| Tue 11 Apr 2006, 13:00 | | Hospitality Property Fund Limited - Detailed Cauti |
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HPA HPB
HPA
Hospitality Property Fund Limited - Detailed Cautionary Announcement
HOSPITALITY PROPERTY FUND LIMITED
(Incorporated in the Republic of South Africa)
(Registration number: 2005/014211/06)
Share code for A linked units: HPA
Share code for B linked units: HPB
ISIN for A linked units: ZAE000076790
ISIN for B linked units: ZAE000076808
("Hospitality" or "the Company")
ANNOUNCEMENT REGARDING AN EXPRESSION OF INTEREST IN PROPOSING AN OFFER OR A
SCHEME OF ARRANGEMENT IN TERMS OF SECTION 311 OF THE COMPANIES ACT TO ACQUIRE
THE ENTIRE ISSUED ORDINARY SHARE CAPITAL IN CITY LODGE HOTELS LIMITED ("CITY
LODGE") AND CAUTIONARY ANNOUNCEMENT
1. Introduction
Linked unit holders of Hospitality are advised that Hospitality has submitted a
letter to the board of directors of City Lodge wherein Hospitality has expressed
its interest in potentially making an offer or proposing a scheme of arrangement
in terms of Section 311 of the Companies Act, No. 61 of 1973, ("the Act") to
acquire the entire issued ordinary share capital of City Lodge ("the
Acquisition"). After the implementation of the Acquisition and as an integral
part of the transaction, Hospitality would sell the City Lodge hotel operating
business (the "OpCo Disposal") including the movable assets, staff and brand
names of the City Lodge group, to a separate operating company ("OpCo"). OpCo
will contemporaneously enter into a lease for the City Lodge hotel properties
("the City Lodge Property Portfolio") with Hospitality (together with the
Acquisition, "the Potential Transaction"). OpCo will be 100% held by a
consortium comprising Hans Enderle, management of City Lodge ("Management") and
staff of City Lodge ("the OpCo Consortium").
Linked unit holders should note that the abovementioned letter does not
constitute an offer or proposal for a scheme of arrangement and is not to be
construed as a statement by Hospitality of a firm intention to make an offer.
Rather it is indicative of the current stage of negotiations. The making of any
offer or proposal of any scheme of arrangement will be dependent inter alia upon
the successful conclusion of negotiations and the successful outcome of the due
diligence exercise referred to below.
2. Rationale for the Potential Transaction
The Potential Transaction will provide Hospitality with the following:
- good quality assets which provide further diversification of its portfolio
in terms of geographic location, star grading, lease expiry profile and
brand affiliation;
- substantial fixed lease income, as well as a component of variable income,
which provides exposure to growth in hotel revenues. The lease to be
concluded with OpCo will contain a high fixed rental component providing a
secure stream of cash flows. The variable income component to the lease
will provide Hospitality"s unitholders with exposure to growth in gross
revenues achieved by the City Lodge hotels;
- a right of first refusal to acquire new properties that OpCo may
develop or acquire;
- hotels which are modern, well run, in prime locations and with a good track
record; and
- improved liquidity through the increase in market capitalisation and
extended shareholder base.
The Potential Transaction is expected to be earnings neutral for Hospitality"s
unitholders.
Hospitality believes the benefits of the Potential Transaction to City Lodge
shareholders to be:
- a consideration which is at a premium to the current City Lodge market
share price;
- risk mitigation through a more diversified hotel property portfolio;
- low risk leases which incorporate a variable component providing exposure
to growth in hotel revenues;
- continued exposure to the City Lodge property portfolio;
- realisation of the true market value of the City Lodge property portfolio;
- pre-tax distributions through Hospitality"s property loan stock structure;
and
- a preferred claim on the future income stream through Hospitality"s A
linked units and exposure to high growth potential through Hospitality"s B
linked units.
Any offer made by Hospitality would be in line with the current international
trend in the hotel and leisure industry which is for hotel companies to separate
the ownership of their hotel properties from their hotel operations. This
enables hotel management to maintain focus on the running of hotels, while
property management companies deal with ownership issues relating to the hotel
properties.
Hospitality intends to increase or maintain its current black economic
empowerment ("BEE") ownership level of approximately 15% in a transaction allied
to the Potential Transaction.
3. Envisaged purchase consideration
It is presently envisaged that Hospitality would issue approximately 2.2831 A
linked units and approximately 2.2831 B linked units for every City Lodge share
currently in issue. The ratio of A to B linked units may change, depending on
the requirements of the BEE transaction that is being contemplated by
Hospitality.
This exchange ratio equates to an acquisition price of R60 per City Lodge share
based on the closing prices of the A and B linked units and City Lodge shares on
Friday, 7 April 2006.
The consideration would equate to a premium of 10% to the City Lodge closing
price of R54.50 on Friday, 7 April 2006 and a premium of 14% to the 30 day
volume weighted average City Lodge price to Friday, 7 April 2006.
Linked unit holders will be advised on the Securities Exchange News Service
("SENS") and in the press if, in negotiations with the City Lodge board, it
becomes necessary to offer a cash component as part of the Potential
Transaction.
4. The Potential Transaction
It is envisaged that the Acquisition will be effected by way of a scheme of
arrangement in terms of section 311 of the Act ("the Scheme"), proposed by
Hospitality, between City Lodge and its shareholders.
Post the Acquisition, Hospitality will implement an internal group
restructuring. Pursuant to this restructuring:
- a Hospitality subsidiary will acquire a property portfolio comprising all
of the City Lodge Property Portfolio; and
- the OpCo Disposal will take place and OpCo will enter into a lease for the
City Lodge Property Portfolio with Hospitality.
The consideration for the OpCo Disposal will be based on a fair market value,
the determination of which will be agreed with the OpCo Consortium.
Hospitality will enter into a fully repairing and maintaining lease with OpCo in
respect of the City Lodge Property Portfolio under the following broad terms:
Lease term:
- an initial 15 years; and
- an option to renew for a further 15 years.
Lease payments:
It is envisaged that lease payments will comprise both fixed and variable
components as follows:
- a fixed portion which equates to approximately 75% of the total
initial lease payment, escalating annually by the greater of:
CPIX; and
- the percentage increase in gross revenue from the hotel operations,
subject to a maximum of CPIX plus 5 percentage points; and
- a variable portion equal to approximately 25% of the total initial
lease payment which will be based on gross revenue from the hotel
operations.
It is envisaged that the total lease payment will be approximately 50% of the
projected turnover of City Lodge in the first year after implementation of the
Potential Transaction.
5. Conditions precedent
The decision to proceed with the Potential Transaction will be taken subject to:
- the approval of the Board of Directors of Hospitality;
- the conclusion of formal agreements including agreements pertaining to the
OpCo Disposal and the lease agreement with OpCo; and
- the South African Revenue Service indicating that it will permit the
Potential Transaction to be treated as a land realisation for tax purposes.
In the event that Hospitality proceeds with the Potential Transaction, it will
be subject to, inter alia, the fulfillment or waiver at Hospitality"s election
(where possible) of the following conditions precedent:
- the completion of a due diligence investigation by Hospitality to the sole
satisfaction of Hospitality;
- the approval of Hospitality"s linked unit holders at general meetings, in
accordance with the Listing Requirements of the JSE Limited ("JSE");
- the approval of the JSE, the Securities Regulation Panel ("SRP"), the South
African Reserve Bank and such other regulatory authorities as may be
necessary;
- the approval the Competition Authorities as contemplated in the Competition
Act, No 89 of 1998, as amended;
- the Scheme being approved by a majority representing not less than 75%
(three fourths) of the votes exercisable by City Lodge shareholders present
and entitled to vote either in person or by proxy, at the scheme meeting/s;
- the Scheme being sanctioned by the High Court of South Africa; and
- a certified copy of the order of court sanctioning the Scheme being
registered by the Registrar of Companies in terms of the Act.
6. Further announcement and cautionary
This announcement does not constitute a firm intention to make an offer for the
purposes of the Securities Regulation Code on Takeovers and Mergers. As noted
above in paragraph 5, any firm intention to make an offer (and the Potential
Transaction) will be subject inter alia to the satisfactory completion by
Hospitality of a due diligence investigation in respect of City Lodge and its
assets. Hospitality would also wish to obtain the support of the independent
directors of City Lodge for the Potential Transaction.
A further announcement of Hospitality"s intentions will be released on SENS and
published in the press.
Should Hospitality proceed with the Potential Transaction, it could have an
impact on the price at which Hospitality A linked units and B linked units trade
on the JSE. Linked unitholders of Hospitality are accordingly advised to
exercise caution when dealing in their Hospitality linked units until a further
announcement is made.
Sandton
11 April 2006
Merchant bank and transactional sponsor
RAND MERCHANT BANK (A division of FirstRand Bank Limited)
Corporate Law Advisors
Edward Nathan (Proprietary) Limited
Date: 11/04/2006 01:00:21 PM Produced by the JSE SENS Department
