| Fri 9 Dec 2005, 13:51 | | Arch Equity - BEE Restructuring Announcement And W |
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Arch Equity - BEE Restructuring Announcement And Withdrawal Of Cautionary
Announcement
Arch Equity Limited
Incorporated in the Republic of South Africa
Registration number 2004/004019/06
Share code: ACH ISIN: ZAE000061073
("Arch Equity" or "the company")
BEE RESTRUCTURING ANNOUNCEMENT AND WITHDRAWAL OF CAUTIONARY ANNOUNCEMENT
Following the finalisation and publication of the Codes of Good Practice for
Broad-Based Black Economic Empowerment ("the Codes"), the directors of Arch
Equity have resolved to embark on an internal restructuring of the company, so
as to establish BEE Newco, a wholly owned subsidiary of Arch Equity, as its
primary investment holding company, and furthermore, to introduce broad-based
BEE parties as shareholders in BEE Newco by disposing of 50.1% of the issued
ordinary share capital in BEE Newco to such BEE parties ("the BEE disposal").
1. Introduction
Arch Equity seeks to embark on a BEE restructuring as a means of ensuring its
compliance with the principles embodied in the now finalised Codes, which
effectively shifts the emphasis from shareholding based on equity control and
voting interests, to economic entitlement.
Arch Equity was initially structured within the ambit of the Broad- Based Black
Economic Empowerment Act, the Financial Sector Charter ("the Charter") and the
Companies Act. Arch Equity"s present shareholding structure may, however, in
terms of the Codes, ultimately provide insufficient economic entitlement to
black people for it to continue to operate as a black company.
Although Arch Equity believes that in time its existing structure will also
create substantial economic entitlement for black people, and will continue to
contribute to the economic transformation process in South Africa, the Arch
Equity board realises that it needs to be pro-active in its implementation of
the Codes and forthwith incorporate its requirements with regard to economic
entitlement in the hands of broad-based BEE parties. It is only by undertaking
the BEE restructuring now, that Arch Equity may secure its continued successful
deal-making track record in the future. Other BEE companies may also face this
challenge. Arch Equity has chosen to take the lead in the inevitable trend that
the Codes will necessitate, thus entrenching its position as one of the foremost
black companies within the BEE sphere.
Furthermore, many of Arch Equity"s investments were made with the intention of
providing the required BEE credentials to these investments. Should Arch
Equity"s BEE status become diluted in terms of the Codes, all of its
investments" empowerment status may similarly become diluted.
To this extent, the directors of Arch Equity view the BEE disposal as imperative
to the continued existence of Arch Equity as an investment holding company
operating within the given BEE climate in South Africa. The BEE disposal is also
a means of advancing its commitment to the economic transformation process in
South Africa as envisaged in the Codes. In pre-empting its full compliance with
the Codes, Arch Equity, through BEE Newco, will ensure that its BEE investments
obtain maximum points in terms of the Codes" scorecard.
The board has already approached the Department of Trade and Industry ("the
dti") with the proposed structure to be implemented in terms of the BEE
disposal. The dti has approved the proposed structure as complying with the
revised Codes.
The board of directors acknowledges that the BEE disposal necessitated by the
introduction and subsequent substantial amendments to the Codes, was not
foreseen at the time of the company"s listing on Altx. Similarly, the Codes, and
their impact on existing BEE structures, could also not have been anticipated.
The board therefore wishes to assure Arch Equity shareholders that the
objectives of the restructured Arch Equity group remain unchanged i.e. sourcing
investments capable of yielding superior tangible returns to its shareholders,
and utilising BEE Newco"s empowerment credentials to make similar investments.
2. BEE Newco structure
2.1 Until the implementation of the BEE disposal, BEE Newco will remain a wholly
owned subsidiary of Arch Equity, holding the following assets:
2.1.1 1 445 582 (2.1%) ordinary shares in the issued share capital of Capitec
Bank Holdings Limited ("Capitec") ("the Capitec Shares", subject to the
following:
In terms of an agreement between Capitec and Arch Equity dated 8 September 2004
("the Capitec Agreement"), Capitec may repurchase the Capitec Shares (issued to
Arch Equity in terms of the Capitec Agreement) from Arch Equity on 28 February
2006 should Arch Equity not be classified as a "Black Company" by the Financial
Sector Charter Council ("the Charter Council") on or before 28 February 2006.
The purchase price in respect of such repurchase shall be R9 488 800.25,
plus interest at prime less 3.5%, less dividends received by Arch Equity in
respect of the Capitec Shares, less interest on such dividends received ("the
Capitec Option"). To date Arch Equity has been unable to obtain confirmation
from the Charter Council as envisaged in the Capitec Agreement. Arch Equity,
however, believes that it complies with the Charter in its present form. The
transfer of the Capitec Shares from Arch Equity to BEE Newco in terms of the BEE
disposal is therefore subject to the condition that if Capitec should exercise
the Capitec Option as described above, the transfer of the Capitec Shares to BEE
Newco shall not arise and the Capitec Shares shall remain vested in Arch Equity.
2.1.2 3 180 922 (3.1%) ordinary shares in the issued share capital of PSG
Group Limited ("the PSG Shares");
2.1.3 100 (100%) ordinary shares in the issued share capital of Arch Equity
Telecom Holdings (Proprietary) Limited, which in turn holds 30% of the issued
ordinary share capital of Orion Telecom Investment Holdings (Proprietary)
Limited ("Orion investment");
2.1.4 300 (30%) ordinary shares in the issued share capital of Flamingo Moon
Trading 26 (Proprietary) Limited, which in turn holds 100% of the issued
ordinary share capital of Big Box Containers (Proprietary) Limited;
2.1.5 162 618 (5%) ordinary shares in the issued share capital of BKB Limited
("the BKB Shares");
2.1.6 75 (75%) ordinary shares in the issued share capital of Compress
Publications Management (Proprietary) Limited;
2.1.7 2 510 (25.1%) ordinary shares in the issued share capital of Grainco
(Proprietary) Limited;
2.1.8 349 (34.9%) ordinary shares in the issued share capital of Fundiswa
Investments (Proprietary) Limited, which in turn holds 11 600 000 (13.2%) of the
issued ordinary share capital of Unitrans Limited ("the Unitrans Shares");
2.1.9 29 400 (29.4%) ordinary shares in the issued share capital of Indevco
Holdings (Proprietary) Limited;
2.1.10 60 (30%) ordinary shares in the issued share capital of Curamelior
Health Risk Management (Proprietary) Limited;
collectively referred to as ("the BEE investments").
2.2 The BEE investments, including the Orion investment, will be acquired by
BEE Newco from Arch Equity at a combined value of approximately R110 million,
which will be funded by Arch Equity on loan account. This loan account will
originate from the sale of the PSG Shares, the Capitec Shares, the Unitrans
Shares and the BKB Shares at their respective market values and the sale of the
remaining BEE investments at their equity carry value as at 31 August 2005.
2.3 Upon the implementation of the BEE disposal, the ordinary shareholders of
BEE Newco will consist of Arch Equity (49.9%), the Jasmyn Consortium (20.1%) and
various other broad-based BEE Groupings (30%) ("the BEE Parties").
2.4 The Jasmyn Consortium consists of, collectively, the ordinary shareholders
in Jasmyn Corporate Holdings (Proprietary) Limited (registration number
2004/015171/07), being:
2.4.1 Business Ventures Investments No. 554 (Proprietary) Limited, an
investment company controlled by Desmond Lockey;
2.4.2 The Sanbourne Trust, a family trust of Patrick Ernst Burton;
2.4.3 Tamarron Trading 181 (Proprietary) Limited, a private investment company
controlled by Barend Petersen and Don Saunders;
2.4.4 Anita Deline Cupido;
2.4.5 Roderick Charles Miller;
2.4.6 Nico Garth Wendell Le Breton; and
2.4.7 Baekeng Lucas Moropa.
2.5 The other Broad-Based BEE Groupings will in due course be determined by
Arch Equity"s board of directors in their sole discretion.
2.6 The BEE Parties as set out in 2.3 to 2.5 above will be made up of
individuals, and organisations whose members will all be black people and who
will enjoy beneficial ownership in respect of voting rights and economic
entitlement, as contemplated in the Codes, by way of their shareholding in BEE
Newco. Such individuals and organisations, where not already identified, shall
be determined by the directors of Arch Equity in their sole and unfettered
discretion, provided that they shall be chosen in strict compliance with the
Codes, on the basis that voting rights and economic entitlement shall vest in
such broad-based groupings with due regard to having the appropriate
representation of black men, black women and people from black designated groups
(as defined in the draft Code 100 as included in the Codes).
2.7 The economic flow-through principles and the control principle of the
Codes are applicable to BEE Newco"s structure. In terms of economic interest,
Arch Equity"s BEE credentials will "flow-through" to BEE Newco proportionately
to Arch Equity"s shareholding therein. In terms of voting rights, the finalised
Codes provide that where more than 50% of the voting rights in a company are
controlled by black people, such a company be regarded as a 100% black company
in respect of voting rights.
2.7.1 The following table reflects the application of such principles.
BEE Newco Voting Rights Economic Interest
shareholders
Arch Equity 53.2% = 100% control 49.9% x 22.3% = 11.1%
49.9% x 100% = 49.9%
Jasmyn Consortium 20.1% 20.1%
Broad based BEE 30.0% 30.0%
Groupings
TOTAL 100% 61.2%
2.7.2 As can be seen from the table above, because black people control 53.2%
of the voting rights in Arch Equity, BEE Newco will, in terms of the control
principle, as defined in the Codes, be considered to be a 100% black company.
Based on the flow-through principle in the Codes as applied to black people"s
economic interest, BEE Newco will, in terms of economic interest, be a 61.2%
black company.
2.8 As at the date of publication of this announcement, the Codes have been
finally revised but remain to be promulgated in 2006. A shareholders agreement
to be concluded between Arch Equity and the BEE Parties will provide that each
BEE Party will comply with the Codes and any subsequent amendments thereto, on
an ongoing basis. Should any BEE Party at any time after the agreement"s
conclusion fail to comply with the Codes (as amended from time to time),
including any of the warranties as may be provided in respect thereof, Arch
Equity shall be entitled to purchase such non-complying BEE Party"s shares in
BEE Newco at par value.
3. Subject matter and terms of the BEE disposal
3.1 Arch Equity will conclude a disposal agreement with each of the BEE
Parties in order to effect the disposal of 50.1% of the issued share capital in
BEE Newco to the BEE Parties. Each of the disposal agreements to be concluded
between Arch Equity and the Jasmyn Consortium, and Arch Equity and the Broad-
Based BEE Groupings, respectively, will contain substantially the same terms and
conditions.
3.2 Arch Equity shall, subject to the fulfilment of the conditions precedent
set out in 7. below, dispose of 50.1% of the issued ordinary share capital in
BEE Newco to the BEE Parties for an aggregate purchase consideration equal to
the par value of the ordinary shares so disposed of, being R0.01 per share.
3.3 In terms of the BEE disposal, and as part of the financing arrangements
agreed in terms thereof with the BEE Parties, Arch Equity will simultaneously
subscribe for such number of compulsory redeemable preference shares in BEE
Newco so as to capitalise its loan account in BEE Newco in an amount equal to
the value of the BEE investments, being approximately R110 million. The
preference shares will be compulsorily redeemed by BEE Newco subject to the
terms and conditions as set out in 4 below.
3.4 A fair and reasonable opinion has been obtained from Grant Thornton
Corporate Finance (Proprietary) Limited ("Grant Thornton"), acting as
independent expert, in respect of the BEE disposal. Grant Thornton is of the
opinion that the terms of the BEE disposal are fair and reasonable to Arch
Equity shareholders. The full text of such opinion shall be provided in the
circular to follow.
3.5 Although such fair and reasonable opinion is not required in terms of the
JSE Limited"s ("JSE") Listings Requirements, the directors of Arch Equity have
nevertheless resolved, in the interests of good Corporate Governance and
transparency towards its shareholders, to obtain such opinion as to the fairness
and reasonableness of the terms of the BEE disposal for Arch Equity
shareholders.
4. The Preference Shares
4.1 Each preference share will, on a winding-up, confer the right upon the
holder, in priority to any payments in respect of any other class of shares then
issued, to receive in full, out of the profits of BEE Newco, the redemption
amount. Save as set out herein, the preference shares shall not be entitled to
any participation in the profits or assets of BEE Newco or, on a winding-up, to
any participation in any surplus assets of the company;
4.2 Each preference share shall confer on the holder thereof the right to
receive out of the profits of BEE Newco a cumulative preferential cash dividend,
which shall accrue on a daily basis and be compounded monthly in arrears,
calculated at the prime rate of interest plus 1% on the issue price for the
period from (and including) the issue date to (but excluding) the redemption
date, subject to any adjustment in accordance with the terms of BEE Newco"s
articles of association;
4.3 BEE Newco shall declare and pay preference dividends at such time and in
such proportion as the directors from time to time deem appropriate, subject to
any preference dividend that has accrued but which remains unpaid accumulating
as set out in 4.2 above;
4.4 The company shall only be entitled to make distributions to ordinary
shareholders within 30 days of the approval by the board of directors of the
company"s audited annual financial statements;
4.5 The company shall not make any distribution to ordinary shareholders,
unless:
4.5.1 the gearing of the company is less than 30% based on the most recent
audited financial statements of the company; and
4.5.2 all the accrued and unpaid preference dividends have been paid to the
holders of the preference shares.
4.6 The company shall:
4.6.1 prior to the tenth anniversary and 1 (one) day of the issue date, be
entitled but not obliged; and
4.6.2 after the tenth anniversary and 1 (one) day of the issue date, be
obliged,
to redeem the preference shares.
4.7 Effective date of BEE disposal
The effective date of the BEE disposal in terms of each of the disposal
agreements entered into between Arch Equity and each of the BEE Parties is 1
December 2005.
4.8 Warranties
All the BEE Parties have provided Arch Equity with the normal warranties for a
disposal transaction of this nature, including relevant warranties regarding
their continued compliance with the Codes.
5. Effect of the BEE disposal on Arch Equity"s shareholders
5.1 The effect of the BEE disposal on Arch Equity shareholders will be that
Arch Equity"s stake in BEE Newco will be 49.9%. Therefore, where previously Arch
Equity shareholders would have shared in 100% of the upside of any profits of
the BEE investments held by BEE Newco, they will now only share in 49.9% of
such upside plus a preferential after tax return of prime plus 1% on the current
value of the BEE investments.
5.2 However, as stated in the introduction, the board of directors could not
have anticipated the impact of the Codes on the continuance of Arch Equity"s
investments in their present structure. The board of directors are of the
opinion that it is only through the BEE disposal and utilisation of BEE Newco
that it can adequately address the requirements of the Codes. The BEE disposal
will equip BEE Newco with stronger empowerment credentials so that it will be
able to seek out deals that otherwise may elude Arch Equity. In this manner Arch
Equity will maintain a significant interest in its investments made to date, and
simultaneously will position itself to unreservedly pursue other BEE investments
in the future.
6. Rationale
6.1 The BEE disposal is aimed at establishing BEE Newco as an entity with
shareholders that are fully representative of black people and, in so doing,
align itself with the principles embodied in the Codes relating to economic
ownership and control.
6.2 In this manner, BEE Newco will acquire the necessary empowerment
credentials so as to ensure its continued growth and profitability in the BEE
sphere by positioning itself to take advantage of the favourable BEE environment
presently prevailing in the country.
6.3 The improved empowerment credentials of BEE Newco, and its access to
funding via Arch Equity"s strong balance sheet, will result in a superior BEE
vehicle, capable of perpetuating Arch Equity"s successful deal-making history.
6.4 The primary objective of the BEE disposal is for Arch Equity to provide,
through BEE Newco, the required BEE credentials to its BEE investments in terms
of the Codes.
6.5 The BEE disposal will therefore, through BEE Newco"s impeccable
empowerment credentials, unlock efficiencies within the Arch Equity group, and
ensure the continued sustainability and future growth of the group in a BEE
environment.
7. Conditions Precedent
The BEE disposal agreements will become unconditional upon the fulfilment of the
following conditions precedent:
7.1 the BEE disposal is implemented such that BEE Newco"s empowerment
credentials comply with the Codes as finalised by the dti;
7.2 the shareholders of BEE Newco secure the necessary funding arrangements so
as to settle the consideration required in terms of the BEE disposal;
7.3 the amended articles of association of BEE Newco, including the terms and
conditions attached to the preference shares are registered by the Registrar of
Companies;
7.4 the Broad-Based BEE Groupings are established as separate legal entities in
compliance with the Codes and any other applicable law to the satisfaction of
the directors of both Arch Equity and BEE Newco;
8. Pro forma financial effects of the BEE restructuring
8.1 Set out below are the unaudited pro forma financial effects of the BEE
disposal, based on the unaudited consolidated financial results of Arch Equity
for the six months ended 31 August 2005.
Arch Equity shareholders should note that the circular to be issued to Arch
Equity shareholders in terms of 11 below has been prepared on a voluntary basis.
The pro forma financial effects as presented below, and as contained in the
aforementioned circular, have not been reported on by any reporting accountant.
Actual Pro forma Percentage
Before the After the change
BEE disposal BEE disposal
(1) (2) (3) (4) (5) (6) (%)
(cents) (cents)
Earnings / (loss) 16.9 41.1 143.4
per share
Headline earnings 19.9 19.5 (2.2)
per share
Net asset value 186.1 208.2 11.9
per share
Net tangible asset 186.1 208.2 11.9
value per share
(1) The figures in the "Actual Before the BEE disposal" column have been
extracted from the unaudited financial results of Arch Equity for the six months
ended 31 August 2005.
(2) The earnings and headline earnings per share figures in the "Pro forma
After the BEE disposal" column have been calculated:
- on the basis that the BEE investments" disposals to BEE Newco
were implemented on 1 March 2005; and
- assuming that the BEE disposal was also effected on 1 March 2005.
(3) The net asset value and net tangible asset value per share figures in the
"Pro forma After the BEE disposal" column have been calculated on the basis that
the BEE disposal was effected on 31 August 2005.
(4) The large increase in the earnings per share is primarily due to a non
recurring profit realised on the sale of the PSG Shares and the Capitec Shares
to BEE Newco.
(5) BEE Newco"s earnings will be more dependent on market movements because it
fair value accounts its investments in PSG Group and Capitec. For the purposes
of the pro forma results no fair value gains or losses have been included as the
sale date of the PSG Group Shares and the Capitec Shares was based on a price
after 31 August 2005.
(6) Capital Gains Tax has been provided for on the BEE investments" disposals
to BEE Newco.
The financial effects contained in the table above have been prepared to
illustrate how the BEE disposal would have affected the relevant financial
ratios of Arch Equity for the financial period indicated and are pro forma only.
9. The future of Arch Equity
9.1. Following the BEE disposal, Arch Equity will hold the following key
assets:
9.1.1 21 540 000 (20.9%) ordinary shares in the issued share capital of PSG
Group Limited;
9.1.2 10 715 335 (15.3%) ordinary shares in the issued share capital of
Capitec Bank Holdings Limited;
9.1.3 49.9% of the ordinary shares in BEE Newco;
9.1.4 R110 million preference shares in BEE Newco; and
the remainder of Arch Equity"s assets, consisting of its investment in Channel
Life Limited, which is in the process of being sold to PSG Group Limited subject
to Competition Commission approval being obtained, as well as cash and cash
equivalents and various market investments.
9.2 As stated in the prospectus, Arch Equity is a black owned and controlled
investment company that focuses on private equity investments and BEE
transactions.
9.3 Arch Equity has not deviated from this initial undertaking in terms of the
BEE disposal. Arch Equity will continue to pursue strategically identified
private equity opportunities and it will, through BEE Newco, continue to pursue
viable BEE transactions. Arch Equity will therefore continue to participate, for
example, in consortiums and/or other private equity transactions where less
onerous BEE credentials may be required and where viable opportunities present
themselves. Arch Equity will therefore continue to operate as an investment
entity within the BEE sphere as originally stated on its initial listing. It is
intended that over time Arch Equity will strive to improve its own empowerment
credentials in terms of the Codes, but for the present, the company"s focus is
ensuring its immediate compliance with the Codes via BEE Newco.
9.4 Furthermore, Arch Equity will continue to manage and oversee its 49.9%
shareholding in BEE Newco, ensuring that it is able to extract maximum value
there from for its shareholders.
10. Directors" opinions and recommendations
The directors are of the opinion that the terms of the BEE disposal are fair and
reasonable and in the interests of Arch Equity shareholders.
11. Circular to Arch Equity shareholders
A circular, containing the details of the BEE disposal will be posted to Arch
Equity shareholders on or about Wednesday, 14 December 2005 for information
purposes only.
12. Withdrawal of cautionary announcement
Arch Equity shareholders are advised that as a result of the publication of this
announcement, the cautionary announcement dated 23 November 2005 is hereby
withdrawn.
9 December 2005
Stellenbosch
Designated and Corporate Adviser
PSG Capital Limited
Warning: The listing of ordinary shares in the company is on ALTx. Investors
are advised of the risks of investing in a company listed on ALTx. Investors are
advised that the JSE does not guarantee the viability or the success of a
company listed on ALTx. In terms of the Listings Requirements, the company is
obliged to appoint and retain a Designated Adviser, which is required to, inter
alia, attend all board meetings held by the company to ensure that all the
Listings Requirements and applicable regulations are complied with, approve the
Financial Director of the company and guide the company in a competent,
professional and impartial manner. If the company fails to retain a Designated
Adviser, it must make arrangements to appoint a new Designated Adviser within 10
business days, failing which the company faces suspension of trading of its
securities. If a Designated Adviser is not appointed within 30 days of its
suspension, the company faces the termination of its listing without the
prospect of an appropriate offer to minority shareholders.
Date: 09/12/2005 01:51:47 PM Produced by the JSE SENS Department
