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AECI Limited - Acquisition by an empowerment consortium of a 25.1% interest in

Release Date: 21/04/2004 08:31:01      Code(s): AFE
AECI Limited - Acquisition by an empowerment consortium of a 25.1% interest in  
AECI"s explosives business                                                      
AECI Limited                                                                    
(Incorporated in the Republic of South Africa)                                  
(Registration number 1924/002590/06)                                            
Share code: AFE    ISIN: ZAE000000220                                           
("AECI" or "the Group")                                                         
African Explosives Limited                                                      
Incorporated in the Republic of South Africa                                    
(Registration number 1973/008610/06)                                            
Tiso Group Limited                                                              
(Incorporated in the Republic of South Africa)                                  
(Registration number 1999/010875/07)                                            
Acquisition by an empowerment consortium of a 25.1% interest in AECI"s          
explosives business                                                             
1.  Introduction                                                                
  AECI, its wholly-owned subsidiaries AEL and AEL Holdings Limited ("AELH"),    
and an empowerment consortium ("the Consortium") led by Tiso have reached       
agreement in terms of which the Consortium will, via a new company introduced   
for this purpose ("EmpCo"), acquire a 25.1% interest in AECI"s South African    
and African explosives operations ("the Business"), for approximately R401      
million payable in cash ("the transaction"). As part of the transaction, AEL    
will become a wholly-owned subsidiary of AELH and will conduct the Business as  
agent for AELH. The transaction excludes AECI"s electronic detonator business   
("DetNet") which is being merged into a global 50:50 joint venture with Dyno    
Nobel ASA of Norway, the international leader in explosives initiation          
2.  The Consortium                                                              
  The Consortium is comprised of Tiso, which will own 75% of EmpCo, and the     
AEL Community Development Trust ("CDT"), which will own the remaining 25%.      
2.1  Tiso                                                                       
  Tiso is a majority black-owned and managed investment company with interests  
in natural resources, mining and industrial services, and financial services.   
Tiso was established in 2001 by Fani Titi, Nkululeko Sowazi and David           
Adomakoh. Staff and management currently hold 56% of the issued share capital   
in Tiso with Investec Limited and the Tiso Foundation holding 24% and 20%       
respectively. The Tiso Foundation is a registered public benefit organisation   
chaired by Bishop Mvume Dandala, the former head of the Methodist Church of     
South Africa and currently the General Secretary of the All Africa Conference   
of Churches. Tiso established the Tiso Foundation in 2002 with the purpose of   
ensuring broad-based equity participation in Tiso beyond its management and     
2.2  AEL Community Development Trust ("CDT")                                    
  The parties are committed to ensuring that the economic benefits of equity    
participation in AEL accrue to a broad base of beneficiaries and have           
accordingly agreed to include the CDT as a significant shareholder in the       
transaction. The CDT, which will own 25% of EmpCo, will be governed by an       
independent Board of Trustees and will focus on deploying income from the AEL   
investment in support of the communities where the majority of AEL"s employees  
live, principally Tembisa and Alexandra.                                        
3.  Rationale for the transaction                                               
  AECI is committed to the implementation of broad-based empowerment within     
the Group in a comprehensive and sustainable manner. It recognises that         
empowerment is a social and commercial imperative to achieving economic         
transformation in South Africa. AECI already has a number of initiatives in     
place relating to employment equity, skills development, preferred procurement  
and enterprise development. It is envisaged that, with the participation of     
Tiso, these initiatives will be enhanced.                                       
  AEL"s customer base is primarily the mining industry in South Africa and      
Africa. The South African mining industry has recently adopted the Mining       
Charter and AEL, as a major supplier to the mining industry, wishes to          
strengthen its relationship with its customers by ensuring compliance with      
their preferred procurement requirements. The transaction, therefore will       
enable AEL"s customers to operate within the procurement parameters of the      
Mining Charter.                                                                 
AEL is a mining solutions company and sought an empowerment partner with      
knowledge of and relationships in the mining industry. In addition, such a      
partner should understand the dynamics of the mining services industry. Tiso    
has a stated objective of focusing on the mining industry and the associated    
service industries. The transaction will satisfy the strategic objectives of    
both AEL and Tiso, thereby ensuring a stable platform for a long-term           
partnership. It is expected that this partnership will add considerable value   
to the Business, and hence to AECI shareholders, over time.                     
4.  Salient terms of the transaction                                            
4.1  Structure                                                                  
  The Business, currently owned and operated as a division of AECI through the  
agency of AEL, has been valued at R1 605 million for the purposes of the        
transaction. As an initial step in the transaction, the Business will be sold   
by AECI to AELH, with the purchase consideration funded by way of R100 million  
in share capital and R1 505 million in shareholder loans.                       
  The Consortium will, through EmpCo, then acquire a 25.1% economic and voting  
interest in AELH for R401 million comprised of R25.1 million in share capital   
and R376 million in shareholder loans. EmpCo will be funded by means of R25.1   
million of equity, being R18.825 million from Tiso and R6.275 million from the  
CDT, and a R376 million bank term loan. The shareholder loans and the bank      
term loan will bear interest at the same rate, with this rate being similar to  
that at which AECI could raise funding in the market.                           
  The CDT"s equity investment of R6.275 million will be funded by AECI by way   
of an interest-free loan. Tiso will fund its equity investment from its own     
  The R376 million in shareholder loans to AELH acquired by the Consortium is   
being funded by a bank term loan. A portion of this loan, namely R201 million,  
will be underwritten by AECI as surety and repayments of the AELH shareholder   
loan due to AECI will rank behind repayments of the AELH shareholder loan due   
to EmpCo. AECI"s surety obligation will diminish over time and will terminate   
when AELH refinances the remaining shareholder loans by way of external         
funding upon commercial terms, which is envisaged to be within six to seven     
  The transaction is structured such that EmpCo will have a direct 25.1%        
economic interest and full voting rights in respect of the Business from        
inception of the transaction. The participation of the CDT and the Tiso         
Foundation in the transaction will result in an effective 40% interest in       
EmpCo being held by broad-based shareholders.                                   
  The AECI Group structure and shareholding of AELH post the transaction are    
depicted in the diagram below:                                                  
*Before the merger of DetNet into a joint venture with Dyno Nobel ASA         
4.2  Use of proceeds                                                            
  The net cash proceeds of R395 million emanating from the transaction will be  
applied by AECI to reduce its existing borrowings.                              
4.3  Professional services                                                      
  AECI and the Consortium have committed themselves to ensuring that the        
Business continues to deliver sustained profitable growth. In this regard AECI  
will continue to provide the services it has historically provided to the       
Business and EmpCo will provide the Business with services, which inter alia,   
will include on-going strategic commercial input to the management of the       
Business; assistance in maintaining and developing relationships with           
customers; and facilitation of policies and programmes relating to employment   
equity, social responsibility, skills development and affirmative procurement   
within the Business. AECI and EmpCo will receive a professional services fee    
for the provision of the above services.                                        
4.4  Exclusivity                                                                
Tiso has undertaken that it will not take part in any investment or business  
activity which directly competes with the operations of the Business or, for a  
period of five years, with the operations of the broader AECI Group. AECI has   
undertaken that it will not, for as long as Tiso remains a shareholder in       
AELH, without prior consent of Tiso, initiate discussions with any other        
potential investor with the view of increasing the empowerment shareholding in  
AELH and that Tiso will be afforded a first option to take up future            
empowerment participation opportunities in the greater AECI Group.              
4.5  Long-term commitment                                                       
  Tiso regards its investment in AELH as a long-term strategic holding and has  
not sought an exit mechanism for its investment.                                
4.6  AELH Board representation                                                  
EmpCo will be entitled to nominate two of the six non-executive directors to  
the Board of AELH and will be represented in various sub-committees of this     
4.7  Effective date                                                             
The effective date of the transaction will be 1 July 2004.                    
5.  Financial effects of the transaction                                        
  The pro forma financial information has been prepared for illustrative        
purposes only and, due to its nature, may not accurately reflect the financial  
position of AECI subsequent to the implementation of the transaction. In        
particular, the pro forma information does not recognise any of the benefits    
which may be expected to result from the Consortium"s participation in the      
Business. The pro forma financial effects of the transaction set out below are  
based on AECI"s audited results for the year ended 31 December 2003.            
                                 Audited    Pro forma                           
                              Before the    After the                           
                             transaction  transaction              %            
(cents)      (cents)        change            
Headline earnings per share          356          336          (5.6)            
Earnings per share                   252          233          (7.5)            
Net asset value per share          2 305        2 305              -            
Tangible net asset value per share 1 458        1 458              -            
1.  The headline earnings and earnings per share are calculated using           
historically published information for AECI for the year ended 31 December      
2003 as if the transaction had taken place with effect from 1 January 2003.     
2.  The headline earnings and earnings per share for the year ended 31          
December 2003, as set out in the "After" column of the table, are based on the  
assumptions that:                                                               
*  the net cash proceeds of R395 million received by AECI were used to repay    
long-term debt at an effective pre tax rate of 11.0%;                           
*  a professional services fee of 0.125% of the Business" turnover was paid to  
EmpCo, which fee would have amounted to R2.5 million before tax; and            
*  the weighted average number of AECI shares in issue for the 12-month period  
was 94.7 million.                                                               
3.  The net asset and tangible net asset value per share in the "After" column  
are calculated as if the transaction had occurred on 31 December 2003 based on  
108.2 million shares in issue on that date, and on the assumption that the      
profit realised on the transaction - due to the sale of the 25.1% minority      
interest in AELH - is set off against the same amount of goodwill recognised    
in AELH consequent to the transfer of the Business from AECI to AELH.           
6.  Conditions precedent                                                        
  A shareholders" agreement has been concluded but the transaction is subject   
to the finalisation of various ancillary agreements, including the bank term    
loan agreement.                                                                 
21 April 2004                                                                   
Financial adviser and sponsor                                                   
to AECI                                                                         
Attorneys to AECI                                                               
Webber Wentzel Bowens                                                           
Attorneys to Tiso                                                               
Moss Morris Attorneys                                                           
Joint financial advisers to Tiso                                                
Tiso Capital Advisers                                                           
Standard Bank                                                                   
Date: 21/04/2004 08:31:09 AM Supplied by www.sharenet.co.za                     
Produced by the JSE SENS Department                                             

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