| Fri 30 Apr 2004, 12:11 | | Statement on Edward Nathan & Friedland |
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Nedcor Limited - Statement on Edward Nathan & Friedland
NEDCOR LIMITED
(Incorporated in the Republic of South Africa)
Registration number: 1966/010630/06
JSE share code: NED
ISIN code: ZAE000004875
STATEMENT ON EDWARD NATHAN & FRIEDLAND
The board of directors of banking group Nedcor Limited wishes to respond to the
comment and speculation on its wholly owned subsidiary Edward Nathan & Friedland
(ENF), the corporate law advisory and consultancy business acquired by the group
in October 1999. This is in line with the principle of transparency as set out
in Tom Boardman"s five-point plan outlined on 15 October 2003.
The facts relating to the ENF acquisition are as follows:
- Prior to the purchase of ENF, Nedcor Investment Bank (NIB) had recognised it
had virtually no presence in the corporate finance market. They had therefore
been looking at a number of alternatives to gain a foothold in this market
including the possibility of purchasing other corporate finance businesses.
Prevailing price earnings multiples were of the order of 20 to 30 times.
- In 1999, Richard Laubscher, the former Nedcor chief executive, through
discussions with Michael Katz, became aware that ENF was considering merging
with an international legal practice.
- Nedcor/NIB then entered into discussions with ENF to purchase its corporate
law advisory business. The chairman of ENF, Professor Michael Katz, although a
non-executive director of Nedcor at the time, was not involved in his capacity
as a director of Nedcor. Because of Michael Katz"s position, great care was
taken not to involve him on the Nedcor side when the acquisition of ENF was
considered. Michael Katz was involved only as one of the ENF representatives.
- Following initial negotiations between the Nedcor executives and ENF, the
proposed transaction to acquire the corporate advisory business of ENF was
presented to the Nedcor chairman"s committee on 18 October 1999. Six non-
executive directors and six of the executive committee members were present and
discussed the issue. It was agreed by the committee that the executive
management could proceed with the negotiations. Michael Katz, who was a non-
executive director representative on the committee, recused himself from these
discussions.
- The committee was aware that ENF would, on its own, not be able to generate
sufficient profit from advisory fees to achieve the return on investment
generally required by the Nedcor group. However, it was felt that it would
achieve an acceptable return when combined with the potential uplift from
additional corporate finance activity, as well as the booking of assets
originated through advisory work. The rationale was that an integrated legal,
corporate finance and transactional services offering would position NIB to take
advantage of additional deal flow and lead to an incremental growth in assets.
In recording the discussion, the minutes of the Nedcor chairman"s committee
stated inter alia "That similar businesses internationally would command prices
of between one and three times gross annual revenue" and "That negotiations were
conducted on the basis of NIBH acquiring ENF at approximately R400 million,
representing four times gross annual revenue". The minutes went on to say "....
there was a gap in NIB"s corporate finance and project finance activities" and
"That the possible acquisition of ENF centred not on the buying of certainty of
income, but the buying of `deal flow" and an investment in a `skills house". At
that stage, NIB was a small participant in the corporate advisory market and the
transaction was expected to catapult NIB into a more prominent position. ENF
generated 75% of its revenue at the time from commercial and corporate
activities.
- Nedcor was also well aware that the only real asset of a law firm, apart from
its good name, trademark and reputation, is its intellectual capital, and that
the professionals of ENF needed to be paid market-related remuneration. This was
in fact a term of the acquisition agreement.
- It was expected that ENF would raise the profile of NIB thereby assisting in
the acquisition of top corporate talent.
- The acquisition of ENF, for a cash payment of R400 million, was approved by
the NIB board of directors on 29 October 1999. Michael Katz recused himself from
the decision.
- As was common practice at the time, the goodwill on the acquisition was
immediately written off against share premium.
Following the ENF acquisition, NIB was able to build a highly rated corporate
finance team and to move to a leading position in the corporate advisory space.
In 2003 Nedbank Corporate was ranked number one in the annual Ernst & Young
survey of corporate finance advisers in South Africa, highlighting the benefits
of the integrated approach to corporate finance transactions. In the recent 2004
survey, Nedbank Corporate was ranked second of the SA corporate advisors in
terms of deal value and first in terms of the number of transactions.
Nedcor chief executive, Tom Boardman, said it seems that one of the main
reasons, apart from deal flow, for the acquisition of ENF was to increase the
size and position of the corporate finance business of Nedcor. Corporate finance
earnings after tax excluding ENF grew from approximately R210 000 in 1999
(before the acquisition) to R11,3 million in 2000, R12,7 million in 2001, R31
million in 2002 (including BoE for six months) and R23,9 million in 2003. The
group has not tracked all the transactions initiated by ENF, but, in addition to
the contribution to corporate finance, ENF have referred a substantial value of
transactions to Nedbank Corporate. The operating profit of ENF, including income
from non traditional legal fees (after remuneration paid to ENF directors,
before taxation, corporate overheads and financing costs) was R31,3 million in
2000, R29,3 million in 2001, R14,7 million in 2002 and R20,8 million in 2003.
This profit excludes the income earned in ENF"s sponsor division which was
merged with Nedcor"s sponsor division.
Tom Boardman confirmed that the investment in ENF, in line with a number of
other investments, was being reviewed. Boardman commented, "Both Nedcor and ENF
wish to retain a close working relationship one way or another. A structure is
being considered which, if accepted, will further enhance ENF"s ability to
effectively operate as it would have done as a stand alone practice, being able
to position itself competitively, whilst remaining in the Nedcor group with the
transaction flow potential for Nedcor."
30 April 2004
Sandton
Issued by Tier 1 Investor Relations on behalf of Nedcor Limited
For further information contact:
Tier 1 Investor Relations
Tel: +27 (0)21 702-3102
Date: 30/04/2004 11:00:06 AM Produced by the JSE SENS Department
