| Mon 16 May 2005, 10:01 | | African Bank Investments Limited - The black equit |
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African Bank Investments Limited - The black equity ownership programme
African Bank Investments Limited
(Registration Number 1946/021193/06)
(Incorporated in the Republic of South Africa)
(Registered bank controlling company)
Ordinary Share Code : ABL ISIN : ZAE000030060
Preference Share Code : ABLP ISIN : ZAE000065215
(`ABIL` or `the Company`)
The black equity ownership programme
1. Introduction and overview
1.1 Introduction
ABIL is pleased to announce the facilitation of a broad-based black equity
ownership programme (`the black equity programme`) in terms of which a large
group of historically disadvantaged (`HD`) people associated with the ABIL group
(including a significant proportion of women) and an ABIL Development Trust to
be formed (`the ABIL Development Trust`) will acquire an initial 7% shareholding
in ABIL, valued at approximately R600 million. Through conservative gearing,
this initial shareholding will generate surplus cash from dividends received on
the ordinary shares in ABIL (`ABIL shares`), which in turn will be used to
acquire additional ABIL shares over a ten-year period.
The black equity programme has been designed to enable the direct black
shareholding in ABIL to grow from the initial 7% to in excess of 15% in ten
years, of which at least 10% will be unencumbered. However, there is no
limitation to the size of the eventual direct black shareholding.
The intended beneficiaries of the black equity programme are historically
disadvantaged individuals who are directors of ABIL (`HD directors`), employees
of the ABIL group (`HD employees`), existing shareholders of ABIL (`HD
shareholders`), and customers and individuals from the general public (`ABIL
customers and the general public`) (collectively `the participants`). In
addition, all white employees of the ABIL group who do not participate in the
ABIL share participation scheme (`qualifying white employees`) will, to a
limited extent, also participate in the programme.
1.2 Financing of the initial shareholding
ABIL proposes that the initial 7% shareholding be financed as follows:
ABIL
Value shares
(Rm) (m)
A specific issue by ABIL of 21 212 121 ABIL
shares at par value (2,5 cents per share)
to a limited purpose vehicle (`Newco`) and the
Development Trust (`the specific issue`) 350* 21,2
Equity capital to be raised from participants
by way of subscription for shares in Newco
(`contribution by participants`) 100 6,1
Total equity underpin (`equity underpin`) 450 27,3
Senior preference share funding to be raised
by Newco from funders (`senior preference
share funding`) 150 9,1
Total value of black equity programme 600 36,4
*Market value using an ABIL share price of R16,50.
Each component of financing is dealt with below:
The specific issue, worth R350 million, represents ABIL shareholders`
contribution to the black equity programme and is a once-off, upfront dilution
of 4,3%. There will be no further costs to shareholders during the ten-year
duration of the black equity programme. ABIL will mitigate the dilution through
the declaration of a special dividend to existing shareholders, described more
fully in paragraph 3.2 below;
ABIL`s contribution of 21 212 121 ABIL shares, will enable the participants to
subscribe for shares in Newco at prices ranging from 15% to 40% of the intrinsic
value of a Newco share. The subscription price will be based on the principle
that the closer the participant is to the business, the greater the discount to
the intrinsic value of Newco shares offered (`the proximity principle`). This
process is expected to raise R100 million, which represents an average equity
contribution by the participants of approximately 22%. This, together with the
specific issue, provides collateral of R450 million against which senior
preference share funding has been raised for Newco; and
ABIL has concluded an agreement with FirstRand Bank Limited, acting through its
Rand Merchant Bank division (`RMB`), whereby RMB and Barclays Bank plc, South
Africa branch (`Barclays`) have underwritten R150 million senior preference
share funding to be raised by Newco. The terms of this senior preference share
funding are dealt with in paragraph 7 below.
The R250 million raised from the participants and the senior preference share
funders will be used to acquire additional ABIL shares in the open market over a
reasonable period of time.
As Newco`s shareholding in ABIL increases, it is intended that additional third-
party funding will be introduced to purchase further ABIL shares as well as
potentially to refinance the initial senior preference share funding, which will
have a six-year maturity. The aggregate external funding will at no point exceed
25% of the underlying value of the ABIL shares held by Newco and thus the black
equity programme will not be subject to risks associated with highly geared
structures.
2. Strategic rationale and key principles
2.1 Strategic rationale
ABIL has considered its proposed black equity programme in light of the national
imperative to broaden participation of black people in the mainstream economy.
As a retail business that targets a large cross-section of the economy, ABIL
employs and transacts with a broad base of individuals, most of whom are not
exposed to empowerment opportunities. Accordingly, ABIL has structured the black
equity programme as broadly as possible to give these individuals the
opportunity to acquire shares in ABIL through Newco, on the proximity principle
outlined above.
ABIL`s approach entails determining a transparent and acceptable upfront cost to
shareholders (with no subsequent cost or dilution) which would be used to
provide a material equity underpin to ensure that the structure is sustainable.
This allows for meaningful equity to be contributed by the participants and for
third-party funding to be raised on an arm`s length basis.
2.2 Key principles of the black equity programme
The black equity programme was designed around the following key principles:
The long-term benefits of the black equity programme should reach a wide
community of individuals that are associated with ABIL;
The structure should not focus on the nominal size of the transaction at the
outset, but rather should be designed to achieve a minimum of 10% unencumbered
direct black shareholding within a period of ten years;
The structure should optimise any contribution by ABIL shareholders by using it
as an equity underpin for the transaction. This contribution should be a once-
off cost to shareholders;
The contribution by ABIL shareholders should be enhanced by meaningful capital
contributions by the participants;
The structure should raise senior preference share funding on an arm`s length
basis, without any recourse to ABIL or its shareholders;
Any shares not taken up by the intended beneficiaries will cascade down to the
next category of beneficiaries (`the waterfall principle`);
The allocation of shares to participants should be based on the proximity and
waterfall principles; and
The participants should have the ability to directly vote their proportionate
share of the underlying ABIL shares at any meeting of ABIL`s shareholders.
3. Impact of the black equity programme on ABIL shareholders
3.1 Economic cost
ABIL estimates the economic cost to shareholders of the black equity programme
to be 4,3% or R350 million, based on the dilutionary effect of the specific
issue.
With regard to the most efficient way for ABIL shareholders to bear this
economic cost, ABIL has considered three alternatives. These entail issuing the
21 212 121 new ABIL shares and given that ABIL has surplus capital, returning
R350 million of capital to shareholders by:
(i) undertaking a general repurchase of an equivalent number of ABIL shares in
the market. The main drawback with this alternative is that it negatively
impacts on the liquidity of the ABIL share during this period;
(ii) undertaking a proportional share buyback from all existing shareholders via
a scheme of arrangement. The economic impact would be the same as above. The
main drawback with this alternative is the forced involvement of all
shareholders in the transaction with possible unintended tax and portfolio
consequences as well as complications for ABIL`s large number of foreign and
small shareholders; or
(iii) paying a special dividend to all existing shareholders approximately equal
to the dilution. This would enable shareholders, should they so wish, to acquire
ABIL shares in the market to restore their proportional holdings. Newco and the
ABIL Development Trust will not be entitled to receive this dividend.
In all three alternatives the secondary tax on companies cost and the reduction
of capital in ABIL is exactly the same. ABIL believes that alternative (iii) is
the most fair and efficient.
3.2 Special dividend
ABIL therefore has declared a special dividend of 70 cents per ordinary share.
The special dividend is subject to the conditions precedent set out in paragraph
8. The dividend finalisation date will be the day of the registration of the
necessary black equity programme resolutions to be passed at a general meeting
of ABIL shareholders to be held to approve the black equity programme.
3.3 Pro forma financial effects on ABIL shareholders
The pro forma financial effects set out below have been prepared to assist ABIL
shareholders to assess the impact of the black equity programme on the earnings
per share (`EPS`), headline EPS (`HEPS`) and the net asset value (`NAV`) and
tangible NAV (`TNAV`) per ABIL share. The material assumptions are set out in
the notes following the table. These pro forma financial effects have been
disclosed in terms of the JSE Listings Requirements and do not constitute a
representation of the future financial position of ABIL on implementation of the
specific issue. The pro forma financial effects are the responsibility of the
ABIL board of directors (`the board`) and are provided for illustrative purposes
only.
As reported After the
before the specific
specific issue1 issue
(cents) (cents) % change
Earnings per share (`EPS`) 90,2 86,32 (4,3)
Headline earnings
per share (`HEPS`) 90,2 86,32 (4,3)
Net asset value (`NAV`)
per share 508,8 486,83 (4,3)
Tangible NAV (`TNAV`)
per share 500,7 479,13 (4,3)
Notes and assumptions:
1. Interim results for the six months ended 31 March 2005.
2. The EPS and HEPS `after the specific issue` are based on the following
assumptions:
a. The specific issue was implemented with effect from 1 October 2004;
b. Newco is not consolidated into the ABIL group;
c. Attributable earnings and headline earnings remain unchanged; and
d. The weighted average number of shares in issue as reported of 470 661 260,
has been increased by the specific issue of 21 212 121 ABIL shares.
3. Based on the assumptions in 2 above, where appropriate, the number of shares
in issue as reported of 466 681 246, has been increased by the specific issue of
21 212 121 ABIL shares.
4. The NAV and TNAV `after the specific issue` have not been reduced by the
special dividend of 70 cents.
4. The participants
The beneficiaries of the black equity programme in ranking order applying the
proximity principle will be:
Directors and employees 60%
HD directors
HD employees
Qualifying white employees
HD shareholders 15%
ABIL customers and the general public 20%
The ABIL Development Trust 5%
100%
In this context, historically disadvantaged people is a term that bears the same
meaning of black people as defined in the Broad-Based Black Economic Empowerment
Act No 53 of 2003 and will be limited to natural persons only, with the
exception of the ABIL Development Trust. The ABIL Development Trust will hold
its shares in ABIL directly while all other participants will hold shares in
Newco.
The actual allocations may differ from that set out above due to possible
varying levels of demand and the application of the waterfall principle.
4.1 ABIL Development Trust
The ABIL Development Trust is an entity which will be created pursuant to the
black equity programme. This ABIL Development Trust will complement the
corporate social responsibility programmes that ABIL conducts via the ABIL
Foundation and its main areas of focus will be determined by a board of trustees
to be formed in conjunction with the board. The majority of the trustees will be
black people drawn from ABIL`s non-executive directors, employees and
independent people with appropriate experience.
4.2 Directors and employees of the ABIL group
A total of 60% of the black equity programme shares will be allocated for the
benefit of existing and future directors, management and employees of the ABIL
group. Every single HD employee in the ABIL group, as well as qualifying white
employees who are not currently participating in the ABIL employee share
participation scheme, will participate in the black equity programme.
Approximately 67% of these shares will be allocated upfront as follows:
An offer of Newco shares worth R7 500 per employee will be made to all
qualifying employees (both black and white) at their par value, ie a nominal
value; and
All HD directors and employees (excluding the qualifying white employees above)
will be invited to subscribe for additional shares in Newco at prices to be
determined. ABIL is in the process of formulating criteria to determine the
level and terms of participation of all these directors and employees and will
submit proposals to a sub-committee of the board for approval. Directors`
participation will be disclosed separately to shareholders prior to the general
meeting to be held to approve the black equity programme.
The balance of 33% of these shares will be reserved for future investment by
existing and future HD directors and HD employees. The participation in Newco is
in addition to any participation that HD directors and employees may receive
under the existing ABIL employee share participation scheme. Any HD director or
HD employee that leaves the employment of ABIL at any time will continue to hold
their shares in Newco on the same basis as any other shareholder in Newco. There
are no special vesting conditions attached to the shares allocated to directors
and employees.
The rationale for including qualifying white employees in the above structure is
to promote a sense of unity amongst all employees in the ABIL group and to
ensure that every single employee in the group will have some form of equity
stake in the listed shares of ABIL. The element of Newco`s shares that will be
held by qualifying white employees will be insignificant and will not be taken
into account for purposes of measuring ABIL`s direct black shareholding.
4.3 HD shareholders
A total of 15% of the black equity programme shares will be allocated for the
benefit of ABIL`s existing HD shareholders.
ABIL has approximately 27 500 shareholders holding between 1 and 100 ABIL
shares. These shareholders hold in aggregate approximately 506 000 shares (an
average of 18,4 shares per shareholder), which constitutes only 0,1% of the
total number of shares in issue. The majority of these shareholders are
historically disadvantaged individuals who became shareholders in ABIL following
a series of corporate actions. The board is proposing the implementation of an
offer pursuant to which HD shareholders will be given the opportunity to
participate in the proposed black equity programme using their shares in ABIL as
currency to subscribe for shares in Newco.
Allocations will be linked to the level of subscription. Any shares not taken up
will cascade down to the pool reserved for ABIL customers and the general
public.
4.4 ABIL customers and the general public
A total of 20% of the black equity programme shares is intended to benefit
ABIL`s historically disadvantaged customers and the historically disadvantaged
general public.
ABIL has a significant client base of which over 90% is estimated to be
historically disadvantaged individuals spread across all nine provinces of the
country. It is ABIL`s desire to recognise these customers by giving them an
opportunity to acquire Newco shares. An offer will also be extended to the
general public to ensure that the transaction is a truly broad-based initiative.
Allocations will be made using criteria that recognise HD customers ahead of the
HD public.
5. Resultant shareholding and mechanics of the black equity programme
5.1 Shareholding structure
ABIL`s shareholding structure after implementation of the black equity programme
will be as follows:
5.2 Mechanics of the black equity programme
The black equity programme will be implemented via a series of steps, which are
outlined below:
Step 1: Newco and the ABIL Development Trust are established and ABIL provides
Newco and the ABIL Development Trust with irrevocable commitments to issue 21
212 121 ABIL shares at their par value within 14 days of the fulfilment of the
conditions precedent described in paragraph 8 below.
Step 2: Newco secures senior preference share funding facility of R150 million
from RMB and Barclays.
Step 3: Newco undertakes an offer to the participants in respect of ordinary
shares in Newco to raise R100 million of equity capital.
Step 4: Using the R250 million cash raised in steps 2 and 3 above, Newco
acquires further ABIL shares. Depending on the prevailing market price of ABIL
shares, this is expected to be approximately 15 million shares.
Pursuant to these steps, Newco and the ABIL Development Trust are expected to
own approximately 36,4 million ABIL shares (`black equity programme shares`),
which will represent approximately 7% of ABIL`s ordinary share capital after
giving effect to the specific issue.
6. Overview of Newco
6.1 Purpose of Newco
Newco will be a limited-purpose vehicle whose sole objective is to acquire and
hold ABIL shares for the benefit of its shareholders, the participants in the
black equity programme. It is used in this black equity programme only as a
mechanism through which senior preference share funding is raised and to receive
dividend income earned from the underlying ABIL shares which is pooled for the
ongoing purchase of additional ABIL shares.
6.2 Meaningful participation by black people in the management and control of
ABIL
The board of ABIL currently comprises eight executive directors and eleven non-
executive directors. There are two executive directors (one male, one female)
and six non-executive directors (four male and two female) who are HD
individuals. A total of 60% of black equity programme shares will be held by HD
directors and employees. These individuals are intimately involved in the
business of ABIL in terms of representation on the board and various
subcommittees of the board, as well as in a number of relevant internal forums
which drive ABIL`s transformation objectives.
6.3 Covenants in favour of ABIL
In order to safeguard ABIL shareholders` contribution to this black equity
programme, Newco will grant certain covenants, the most important of which are
as follows:
Newco will not be entitled to dispose of its interest in ABIL shares until the
expiry of a ten-year lock-in period;
Participants will not be entitled to dispose of their shares in Newco until the
expiry of a minimum five-year lock-in period, after which there will be
controlled trading of Newco shares allowed between HD individuals only; and
The shareholders of Newco will have the ability to vote their proportionate
indirect share of the underlying ABIL shares at ABIL`s general meetings.
The above covenants will be entrenched in the Memorandum and Articles of
Association of Newco.
6.4 Exit for Newco shareholders
Newco is a limited-purpose company and as such will have a finite life. It is
envisaged that at the end of such period (anticipated to be ten years) Newco
will unbundle its shares in ABIL with the result that Newco shareholders will
hold their shares in ABIL directly.
7. Funding
7.1 Initial funding
Newco will raise senior preference share funding of R150 million which has been
underwritten by RMB and Barclays. The initial funding has been underwritten on
the basis of an indicative fixed coupon rate of 9,78% as at 8 May 2005, (being
referenced off the 6-year swap rate), a 6-year term, an initial asset cover of 4
times and an unwinding of the funding structure if the asset cover falls below 2
times.
To the extent that the actual asset cover is more than certain minimum
predetermined asset cover ratios as a result of ABIL share price appreciation
and/or amortisation of the initial funding, Newco will utilise all excess cash
flow to buy additional ABIL shares in the open market.
The funding agreement will contain various conditions of default and covenants
which are usual for funding of this nature.
7.2 Future funding
To the extent that actual asset cover ratios exceed certain predetermined asset
cover ratios, additional funding may be raised to purchase additional ABIL
shares. This is designed to maintain gearing in Newco at optimal yet
conservative levels throughout the life of the black equity programme.
8. Conditions precedent
The black equity programme is subject to, inter alia, the following conditions
precedent:
The approval by the ordinary shareholders in general meeting of the specific
issue to Newco and the ABIL Development Trust;
The signing of the funding agreements and other agreements required to implement
the black equity programme;
Obtaining any approval by the Registrar of Banks required in terms of the Banks
Act, 1990
(Act 94 of 1990), as amended; and
Obtaining any other shareholder and regulatory approvals that may be required.
9. Opinion of the board
The black equity programme has been structured in line with ABIL`s empowerment
charter, which was approved by the board in 2003. Having considered the
strategic intents contained in this charter, the Financial Sector Charter and
various transactions concluded in the financial services industry, the board is
of the opinion that the terms and conditions of the black equity programme are
in the interest of all stakeholders of ABIL. Accordingly, the board recommends
that ordinary shareholders vote in favour of the resolutions to be proposed at a
general meeting to be held to approve the black equity programme. In respect of
their personal holdings in ABIL, the board members who are not eligible to
participate in the black equity programme intend to vote in favour of the
resolutions to be proposed at the general meeting to be held to approve the
black equity programme. The directors who are eligible to participate in the
black equity programme will not be entitled to vote at this general meeting.
Of the board of directors, eight of the nineteen directors are eligible to
benefit under the proposed black equity programme. While these directors
contributed to the many views elicited which shaped the black equity programme,
all eight of these directors recused themselves from the decision-making
processes of the board. The board has also appointed a subcommittee of
independent non-executive directors to consider and approve the allocation
methodology to be applied to directors and employees. In addition, the board
will appoint an independent expert to advise whether the specific issue is fair
and reasonable.
10. Next steps
The black equity programme proposed in this announcement is considered an
enabling framework for the fulfilment of ABIL`s broad-based black economic
empowerment aspirations. In adherence to good governance principles, ABIL has
not been able to consult widely with all key stakeholders, especially in light
of the broad-based nature of the participants and potential related-party
conflicts. ABIL will now engage with all stakeholder groups to ensure that the
implementation of this framework is optimised and ultimately achieves the
necessary support. It is not expected that this will materially change the
structure, but should any issue be relevant for shareholder consideration,
further announcements will be made prior to the general meeting to be held to
approve the black equity programme. In all instances a circular to shareholders,
including particulars of the black equity programme, the intended offer to HD
shareholders and related shareholder resolutions, will be sent to ordinary
shareholders in due course.
For queries please contact
0800 225 233
or one of our branches
Registered office
59 16th Road, Midrand, 1685 Private Bag X170, Midrand, 1685
Telephone +27 11 256 9000 Fax +27 11 256 9304
Share transfer secretaries
Ultra Registrars (Pty) Limited, 11 Diagonal Street, Johannesburg, 2001
Telephone +27 11 834 2266 E-mail: africanbank@ultrareg.co.za
Board of directors
AS Mabogoane (Chairman), G Schachat (Deputy Chairman)*, L Kirkinis (CEO)*, JA de
Ridder*, A Fourie*, DB Gibbon, BD Goba, AG Herselman*, JJ Kekane, SA Levitt, MLD
Marole*, R Naidoo, BJT Shongwe, TM Sokutu*, BPF Steele, GZ Steffens (German),
DFG Tembe (Mozambique), A Tugendhaft, DF Woollam*
* Executive
Group secretary
S Martin
Merchant bank, debt arranger, co-underwriter and joint sponsor
RAND MERCHANT BANK (A division of FirstRand Bank Limited)
CORPORATE FINANCE
Co-underwriter
Barclays Bank Plc, South Africa branch
Attorneys
Prinsloo, Tindle & Andropoulos Inc
Lead sponsor
Deutsche Securities
Reporting Accountants
Deloitte and Touche
