| Wed 25 Aug 2004, 10:45 | | INTRODUCTION OF A BLACK ECONOMIC EMPOWERMENT PARTN |
|
AVENG - INTRODUCTION OF A BLACK ECONOMIC EMPOWERMENT PARTNER
AVENG LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 1944/018119/06)
Share code: AEG ISIN: ZAE000018081
(`Aveng`)
TISO GROUP
(Incorporated in the Republic of South Africa)
(Registration number 1999/010875/07)
(`Tiso`)
* 25% of Grinaker-LTA and Trident Steel sold to a Tiso led BEE consortium for
R496 million
* Over 70% of the proposed BEE transaction to benefit broadly based
communities
INTRODUCTION OF A BLACK ECONOMIC EMPOWERMENT (`BEE`) PARTNER INTO GRINAKER-LTA
LIMITED AND TRIDENT STEEL HOLDINGS (PROPRIETARY) LIMITED
1. Introduction
Aveng supports the South African Government`s BEE initiatives and over the
years has been successful in introducing black shareholders into many of
its operating companies, the details of which are contained in past annual
reports to shareholders. In line with its commitment to transformation,
Aveng now wishes to advance its BEE strategy to both the divisional and
group levels to complement its existing BEE activity at the operating
company level.
Accordingly, Aveng has concluded an agreement, which is effective from 1
July 2004, to introduce a consortium of BEE partners (`BEE consortium`) via
a newly registered company, Qakazana Investment Holdings (Proprietary)
Limited (`Qakazana`), into Aveng`s South African operating subsidiaries,
Grinaker-LTA Limited (`Grinaker-LTA`) and Trident Steel Holdings
(Proprietary) Limited (`Trident Steel`), in terms of which Qakazana will
acquire an effective 25% strategic investment in both Grinaker-LTA and
Trident Steel for a combined value of R496 million (`the proposed BEE
transaction`), subject to the fulfilment of the conditions precedent set
out in paragraph 6 below.
2. The BEE Consortium
While the board of directors of Aveng (`the board`) recognises the
importance of having a lead BEE partner which is able to play a meaningful
role in adding value for all shareholders, it also believes that the fruits
of such an arrangement should benefit a broader base of previously
disadvantaged individuals.
Following a systematic search extending over 12 months, the board has
identified Tiso Group (Proprietary) Limited (`TisoGroup`) to be the lead
BEE partner and has agreed with TisoGroup that it would acquire an
effective 36% controlling interest in Qakazana, through Four Arrows
Investments 39 (Proprietary) Limited (`Four Arrows`), and that TisoGroup,
as the strategic partner, will vote 100% of the issued ordinary shares of
Qakazana on behalf of the BEE consortium. The Tiso Aveng Women`s Trust
(`Women`s Trust`), which will be established for the benefit of broadly-
based women`s groups associated with the building and construction
industry, will be brought into the process with an effective 12% interest
in Qakazana. In addition, the Aveng Community Investment Trust (`Community
Investment Trust`), which is in the process of being established and
registered as a public benefit organisation and to be overseen by an
independent board of trustees, will hold a 20% interest in Qakazana. The
Community Investment Trust will have a clear mandate to focus on investing
in technical and business education and job creation initiatives aligned to
the broader building and construction industry in which Aveng and its
subsidiaries (`the group`) are involved.
Finally, the vitally important role played in the past and to be played in
the future by the employees and black business partners of the group is
recognised by allocating a 32% interest in Qakazana to the Aveng
Empowerment Trust (`Empowerment Trust`).
The shareholding structure of Qakazana, which is effectively owned 71,2%,
after taking into account the Tiso Foundation`s interest in Tiso, by
broadly-based previously disadvantaged parties, after the proposed BEE
transaction, will be as follows: (Refer to the diagram to be published in
the press on 26 August 2004).
TisoGroup is a majority black-owned and managed natural resources,
financial and industrial services group. The 22 staff and management of
TisoGroup hold 56% of the issued share capital of the company, with
Investec Bank Limited holding 24% and the Tiso Foundation, a registered
public benefit organisation chaired by Bishop Dandala, Secretary General of
the All Africa Conference of Churches, holding the remaining 20%. TisoGroup
created the Tiso Foundation in 2002 to ensure broad-based equity
participation in TisoGroup beyond that of its employees, and a channel
through which Tiso contributes to and invests in social initiatives. It is
intended that all income generated by the Tiso Foundation from its
shareholding in TisoGroup will be distributed to projects promoting
leadership and skills development selected by the foundation in terms of
its mandate.
The Women`s Trust will be established to promote the interests of broadly-
based grassroots black women`s groupings through training and empowerment
within the building and construction industry. Two section 21 associations,
namely South African Women in Construction and Women for Housing, have been
consulted in the compilation of the trust documentation and both of these
organisations have been invited to provide a trustee to serve on the
Women`s Trust.
The Empowerment Trust is a trust to be established for the benefit of the
employees (75%) and black business partners of the group (25%). The
Empowerment Trust will hold the shares allocated to it in Qakazana, during
which time an equal number of units in the Empowerment Trust will be
allocated to all permanent employees of Grinaker-LTA and Trident Steel on
an annual basis. In addition, units will be made available by the trustees
from time to time to attract and retain senior black employees. Trustees
will allocate units in the Empowerment Trust to black business partners to
recognise their contributions to the development of group companies.
The Community Investment Trust will be overseen by independent trustees. In
terms of its mandate, the trust will focus principally on technical and
business education projects as well as on job creation initiatives for the
benefit of disadvantaged communities, principally those within the context
of the broader building and construction industry. As the Community
Investment Trust will require cash flows during the transaction period to
be able to fulfil its mandate, Aveng will annually transfer 1% of the prior
financial year`s headline earnings of the group to the Community Investment
Trust as an interest free loan, which funding will be secured by the pledge
of the Community Investment Trusts` interest in Qakazana. The trustees of
the Community Investment Trust will be asked to consider allocating between
10% and 15% of the amount received annually to the Women`s Trust to assist
them in their projects.
3. Rationale
3.1 Approach to BEE at an operating company level
Aveng has to date successfully established joint venture partnerships
at the operating company level with black partners. Aveng has a track
record of establishing empowerment enterprises encompassing a wide
spectrum of the group`s activities in South Africa. Generally, the
majority stake acquired by Aveng initially is reduced to a minority
stake over time. In many instances, Aveng has withdrawn entirely from
the empowerment company once the enterprise development process is
complete and the empowerment enterprise has proved to be economically
sustainable. Aveng remains committed to BEE enterprise development and
skills transfer at the operating level in group companies.
3.2 Approach to BEE at divisional and group level
Aveng believes that BEE involvement at a divisional and group level
will complement what is already taking place at the operating company
level, enhancing the operational success of Aveng. This initiative
will bring about active and constructive black economic participation
in Aveng`s management processes through direct involvement on the
management boards of both Grinaker-LTA and Trident Steel.
The intention is to complement the BEE consortium`s intimate
divisional involvement with a strategic involvement at the Aveng group
level through participation on the main board of Aveng. The BEE
consortium will be paid an annual market-related fee for their
strategic and board involvement and time spent within the group.
Accordingly, the board has resolved to implement a BEE transaction
through the sale of an effective 25% interest in Grinaker-LTA and
Trident Steel to a newly registered company Qakazana (Xhosa for
`little spark`) created for this purpose.
4. SALIENT TERMS OF THE PROPOSED BEE TRANSACTION
In terms of the proposed BEE transaction, Aveng will dispose of a 25%
interest in Grinaker-LTA and Trident Steel to Qakazana at the independently
determined market-related price of R496 million. Qakazana will settle the
purchase consideration by issuing preference shares in Qakazana to Aveng
(`Qakazana preference shares`).
The BEE consortium will then acquire all of the issued ordinary shares in
Qakazana (`Qakazana ordinary shares`) from Aveng for a consideration equal
to their par value. Aveng will continue to hold all of the Qakazana
preference shares.
The following is a diagrammatic overview of the structure after the
proposed BEE transaction: (Refer to the diagram to be published in the
press on 26 August 2004).
4.1 The share capital of Qakazana
4.1.1 Qakazana Ordinary shares
The Qakazana capital structure allows the BEE consortium to
crystallise any capital growth in the value of Qakazana
during the period commencing on 1 July 2004 and ending
between 30 June 2011 and 30 June 2013 (`the transaction
period`). In addition, to reduce the market risk associated
with the determination of value on a single date the BEE
consortium will be allowed to lock in value during the
transaction period, as set out in paragraphs 4.2.1and 4.2.3
below.
The Qakazana ordinary shares carry full voting rights.
As the Community Investment Trust will require cash flows
during the transaction period to be able to fulfil its
mandate, Aveng will provide interest free funding to the
Community Investment Trust, which funding will be secured by
the pledge of the Community Investment Trusts` interest in
Qakazana.
4.1.2 Qakazana Preference shares
The preference shares issued by Qakazana are entitled to
receive a cumulative preference dividend equal to the South
African CPIX plus 8%, compounded quarterly in arrears (`pref
funding rate`).
Except in certain extraordinary circumstances, the
preference shares issued by Qakazana, which are held by
Aveng, will not have any voting rights. The Qakazana
preference shares rank pari passu with the ordinary shares
issued by Qakazana in all other respects.
4.2 The put and call option
In order to provide the BEE consortium with a conversion mechanism at
the end of the transaction period and allow it to lock in value over a
period of time, Aveng has granted the BEE consortium a put option, in
terms of which Aveng is, at the election of the BEE consortium,
required to purchase the Qakazana ordinary shares held by the BEE
consortium (`the put option`).
4.2.1 Exercise dates
The put option can be exercised only by TisoGroup, on behalf
of the BEE consortium, within 30 days after the distribution
of the Aveng annual report to the Aveng shareholders for the
financial years ending on 30 June 2011 and 2012.
TisoGroup will have the right to exercise the put option
early in the event of certain material events which might
effect their investment.
Aveng has the right to exercise a call option within 30 days
after distribution of the Aveng annual report to the Aveng
shareholders for the financial year ending on 30 June 2013,
on the same terms as the put option, if the put option has
not been exercised by that date.
4.2.2 Exercise price
The put option can be exercised at a price that will entitle
the BEE consortium to realise 80% of any increase in the
value of the Qakazana ordinary shares, after deducting the
outstanding balance of the Qakazana preference shares. The
value of Qakazana`s investments in Grinaker-LTA and Trident
Steel will be based on a calculation using the average of
the two-financial year volume weighted average monthly price
earnings ratio of Aveng, which will be applied to the
average headline earnings of Grinaker-LTA and Trident Steel
for the two financial years immediately preceding the
exercise date of the put option. Should either TisoGroup or
Aveng object to the value calculated by using the above
process, the value will be determined by the auditors of
Aveng using the same valuation process adopted initially in
determining the values of Grinaker-LTA and Trident Steel for
purposes of the proposed BEE transaction.
4.2.3 Fixing of the exercise price
In order to ensure that the BEE consortium is not overly
reliant on a market value at a point in time, it has the
option to fix certain percentages of the exercise price
within 30 days after the distribution of the Aveng annual
report to shareholders for the following financial years:
30 June 2007 up to 12.5%
30 June 2008 up to 25.0%
30 June 2009 up to 37.5%
20 June 2010 up to 50.0%
Notwithstanding the portion of the exercised price that is
fixed, the exercise price will be settled at the conclusion
of the transaction period.
4.2.4 Settlement of the exercise price
The exercise price will be settled by Aveng, at its
discretion, by effectively issuing (`the specific issue`)
the requisite number of new Aveng ordinary shares based on
the 30 trading day weighted average price of the Aveng
ordinary shares on the JSE Securities Exchange South Africa
(`JSE`) on the trading day immediately prior to the exercise
of the put option, or in cash.
5. FINANCIAL EFFECTS OF THE PROPOSED BEE TRANSACTION
5.1 Financial effects
The benefits of the proposed BEE transaction to the BEE consortium are
anticipated to accrue during the course of the transaction period and
not at its inception. On the assumption that the BEE transaction took
place on 1 July 2003, the proposed BEE transaction would have had no
effect on the published headline earnings, earnings, net asset value
or net tangible asset value per Aveng share based on the interim
financial results of Aveng for the six months ended 31 December 2003.
5.2 Accounting treatment
Based on current accounting statements, the Aveng financial statements
will reflect a minority interest in each financial period to the
extent of the amount by which the BEE consortium`s proportionate
effective share in the earnings of Grinaker-LTA and Trident Steel
exceeds the pref funding rate.
At present it appears that further changes to accounting standards are
being considered, which could have an effect on the above accounting
treatment. As the proposed BEE transaction will not terminate before
2011 it is likely that changes to accounting standards, including some
not presently envisaged, will be made before then, which could affect
how the proposed BEE transaction is accounted for, including the
consideration paid by Aveng on the exercise of the put option or call
option.
6. CONDITIONS PRECEDENT
The proposed BEE transaction is conditional on the fulfilment, inter alia,
of the following conditions precedent:
6.1 the approval of the specific issue by the requisite majority of Aveng
shareholders;
6.2 the Community Investment Trust, Empowerment Trust and the Women`s
Trust being established and being registered with the Master of the
High Court of South Africa;
6.3 the Community Investment Trust, Women`s Trust and the Empowerment
Trust bind themselves in writing, as parties to the proposed BEE
transaction; and
6.4 the approval of the proposed BEE transaction by the Competition
Authorities.
7. OPINIONS, RECOMMENDATIONS AND UNDERTAKINGS
The directors of Aveng have considered the terms and conditions of the
proposed BEE transaction and are of the opinion that the proposed BEE
transaction is in the best interests of all of Aveng`s key stakeholders,
including customers, suppliers, staff, debt funders and shareholders and,
accordingly, recommend that the Aveng shareholders vote in favour of the
ordinary resolutions required to implement the proposed BEE transaction.
8. POSTING OF CIRCULAR AND SHAREHOLDERS MEETING
A circular containing full details of the proposed transaction and
incorporating a notice of general meeting, to take place at the registered
office of Aveng, Block B, 204 Rivonia Road, Morningside, 2057 at 14:00 on
Thursday, 9 September 2004, will be posted to Aveng shareholders today.
Johannesburg
25 August 2004
Corporate adviser and transactional sponsor
Investec Bank Limited
(Registration number 1969/004763/06)
Corporate legal adviser
TABACKS
Lead Sponsor
J P MORGAN
Reporting accountants
Ernst & Young
Chartered Accountants (SA)
(Registered Accountants and Auditors)
BEE consortium legal adviser
MOSS MORRIS
ATTORNEYS
BEE consortium financial advisers
TISO Capital Advisors
Date: 25/08/2004 09:00:28 AM Produced by the JSE SENS Department
