| Tue 13 Sep 2005, 15:50 | | Discovery - Announcement Of A Black Economic Empow |
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Discovery - Announcement Of A Black Economic Empowerment Transaction
DISCOVERY HOLDINGS LIMITED
(Incorporated in the Republic of South Africa)
(Registration number: 1999/007789/06)
ISIN: ZAE000022331
Share Code: DSY
ANNOUNCEMENT OF A BLACK ECONOMIC EMPOWERMENT TRANSACTION
1. Introduction
Discovery is pleased to announce that it has reached agreement to conclude a
Black Economic Empowerment (`BEE`) transaction (`the proposed BEE transaction`)
pursuant to which shares equivalent to approximately 7,0% of Discovery`s current
issued share capital (or 6,54% of the issued share capital post the proposed BEE
transaction) will be allocated as follows:
- 1,0% to Discovery employees and black non-executive directors;
- 2,6% to the Discovery Foundation; and
- 3,4% to BEE groups comprising a broad-base of historically disadvantaged
individuals (`HDIs`).
The proposed BEE transaction has a value of approximately R831 million based on
the 30-day volume weighted average price (`VWAP`) of a Discovery share to
Friday, 9 September 2005 of R21,47. Due to the fact that Discovery holds
significant offshore assets, the transaction represents approximately 7,7% of
the value of Discovery`s South African operations.
Discovery subscribes to the black ownership requirements as embodied in the
Financial Sector Charter (`the Charter`), to introduce BEE ownership equivalent
in value to at least 25% of the value of Discovery`s South African operations.
In terms of the Charter, Discovery will be compliant with the 25% BEE ownership
requirement, taking account of the proposed BEE transaction, the empowerment
credentials of FirstRand Limited (Discovery`s major shareholder) and Discovery`s
existing indirect black shareholding.
2. Rationale
Discovery believes that BEE is a social and commercial imperative in ensuring
that transformation is achieved within South Africa and is firmly committed to
the principles embodied in the BEE philosophy as presented by government.
Economic transformation through BEE is a necessary step towards ensuring South
Africa`s economic growth and long-term prosperity. Discovery believes that its
benefits should pervade through all sectors of black society represented by
business, the workforce and the community at large. Discovery views the proposed
BEE transaction as an extension of this commitment and one manifestation of its
efforts towards ensuring that transformation occurs both within Discovery and
South Africa. This transformation is particularly important in overcoming the
current urgent need to broaden access to both the public and private health care
sectors through greater cooperation between stakeholders.
Discovery considered the alternatives of introducing BEE ownership either at
holding company level or solely in the South African operations. The decision to
implement the transaction at the holding company level was based on the
following considerations:
- it allows the BEE partners to participate in the growth of both Discovery`s
local and international businesses whilst ensuring that the company has fully
complied with the provisions of the Charter targets for the South African
operations;
- it ensures the alignment of all shareholders` interests within Discovery;
- it provides an easily demonstrable value benchmark by virtue of Discovery
being listed; and
- it allows the BEE partners to invest in a liquid asset.
In order to achieve the Charter requirement that 25% of the value of Discovery`s
South African assets must be held by HDIs, 22,9% of Discovery`s issued ordinary
share capital must be in the hands of HDIs, based on an estimate that 91,5% of
Discovery`s value can be attributed to its South African assets (see paragraph
5.2 below).
3. Principles relating to the proposed BEE transaction
Discovery has followed regulatory guidelines as well as Discovery-specific
principles in structuring the proposed BEE transaction in order to:
- achieve meaningful participation by broad-based BEE groups;
- enter into a partnership with an entrepreneurial and innovative BEE partner
that will actively assist in the growth of Discovery;
- create a platform whereby black employees are recognised for their ongoing
contribution to Discovery`s success;
- develop a long-term relationship with its strategic BEE partners;
- transfer full economic and voting rights to it`s BEE partners and on
implementation of the proposed BEE transaction;
- achieve an acceptable economic cost to Discovery`s ordinary shareholders; and
- comply with the Charter.
4. Discovery`s BEE partners
WDB Investments Holdings (Proprietary) Limited (`WDBIH`)
WDBIH is a wholly owned subsidiary of WDB Trust (`WDB`). The WDB Trust was
established in 1992 with the purpose of supporting the economic upliftment of
poor black women in rural South Africa. Its specific objectives are to provide
poor women with access to finance through not-for-profit micro-credit, to
educate women about developing their own businesses, to enhance their household
livelihoods and to improve the position of women in society overall. WDB
emphasises a banking relationship based on mutual trust, credit discipline,
collective responsibility, accountability and savings. Since its establishment,
WDB has reached over 14 000 women in rural areas with its training and micro-
credit programmes. WDB also provides training in mother tongue functional
literacy, computer literacy, business development skills and micro-credit
delivery.
WDBIH is the for-profit arm of the WDB Group and is recognised as a leading
broad-based women`s empowerment grouping. Profits made by WDBIH are returned to
WDB to enable the trust to further its objectives. WDBIH`s partnerships are
premised on being an active shareholder, in particular with regard to assisting
with transformation issues and the low income market. Furthermore, a cooperation
agreement will be entered into between the BEE parties to provide an effective
channel for their participation in Discovery.
Dr Thabane Vincent Maphai (`Dr Maphai`)
Dr Maphai, current chairman of BHP Billiton SA, joins the BEE partnership as a
highly respected executive in South Africa`s corporate sector. Dr Maphai will
chair the Discovery Foundation, bringing vision, leadership and social
commitment to this important initiative. As a nominated new non-executive
Discovery board member, Dr Maphai also brings to Discovery his business acumen,
leadership qualities and unique insight into the transformation challenges
facing South Africa. He has experienced these challenges both from the
perspectives of business and the State, for example, when he chaired the
Presidential Review Commission into the restructuring of the public sector and
the board of the SABC.
The Discovery Foundation
The Discovery Foundation is an entity which will be created pursuant to the
proposed BEE transaction. The Discovery Foundation will be a BEE entity, with
the majority of its trustees being black South Africans. Its objective will be
the economic upliftment of black South Africans. Its trustees will be drawn from
Discovery`s BEE partners and independent people with appropriate experience, in
consultation with the stakeholders who represent the beneficiaries. Amongst its
initial programmes, the Discovery Foundation will focus on the educational and
professional development of black South Africans for the medical and health care
industry. Therefore, the Foundation will seek to have significant impact in a
focused area of special need in the health sector.
Discovery employees and black non-executive directors
Discovery`s board of directors believes the participation of its employees in
the proposed BEE transaction substantially enhances the broad-based nature of
its transaction and recognises the contribution of the employees to the success
of the company. All of Discovery`s permanent employees will be included in the
employees scheme. Allocation of shares to the staff scheme has been weighted to
ensure that the majority of the beneficiaries of the staff scheme are HDIs as
defined in the Charter.
The staff scheme has been designed to ensure the following objectives will be
achieved:
- retention of employees;
- acknowledgement of the individual contributions made by middle and senior
black management; and
- recognition of the collective contribution made by all employees in
Discovery`s success.
In addition, an allocation has been made to the black non-executive directors of
Discovery, Judith Dlamini and Sindiswa Zilwa. This allocation has been made to
allow black non-executive directors to participate in the proposed BEE
transaction in recognition for the invaluable guidance they have and will
continue to provide to Discovery in operating within the local health care and
financial services industries.
5. The proposed BEE transaction
5.1 Flow-through from the FirstRand BEE transaction
The Charter states that provided a financial institution is at least 25% owned
by another financial institution, it may take into account a portion of the
black ownership in that other company based on the percentage shareholding of
that other company in the financial institution concerned.
FirstRand, an effective 62,3% shareholder in Discovery, has committed itself to
be fully compliant with the 25% black ownership requirements of the Charter by
2010 and has implemented a 10% direct ownership BEE transaction, details of
which are available in the FirstRand announcement dated 24 February 2005.
5.2 Value of South African operations
Discovery has undertaken a valuation of its non-South African assets and is of
the view that the non-South African assets conservatively account for at least
8,5% of the total value of Discovery.
5.3 Summary of Discovery`s BEE ownership post the proposed transaction
The black ownership of Discovery, post the proposed BEE transaction, will be as
follows:
Shareholding in
Discovery as a % of
Shareholding in Discovery`s South
Discovery African operations
WDBIH 3,0% 3,3%
Dr Maphai 0,2% 0,2%
Discovery Foundation 2,4% 2,6%
Discovery`s employees and
non-executive directors 1,0% 1,1%
Discovery employees via existing
incentive arrangements 0,2% 0,2%
FirstRand BEE shareholders 14,4% 15,7%
Estimated Indirect
shareholding 1,7% 1,9%
Total 22,9% 25,0%
5.4 Resultant structure
Upon implementation of the proposed BEE transaction, the direct BEE shareholding
in Discovery will be as follows:
See Business Day, Business Report and Beeld for organogram.
5.5 Mechanics of the proposed BEE transaction
WDBIH, Dr Maphai, Discovery Foundation and non-executive directors (`BEE
parties`)
Discovery will issue to the BEE parties approximately 33 336 000 ordinary shares
representing 6,0% of the current issued share capital of the company (or 5,6% of
the issued share capital post the proposed BEE transaction) for a total
consideration of R3,9 million. The difference between the market value of the
ordinary shares of R715 million and subscription consideration of R3,9 million
represents an outstanding funded amount provided by Discovery shareholders (`the
funded amount`). The BEE parties will provide Discovery and its subsidiaries
with a right to purchase, at the end of 10 years, such number of ordinary shares
at 0,1 cent per share (the par value) as will provide Discovery with a notional
return on this funded amount (`the Discovery repurchase agreement`).
The consideration will be paid by Discovery at the end of this 10-year period
from available cash resources, subject to the requirements of the Companies Act
and the rules of the JSE Limited (`the JSE`).
In order to allow the BEE parties to retain the full number of Discovery shares
that will be issued to them in terms of the proposed BEE transaction, the BEE
parties will have a right to simultaneously acquire from Discovery, at the then
30-day VWAP per Discovery share, the same number of shares repurchased by
Discovery in terms of the Discovery repurchase agreement.
The ordinary shares acquired by the BEE parties in terms of the proposed BEE
transaction will rank pari passu with existing Discovery ordinary shares and
will entitle the holders to all dividends or capital distributions made by
Discovery. The BEE parties have undertaken to utilise these distributions to
acquire additional Discovery ordinary shares in the market within three months
of the date of any distribution. The acquisition of additional Discovery
ordinary shares will further contribute to ensuring the long-term sustainability
of the proposed BEE transaction.
Staff scheme
Discovery will issue to a newly created staff trust approximately 5390000
ordinary shares representing approximately 1,0% of the current issued share
capital of the company (or 0,9% of the issued share capital post the proposed
BEE transaction) at the par value of 0,1 cent per share. The beneficiaries of
the trust will be Discovery`s South African employees with the majority being
HDI`s.
5.6 Restrictions on transfer of Discovery shares by WDBIH and Dr Maphai
WDBIH and Dr Maphai will not be entitled at any time to sell or transfer
ownership of any of the Discovery ordinary shares for the first 10 years after
the issue date, unless Discovery agrees otherwise.
5.7 Cooperation agreement
A cooperation agreement will be entered into between the BEE parties to provide
an effective channel for their participation in Discovery.
5.8 Conditions precedent to the proposed BEE transaction
The proposed BEE transaction is subject to, inter alia, the following conditions
precedent:
- the passing of all necessary resolutions by the requisite majority of
shareholders at a general meeting of Discovery; and
- the approval of the JSE.
5.9 Appointment of directors to the board
In terms of an agreement entered into between Discovery and WDBIH, WDBIH will be
entitled to nominate a representative to participate on the board of Discovery
and its sub-committees.
In terms of an agreement entered into between Discovery and Dr Maphai, Dr Maphai
will be nominated to join the board of Discovery as a non-executive director.
6. Accounting treatment
The principle underlying the accounting treatment is consistent with the
accounting policies as applied for the year ended 30 June 2005 and is compliant
with South African Statements of Generally Accepted Accounting Practice (GAAP).
GAAP may require a transaction to be accounted for in a different manner to its
legal substance and form.
Discovery will apply International Financial Reporting Standards (IFRS) with
effect from the financial year ended 30 June 2006. Upon implementation of these
standards, Discovery may be required to account for the effective facilitation
cost of the transaction as a share-based payment in terms of IFRS: Share-based
Payments (IFRS 2) and the accounting guidance issued by the South African
Institute of Chartered Accountants.
7. Financial effects of the proposed BEE transaction
The pro forma financial effects set out below have been prepared to assist
Discovery ordinary shareholders to assess the impact of the proposed BEE
transaction on the earnings, net asset value, headline earnings and tangible net
asset value per Discovery ordinary share. These pro forma financial effects have
been disclosed in terms of the JSE Listings Requirements and should not in any
way be construed as a forecast of the Group`s financial position.
The pro forma financial effects of the transaction set out below are provided
for illustrative purposes only and are based on the following assumptions:
- the earnings, net asset value, headline earnings and tangible net asset value
per share reflected in the `before` column were extracted from the Group`s
audited results for the year ended 30 June 2005;
- the effect on net asset value and tangible net asset value per share reflected
in the `after` column assumes that the transaction was effective on 30 June
2005; and
- the effect on earnings and headline earnings per share reflected in the
`after` column assumes that the transaction was effected on 30 June 2004.
Actual Pro forma
before the after the Increase Increase
transaction transaction (%)
Earnings per
ordinary
share (cents) 112,6 112,6 - -
Headline earnings
per ordinary
share (cents) 103,3 103,3 - -
Net asset value
per ordinary
share (cents) 620,0 620,0 - -
Tangible net asset
value per ordinary
share (cents)2 611,5 611,5 - -
Actual number of
ordinary shares
in issue (000`s) 548 957 587 682 38 725 7
Weighted average
number of ordinary
shares in issue
(000`s) 519 188 519 188 - -
Notes:
1. Discovery will only report its results in terms of IFRS with effect from the
year ended 30 June 2006. As such, no effect has been taken into account of the
impact of the application of IFRS 2, however the IFRS 2 impact will be disclosed
to shareholders in the circular referred to in paragraph nine below.
2. Includes R1 881 million in respect of assets under insurance contracts.
8. Estimated economic cost
Discovery has estimated the economic cost of entering into the proposed BEE
transaction for the Group and its shareholders. Discovery estimates that the
value of the facilitation to be provided by Discovery shareholders to the BEE
partners for the proposed BEE transaction is approximately R260 million. This
represents 2,1% of the market capitalisation of Discovery based upon its closing
share price on Friday, 9 September 2005.
9. Documentation
A circular containing the full details of the transaction, including a notice of
general meeting, will be posted to Discovery shareholders in due course.
Sandton
13 September 2005
Joint transactional adviser and transaction sponsor
RMB (A division of FirstRand Bank Limited) Corporate Finance
Joint transactional adviser
BusinessMap Investment Strategy Advisers (Pty) Ltd
Financial adviser to WDBIH
Morgan Stanley
Corporate law advisers to Discovery
Edward Nathan (Pty) Ltd
Legal advisers to WDBIH
MJ King Inc.
Structuring adviser
Rand Merchant Bank (A division of FirstRand Bank Limited)
Reporting accountants and auditors
PricewaterhouseCoopers Inc.
Independent sponsor
PricewaterhouseCoopers Inc.
Date: 13/09/2005 11:20:29 AM
Produced by the JSE SENS Department
