| Tue 16 May 2006, 9:23 | | Massmart Holdings Limited - Black Economic Empower |
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MSM
MSM
Massmart Holdings Limited - Black Economic Empowerment Transaction
Massmart Holdings Limited
(Incorporated in the Republic of South Africa)
(Registration number 1940/014066/06)
(Share code: MSM ISIN: ZAE000029534)
("Massmart" or "the Company")
Black Economic Empowerment Transaction
Transaction highlights
- Fully company-funded black economic empowerment transaction equivalent to
approximately 10% of Massmart"s current issued share capital ("the new
issue") with an approximate value of R1.1 billion.
- Participation by the Massmart"s general staff and previously disadvantaged
managers and non-executive directors.
- Massmart"s general staff - 83% of whom are previously disadvantaged - will
be allocated 85% of the new issue.
- Massmart"s current and future previously disadvantaged managers will be
allocated 10% of the new issue.
- Massmart"s current and future previously disadvantaged non-executive
directors will be allocated 5% of the new issue.
- Previously disadvantaged individuals will be participants in 8.6%
(approximately R1.0 billion) of Massmart"s equity.
1. Introduction and rationale
Massmart is pleased to announce that it has, subject to fulfilment of the
conditions precedent set out in paragraph 4 below, resolved to enter into a
Black Economic Empowerment ("BEE") transaction pursuant to which shares
equivalent to approximately 10% of Massmart"s current issued share capital will
be issued to trusts representing a broad base of Massmart"s and all its
subsidiaries"("Massmart Group" or "the Group") staff, previously disadvantaged
Massmart Group managers and previously disadvantaged non-executive directors of
Massmart ("the BEE Transaction").
The BEE Transaction has a value of approximately R1.1 billion based on the
closing price of a Massmart ordinary share ("ordinary share") on 15 May 2006, of
R55.00.
The Board of Directors of Massmart ("the Board") is totally committed to the
spirit and principles supportive of BEE and believes BEE to be essential to the
redress of past inequities and the transformation and normalisation of South
African society.
The Board believes that the BEE Transaction is both morally defensible and
entirely appropriate at this time in the history of the Company and country.
The BEE Transaction will better align the Massmart Group with: its staff whose
efforts have been the origin of the value created over the past 18 years; its
customers whose continued patronage is highly valued; and with broader society
whose respect it strives to earn.
Prior to the publication of the first draft of the Codes of Good Practice on
Broad-based BEE and in the absence of a charter defining BEE for South African
retailers, the Board approved a policy in early 2004 to focus on every aspect of
BEE and the Massmart Group has established programmes and targets to do so.
Massmart was recently rated the 4th most empowered company among South African
retailers and will continue to pursue its BEE objectives.
One of these objectives is to share the ownership of Massmart with previously
disadvantaged individuals. In considering who would contribute the most to
Massmart"s vision, the Board felt that the permanent employees of the Massmart
Group were the people who most deserved to be recognised for the part they have
played in the Group"s progress. Furthermore, the Board decided that those who
had served the Massmart Group the longest deserved a greater participation.
The BEE Transaction, if approved, is one of the largest and most important
transactions in the history of Massmart.
2. Structure of the BEE Transaction
The BEE Transaction will be structured as follows:
- the general staff trust ("Thuthukani Empowerment Trust") will be created
for the benefit of all of the Massmart Group"s permanent employees in
South Africa who are employed on 1 October 2006, regardless of race and
gender and who are not beneficiaries of Massmart"s existing share ownership
scheme. These approximately 14,500 employees (approximately 83% of whom are
previously disadvantaged individuals) will immediately have vested rights
that are similar to those of existing Massmart shareholders, including the
right to dividends, the right to vote at shareholder meetings through
elected trustees, and the right to acquire, after a certain period and
pursuant to the conversion of the undermentioned `A" preference shares,
ordinary shares, and thereafter to retain or sell them;
- the Black Management Trust ("Management Trust") will be created for the
benefit of the Massmart Group"s current and future previously disadvantaged
management in South Africa. This trust will initially benefit approximately
30 of the Massmart Group"s previously disadvantaged management; and
- the Black Non-Executive Directors" Trust ("Non-Executive Directors Trust")
will be created for the benefit of the Massmart Group"s current and future
previously disadvantaged non-executive directors. This trust will currently
benefit three previously disadvantaged non-executive directors.
3. Mechanics of the BEE Transaction
Massmart will, subject to shareholder approval, create two new classes of
preference shares to be issued to the three trusts. Convertible Redeemable
Participating Non-cumulative `A" Preference Shares ("A preference shares") and
Convertible Redeemable `B" Preference Shares ("B preference shares") will be
created and authorised for this purpose. The main difference between the two
classes of preference shares is that the holders of the `A" preference shares
will receive dividends and other distributions whilst the `B" preference shares
will not. In addition, the capital distribution profiles of these two classes of
preference shares are different.
Massmart will issue the newly created preference shares to the three trusts in
the following manner:
- a maximum of 17,000,000 `A" preference shares will be issued to the
Thuthukani Empowerment Trust, at their par value of one cent each, for a
total consideration of a maximum of R170,000. The Thuthukani Empowerment
Trust will be funded by means of a capital contribution made by the
Massmart Group;
- a maximum of 2,000,000 `B" preference shares will be issued to the
Management Trust, at their par value of one cent each, for a total
consideration of a maximum of R20,000. The Management Trust will be funded
by means of a capital contribution made by the Massmart Group; and
- a maximum of 1,000,000 `B" preference shares will be issued to the Non-
Executive Directors Trust, at their par value of one cent each, for a total
consideration of a maximum of R10,000, which will be funded by the
participating non-executive directors.
The terms specific to each of the trusts are dealt with below.
3.1 The Thuthukani Empowerment Trust
3.1.1 Issue and vesting
The number of `A" preference shares allocated by the Thuthukani Empowerment
Trust to each employee beneficiary will be based on the length of service the
employee beneficiary has with the Massmart Group. An initial allocation of 400
`A" preference shares each will be made to all employee beneficiaries,
irrespective of the length of service, with extra "A" preference shares being
allocated based on length of service with the Massmart Group. The total number
of `A" preference shares allocated to any individual will be subject to a likely
maximum of 2,400 `A" preference shares.
The allocation of the `A" preference shares will be once-off and any employees
joining the Massmart Group after 1 October 2006 will not be allocated any `A"
preference shares.
The rights to the `A" preference shares will vest in each employee beneficiary
as soon as the employee beneficiary accepts his allocation.
3.1.2 Capital distribution
Employee beneficiaries will be entitled to elect to receive their `A" preference
shares on the following basis:
- 33.33% at the end of year four (being 1 October 2010) ("First Trigger
Date");
- 33.33% at the end of year five ("Second Trigger Date"); and
- 33.33% at the end of year six ("Third Trigger Date").
The number of `A" preference shares to be received will be calculated by
reference to the formula set out in paragraph 3.1.4. The employee beneficiaries
have to be in the employ of the Massmart Group on the respective Trigger Dates
in order to be eligible to receive the `A" preference shares.
Employee beneficiaries who leave the employ of the Massmart Group for any reason
other than death, disability, sale of business or retirement will forfeit their
rights to the `A" preference shares.
3.1.3 Dividends
Eligible employees will be vested employee beneficiaries of the Thuthukani
Empowerment Trust from inception. The `A" preference shares will pay a dividend
equivalent to a percentage of the ordinary share dividend and any other
distributions in the following manner:
- 25% of the ordinary share dividend and any other distributions in year one
(being the financial year to June 2007);
- 50% of the ordinary share dividend and any other distributions in year two;
- 75% of the ordinary share dividend and any other distributions in year
three; and
- 100% of the ordinary share dividend and any other distributions in year
four and thereafter.
These dividends will be paid in addition to those paid to ordinary shareholders
and the Company"s dividend cover policy will continue to apply in relation to
the ordinary shares.
3.1.4 Capital distribution formula
After becoming entitled to distributions in terms of paragraph 3.1.2, employee
beneficiaries will be able to elect the date on which they will receive the
formula-determined number of `A" preference shares which will thereafter be
converted on a one-for-one basis into ordinary shares. The formula-determined
number of `A" preference shares will, seven days after the employee beneficiary
has required a distribution, convert into ordinary shares and will thereafter
rank pari passu with all other ordinary shares then in issue.
If no election is made when the employee beneficiary is entitled to do so, the
formula-determined number of `A" preference shares will automatically be
transferred to the employee beneficiary at maturity of the scheme, being 1
October 2012, unless an election is made prior thereto.
Any `A" preference shares not delivered to employee beneficiaries during the
life of the Thuthukani Empowerment Trust will be forfeited for no consideration
by the employee beneficiaries and redeemed at their par value by the Company.
The number of `A" preference shares that each employee beneficiary will be
entitled to receive after they notify the trustees in terms of 3.1.2 will be
calculated using the following formula:
N = EP x (1-RP/P)
Where:
N = number of `A" preference shares that an employee beneficiary will be
entitled to receive and which shall be distributed to him
EP = the distributable portion, being ? (one third) of the employee
beneficiary"s initial allocation on each of the First, Second and Third Trigger
Dates, provided that the distributable portion shall accumulate if the employee
beneficiary does not transmit a distribution notice to the trustees when he
becomes entitled to receive his `A" preference shares
RP = reference share price, being the five day Volume Weighted Average Price
("VWAP") on the last practicable date prior to the issue of the circular to
shareholders
P = the VWAP of an ordinary share for the five trading days prior to the 15th
day of the month in which an employee beneficiary makes an election to receive a
distribution, provided that if he makes his election after the 12th day of the
month, then the VWAP of an ordinary share for the five trading days prior to
15th day of the following month
3.1.5 Trustees and voting
More than 50% of the trustees of the Thuthukani Empowerment Trust will be
previously disadvantaged and 1 of the 9 trustees will be a previously
disadvantaged external trustee, independent of Massmart. The majority of the
trustees will be elected by the employee beneficiaries.
Trustees will be able to vote the shares on behalf of the employee
beneficiaries.
3.2 The Management Trust
Current and future previously disadvantaged managers in the Massmart Group will
be eligible to participate in the Management Trust.
The mechanics of the Management Trust are the same as for the Thuthukani
Empowerment Trust in all respects apart from the differences noted below.
3.2.1 Allocation and vesting
The allocation of the rights to the `B" preference shares will be done by the
trustees of the Management Trust after instructions from the Massmart Nomination
and Remuneration Committee.
3.2.2 Capital distribution
Employee beneficiaries will, based on the formula set out in 3.1.4, become
entitled to receive the `B" preference shares on the following basis:
- 25% at the end of year two (from the date of issue);
- 25% at the end of year three;
- 25% at the end of year four; and
- 25% at the end of year five.
Employee beneficiaries who leave the employ of the Massmart Group for any reason
other than death, disability, sale of business or retirement will forfeit their
rights to the `B" preference shares.
3.2.3 Dividends
The `B" preference shares will carry no right to dividends until the employee
beneficiaries elect to receive their `B" preference shares which will then
automatically convert into ordinary shares on a one-for-one basis and seven days
thereafter rank pari passu with the ordinary shares then in issue.
3.2.4 Trustees and Voting
More than 50% of the trustees of the Management Trust will be previously
disadvantaged and 1 of the 3 trustees will be a previously disadvantaged
external trustee, independent of Massmart. The majority of the trustees will be
appointed by the employee beneficiaries.
Trustees will be able to vote the `B" preference shares on behalf of the
employee beneficiaries.
3.3 Non-Executive Directors Trust
Current and future previously disadvantaged non-executive directors will be
allocated vested rights in the `B" preference shares. The terms of the trust are
the same as those of the Management Trust, except as noted below.
3.3.1 Allocation and vesting
The allocation of the rights to the `B" preference shares will be made by the
Non-Executive Directors Trust to all current previously disadvantaged non-
executive directors in equal proportions. Each of the current previously
disadvantaged non-executive directors will have an economic interest of 0.1% of
the issued share capital of Massmart prior to the implementation of the BEE
Transaction. The balance of 0.2% of the existing issued share capital of
Massmart will be allocated to future previously disadvantaged non-executive
directors.
3.3.2 Capital distribution
As per the Management Trust.
3.3.3 Dividends
As per the Management Trust.
3.3.4 Trustees and voting
More than 50% of the trustees of the Non-Executive Directors Trust will be
previously disadvantaged and 1 of the 3 trustees will be an external previously
disadvantaged trustee, independent of Massmart.
Trustees will be able to vote the `B" preference shares on behalf of employee
beneficiaries.
3.3.5 Participating directors
The following previously disadvantaged non-executive directors have been invited
to participate in the Non-Executive Directors Trust:
Mr. Zitulele ("KK") Combi;
Ms. Phumzile Langeni; and
Ms. Dawn Mokhobo.
4. Conditions precedent
The BEE Transaction is subject, inter alia, to the fulfillment of the following
conditions precedent:
- the passing of all necessary resolutions by the requisite majority of
shareholders at a general meeting of Massmart;
- registration of the special resolutions by the Registrar of Companies; and
- the approval of the JSE Limited.
5. Estimated economic cost
Massmart has estimated the economic cost of entering into the BEE Transaction
for the Massmart Group and its shareholders to be approximately R240 million.
This represents approximately 2.30% of the market capitalisation of Massmart at
15 May 2006. This figure was calculated with reference to the requirements of
International Financial Reporting Standard ("IFRS") 2 - Share Based Payments.
6. Financial effects of the BEE Transaction
The principles underlying the accounting treatment are in compliance with IFRS.
IFRS 2 - Share-Based Payments requires the total charge to be amortised over the
period of the BEE Transaction, being six years. This amortised charge will
commence in the June 2007 financial year.
The table below sets out the unaudited pro forma financial effects of the BEE
Transaction, based on the assumptions set out below. The unaudited pro forma
financial effects have been prepared for illustrative purposes only and may not
give a fair reflection of the Company"s financial position, changes in equity,
results of operations or cash flows after completion of the BEE Transaction.
The financial effects based on the interim results for 2006 (being for the six
months ended December 2005) are set out below and are the responsibility of the
directors of the Company. The purpose of the pro forma financial information is
to illustrate the effects of the BEE Transaction.
For the six months to Before Pro Increase/
December 2005 the BEE forma (decrease
Transacti after ) (%)
on the BEE
Transact
ion
Basic earnings per 258.5 247.6 (4.2)
ordinary share (cents)
Headline earnings per 258.2 247.3 (4.2)
ordinary share (cents)
Fully diluted basic 250.0 239.5 (4.2)
earnings per ordinary
share (cents)
Fully diluted headline 249.8 239.3 (4.2)
earnings per ordinary
share (cents)
Net asset value per 970.6 968.2 (0.2)
ordinary share ("NAV")
(cents)
Tangible net asset value 336.1 333.7 (0.7)
per ordinary share
(cents)
Actual number of 199 741 199 741 0.0
ordinary shares in issue
(000s)
Weighted number of 199 293 199 293 0.0
ordinary shares in issue
(000s)
Weighted average number 206 006 206 006 0.0
of fully diluted
ordinary shares in issue
(000s)
Notes:
1. The tangible NAV excludes intangible assets.
2. The following assumptions have been made in the preparation of the
financial effects:
- the earnings and headline earnings per share reflected in the "Before"
column were extracted from published interim unaudited results for 31 December
2005;
- the NAV and tangible NAV per share reflected in the "Before" column were
extracted from published interim unaudited results for 31 December 2005;
- the effect on NAV and tangible NAV per share reflected in the "After"
column assumes that the transaction was effective 31 December 2005; and
the effect on earnings and headline earnings per share reflected in the "After"
column assumes that the transaction was effected on 1 July 2005 and is after
reflecting half of the IFRS 2 charge for the six months to December 2005.
7. Opinion
Deloitte & Touche Corporate Finance has been appointed by the Board to consider
the terms of the BEE Transaction and to provide an opinion as to whether they
are fair and reasonable to shareholders. The opinion from Deloitte & Touche
Corporate Finance will be contained in the circular to shareholders.
8. Important dates and times
2006
Circular and notice of general meeting Thursday 8 June
posted to shareholders on or about
Last day for receipt of proxies in Wednesday 12
respect of the general meeting by July
10:00 on
General meeting to be held at 10:00 on Friday 14 July
Results of general meeting published Friday 14 July
on SENS on
Results of general meeting published Monday 17 July
in the press on
Special resolutions lodged with the Thursday 20 July
Registrar of Companies on or about
Note:
Any material changes to the above dates and time will be published on SENS and
in the press.
9. Documentation
A circular containing the full details of the BEE Transaction, including a
notice of general meeting, will be posted to shareholders on or about 8 June
2006.
Sandton
16 May 2006
Merchant bank and Corporate law advisers to
transaction sponsor Massmart
RAND MERCHANT BANK (A Edward Nathan (Pty) Ltd
division of FirstRand
Bank Limited)
Independent expert Reporting accountants and
Deloitte & Touche auditors
Corporate Finance Deloitte & Touche
Sponsor
Deutsche Securities (SA)
(Pty) Ltd
Date: 16/05/2006 09:24:06 AM Produced by the JSE SENS Department
