| Tue 12 Jul 2005, 9:41 | | African Bank Investments Limited - The Introductio |
|
African Bank Investments Limited - The Introduction Of A New Long-Term Incentive
Programme By Abil And The Conversion Of The Existing Abil Option Schemes
AFRICAN BANK INVESTMENTS LIMITED
(Incorporated in the Republic of South Africa)
(Registered bank controlling company)
(Registration number 1946/021193/06)
(Ordinary share code: ABL) (ISIN: ZAE000030060)
(Preference share code: ABLP)(ISIN: ZAE000065215)
(`ABIL`)
THE INTRODUCTION OF A NEW LONG-TERM INCENTIVE PROGRAMME BY ABIL AND THE
CONVERSION OF THE EXISTING ABIL OPTION SCHEMES
In the interest of good corporate governance and transparent disclosure, ABIL
would like to draw investors` attention to certain proposed changes that it
wishes to implement in terms of its long-term incentive programmes for its
employees. The necessary approvals for these proposed changes are included in
the transaction circular and notice of general meeting issued by ABIL on 12th
July 2005 for a meeting convened on 5th August 2005, which will also consider
ABIL`s proposed BEE programme.
Introduction
ABIL currently operates its share participation schemes through the ABIL
Employee Share Participation Scheme and the Baobab Solid Growth Share Option
Scheme which involves the granting of vanilla options, vesting at pre-determined
strike prices over a 5-year period in equal 20% tranches.
Recent changes in both accounting statements (IFRS 2) as well as taxation law
(section 8C of the Income Tax Act) have rendered the current schemes
inefficient. In addition, there is an increasing market view that traditional
option schemes, whilst purporting to align reward to shareholder interest, do
not always achieve this due the asymmetric profile of options (i.e. limited risk
and highly geared returns). Lastly, for companies with a high dividend yield,
such as ABIL, there is an embedded conflict between the value for option holders
and shareholders resulting from these dividend payments.
Given all these issues ABIL`s remuneration committee has decided to implement a
new long-term incentive programme to counteract the negatives associated with
the current schemes.
The new long-term incentive programme
In developing a fresh approach to its incentive programmes, ABIL has committed
itself to the core principle that all incentives (incorporating short-term
bonuses and long-term incentive structures) should be funded out of a percentage
of the economic profit or EVA of the ABIL group for each year.
Currently the annual short-term bonuses are determined in this manner, using a
range of 12.5% to 17.5% of pre-tax grossed up economic profit for each year,
whilst option grants have been based on a discretionary determination approved
by the remuneration committee and Board from time to time.
Going forward, the remuneration committee of ABIL has set a guideline for the
combined incentive pool to be 17.5% to 22.5% of pre-tax grossed up economic
profit, to fund both annual bonuses and long-term incentives grants. Thus the
cost of replacing the existing option scheme will be effectively 5% of the
annual after tax economic profit.
The new long-term incentive programme will be introduced in November 2005, based
on the earnings for the year to 30 September 2005. If the long-term incentive
programme had been implemented for the 2004 financial year, the 5% additional
pool would have been approximately R30 million and therefore an after tax cost
to the company of R21 million.
In addition to the qualitative benefits, the primary financial benefit of the
introduction of a new long-term incentive programme, described in more detail
below, is the cost saving to the company from the tax deductibility of the
expense. In addition, the long-term incentive programme is likely to result in
lower volatility in earnings due to the lower level of gearing inherent in the
long-term incentive programme when compared to traditional options.
The new long-term incentive programme (`LTIP`) will be a cash settled incentive
based on a `phantom` equity scheme. The size of the initial LTIP for each year
will be based on the EVA-derived incentive pool, whilst the subsequent
performance of the ABIL share price will determine the eventual cash payouts
from time to time. The cash awards under the long-term incentive programme will
vest to the individual over 4 years at 25% per annum.
Conversion of the current schemes
The current schemes has approximately 4 years to unwind and given the
inefficiencies referred to above, it would be optimal, in addition to embarking
on the new scheme, to also convert the existing scheme rather than let it run
down over time.
The key principle in assessing this is to ensure that any conversion is designed
to put individuals in a similar economic position which they had prior to the
conversion, while accruing other potential benefits to the company. The main
benefits to be derived for the company is the tax deductability of the cost in
the hands of the company, the structure being more capital efficient and there
being less disruption in the market with regard to the issuing and selling of
shares in ABIL to cover the cost of options.
It is therefore proposed that ABIL makes changes to the current option scheme,
and give employees the following 3 options to choose from:
1. Remain within the current option scheme on the existing terms and conditions.
2. To convert current options to a synthetic instrument that would simulate a
physical holding in ABIL shares backed by an interest-bearing loan.
The current rules that pertain to vesting rights under resignation, dismissal,
death etc would apply to the converted instrument.
3. To exercise existing options, take up and pay for the shares out of personal
resources.
In order to protect the company from unvested shares being sold, the individual
will grant the company a cash settled call over the profits made on the shares
purchased, in the event that they leave before the vesting dates.
To encourage employees to migrate to the new scheme, employees would under
options 2 and 3 be given an early vesting of the last tranche of each option
series they hold. The current scheme has approximately 40 million options
outstanding, with an intrinsic value of approximately R420 million. The key
risk to the company for granting this concession is the inability to recover the
profits taken on this early vesting tranche on any employees that leave before
the original vesting dates. Given that this affects approximately 25% of the
options outstanding and by applying probabilities of resignation and remaining
vesting terms of these options, the remuneration committee was satisfied that
the risk was not material.
Additional information
Investors requiring additional information regarding the new long-term incentive
programme or the conversion of the current schemes are referred to a transaction
circular and notice of general meeting which will be posted to shareholders
today, and which is also available on ABIL`s website at www.africanbank.co.za.
Johannesburg
12 July 2005
Sponsor
Deutsche Securities (SA) (Pty) Limited
Date: 12/07/2005 09:11:09 AM
Produced by the JSE SENS Department
