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Arh - Arb Holdings - Acquisition Of The Business Of Paragon Electrical As A

Release Date: 01/12/2009 11:00:02      Code(s): ARH
ARH - ARB Holdings - Acquisition of the Business of Paragon Electrical as a     
                   Going Concern                                                
ARB HOLDINGS LIMITED                                                            
(Incorporated in the Republic of South Africa)                                  
(Registration Number 1986/002975/06)                                            
Share Code:  ARH    ISIN: ZAE000109435                                          
("the Company")                                                                 
ACQUISITION OF THE BUSINESS OF PARAGON ELECTRICAL AS A GOING CONCERN            
1.   INTRODUCTION                                                               
    Further to the cautionary announcements published by ARB on 4 September     
    2009 and 19 October 2009, ARB and ARB Electrical Wholesalers (Pty) Ltd      
("ARB Electrical"), a subsidiary of ARB, have entered into agreements       
    with, inter alia, Paragon Electrical Wholesalers (Pty) Ltd, Paragon         
    Electrical Wholesalers North (Pty) Ltd, Paragon West Electrical             
    Wholesalers (Pty) Ltd, Paragon East Electrical Wholesalers (Pty) Ltd,       
Belmax Wholesalers (Pty) Ltd and Paragon Electrical Distributors CC         
    (together "the Paragon Group"), as well as the trustees for the time        
    being of the Gezina Property Trust, the Wolmer Property Trust, the MVO      
    Property Trust and the Erf 849 Centurion Trust (together "the Paragon       
Group Trusts") on 27 November 2009 to acquire:                              
    -    The electrical wholesaling business of the Paragon Electrical          
         Group ("Paragon") as a going concern from the Paragon Group ("the      
         Paragon Business"); and                                                
-    Certain immovable properties used by Paragon, together with all        
         improvements thereon, from the Paragon Group Trusts ("the Paragon      
         Properties")                                                           
    as one indivisible transaction ("the Paragon Acquisition").                 
2.   THE PARAGON BUSINESS                                                       
    Paragon is one of the leading electrical and lighting wholesalers in        
    the greater Pretoria and Centurion areas. The business was started over     
    40 years ago in 1969 by Max van Os with a single branch in the centre       
of Pretoria. Today, the Paragon Business comprises five electrical          
    wholesaling branches and a specialist cable trading division.               
    Paragon`s branches are located as follows:                                  
    -    Frederika Street in Gezina (just north of the Pretoria CBD);           
-    Corobay Avenue in Pretoria East;                                       
    -    Soutter Street in Pretoria West;                                       
    -    President Steyn Street in Pretoria North; and                          
    -    Larch Close in Centurion (just south of Pretoria).                     
Paragon employs approximately 100 staff.                                    
3.   RATIONALE FOR THE PARAGON ACQUISITION                                      
    The Paragon Acquisition, the first since ARB`s listing on the JSE in        
    November 2007, marks a significant milestone in the ongoing growth and      
development of the ARB Group. The Paragon Acquisition provides ARB          
    Electrical with an immediate and well-established presence in the fast      
    growing Pretoria and Centurion markets and extends its national             
    footprint in line with its stated growth strategy.                          
Following the Paragon Acquisition, ARB Electrical will have 12 branches     
    located throughout South Africa (Durban, Johannesburg, Cape Town, East      
    London, Pietermaritzburg, Richards Bay, Nelspruit and now, Pretoria and     
    Centurion).                                                                 
Several opportunities exist to unlock further value (which have not         
    been taken into account in calculating the pro forma financial effects      
    set out in 5 below) including:                                              
    -    Improved operational efficiencies and enhanced economies of scale      
to be achieved through the integration of the Paragon Business         
         into ARB Electrical and leveraging ARB Electrical`s centralised        
         IT, finance, credit control, administration and human resources        
         functions;                                                             
-    Combining Paragon`s and ARB Electrical`s buying power;                 
    -    Utilising Paragon`s well-established market presence in Pretoria       
         as a base from which to service the nearby, high growth regions of     
         Witbank and Rustenburg;                                                
-    Leveraging ARB Electrical`s BEE status to allow Paragon to target      
         local government, municipalities and parastatals in the greater        
         Pretoria area;                                                         
    -    Providing ARB Electrical with access to the significant "walk-in"      
trade in the Gauteng region. ARB Electrical`s Johannesburg based       
         branch is focused on the distribution of power cable and overhead      
         line equipment and as such, is the only branch within ARB              
         Electrical which does not have a trade counter. Each of the five       
Paragon branches, by contrast, trade extensively over the counter;     
    -    Providing the Paragon Business with access to growth funding; and      
    -    Combining the complimentary focuses of ARB Electrical (in power        
         cable and overhead line equipment) with Paragon (in general            
electrical contracting materials) to provide a holistic electrical     
         products supply solution to contractors, industry and parastatals      
         throughout Gauteng.                                                    
4.   THE PARAGON ACQUISITION                                                    
4.1  Vendors                                                                    
    The vendors of the Paragon Business are Paragon Electrical Wholesalers      
    (Pty) Limited, Paragon Electrical Wholesalers North (Pty) Limited,          
    Paragon West Electrical Wholesalers (Pty) Limited, Paragon East             
Electrical Wholesalers (Pty) Limited, Belmax Wholesalers (Pty) Limited      
    and Paragon Electrical Distributors CC.                                     
    The vendors of the Paragon Properties are The Gezina Property Trust,        
    The Wolmer Property Trust, The MVO Property Trust and The Erf 849           
Centurion Property Trust.                                                   
4.2  Transaction structure                                                      
    In terms of the agreement, the following forms part of the Paragon          
    Acquisition:                                                                
-    Fixed assets and vehicles, stock, certain standard contracts, all      
         intellectual property rights including but not limited to the          
         Paragon and Belmax trade names and all associated goodwill ("the       
         Paragon Business Assets"), although no value has been placed on        
the intellectual property rights and goodwill for purposes of          
         determining the purchase consideration as set out in 4.3 below;        
    -    All Paragon staff as at the effective date; and                        
    -    The Paragon Properties, being the properties from which Paragon`s      
North, West, Centurion and Gezina branches operate.                    
    Consistent with ARB`s current asset ownership structure:                    
    -    ARB Electrical will acquire the Paragon Business Assets, with the      
         exception of the vehicles, as going concerns; and                      
-    ARB will acquire the Paragon Properties and vehicles and will in       
         turn lease these to ARB Electrical in terms of arms-length rental      
         agreements.                                                            
4.3  Purchase consideration                                                     
The maximum purchase consideration for the Paragon Acquisition is R30       
    000 000 made up as follows:                                                 
    -    R19 300 000 in respect of the Paragon Business Assets, as going        
         concerns; and                                                          
-    R10 700 000 in respect of the Paragon Properties.                      
    The purchase consideration in respect of the Paragon Business Assets        
    will be reduced on a rand-for-rand basis in the event that the              
    aggregate net stock value, after provision has been made for any and        
all obsolete, slow-moving, unsaleable, unusable, damaged and surplus or     
    excessive stock, on the effective date is less than R17 500 000. No         
    upward adjustment to the purchase consideration shall be made in the        
    event that the aggregate net stock value on the effective date exceeds      
R17 500 000.                                                                
    The purchase consideration will be discharged in cash out of ARB`s          
    existing cash resources as follows:                                         
    -    R19 300 000 (subject to any adjustment as set out above) on the        
closing date; and                                                      
    -    R10 700 000 on the date of registration of transfer of the Paragon     
         Properties into the name of ARB, regardless of the closing date.       
4.4  Effective and closing date                                                 
The effective date of the Paragon Acquisition is 1 March 2010.              
    The closing date of the Paragon Acquisition is the third business day       
    after the date on which the last suspensive condition is fulfilled or       
    waived, unless that falls on a date before the effective date, in which     
event it will be the effective date.                                        
4.5  Suspensive conditions                                                      
    The Paragon Acquisition is subject to, inter alia, the fulfilment of        
    the following suspensive conditions:                                        
-    Obtaining the approval of the Competition Commission with regards      
         to the Paragon Acquisition; and                                        
    -    The deeds of sale in respect of the Paragon Properties                 
         acquisitions becoming unconditional in all respects.                   
4.6  Restraint, non-compete and non-solicitation undertakings                   
    Comprehensive restraint, non-compete and non-solicitation undertakings      
    have been provided by each of the vendors and exiting employees who are     
    shareholders in, or members or beneficiaries of, any of the vendors.        
4.7  Warranties                                                                 
    The vendors have provided standard warranties for a transaction of this     
    nature.                                                                     
5.   PRO FORMA FINANCIAL EFFECTS                                                
The table below sets out the unaudited pro forma financial effects of       
    the Paragon Acquisition on ARB. These pro forma financial effects are       
    the responsibility of the company`s directors and are presented for         
    illustrative purposes only to show how the Paragon Acquisition may have     
affected ARB`s financial performance and position for the year ended 30     
    June 2009. The pro forma financial effects which, due to their nature,      
    may not provide a fair reflection of ARB`s financial performance or         
    position after the Paragon Acquisition, are based on the assumptions        
that:                                                                       
    -    For the purpose of calculating earnings per share (basic and           
         diluted) and headline earnings per share (basic and diluted), the      
         Paragon Acquisition was implemented on 1 July 2008; and                
-    For the purpose of calculating net asset value per share and net       
         tangible asset value per share, the Paragon Acquisition was            
         implemented on 30 June 2009.                                           
                                                                                

                                                                                
  (cents)                  Before the      After the       % change             
                           Paragon         Paragon                              
Acquisition1    Acquisition2                         
  Earnings per share       30,92           33,53           +8,4                 
  (basic)4, 5                                                                   
  Earnings per share       30,84           33,44           +8,5                 
(diluted)4, 5                                                                 
  Headline earnings per    30,91           33,53           +8,5                 
  share (basic)4, 5                                                             
  Headline earnings per    30,83           33,44           +8,5                 
share (diluted)4, 5                                                           
  Net asset value per      195,59          195,55          0,0                  
  share5, 6                                                                     
  Net tangible asset       194,85          194,81          0,0                  
value per share5, 6                                                           
Notes                                                                           
1.   The "Before the Paragon Acquisition" information has been extracted,       
    without adjustment, from ARB`s published audited results for the year       
ended 30 June 2009.                                                         
2.   The "After the Paragon Acquisition" was determined using information       
    for the Paragon Group extracted from its audited financial statements       
    for the year ended 28 February 2009.                                        
3.   Existing cash resources of R30 000 000 will be utilised for the purpose    
    of discharging the purchase consideration.                                  
4.   Adjustments to earnings per share (basic and diluted) and headline         
    earnings per share (basic and diluted) have been made on the assumption     
that:                                                                       
(a)  the Paragon Acquisition was implemented on 1 July 2008;                    
(b)  interest was foregone on the maximum purchase consideration of R30 000     
    000 at an average call rate of 7% per annum (pre-tax);                      
(c)  the Paragon Group reported an aggregate net profit after tax of R8 510     
    816 for the year ended 28 February 2009. This amount was reduced by the     
    26% minority interest in ARB Electrical for purposes of calculating the     
    pro forma financial effects set out above;                                  
(d)  estimated once-off transaction costs of R185 000 (pre-tax and minority     
    interests) were incurred by ARB Electrical;                                 
(e)  ongoing rental income in respect of the Paragon Properties amounting to    
    R1 527 120 (pre-tax) was earned by ARB. Due to the minority interest in     
ARB Electrical only 74% of this rental income is eliminated on              
    consolidation; and                                                          
(f)  ARB Electrical`s portion of the purchase consideration, amounting to       
    R18 100 000, was funded by way of a loan from ARB bearing interest at       
10.5% per annum (pre-tax). Due to the minority interest in ARB              
    Electrical only 74% of this interest is eliminated on consolidation.        
5.   The (actual and weighted average) number of shares in issue used for       
    purposes of calculating the earnings per share (basic), headline            
earnings per share (basic), net asset value per share and net tangible      
    asset value per share is 235 000 000 shares and the weighted average        
    number of shares in issue used for purposes of calculating the earnings     
    per share (diluted) and headline earnings per share (diluted) is 235        
620 000 shares.                                                             
6.   Adjustments to net asset value per share and net tangible asset value      
    per share have been made on the assumption that the Paragon Acquisition     
    was implemented on 30 June 2009 and that net assets with a value of R30     
000 000 were acquired (ie no goodwill arose as a result of the Paragon      
    Acquisition). A further adjustment was made for the transaction costs       
    as set out in 4(d) above after adjusting for tax and minority               
    interests.                                                                  
6.   TRANSACTION CATEGORISATION                                                 
    The Paragon Acquisition represents a Category 2 transaction in terms of     
    the JSE Limited`s Listings Requirements and therefore does not require      
    ARB shareholder approval.                                                   
7.   WITHDRAWAL OF CAUTIONARY                                                   
    Shareholders are advised that caution is no longer required to be           
    exercised when dealing in their ARB securities.                             
Durban                                                                          
1 December 2009                                                                 
Sponsor: PSG Capital (Pty) Limited                                              
Legal Advisor: Brink Cohen Le Roux                                              
Date: 01/12/2009 11:00:01 Supplied by www.sharenet.co.za                     
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