| Mon 9 May 2005, 8:50 | | Barclays Bank PLC offer to Absa shareholders |
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Sanlam - Announcement Barclays Bank PLC offer to Absa shareholders
Sanlam Limited
(Incorporated in the Republic of South Africa)
(Registration number 1959/001562/06)
Share code: SLM
ISIN: ZAE000028262
(`Sanlam` or `the Group`)
Announcement Barclays Bank PLC offer to Absa shareholders
1. INTRODUCTION
It was announced on SENS on Monday, 9 May 2005 that Barclays has the firm
intention to acquire, by way of a recommended acquisition, 60% of Absa`s
ordinary share capital (the `Barclays Acquisition`). Absa ordinary shareholders
who participate in the Barclays Acquisition will receive a cash consideration of
R82.50 per Absa ordinary share acquired by Barclays in terms of the Barclays
Acquisition. Absa shareholders on the register at the dividend record date (24
June 2005) will be entitled to receive the final dividend of R2.00 per Absa
ordinary share in respect of the financial year ended
31 March 2005. Sanlam`s shareholders` funds have a beneficial ownership of
18.8% of the Absa ordinary shares (the `Sanlam Absa Shares`).
The Barclays Acquisition is subject to the fulfilment or waiver of certain
conditions including, inter alia, no material adverse change in the business
condition of Absa, and Barclays being able to acquire at least 56.5% of the Absa
Shares. Barclays has indicated that it will formally launch the
Barclays Acquisition as soon as practicably possible. Further details of the
Barclays Acquisition are included in the announcement made on SENS on 9 May 2005
by Barclays regarding its firm intention to undertake the Barclays Acquisition.
As Sanlam is seeking the ability to dispose of up to 100% of the Sanlam Absa
Shares to Barclays, the Disposal (as defined below) is a Category 1 transaction
in terms of the JSE Securities Exchange South Africa Listings Requirements.
Sanlam is accordingly required to seek shareholder approval and issue a circular
(the `Circular`) to Sanlam shareholders containing full details of the Disposal
and the ordinary resolutions (the `Resolutions`) to be approved by Sanlam
shareholders to implement the Disposal.
2. SUMMARY STRUCTURE OF THE ABSA DISPOSAL
The Barclays Acquisition is to be achieved through a dual mechanism, being a
scheme of arrangement (the `Scheme`) and a simultaneous partial offer (the
`Simultaneous Partial Offer`) in terms of which Absa shareholders will be
invited to tender all or some of their Absa Shares for purchase by Barclays, to
allow Barclays, following completion of the Barclays Acquisition, to hold up to
60% of Absa`s ordinary share capital. The Scheme, if successful, will result in
Barclays acquiring approximately 32% of Absa`s ordinary share capital and the
Simultaneous Partial Offer, if successful, will result in Barclays acquiring an
additional 28% of Absa`s ordinary share capital, together comprising 60% of
Absa`s ordinary share capital. The Scheme and the Simultaneous Partial Offer are
inter-conditional, have been recommended by the Absa Board and have the support
of the Absa management team.
Sanlam has entered into a conditional irrevocable undertaking with
Barclays that, subject to the fulfilment or waiver of certain conditions, it
will vote in favour of the Scheme and the Whitewash Resolution (as defined
below), and tender all of its Sanlam Absa Shares to Barclays in terms of the
Simultaneous Partial Offer, to allow Barclays to acquire additional Absa
ordinary shares, up to an aggregate level of 60%, to the extent that other
shareholders do not participate in the Simultaneous Partial Offer. As a result
of this commitment to Barclays, it is possible that in terms of the Barclays
Acquisition, Sanlam could dispose of the entire holding of Sanlam Absa Shares.
The conditional irrevocable undertaking given by Sanlam to Barclays requires the
Scheme to be proposed and the Simultaneous Partial Offer to be made before 8
June 2005 and does not prevent Sanlam benefiting from a higher Barclays
Acquisition price nor from accepting a materially better alternative offer from
another offeror. The disposal by Sanlam of up to 100% of the Sanlam Absa Shares
to Barclays through the Barclays Acquisition or to any other offeror is
collectively `the Absa Disposal` or `the Disposal`.
Sanlam has undertaken to vote, subject to shareholder approval, in favour of the
resolution to waive the requirement for a full mandatory offer from Barclays
(`the Whitewash Resolution`). A mandatory offer would otherwise be triggered in
terms of Rule 8 of the SRP Code on Takeovers and Mergers following the
acquisition by Barclays of ordinary shares comprising in aggregate 35% or more
of the voting securities in Absa.
3. SUMMARY DESCRIPTION OF ABSA
Absa is one of South Africa`s largest financial services organisations, serving
personal, commercial and corporate customers in South Africa. Absa also provides
products and services to selected markets in the United Kingdom and the Channel
Islands, Germany, the United States, Asia and Africa.
Absa applies a customer-centric business model with targeted business units
serving specific market segments. Absa interacts with its customers through a
combination of physical and electronic channels, offering the full spectrum of
banking services, from basic products and services for the low-
income personal market to customised solutions for the commercial and corporate
market.
4. SANLAM`S SHAREHOLDING IN ABSA
Sanlam Group (the `Group`) companies currently have an interest of 142.2 million
Absa ordinary shares (or 21.5% of Absa`s ordinary share capital). Of these 142.2
million Absa ordinary shares 18.0 million Absa ordinary shares (or 2.7% of
Absa`s ordinary share capital) are held on behalf of policyholders` funds and by
Santam Limited (`Santam`). The balance of 124.2 million shares (or 18.8% of
Absa`s ordinary share capital) is held on behalf of the Sanlam shareholders`
funds, giving Sanlam`s shareholders an indirect beneficial interest in these
shares. These 124.2 million Absa ordinary shares (i.e. the Sanlam Absa
Shares), represent the shares that, subject to the fulfilment of certain
conditions referred to in paragraph 7 below, Sanlam has undertaken to dispose
of to Barclays in terms of the Barclays Acquisition and are the subject of the
ordinary resolutions. The responsible portfolio managers will have full
discretion to decide on the policyholders` funds` participation in the
Barclays Acquisition, subject to the terms of their respective mandates.
Santam will have full discretion to decide on its participation in the
Barclays Acquisition.
5. RATIONALE FOR THE DISPOSAL AND USE OF PROCEEDS
As disclosed in previous Sanlam announcements, including the Group`s
final results announcement on 3 March 2005, the Sanlam Board (`the Board`) is
continuing to assess ways to enhance the efficiency of capital utilisation
within the Group. The proposed monetisation of the investment in Absa will
reduce the current concentration risk in Sanlam`s shareholders` funds, provide
Sanlam with additional capital liquidity and flexibility, and allow Sanlam
more potential for improved capital efficiency than its current shareholding
in Absa affords.
The Board believes that the financial terms of the Barclays Acquisition
reflect appropriate value for Sanlam`s investment in Absa. The Board will use
the proceeds to continue to manage the growth of Sanlam in the most
appropriate manner to achieve long-term value for Sanlam shareholders. This
includes the pursuit of investment opportunities that complement the Group`s
growth strategy and meet appropriate return hurdle rates. Any excess capital
will be returned to shareholders through an optimal combination of capital
distribution and share buy-backs.
6. ONGOING BUSINESS RELATIONSHIP WITH ABSA
Sanlam has received a commitment from Absa to continue developing the
ongoing relationship between Sanlam and Absa, based on the principle of
commercial reciprocity, as set out in a Memorandum of Understanding entered
into between the two groups in August 2003. Barclays has indicated its support
for the relationship between Absa and Sanlam.
7. SHAREHOLDERS APPROVAL
The Absa Disposal is subject to the approval by the shareholders of
Sanlam in a general meeting.
The effective date of the Absa Disposal will be three business days
after the closing date of the Barclays Acquisition. The final number of Sanlam
Absa Shares to be disposed of by Sanlam is subject to approval of the Scheme and
the number of Absa ordinary shares disposed of by other Absa shareholders as
part of the Simultaneous Partial Offer and will only be known once the Scheme
becomes operative and the Simultaneous Partial Offer has closed. The final
number of Sanlam Absa Shares that have been sold as part of the Absa Disposal,
will be disclosed in Sanlam`s interim financial results announcement for the
period ended 30 June 2005.
8. UNAUDITED PRO FORMA FINANCIAL EFFECTS OF THE ABSA DISPOSAL
The Board believes that the Disposal of all or the majority of the
Sanlam Absa Shares, on the proposed Barclays Acquisition terms, will be
beneficial to Sanlam and its shareholders.
The effects of the Disposal are calculated in terms of South African
Standards of Generally Accepted Accounting Practice and do not take account
of any potential effects as a result of the implementation of International
Financial Reporting Standards effective 1 January 2005.
The Disposal will be accretive to attributable earnings due to the
inclusion of the realised capital gain in the pro forma attributable earnings.
As a result of the Disposal, Sanlam`s shareholding in Absa will no longer be
equity-accounted in Sanlam`s attributable earnings. Only investment income
earned and realised capital gains on the Disposal proceeds will be
reflected in attributable earnings and all unrealised market value changes in
respect of the investment of Disposal proceeds will be excluded from
attributable earnings.
The Disposal will be dilutive to headline earnings calculated on the
2004 accounting basis, primarily due to the way the investment in Absa is
accounted for by Sanlam. Headline earnings include operating income,
investment income, as well as equity-accounted Absa income, but exclude
realised and unrealised market value changes. As a result of the Disposal,
Sanlam`s shareholding in Absa will no longer be equity-accounted in Sanlam`s
headline earnings. Only investment income earned on the Disposal proceeds
will be reflected in headline earnings and all market value changes in respect
of the investment of Disposal proceeds will be excluded from headline
earnings. If Sanlam retains a shareholding in Absa, the residual Absa stake
will be accounted for as a normal portfolio investment.
The Board does not view this headline earnings dilution as detrimental
to Sanlam`s future value as the effect is due to a change in the applicable
accounting treatment and not a fundamental change in value.
In addition, the Disposal is immediately accretive to and improves the
quality of Sanlam`s embedded value, which the Board considers to be a more
important determinant of shareholder value than attributable or headline
earnings. The Disposal will crystallise the strong rally in Absa`s share price
over the past nine months and the Disposal will decrease the volatility in the
embedded value due to the reduction in concentration risk that the Absa
shareholding currently represents.
The Disposal will also immediately improve the quality of Sanlam`s
capital and the Disposal proceeds will provide the Board with more flexibility
to pursue value-enhancing initiatives than the current Absa shareholding
affords.
The continuation of the existing business relationship between Absa and
Sanlam and the support of Barclays for the relationship, gives the Board
confidence that Sanlam will continue to benefit from the relationship by way
of an improvement in Sanlam`s new business profitability.
The tables below set out the financial effects of the Absa Disposal
based on the audited published financial results of Sanlam for the year ended
31 December 2004. The unaudited pro forma financial effects are presented for
illustrative purposes only and because of their nature may not be a fair
reflection of Sanlam`s financial position after the Absa Disposal, nor of
Sanlam`s future earnings.
Because the absolute number of Absa Shares that Sanlam will sell to
Barclays is uncertain at this stage, the tables below set out the financial
effects of a Disposal of both 60% and 100% of the Sanlam Absa Shares.
Unaudited pro forma financial effects assuming 60% Disposal:
Unaudited
Audited Unaudited pro forma
before the pro forma after the
Disposal(1) adjustments Disposal
Diluted earnings per share
(cents)(2)
Core earnings 122.3 (22.2) (3) 100.1
Headline earnings 116.6 (22.2) (3) 94.4
Attributable earnings 120.2 95.6 (3) 215.8
Adjusted headline earnings based
on the LTRR 151.6 (2.0) (3) 149.6
Basic earnings per share (cents)
Core earnings 123.8 (22.5) (3) 101.3
Headline earnings 118.0 (22.5) (3) 95.5
Attributable earnings 121.7 96.8 (3) 218.5
Adjusted headline earnings based
on the LTRR 153.5 (2.0) (3) 151.5
Shareholders` funds after
adjusting
for subsidiaries at
fair value (R million) 29 982 566 (4) 30 548
Net asset value per share
after adjusting for
subsidiaries at fair value (cents) 1 100 21 (4) 1 121
Net asset value per share (cents) 1 014 21 (4) 1 035
Tangible net asset value
per share (cents) 946 21 (4) 967
Embedded value of
shareholders` funds
(R million) 36 682 566 (4) 37 248
Embedded value per share (cents) 1 346 21 (4) 1 367
Return on embedded value per
share (%) 22.5 1.9 (5) 24.4
Weighted average number
of ordinary shares
(million) 2,698.3 - 2,698.3
Diluted weighted average number of
ordinary shares (million) 2,731.3 - 2,731.3
Adjusted shares issued at end of
period
(million) 2,725.9 - 2,725.9
Notes:
1. Extracted from the audited published results of Sanlam for the year
ended 31 December 2004.
2. Based on basic earnings adjusted for shares yet to be issued under the
Sanlam Share Incentive Scheme and the conversion of deferred shares to the
extent that conversion rights have vested.
3. For the purposes of calculating the pro forma basic and diluted core
earnings, headline earnings, attributable earnings and adjusted headline
earnings based on the LTRR per ordinary Sanlam share it was assumed that:
(a) The Disposal was effected on 1 January 2004.
(b) After selling a stake of 11.3% in Absa (74.5 million shares) at R82.50
per share, it was assumed that Sanlam would reinvest the proceeds in a
balanced portfolio.
(c) The actual return of 4.1% (after tax 3.5%) earned during the year ended
31 December 2004 on other assets (excluding the investment in Absa) was
assumed to have been earned on the investment of the net proceeds of R5 768
million in a balanced portfolio with the same asset mix as the actual mix
during this period.
(d) The shareholders` funds` investment in Absa was previously equity-
accounted as the Sanlam Group held a stake of more than 20%. Following the
Disposal of the stake in Absa, the return on the proceeds will in future be
disclosed as investment return in line with current accounting policies.
The dividends on the retained stake were included in investment income
and the investment gains treated similar to other financial instruments.
(e) In line with Sanlam`s current accounting policies, the gain realised
upon the Disposal of the investment in Absa, after allowing for capital gains
tax, has been transferred from unrealised investment surpluses, which are
taken directly to equity, to realised investment surpluses through the income
statement. It does not, however, form part of core or headline earnings.
The realised gain represents the difference between the proceeds of
R82.50 per share and the original cost, applied to the 74.5 million shares
sold, net of Disposal costs of R51 million. The capital gains tax effect
represents the difference between the Disposal price and the assumed tax base
cost of these shares, a capital gains tax inclusion rate of 50% and a
corporate income tax rate of 30%.
(f) For the LTRR headline earnings, the equity-accounted earnings of the
Absa stake has been replaced with an expected long-term rate of
return earnings of 11% pre tax (9% post tax) on the reinvested net proceeds of
R5 768 million and the retained Absa stake.
4. For the purposes of calculating the pro forma net asset value, net
tangible asset value and embedded value per ordinary Sanlam share, it was
assumed that:
(a) The Disposal was effected on 31 December 2004.
(b) Goodwill is regarded as an intangible asset.
(c) A stake of 11.3% in Absa (74.5 million shares), carried at a fair value
of R75.99 per share as at 31 December 2004, was sold at the Disposal price of
R82.50 per share.
The proceeds were invested in a balanced portfolio of investments. The
remainder of the stake not sold (49.7 million shares) was not revalued to the
Disposal price.
(d) The increase in net asset value of R566 million consists of the
following:
(i) The realised gain on the sale of the stake in Absa, which amounted to
R485 million.
(ii) The capital gains tax liability as at 31 December 2004 was based on a
conservative calculation methodology that did not assume immediate disposal of
the Absa Shares. The sale of 74.5 million Absa Shares at R82.50 per share
reduced the accounting capital gains tax liability by R132 million.
(iii) Disposal costs amounting to R51 million were paid in cash on 31 December
2004.
5. The increase in net asset value of R566 million as a result of the
Disposal represents a return of 1.9% on the embedded value of R29 231 million
as at 1 January 2004.
Unaudited pro forma financial effects assuming 100% Disposal:
Unaudited
Audited Unaudited pro forma
before the pro forma after the
Disposal(1) adjustments Disposal
Diluted earnings
per share (cents)(2)
Core earnings 122.3 (21.0) (3) 101.3
Headline earnings 116.6 (21.0) (3) 95.6
Attributable earnings 120.2 175.6 (3) 295.8
Adjusted headline earnings based
on the LTRR 151.6 (1.7) (3) 149.9
Basic earnings per share (cents)
Core earnings 123.8 (21.3) (3) 102.5
Headline earnings 118.0 (21.3) (3) 96.7
Attributable earnings 121.7 177.7 (3) 299.4
Adjusted headline earnings based
on the LTRR 153.5 (1.8) (3) 151.7
Shareholders` funds
after adjusting
for subsidiaries at
fair value (R million) 29 982 950 (4) 30 932
Net asset value per share
after adjusting for
subsidiaries at
fair value (cents) 1 100 35 (4) 1 135
Net asset value
per share (cents) 1 014 35 (4) 1 049
Tangible net asset value
per share (cents) 946 35 (4) 981
Embedded value of
shareholders` funds
(R million) 36 682 950 (4) 37 632
Embedded value per
share (cents) 1 346 35 (4) 1 381
Return on embedded value
per share (%) 22.5 3.2 (5) 25.7
Weighted average number
of ordinary shares
(million) 2,698.3 - 2,698.3
Diluted weighted
average number of
ordinary shares (million) 2,731.3 - 2,731.3
Adjusted shares issued
at end of period
(million) 2,725.9 - 2,725.9
Notes:
1. Extracted from the audited published results of Sanlam for the year
ended 31 December 2004.
2. Based on basic earnings adjusted for shares yet to be issued under the
Sanlam Share Incentive Scheme and the conversion of deferred shares to the
extent that conversion rights have vested.
3. For the purposes of calculating the pro forma basic and diluted core
earnings, headline earnings, attributable earnings and adjusted headline
earnings based on the LTRR per ordinary Sanlam share it was assumed that:
(a) The Disposal was effected on 1 January 2004.
(b) After selling a stake of 18.8% in Absa (124.2 million shares) at R82.50
per share, it was assumed that Sanlam would reinvest the proceeds in a
balanced portfolio.
(c) The actual return of 4.1% (after tax 3.5%) earned during the year ended
31 December 2004 on other assets (excluding the investment in Absa) was
assumed to have been earned on the investment of the net proceeds of R9 619
million in a balanced portfolio with the same asset mix as the actual mix
during this period.
(d) The shareholders` funds` investment in Absa was previously equity-
accounted as the Sanlam Group held a stake of more than 20%. Following the
Disposal of the stake in Absa, the return on the proceeds will in future be
disclosed as investment return in line with current accounting policies.
(e) In line with Sanlam`s current accounting policies, the gain realised
upon the Disposal of the investment in Absa, after allowing for capital gains
tax, has been transferred from unrealised investment surpluses, which are
taken directly to equity, to realised investment surpluses through the income
statement. It does not, however, form part of core or headline earnings.
The realised gain represents the difference between the proceeds of
R82.50 per share and the original cost, applied to the 124.2 million shares
sold, net of Disposal costs of R79 million. The capital gains tax effect
represents the difference between the Disposal price and the assumed tax base
cost of these shares, a capital gains tax inclusion rate of 50% and a
corporate income tax rate of 30%.
(f) For the LTRR headline earnings, the equity-accounted earnings of the
Absa stake disposed of has been replaced with an expected long-term rate of
return earnings of 11% pre tax (9% post tax) on the reinvested available
assets of R9 619 million.
4. For the purposes of calculating the pro forma net asset value, net
tangible asset value and embedded value per ordinary Sanlam share, it was
assumed that:
(a) The Disposal was effected on 31 December 2004.
(b) Goodwill is regarded as an intangible asset.
(c) A stake of 18.8% in Absa (124.2 million shares), carried at a fair value
of R75.99 per share as at 31 December 2004, was sold at the Disposal price of
R82.50 per share.
(d) The increase in net asset value of R950 million consists of the
following:
(i) The realised gain on the sale of the stake in Absa, which amounted to
R809 million.
(ii) The capital gains tax liability as at 31 December 2004 was based on a
conservative calculation methodology that did not assume immediate disposal of
the Absa Shares. The sale of 124.2 million Absa Shares at R82.50 per share
reduced the accounting capital gains tax liability by R220 million.
(iii) Disposal costs amounting to R79 million were paid in cash on 31 December
2004.
5. The increase in net asset value of R950 million as a result of the
Disposal represents a return of 3.2% on the embedded value of R29 231 million
as at 1 January 2004.
9.BOARD OF SANLAM RECOMMENDATION AND CONVENING OF A GENERAL MEETING
The Board fully supports the acquisition of a majority shareholding in
Absa by Barclays. The Board is of the view that the acceptance of the Absa
Disposal will be to the long-term benefit of Sanlam shareholders. Accordingly,
the Board recommends that shareholders vote in favour of the Resolutions to be
proposed at the General Meeting.
A Circular containing the full details of the Absa Disposal will be sent
to Sanlam shareholders on or about 19 May 2005. A meeting for Sanlam
shareholders to approve the Absa Disposal will be held on or about 9 June
2005.
By order of the Board
9 May 2005
Financial advisor and transaction sponsor
Deutsche Securities (SA) (Proprietary) Limited
Reporting Accountants
PricewaterhouseCoopers Inc.
and
Ernst & Young
Attorneys
JOWELL GLYN & MARAIS
