| Fri 8 Oct 2004, 9:37 | | Afgri Limited - Offer By Afgri Operations Limited |
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Afgri Limited - Offer By Afgri Operations Limited To Acquire Certain Specified
Release Date: 08/10/2004 07:26:15 Code(s): AFR
Afgri Limited - Offer By Afgri Operations Limited To Acquire Certain Specified
Assets And Specified Liabilities Of Boland Agri Beherend Limited
AFGRI LIMITED
(Incorporated in the Republic of South Africa)
Registration number: 1995/004030/06
Share Code: AFR
(ISIN : ZAE000040549)
OFFER BY AFGRI OPERATIONS LIMITED, A WHOLLY-OWNED SUBSIDIARY OF AFGRI LIMITED
(`AFGRI`), TO ACQUIRE CERTAIN SPECIFIED ASSETS AND SPECIFIED LIABILITIES OF
BOLAND AGRI BEHEREND LIMITED (`Boland Agri`) AS A GOING CONCERN (`the AFGRI
Offer`)
1. INTRODUCTION
Shareholders of Boland Agri (`Boland Agri Shareholders`) are referred to the
announcement of the AFGRI Offer published on 16 September 2004.
Boland Agri`s board of directors (`the Boland Agri Board`) published an
announcement on 5 October 2004, which contained, inter alia:
- extracts from the opinion of Boland Agri`s independent advisors in regard
to the AFGRI Offer; and
- the Boland Agri Board`s recommendation to Boland Agri Shareholders in
regard to the AFGRI Offer (collectively, `the Boland Agri Recommendation`).
This announcement sets out AFGRI`s response to the Boland Agri Recommendation.
2. RESPONSE TO SPECIFIC STATEMENTS CONTAINED IN THE BOLAND AGRI RECOMMENDATION
2.1 Repayment of Boland Agri shareholder loans
The Boland Agri Recommendation emphasises that Boland Agri`s
shareholder loans (`Shareholder Loans`), which amounted to R62 million
at 30 April 2004, would also be repaid in the event that Boland Agri
Shareholders approve the proposed merger between Boland Agri and WPK
Beleggings Limited (`WPK`) (`the proposed WPK Merger`).
The repayment of Shareholder Loans on implementation of the proposed
WPK Merger could have significant implications, inter alia:
- for Boland Agri (in respect of its future profitability and
capital structure);
- for the proposed WPK Merger (insofar as the respective share
ratios to be allocated to Boland Agri and WPK shareholders are
concerned); and
- for the proposed new entity that would combine the businesses of
Boland Agri and WPK (which is referred to as `Cape Agri`),
particularly in respect of its future profitability and capital
structure.
The Boland Agri Board failed, however to indicate the following
critical information pertaining to the proposed repayment of
Shareholder Loans on implementation of the WPK Merger, namely:
- the timing of the repayment of such Shareholders Loans (and the
possible impact of inflation on the net present value of these
loans); and
- the source of funding that will be applied to repay Shareholder
Loans and the impact that such repayment would have on the
overall profitability of Boland Agri.
Boland Agri`s latest published audited balance sheet, as at 30 April
2004, indicates that Boland Agri does not have sufficient cash funds
available to repay the Shareholder Loans and that such a repayment
would require one or more of the following:
- Boland Agri incurring significant additional debt; and/or
- Boland Agri having to dispose of certain core assets or
investments; and/or
- WPK (and, by implication, WPK shareholders) having to fund the
repayment of Boland Agri`s Shareholder Loans.
The repayment of Shareholder Loans could therefore materially impact
upon:
- Boland Agri`s profitability (and therefore also the proposed Cape
Agri`s profitability);
- Boland Agri`s ability to declare and pay commissions/bonuses
and/or dividends to its shareholders (likewise in respect of Cape
Agri);
- the value of Boland Agri`s shares; and
- the ratio in terms of which shares would be allocated to Boland
Agri Shareholders in Cape Agri, vis-a-vis the shareholders of WPK
(i.e. how many shares in Cape Agri the Boland Agri Shareholders
would have to sacrifice if repayment of the Shareholder Loans is
effected).
2.2 Offer price per share
AFGRI published an indicative distribution per Boland Agri Shareholder
of R2.50 per Boland Agri share (in addition to the repayment of
Shareholder Loans amounting to R62 million).
According to the Boland Agri Recommendation, it appeared, based on
certain assumptions, as if the net amount to be distributed pursuant
to the implementation of the AFGRI Offer would be R1.96 per Boland
Agri share.
AFGRI and its advisors draw the following to the attention of Boland
Agri`s Shareholders:
- Boland Agri did not disclose any of the assumptions used by them
in calculating the net amount of R1.96 per share (in addition to
the repayment of Shareholder Loans amounting to R62 million);
- Boland Agri informed its shareholders, at informal information
sessions held by them, that their assumptions included, inter
alia, liquidation costs of approximately R7 million. Such amount
appears to be excessive in view of the nature of the AFGRI Offer
and the structure of Boland Agri and its operations;
We have obtained independent professional advice to confirm:
- The reasonableness of the assumptions in allocating the purchase
price applied by AFGRI and its advisors in calculating the
potential tax liability; and
- The amount of the potential tax liability to Boland Agri upon
implementation of AFGRI`s offer
AFGRI therefore reiterates that its offer would result in a dividend
distribution of R2.50 per Boland Agri share (in addition to the
repayment of Shareholder Loans amounting to R62 million) and AFGRI
hereby undertakes the following to Boland Agri Shareholders,
- It guarantees a payment, upon acceptance and implementation of
the AFGRI Offer, in the form of a dividend exempt from income
tax, of R2.50 per Boland Agri share (in addition to the repayment
of Shareholder Loans amounting to R62 million);
- provided that Boland Agri agrees to follow the advice given by
AFGRI`s corporate advisors in respect of the implementation of
the AFGRI Offer;
- Boland Agri does not incur unnecessary or unauthorised costs
during the process of implementation of the AFGRI Offer, and in
particular the voluntary liquidation of Boland Agri and the
payment of a dividend to Boland Agri Shareholders; and
- Boland Agri allows AFGRI to conduct a due diligence investigation
which would, inter alia, allow AFGRI to implement its offer in
the manner most beneficial to Boland Agri Shareholders
2.3 Fair & reasonable value of Offer price per Boland Agri share
According to the independent opinion obtained by Boland Agri`s Board,
the equivalent offer price of R1.96 per share (in addition to the
repayment of Shareholder Loans amounting to R62 million) does not
constitute a fair and reasonable price.
However, the price upon which Boland Agri`s Board obtained an
independent opinion, is inaccurate, particularly in view of AFGRI`s
undertaking in 2.2 above.
Furthermore, Boland Agri`s Board has not published any indication of
what it or its advisors consider to be a fair and reasonable offer
price. Therefore Boland Agri Shareholders are not placed in a position
to fairly consider the merits of the AFGRI Offer. The Boland Agri
Recommendation does not set out clear reasons in support of the
rejection of the AFGRI Offer consideration, other than certain
statements that appear to be speculative.
A statement is made in the Boland Agri Recommendation that `although a
measure of value would be unlocked in favour of Boland Agri
Shareholders in the short term, the true value would be for the
benefit of AFGRI and its shareholders.` (AFGRI`s underlining).
However, no indication is given as to what such `true value`
constitutes or how it has been arrived at.
2.4 Payment date and conditions pertaining to the AFGRI Offer
consideration
The conditions pertaining to AFGRI`s Offer are less onerous than those
customary to a transaction of this nature. In particular, AFGRI has
not insisted on a due diligence investigation to confirm, inter alia,
the value of Boland Agri`s assets and liabilities.
The possible adjustment of the AFGRI Offer consideration will only
apply if Boland Agri has materially misstated the book value of its
assets and liabilities in its latest audited annual financial
statements at 30 April 2004. The provisional liabilities to which the
Boland Agri Recommendation refers and which would remain with Boland
Agri, are only relevant if Boland Agri`s liabilities have been
materially understated in its audited financial statements.
AFGRI is therefore of the opinion that these customary and reasonable
conditions imposed by AFGRI in its offer are emphasised by Boland
Agri`s Board in an attempt to deflect attention from the real value of
AFGRI`s Offer.
2.5 Over the counter trading value of Boland Agri shares and the unlocking
of value
Boland Agri`s Board concedes that the over the counter trading value
of Boland Agri`s shares does not reflect the true value of the shares.
However:
- it does not state what it considers to be a realistic value of
the Boland Agri shares; or
- on what basis it has arrived at such a value.
More importantly, the Boland Agri Board does not propose, indicate or
recommend an alternative way in which the underlying value of Boland
Agri shares could be unlocked.
Contradictory feedback by Boland Agri Shareholders in regard to the
proposed WPK Merger was given in this regard to AFGRI during the
course of the AFGRI information sessions held by AFGRI in the Boland
Agri region during this week. Certain Boland Agri Shareholders
appeared to be under the impression that trading restrictions would be
maintained by Cape Agri, whilst others had different views.
It is important for Boland Agri Shareholders to understand the exact
proposed arrangements in respect of the proposed WPK Merger and Cape
Agri and in particular:
- how freely their shares in Cape Agri would be tradable; and
- if not, how else the Boland Agri/Cape Agri board of directors
would propose to allow shareholders to unlock inherent value.
2.6 Value increase resulting from the establishment of Cape Agri
The Boland Agri Recommendation contains a statement that the Boland
Agri Shareholders` value would `further increase` subsequent to Boland
Agri and WPK establishing Cape Agri.
Importantly, the Boland Agri Board did not disclose:
- the reason why the Cape Agri shares which Boland Agri
Shareholders would receive on implementation of the WPK Merger,
would suddenly be worth more, than the Boland Agri shares they
currently hold; nor
- the impact that the proposed repayment of the Boland Agri
Shareholder Loans would have on such value (refer also 2.2
above); nor
- the costs associated with the proposed WPK Merger.
Furthermore, no indication is given in respect of the future
unlocking of value of shares held in Cape Agri.
Boland Agri Shareholders should also consider the income tax
implications of unlocking value in Cape Agri, vis-a-vis the AFGRI
Offer. The AFGRI Offer would result in a tax exempt payment to Boland
Agri Shareholders (in the form of dividends and the repayment of
Shareholder Loans), whilst disposing of shares in Cape Agri would
result in capital gains tax being levied on profits made by Boland
Agri Shareholders.
2.7 Rationalisation assumed by the Boland Agri Recommendation
The Boland Agri Recommendation states under the heading `other
considerations` that there would be `probable rationalisation` upon
acceptance of the AFGRI Offer. No basis or justification for this
unwarranted assumption is provided, bearing in mind that:
- AFGRI has no regional infrastructure in the Western Cape;
- AFGRI would be compelled (in terms of section 197 of the Labour
Relations Act) to assume responsibility for Boland Agri`s staff
on the same basis which applied prior to implementation of the
AFGRI Offer; and
- despite Boland Agri`s independent advisors having considered the
possible effects and benefits of the proposed WPK Merger, they do
not make mention of possible rationalisation in relation to the
dual infrastructure, head office and overlapping functions which
currently exist between WPK and Boland Agri.
AFGRI and its advisors therefore view this statement as unjustified.
2.8 Lower silo costs undertaken by AFGRI
Boland Agri`s advisors state that AFGRI`s proposed lower silo costs
could be an attempt (by AFGRI) to `buy market share`.
This statement is without any substance, in view of the following:
- the lower silo tariffs undertaken by AFGRI represents its actual
current average national silo rate. It does not represent a
special rate which AFGRI proposes to introduce in an attempt to
acquire additional market share; and
- Boland Agri historically has an under-capacity in terms of its
silos, hence there is no need to acquire market share in a market
that requires additional silo capacity. The silo capacity
requirement is confirmed by the fact that AFGRI has successfully
introduced additional silo capacity in the Western Cape in its
Klipheuwel bunker silo.
3. RECOMMENDATION BY THE BOLAND AGRI BOARD
Boland Agri`s Board recommends that Boland Agri Shareholders should reject
AFGRI`s Offer, inter alia, upon the recommendation that value (in Cape
Agri) would be unlocked:
- in the long-term; and
- in a `responsible manner`.
The Boland Agri Board fails to indicate, however:
- what `long-term` in reality means;
- what the effect of inflation would be on the unlocking of future
value, including Shareholder Loans;
- what the risks are of not accepting an immediate cash offer and, in
particular, the AFGRI Offer;
- the risks pertaining to the proposed WPK Merger (including competition
law issues, refer 5 below);
- what mechanism would lead to the unlocking of value in Cape Agri, and,
in particular:
- if share trading restrictions would remain or are to be removed;
- if share trading restrictions remain, how such restrictions would
affect the unlocking of value in Cape Agri; and
- if no share trading restrictions are to remain, how Cape Agri would
propose to protect itself against perceived hostile take-over offers
(which Boland Agri holds out to be one of the motivating factors for
establishing Cape Agri).
4. AFGRI OFFER NOTICE AND BOLAND AGRI BOARD APPROVAL
The Boland Agri Recommendation points out that even if Boland Agri
Shareholders approve the AFGRI Offer, it would still require the approval
of the board of directors of Boland Agri. If the Boland Agri Board refuses
to approve the AFGRI Offer notwithstanding approval of the transaction by
Boland Agri shareholders in terms of section 228 of the Companies Act,
1973, the Boland Agri Board would potentially expose themselves to all
relevant remedies available to the shareholders of a company in those
circumstances, including potential actions for damages for failure to act
with the necessary degree of care and skill and removal from the board of
directors.
5. EFFECT ON COMPETITION IN THE WESTERN CAPE
5.1 Proposed WPK Merger reduces competition
The Boland Agri Recommendation does not address the possible effects
on competition in the Western Cape of the proposed WPK Merger.
Boland Agri and WPK shareholders should consider the fact that, if the
WPK Merger is approved and implemented, approximately 65% of the
Western Cape`s silo capacity would be controlled by a single entity
(i.e. Cape Agri), thereby reducing competition in the region
significantly. In terms of the Competition Act, 1998, a firm is
dominant in a market if it has at least 45% of that market. Any
dominant firm is strictly prohibited from abusing that position of
dominance. Any proposed merger between two dominant firms will also
raise serious merger related concerns since such a merger in all
likelihood will lead to a substantial lessening of competition in the
relevant Western Cape market. This factor will play a major role in
the deliberations of the Competition authorities whether to approve
the WPK Merger or not.
Shareholders of Boland Agri and WPK are in many instances also
consumers relying on, inter alia, the silos in the area. The proposed
WPK Merger could have a significant long-term impact on the costs
pertaining to these services as a result of the elimination of
competition.
5.2 AFGRI Offer would maintain competition
The AFGRI Offer would ensure that healthy competition in the area
would be maintained, particularly in regard to silo tariffs, as a
result of maintaining two of the current regional competitors as
separate entities with different shareholders.
AFGRI has already signalled its intention to introduce further
competition in the Western Cape by undertaking to significantly reduce
Boland Agri`s silo tariff costs upon implementation of the AFGRI
Offer.
6. CONCLUSION
Shareholders who were unable to attend the AFGRI information sessions in
the Boland Agri region or alternatively who require further information on
AFGRI or the AFGRI Offer, may contact Cobus Human of Quaestor Capital on
(011) 535 4600.
Johannesburg
7 October 2004
Quaestor Capital Brink Cohen Le Roux Inc
Corporate Advisor to AFGRI on the Offer Attorneys to AFGRI
