| Mon 4 Dec 2006, 16:55 | | Adcorp - Acquisition of FMS and withdrawal of caut |
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ADR
ADR
Adcorp - Acquisition of FMS and withdrawal of cautionary
Adcorp Holdings Limited
(Incorporated in the Republic of South Africa)
(Registration number 1974/001804/06)
Share Code: JSE ADR & ISIN: ZAE000000139
("Adcorp or the "the company")
Announcement to shareholders of Adcorp regarding the acquisition of Funerary
Management Services (Pty) Limited ("FMS") by Adcorp ("the acquisition") and
withdrawal of cautionary announcement
1. Introduction
Further to the cautionary announcement of Adcorp published in the press
on 14 November 2006, Investec Corporate Finance is authorised to announce
that Adcorp has entered into an agreement on 4 December 2006 with the
current shareholders of FMS to acquire the entire issued share capital of
FMS in consideration for cash and Adcorp shares.
2. Details of the acquisition
2.1 The vendors of FMS
The FMS Group is 94.3% owned by Fuman Investments (Pty) Limited ("Fuman")
and 5.7% owned by T C Fowler (an individual).
2.2 Effective date
The effective date of the transaction will be 1 January 2007.
2.3 Purchase consideration
Adcorp will acquire the entire issued share capital of FMS for a purchase
consideration of R225 000 000 (two hundred and twenty five million rand).
The purchase price will be discharged as follows:
- the issue of 2 788 000 new Adcorp shares ("the vendor shares"); and
- a cash payment of R153 069 600.
The vendor shares will be issued at a price of R25.80, which is the
closing price of Adcorp shares on the JSE Limited ("JSE") on Friday 10
November 2006, being the date that the basic terms of the acquisition
were agreed upon, which is also the last business day preceding the
cautionary announcement. The cash will be raised via a combination of
existing cash resources of Adcorp and new debt.
2.4 Conditions precedent
The acquisition is subject to the following conditions precedent:
- Adcorp being satisfied with its due diligence investigation into the
business and affairs of FMS;
- Approval in general meeting by shareholders to place 2 788 000 unissued
shares of the company under the control of the directors in order to
discharge a portion of the purchase price as described in 2.3 above.
- Approval of the acquisition by the Competition Commission and the JSE,
including the approval by the JSE of the required documentation to be
distributed to Adcorp shareholders; and
- conclusion of employment agreements between Adcorp and the key
employees of FMS, including appropriate restraint undertakings.
3. FMS - nature of business
Founded in 1997, FMS has built a range of Added Value Services it offers to
its clients ranging from the crucial to the convenient. FMS offers its
services to policyholders of several large insurance companies and members
of various affinity groups. The business model is based on the principle
that life insurance companies and affinity groups can offer additional
products and services to its policyholders, beneficiaries and members.
These added value services offered by FMS are considered to be sound,
practical, essential and integral to most policyholders. The services
offered by FMS can be classified as follows:
Risk related
- Legal: face-to-face consultation, legal support and documentation,
wills and estate planning services, employment and labour legislation,
industrial relations services and a tax information helpline.
- Health: advice on selected health issues, access to health advisors,
first aid and other emergency medical advice, counselling on chronic and
dread diseases and counselling on addictions.
- HIV / AIDS: 24-hour access to telephonic trauma and post-traumatic
stress disorder counselors, psychiatric consultations and blood tests.
- Trauma: emergency assistance service and transport, cover for assault,
referrals for psychiatric consultations and cover for trauma.
- Emergency: telephonic emergency medical advice, arrangement for
emergency medical attention, transfer services to hospitals and general
medical consultations.
- Funeral: assistance with making a claim against the policy,
transportation of the deceased, identification of credible undertakers and
suppliers.
Lifestyle related
These services offer policyholders various discounts and cash-back
payments on products such as gym memberships, health related programmes,
vitamins and supplements, weight loss programmes, magazine subscriptions,
advanced driving, movies, travel and discounted airtime.
Central to the services offered by FMS is its call centre. This facility
processes all telephonic interactions with customers and is in 24-hour
operation. The centre executes, controls and manages a multitude of services
to a diversified market, acting as an extension of its clients" operational
teams.
4. Rationale for the acquisition
The expertise of FMS in employee benefits as well as the provision of added
value services to over 5 million families will greatly enhance Adcorp"s
influence in the human capital management market. Adcorp currently employs
in excess of 35 000 contract workers and extending the business activities
of Adcorp into the area of employee benefits would substantially increase
the current benefit offerings to these contract workers.
In addition, Adcorp is currently a significant provider in the Business
Process Outsourcing ("BPO") industry in South Africa. In this regard, Adcorp
provides many outsourced services in areas such as recruitment process
outsourcing ("RPO"), contact centre resourcing, payroll outsourcing, back
office administration as well as various other personnel intensive clerical
and technical functions. BPO as an industry has grown dramatically both
locally and internationally over the past years by in excess of 40% per
annum and is forecast to continue to do so in the foreseeable future.
In South Africa, BPO is an industry that has been identified by the South
African Government as a key sector to support given its significant job
creation potential. In this regard, the South African Department of Trade
and Industry recently announced its intention to provide a comprehensive
package of incentives to businesses operating in this space in order to
further promote the sector in South Africa.
Given Adcorp"s significant presence in the BPO arena, the acquisition of FMS
is a natural and logical extension to its operations, which will further
entrench Adcorp in this industry.
The acquisition of FMS will increase the earnings of Adcorp substantially
and enhance the quality and predictability of its earnings given that the
income streams of FMS are entirely annuity based.
5. Financial effects on Adcorp shareholders
The unaudited pro forma financial effects of the acquisition are the
responsibility of the directors of Adcorp and are presented for illustrative
purposes only to provide information about how the acquisition might have
impacted on the financial position and results of Adcorp had the acquisition
occurred at an earlier date.
Interim results to 30 June
2006
Before (cents) 1,4 After change %
(cents)(2,5,7)
Per Adcorp share
Earnings 58.3 57.2 -1.7%
Headline earnings 3 106.5 102.2 -4.0%
Net asset value 554.1 677.4 22.3%
Tangible net asset value 434.5 489.9 12.8%
Cash flow per share 8 63 72 14.9%
Number of shares in issue 43,005 45,793 6.5%
("000)
Weighted issue number of 42,757 45,545 6.5%
shares ("000)
Notes:
1.The earnings and headline earnings per share, as set out in the Before
column, are based on the published interim results of Adcorp for the six
months ended 30 June 2006.
2.The earnings and headline earnings per share, as set out in the After
column, are based on the interim results of Adcorp for the six months
ended 30 June 2006 and six months apportioned for FMS (based on audited
28 February 2006 Income Statement, i.e. 12 months" earnings divided by
2).
3.For this calculation, R60 million of the purchase price in excess of the
net asset value of FMS has been allocated to Intangible Assets and the
remainder to Goodwill. This allocation is based on management"s best
estimate. The allocation of the purchase price between Goodwill and
Intangible Assets is subject to audit and if this results in the
allocation being materially different to management"s estimates,
shareholders will be advised thereof. As a result of the allocation of
R60 million of the purchase price to Intangible Assets, we have included
an amortisation charge in the calculation of Earnings and Headline
earnings in the After column. An amortisation period of five years was
assumed for the calculation. The headline earnings of Adcorp would have
increased 9,9% if, for this calculation, the purchase price in excess of
the net asset value of FMS has been allocated to Goodwill.
4.The net asset value and tangible asset value per share, as set out in the
Before column, is based on the interim balance sheet published by Adcorp
as at 30 June 2006.
5.The net asset value and tangible net asset value per share, as set out in
the After column, is based on the published interim balance sheet of
Adcorp as at 30 June 2006 and balance sheet of FMS as at 28 February 2006
and the assumptions that:
5.1 the vendor placement of 2 788 000 shares took place at 30
June 2006;
5.2 the cash consideration was paid at 30 June 2006.
6.An interest rate of 12% (prime) was assumed on the debt raised for
funding the transaction.
7.Transaction costs were included.
8.The cash flow per share calculation is based on the cash generated by
operations before any distribution to shareholders. The Before column is
based on the published interim results of Adcorp for the six months ended
to 30 June 2006. The After column includes the cash flow from operating
activities of FMS apportioned for six months based on the audited Cash
Flow Statement for the year ended 28 February 2006 and the interest
incurred on the debt assumed by Adcorp for the acquisition of FMS. If
transaction costs were ignored, the cash flow per share would have
increased by 24,1% rather than 14,9%.
The articles of association of FMS will be changed in line with that of
Adcorp in due course.
6. Documentation
Due to the approval required by shareholders to place 2 788 000 unissued
shares under the control of directors as described in paragraph 2.4 above, a
notice of the general meeting to be held and the ordinary resolution to be
passed will be posted to Adcorp shareholders in due course.
7. Withdrawal of cautionary announcement
Shareholders are referred to the cautionary announcement dated 14 November
2006 and are advised that as a result of the conclusion of the agreements
between Adcorp and the vendors to acquire the entire issued share capital of
FMS, caution is no longer required to be exercised by shareholders when
dealing in their securities.
Sandton
4 December 2006
Corporate advisor and Sponsor to Adcorp Attorneys to
transaction sponsor to Adcorp Adcorp
(Investec Corporate Finance) (Deloitte) (Roodt Inc.)
Reporting Accountants Attorneys to Fuman
(Deloitte) (Moss Cohen)
Date: 04/12/2006 04:55:11 PM Produced by the JSE SENS Department
