shares shall have the same rights as the
holders of Absa ordinary shares as regards voting (subject to
4.7 below), notices, rights issues and any restructuring of Absa and/or its
capital.
4.4 Salient terms of the relationship agreement between Absa, the Promoters
and Newco
Absa, the Promoters and Newco have entered into a relationship agreement to
protect both Absa"s and Newco"s rights under the BEE ownership transaction in
terms of which new BEE groupings are to be introduced as shareholders of Absa.
Duration
The relationship agreement will endure from the signature date as follows:
- if not one option is exercised, the agreement will endure until the
options lapse; or
- if one or more options are exercised, the agreement will endure until
31 March 2011 or such earlier date as Absa in its discretion may determine after
it and its subsidiaries have complied fully with its empowerment requirements
("final date").
Subscription by Newco for redeemable preference shares
Newco is to subscribe on the third business day following the fulfilment of the
last suspensive conditions referred to in paragraph 8 below for 73 152 300
redeemable preference shares at a subscription price of R2,00 per share (total
of R146,3 million).
Rights of Newco to nominate directors to the board of Absa
Newco is to have the right to nominate one director to the board of Absa in
respect of each complete 5% shareholding in Absa, subject to a maximum of two
nominations. If at any time after the initial nominations, Newco"s shareholding
in Absa is diluted because of Absa issuing additional shares only, then such
right shall remain for so long as Newco holds at least 4%
(i.e. 80% of 5%) of the shares in the enlarged issued share capital of Absa.
Mr Tokyo Sexwale will remain on the Absa board as a non-executive
director, and shall not be regarded as a nominee of Newco.
Restrictions on sale or encumbrance by Newco of redeemable preference
shares
Newco shall not sell or encumber any of the redeemable preference shares it
holds in Absa prior to the final option exercise date, except when it is done
with Absa"s prior written consent.
Restrictions on sale or encumbrance by Newco of Absa ordinary shares
Newco shall be entitled, at any time on or after issue of any Absa ordinary
shares to Newco pursuant to the exercise of the options, to sell or encumber
up to 49,9% of the number of all of the Absa ordinary shares issued to and
registered in the name of Newco.
Newco undertakes to Absa, having regard to the broad-based black
ownership empowerment strategy of Absa, to use its reasonable commercial
endeavours to sell or encumber such shares to or in favour of HDSA"s.
Exercise or lapse of options/redemption of redeemable preference shares
The Newco board will decide in its sole discretion whether or not to exercise
from time to time all or any of the options.
On exercise or lapse of any option, Absa will redeem the relevant
redeemable preference share at par value, being R2,00 each.
Newco will raise the funds necessary to pay the relevant option strike
price in respect of options exercised.
Absa will allot and issue the relevant Absa ordinary shares to Newco (or
its nominee - being an eligible HDSA), after payment of the relevant option
strike price.
No listing of redeemable preference shares or Newco shares
At no stage shall any of the redeemable preference shares or the Newco shares
be listed on the JSE or on any recognised exchange.
Support and co-operation
Newco and each Promoter agrees at all times to actively and willingly promote
and, where reasonably possible at the request of Absa, assist Absa in
protecting, enhancing and promoting the business of Absa and its subsidiaries.
Restraint undertakings by Newco and each of the Promoters
Newco is to be restrained for so long as it is a shareholder of Absa and for a
further period of 365 days thereafter, and each of the Promoters is to be
restrained for so long as that Promoter holds shares in Newco and for a period
of 365 days thereafter, from concluding or participating in any similar BEE
transaction with any of the banking-related businesses of Absa"s competitors.
4.5 Salient terms of the shareholders" agreement between Newco shareholders,
Newco and Absa
Newco shareholders are to enter into a shareholders" agreement to regulate
their affairs as shareholders in Newco. Absa will be a party to the agreement
for the purposes of ensuring that Newco remains controlled by HDSA"s.
Duration
The shareholders" agreement will endure from the date of signature until
terminated by agreement between the parties.
Business of Newco
To acquire and hold up to 10% of the issued voting shares on a fully diluted
basis in Absa, and no other assets or business.
Business of HDSA SPV
HDSA SPV (a nominal shareholder of Newco) has been established as a special
purpose warehousing vehicle to ensure (through voluntary or compulsory pre-
emptive and other mechanisms) that Newco remains controlled by HDSA"s at all
times prior to the final date. HDSA SPV has a period of six months after
acquiring any Newco shares to sell such shares to eligible HDSA"s.
Subscription by initial members of the BEE groupings for Newco shares
Each initial member of the BEE groupings (being the three Promoters"
companies, HDSA SPV and the nine regional co-ordinators) shall subscribe for
the Newco shares as principal and for future members of the BEE groupings.
Such future members" shares will be sold and transferred to them by 30
September 2004, provided they are eligible HDSA"s and have signed the
shareholders" agreement. Any shares set aside for future members and not sold
and transferred by 30 September 2004 to approved future members will be
transferred to HDSA SPV on 1 October 2004.
Restrictions on sale or encumbrance by Newco shareholders of Newco shares
Newco shareholders shall not be entitled prior to the final date to sell or
encumber any Newco shares unless:
- the Newco board approves the sale or encumbrance;
- the relevant Newco shares are first offered to HDSA SPV and the
Promoters under the rights of pre-emption; and
- the sale or encumbrance is to an eligible HDSA.
Pre-emptive rights over Newco shares
No Newco shares may be sold or encumbered unless the Newco shares are first
offered to HDSA SPV and the Promoters" companies, subject to the Promoters not
acquiring, together with their existing shares, more than 49,9% of all the
issued shares of Newco (directly or indirectly) prior to the final date.
Shares not taken up under the above offer will be offered to third-party
investors who are eligible HDSA"s.
Compulsory offers of Newco shares
If a Newco shareholder commits a breach of the agreement which is not
remedied, then such Newco shareholder will be deemed to have offered his
shares to HDSA SPV and the Promoters" companies.
If Newco commits a breach of the agreement which is not remedied, then
all Newco shareholders will be deemed to have offered their shares to HDSA SPV
only. All shares so acquired by HDSA SPV will be sold to eligible HDSA"s
within six months.
The shares offered herein will be offered at a price equal to their
initial subscription prices of R0,10 (ten cents) per Newco share.
Newco board"s powers and duties
The Newco board of directors shall manage Newco, including, inter alia, the
right to nominate directors to the Absa board, the right to vote any shares in
Absa, the responsibility to raise funding for the exercise of options and the
right to exercise options.
Status of Absa
Absa is a party to the shareholders" agreement and has only rights (no
obligations). Absa will cease to be a party (and its rights in terms of the
shareholders" agreement will lapse) on the date the options lapse if not one
option is exercised, or the final date if one or more options are exercised.
4.6 Salient terms of the Absa employee share ownership trust deed
Eligible employees
All employees of all South African wholly-owned subsidiaries of Absa -
including South African employees on secondment elsewhere in the Absa group,
but excluding executive directors of Absa and Absa Bank - will be able to
participate in a once-off offer to them, on a basis that each employee will be
issued and allocated (via the Absa ESOP Trust) 200 redeemable preference
shares.
Funding of the subscription price of the redeemable preference shares
Each participant will be awarded, by Absa employer companies, a once-off
taxable cash bonus with net proceeds of R400,00 (i.e. after deducting
applicable employee-related taxes), which will be used to subscribe for 200
redeemable preference shares at R2,00 each.
Exercise of options
Eligible participants may instruct the trustees only during the option period
to exercise options (only in blocks of 100) provided, inter alia, the
instruction is accompanied by evidence that the participant is still an
eligible employee and by payment of the full amount of the option strike price
in respect of 100 or 200 options to the Absa ESOP Trust.
Redemption of the redeemable preference shares
Absa will redeem the redeemable preference shares on exercise of the options
by the trustees or on lapse of the options on the final option exercise date.
In the case of options that are exercised, payment to the Absa ESOP
Trust of the redemption monies of R2,00 per redeemable preference share will
be set-off against the obligation of the Absa ESOP Trust to pay the full
option strike price to Absa.
In the case of options that lapse (because the participant ceases to be
an eligible employee or because the participant elects not to exercise the
option), the redemption monies of R2,00 per redeemable preference share will
(notwithstanding anything to the contrary in the articles) be forfeited by the
Absa ESOP Trust and the participants in favour of Absa.
The administrative trust as nominee for the participants
The Absa ESOP Trust will be the registered shareholder in respect of the
redeemable preference shares, the ordinary shares arising on the exercise of
the options and other shares arising from rights issues and/or capitalisation
issues. The participants will be the beneficial owners of such shares.
The Absa ESOP Trust (as registered shareholder) has the power to attend
general meetings of Absa and to vote the redeemable preference shares subject
to 4.7 below, the ordinary shares and such other rights issue and/or
capitalisation shares in its discretion.
All cash dividends and other cash payments received by the Absa ESOP
Trust will be received as nominee and the Absa ESOP Trust will be required to
retain such amounts and to invest such amounts in an interest-bearing account
with Absa Bank for the benefit of participants (but also at the risk of the
participants). Such investments may be used by the trustees to fund (in whole
or in part) the option strike prices pursuant to the exercise of options. Any
investments not so paid must be released to participants, at that time, within
30 days of the final option exercise date.
Restriction on sale or encumbrance of redeemable preference shares
The redeemable preference shares may not be sold or encumbered by the Absa
ESOP Trust or any participant, except with the prior written consent of Absa.
No restriction on sale or encumbrance of Absa ordinary shares
Participants may at any time sell or encumber the Absa ordinary shares they
obtain by exercising the options and paying the option strike price.
4.7 Stock exchange listings and voting rights of the redeemable preference
shares on JSE related matters
Absa"s ordinary shares are listed on the JSE. The redeemable preference
shares shall be unlisted, and in terms of Rule 4.24 of the JSE Listings
Requirements such unlisted shares would not be taken into account at
shareholder meetings on matters that require a vote in terms of the JSE
Listings Requirements. In the light of the proposed BEE ownership transaction
being a meaningful BEE initiative, the JSE has ruled that on the basis that
current shareholders will not be diluted by more than 11% of the present share
capital of Absa as a result of the proposed transactions, the unlisted
redeemable preference shares held by Newco (in terms of the BEE ownership
transaction) shall be entitled to voting rights equivalent to those of the
listed Absa ordinary shares for JSE purposes, whereas the unlisted redeemable
preference shares held by the Absa ESOP Trust (in terms of the Absa ESOP
transaction) shall not be entitled to such equivalent voting rights for JSE
purposes. Furthermore, all unlisted redeemable preference shares will not be
taken into account for determining any categorisation in terms of Section 9
(viz Transactions) of the JSE Listings Requirements.
5. EFFECTS ON ABSA AND ABSA SHAREHOLDERS
5.1 Effect of the specific issues (and options) on Absa"s authorised and
issued share capital
The authorised and issued share capital of Absa before and after the
creation of the redeemable preference shares and after giving effect to the
specific issues and exercise of options are as follows:
Before After After exercising the
issuing the options (i.e. after
redeemable redemption of
preference the redeemable
shares preference shares
and subscription of
ordinary shares)
R"m R"m R"m
Authorised
800 000 000 ordinary shares of
R2,00 each 1 600 1 600 -
80 467 500 redeemable preference
shares of R2,00 each - 161 -
880 467 500 ordinary shares of
R2,00 each - - 1 761
Issued
651 055 074 ordinary shares of
R2,00 each 1 302 1 302 -
A maximum of 80 467 500 redeemable
preference shares of R2,00 each - 161 -
A maximum of 731 522 574 ordinary
shares of R2,00 each - - 1 463
Share premium 1 513 1 513 5 215*
* Assumed that Absa ordinary shares are issued at R48,00 each.
5.2 Effect of the specific issues (and options) on Absa"s shareholders
In terms of the proposed transactions, up to 80 467 500 redeemable
preference shares are to be issued at R2,00 each. The holders of these shares
have an option attached to the redeemable preference share to subscribe for
Absa ordinary shares at the relevant option strike price during the option
period, as described in 4.3 above. Absa has attributed a value of R10,67 to
the option attached to each redeemable preference share, which translates to a
total value for the options of R858,6 million, being 2,8% of Absa"s market
capitalisation of R30,8 billion (based on 651 055 074 Absa ordinary shares in
issue and an Absa share price of R47,31 per share).
The value of R10,67 was calculated by using the widely accepted Binomial
Pricing Theory technique for pricing options, with the following assumptions:
Input Assumption
Style Bermudan option*
Spot price R47,31 (being the five-day volume-weighted average
trading price on the JSE up to the close of business
on 2 April 2004)
Option strike prices If Absa share price = R70,00, then R48,00; or
If Absa share price >R70,00 but =R100,00, then
R48,00 plus R0,70 (70 cents) for each complete R1,00
increment over R70,00; or
If Absa share price > R100,00, then the option
strike price is R69,00
Bermudan
exercise date three years and one business day from date of issue
of the options
Expiry date two years from the first Bermudan exercise date
Volatility for
at-the-money
forward strike 23,83%
5-year swap rate
used to imply
risk-free rate (naca) 10,18%
Dividend yield 3,70%
* A Bermudan option is an option that can be exercised on specified dates
during its life. In this instance the exercise period covers the two years
between the third and fifth anniversaries of the issue date.
5.3 Potential effect of the specific issues (and options) on Absa"s
calculation of fully diluted earnings and net asset value per ordinary share
In terms of Generally Accepted Accounting Practice - AC 104 - options are
dilutive on the calculation of earnings per share (i.e. an accounting
dilution), when they would result in the issue of ordinary shares for less
than fair value (i.e. if the market value of an Absa ordinary share at the
date of calculating the Absa earnings per share is higher than the option
strike price). For illustrative purposes only and assuming that all the
options attached to the redeemable preference shares are exercised and the new
Absa ordinary shares subscribed for at the option strike price, the
dilutionary effects on earnings per share, irrespective of the date of
exercise of the options or the level of earnings, would be those disclosed in
the table below.
Assumed Absa ordinary Resulting option strike Pro forma dilutionary impact
share price price on Absa"s diluted
earnings per share
R R %
50,00 48,00 0,5
60,00 48,00 2,4
70,00 48,00 3,7
80,00 55,00 3,7
90,00 62,00 3,7
100,00 69,00 3,7
110,00 69,00 4,4
120,00 69,00 5,0
The proposed transactions may have an effect on the net asset value and/or
tangible net asset value per Absa ordinary share at the date of exercise of
the option if the actual net asset value or tangible net asset value per Absa
ordinary share at that date materially differs from the option strike price.
5.4 Effect of the specific issues (and options) on Absa"s historic earnings
and net asset value per ordinary share
In compliance with the JSE Listings Requirements, the pro forma historical
financial effects have been prepared for illustrative purposes only, to
provide information about how the specific issues might have affected Absa,
had the proposed specific issues and subscription been effected on 1 April
2003 (i.e. for the six-month period from 1 April 2003 to 30 September 2003)
for income statement purposes and on 30 September 2003 for balance sheet
purposes. Because of the nature of the instrument, this may not be a true
reflection of Absa"s actual financial position or results. The financial
benefits emanating from the BEE ownership transaction are difficult to
quantify, but are expected to be significant in the future. These benefits
have been ignored in computing the effects below.
Before After the (Decrease) After Increase/
issue of redeeming the (Decrease)
the redeemable
redeemable preference
preference shares and
shares subscribing
for ordinary
shares (Note 3 -
Note 1 Note 2 Note 3 Note 1)
Cents Cents % Cents %
Earnings per
ordinary share 320,3 315,6 (1,5) 304,7 (4,9)
Headline earnings
per ordinary share 324,5 321,9 (0,8) 310,3 (4,4)
Net asset value
per ordinary share 2 748,8 2 744,6 (0,2) 2 970,6 8,1
Net tangible asset
value per
ordinary share 2 723,7 2 719,5 (0,2) 2 948,2 8,2
Notes:
1. The information has been compiled from the unaudited consolidated income
statement of Absa for the six-month period ended 30 September 2003 and the
unaudited consolidated balance sheet of Absa at 30 September 2003.
2. The adjustments relate to the assumptions that:
- 80 467 500 redeemable preference shares have been issued at a price of
R2,00 per redeemable preference share;
- the cash received of R160,9 million from the issue of the redeemable
preference shares was utilised to repay current wholesale funding at an
average wholesale funding rate of 12,2% per annum (or 8,5% post tax) for the
six-month period ended 30 September 2003;
- the payment of a once-off taxable bonus estimated at R19,8 million (or
R13,9 million post tax) to qualifying employees, such that the employee will
be entitled to a net cash bonus of R400,00 for the purposes of subscribing for
200 redeemable preference shares at R2,00 each in terms of the proposed Absa
ESOP transaction;
- preference dividends of 11,3% (being 72% of the average prime overdraft
rate of 15,7% for the six-month period ended 30 September 2003) have been paid
on the redeemable preference shares issued;
- estimated costs relating to the evaluation, negotiation and implementation
of the proposed transactions (including professional fees, publishing costs
and statutory fees) of approximately R13,5 million (not tax deductible); and
- the tax effects related to the above.
3. The adjustments relate to the assumptions that:
- the options are exercised and 80 467 500 redeemable preference shares are
redeemed at R2,00 per share. 80 467 500 new ordinary shares are issued at
R48,00 per share pursuant to the exercise of the options, thereby raising R3,9
billion capital;
- the payment of a once-off taxable bonus estimated at R19,8 million (or
R13,9 million post tax) to qualifying employees, such that the employee will
be entitled to a net cash bonus of R400,00 for the purposes of subscribing for
200 redeemable preference shares at R2,00 each in terms of the proposed Absa
ESOP transaction;
- earnings of 12,2% per annum (or 8,5% post tax) (being Absa"s average
wholesale funding rate for the six-month period ended 30 September 2003) have
been received on the cash generated of R4,2 billion; comprising R3,9 billion
received on the issue of shares and R0,3 billion cash released due to lower
liquidity reserves required by the South African Reserve Bank;
- estimated transaction costs relating to the evaluation, negotiation and
implementation of the proposed transactions (including professional fees,
publishing costs and statutory costs) of approximately R13,5 million (not tax
deductible); and
- the tax effects related to the above.
4. No adjustments have been made for IFRS 2 implications as referred to in
5.6 below.
5.5 Effect of the specific issues (and options) on Absa"s return on equity
The issue of the redeemable preference shares, in terms of the specific
issues, for R160,9 million will be disclosed as a liability and will
accordingly not have an impact on Absa"s return on equity.
The exact amount of capital to be raised on the specific issue of Absa
ordinary shares following the future exercise of the options will depend on
the option strike price, which is dependent upon the Absa ordinary share price
at the date of exercise of the option. The amount which could potentially be
raised, during the option period (between three and five years from the date
of issue of the redeemable preference shares) is expected to be significant
(potentially R3,9 billion at an option strike price of R48,00 per share).
Absa"s return on average equity is a fundamental driver of the Absa business.
Absa therefore actively manages its capital needs and returns thereon on a
continuous basis and this raising of capital will be managed in the same
manner.
5.6 Accounting treatment
A new accounting statement IFRS 2 - Share Based payments - ("IFRS 2") was
released in February 2004 to regulate the accounting treatment of equity
issued to staff and other parties. It is anticipated that IFRS 2 will be
adopted as an accounting standard in South Africa. The Absa board of directors
is of the opinion that both the proposed BEE ownership transaction and the
Absa ESOP transaction fall within the ambit of the new IFRS 2 and this view is
supported by the opinions of KPMG and Ernst & Young, the independent reporting
accountants.
IFRS 2 shall become effective for companies with financial years beginning
on or after 1 January 2005. In the case of Absa, this implies that IFRS 2 will
only affect the issue of share options vesting after 1 April 2005, which would
then be accounted for in the financial year ending 31 March 2006. The BEE
ownership transaction has no IFRS 2 accounting impact for Absa, as the options
attached to the redeemable preference shares vest immediately on issue of the
redeemable preference shares. Regarding the Absa ESOP transaction, however,
the options will only vest during the option period as participants need to be
employees of Absa at the option exercise date.
In the view of the Absa board of directors the most appropriate gauge of
the financial impact of the proposed transactions on Absa and its shareholders
is the value of the options issued in terms of these transactions which is
reflected in 5.2 above at R858,6 million.
While unlikely, it is possible that the accounting treatment described
above could subsequently be altered as a result of further developments to
accounting standards or if a different interpretation is placed on the newly
released IFRS 2. Should this be the case and should any such changes require
adjustments to the existing or any prior income statement and/or balance sheet
and/or earnings per ordinary share of Absa, then, at the election of Absa,
after consultation with Newco, Absa will be entitled to convert the variable
option strike price to a fixed option strike price of R58,00. In this case,
the fair value of the options are approximately R833,6 million, which is in
line with the fair value of the options at a variable option strike price of
R858,6 million.
5.7 Board appointments
On closing of the proposed transactions, Mrs Nthobi Angel and Mr Leslie
Maasdorp will be nominated by Newco to join the board of Absa.
The Financial Charter has set a board composition target for financial
institutions of 33% black people (with a minimum of 11% being black women) by
31 December 2008. If the Absa shareholders accept the nominations of Mrs Angel
and Mr Maasdorp, the Absa board will have 27,8% black representation (5,6%
being black women). Absa is confident that the required Financial Charter
targets will be achieved well before the targeted date of 31 December 2008.
5.8 Directors" disclosure of interests in the BEE ownership transaction
Mr Tokyo Sexwale is lead Promoter to the Absa empowerment initiative,
Chairman of Newco (which company will upon implementation of the BEE ownership
transaction effectively own 10% of the voting shares of Absa), Chairman of
Mvelaphanda Holdings (Proprietary) Limited (which company will effectively own
20% of the shares of Newco) and a shareholder of Mvelaphanda Holdings
(Proprietary) Limited.
The Promoters have invited Dr FA Sonn and Mr PEI Swartz (both non-executive
directors of Absa), Mr IB Skosana (executive director of Absa Bank), Mr NP
Mageza (alternate executive director of Absa Bank) and Dr NB Bam (former non-
executive director of Absa) to participate in the BEE groupings upon bases and
terms still to be agreed upon by the Promoters.
6. FAIR AND REASONABLE OPINION
Pursuant to the requirements of 5.51(f) and 5.53(b) of the JSE Listings
Requirements, a fair and reasonable opinion from an independent professional
expert is required, indicating whether the terms and conditions of the
proposed transactions are fair and reasonable to Absa"s shareholders.
The Absa board of directors has appointed Merrill Lynch South Africa
(Proprietary) Limited ("Merrill Lynch") to provide such an opinion. Merrill
Lynch has considered the terms of the proposed transactions and, based on a
review of information available to it and certain assumptions set out therein,
is of the opinion that the proposed transactions are fair and reasonable to
the shareholders of Absa. A copy of the full text of the opinion will be
included as an annex to the shareholders" circular. Merrill Lynch is acting
exclusively for Absa and for no-one else in connection with the proposed
transactions and will not be responsible to anyone other than Absa for
providing the protection afforded to clients of Merrill Lynch or for providing
advice in relation to the proposed transactions.
7. OPINION OF THE BOARD
Absa has taken great care in designing the BEE ownership transaction to
ensure that the long-term interests of Absa and all its stakeholders
(including its existing and future shareholders) are positively affected.
However, Absa is not able to predict the future dynamics of a broadly-based
empowerment structure which, by its nature, may generate challenges in the
future and accordingly, the future financial and other benefits emanating from
the BEE ownership transaction are difficult to quantify. Whilst there can be
no absolute assurances that all of the expected benefits of the transaction
will materialise in the future, or at all, the board does believe that the
transaction will be positive for the future development of Absa"s business in
general and that failure to proceed with meaningful empowerment initiatives
would result in the loss over time of shareholder value substantially
