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Updated terms announcement on proposed merger of the Latin American assets of Sun International with Dream S.A.
Sun International Limited
(Registration number 1967/007528/06)
Share code: SUI ISIN: ZAE000097580
("Sun International" or "the Company")
UPDATED TERMS ANNOUNCEMENT ON PROPOSED MERGER OF THE LATIN AMERICAN ASSETS OF SUN INTERNATIONAL WITH DREAM S.A. ("DREAMS")
1. INTRODUCTION
Shareholders are referred to the Stock Exchange News Service ("SENS") announcement released on the Johannesburg Stock
Exchange ("JSE") on 13 February 2015 in which shareholders were notified that Sun International had reached agreement
and concluded a Memorandum of Understanding ("MOU") on 13 February 2015 with the shareholders of Dreams to merge its
casino and hotel portfolio of assets with Sun International’s Latin American portfolio, which consists of Monticello
Grand Casino in Chile, the Ocean Club Casino in Panama and the Sun Nao Casino in Colombia ("the Proposed Merger").
Further reference is made to the subsequent SENS announcements of 13 April 2015 and 20 May 2015 informing shareholders
of the extension of the period for the negotiation and execution of the definitive legal documentation and finalisation
of the reciprocal due diligence reviews.
Shareholders are advised that Sun International and Dreams ("the Parties") have completed the reciprocal due diligence
reviews, negotiated adjustments where necessary and have now entered into binding transaction agreements on 31 August
2015 ("Transaction Agreements") the terms of which are outlined below. Shareholders should note that whilst certain
information provided in this announcement has been previously disclosed, it has been repeated where appropriate in the
interest of providing all salient terms of the Proposed Merger.
The contribution of Monticello and the Ocean Sun (together valued at approximately $400 million) will give Sun
International a beneficial interest of 50% of the issued and outstanding shares in the combined entity ("the Merged
Entity") on a fully diluted basis. The Sun Nao Casino in Cartagena, Colombia, which has been completed at an estimated
cost of US$25 million, will be acquired for cash by the Merged Entity (effectively reimbursing Sun International for its
cost of development). In order to consolidate the Merged Entity and entrench its position as the long-term strategic
shareholder, Sun International will acquire shares representing an additional 5% in the Merged Entity thereby increasing
its effective shareholding to 55% ("Additional Shares"). The purchase consideration of the Additional Shares is US$51.3
million, which recognises a control premium over and above the underlying intrinsic value of the shares. The effective
date of the Proposed Merger will be upon the fulfilment or waiver of the conditions precedent detailed in paragraph 5.2.
2. BACKGROUND TO DREAMS
Dreams is a Chilean-based company and is a leader in the gaming and entertainment industry with operations in Chile and
Peru. Dreams’ properties have components that are similar to those of Sun International, including hotels, casinos,
entertainment and food and beverage facilities. Dreams has built a strong base in Chile where it now operates six
casinos and it has more recently expanded into Peru, where it operates four smaller gaming establishments focused
primarily on the capital, Lima, with plans to expand across the region. Dreams’ portfolio of properties comprises:
CASINO HOTEL FOOD AND BEVERAGE
Convention
Slot Table Centre SPA
PROPERTY machines games Rooms Delegates sqm Restaurant Bar/Clubs
CHILE 2,884 147 378 5,000 6,950 11 9
Iquique 724 22 – – – – 1
Temuco 659 36 96 1,500 1,700 5 2
Valdivia 386 22 104 1,000 1,800 2 2
Puerto Varas 505 36 50 1,000 1,500 1 2
Coyhaique 160 11 40 500 350 1 1
Punta Arenas 450 20 88 1,000 1,600 2 1
PERU 1,081 23 2 2
Lima (New York) 460 17 – – – 1 1
Lima (Eden) 206 – – – – – –
Lima (Kingdom) 161 6 – – – – –
Lima (Pachanga) 254 – – – – 1 1
Total 3,965 170 378 5,000 6,950 13 11
Dreams has a strong locally-based executive management team in Chile that has been involved in building the business
from inception and has extensive knowledge of the wider Latin America region. It is anticipated that this executive team
will lead the Merged Entity.
The shareholders of Dreams comprise Nueva Inversiones Pacifico Sur Limitada ("Pacifico"), which holds a 51% interest
with the remaining 49% owned by Entretenimientos del Sur Limitada ("EdS"), a private equity investment vehicle,
controlled by Citigroup and currently advised by the Rohatyn Group. Pacifico is 100% owned by the Fischer family, a
well-established Chilean family with various business interests including the development of the Dreams portfolio over a
period of more than 15 years. The Fischer family wishes to remain shareholders within the Merged Entity and as an anchor
partner for the region. EdS, and the Rohatyn Group have in-depth knowledge of the region and are seeking to grow the
business and increase its value as part of EdS's ultimate exit strategy.
3. PROFILE OF THE MERGED ENTITY
The Merged Entity will comprise a sizeable portfolio of assets, making it the premier gaming group in Latin America, and
initially consisting of:
CASINO HOTEL FOOD AND BEVERAGE
Convention
Slot Table Centre SPA
machines games Rooms Delegates sqm Restaurant Bar/Clubs
Chile 4,747 228 533 6,800 7,437 22 19
Monticello 1,863 81 155 1,800 487 11 10
Dreams operations 2,884 147 378 5,000 6,950 11 9
Peru (Dreams) 1,081 23 2 2
Panama (Sun) 600 34 3 3
Colombia (Sun) 220 16 1 1
Total 6,648 301 533 6,800 7,437 28 25
For the 12 months ended 30 June 2015, based on the unaudited results for Dreams, the combined businesses generated
EBITDA of approximately US$100 million.
Given the expertise of the local executive management team there is no requirement for significant day-to-day support
from Sun International and, accordingly, there is no need for the Merged Entity to enter into a separate management
agreement.
4. RATIONALE FOR THE PROPOSED MERGER
In recent years, Sun International has made a substantial balance sheet commitment to Latin America and assembled an
attractive portfolio of assets which forms the platform to leverage off its growth strategy in the region to establish a
business of scale. Sun International believes that in order to achieve critical mass in Latin America, the Company
should pursue a merger of its assets with another meaningful player in the region. In addition to expediting its growth
strategy, a merger also diversifies Sun International’s concentration risk. Sun International has been looking for a
suitable partner in Latin America for some years and believes that Dreams provides:
- a strong presence in Chile, which is a country that Sun International understands well and in which it desires
further exposure;
- an expansion strategy that has seen Dreams grow a presence in Peru, which is complementary to Sun International’s
expansion into Panama and Colombia;
- an executive management team that comes from Latin America and has significant operational experience in the
region; and
- strong local shareholders, in the form of both the Fischer family who have been in the industry for more than a
decade and EdS, which has an in-depth knowledge of the region and is seeking to grow the business and increase its
value as part of its ultimate exit strategy. These partners are experienced investors in casino assets in Latin
America and will make a significant contribution in adding value to the Merged Entity.
From a Dreams perspective, its strategic objective is to be a regional leader in the casino and entertainment industry
and the combination of Dreams and Sun International’s Latin American portfolio immediately achieves this goal. The
introduction of Sun International as a long-term strategic shareholder with an aligned business vision provides
significant momentum to Dreams’ growth aspirations and also opens the possibility for a medium term exit by EdS.
The Proposed Merger results in the creation of Latin America’s largest gaming group which will have the profile,
critical mass and balance sheet to expand into the rest of the continent, make meaningful acquisitions, and take on
larger projects. The Proposed Merger should also unlock synergies between the combined Chilean properties as a result of
its enhanced scale.
The Merged Entity will be structured with a relatively low level of gearing (below 2x EBITDA of the Merged Entity) which
will ensure that it is self-sustaining in the near term and will operate without having to leverage off Sun
International’s South African balance sheet.
5. SALIENT TERMS OF THE PROPOSED MERGER
5.1. Mechanics of the Proposed Merger
The Sun International and Dreams portfolios were valued as a merger of equals utilising a relative EBITDA multiple
basis. The valuation benchmark employed was the recent acquisition by Sun International of a significant additional
shareholding in Monticello. The valuation factored in specific risks, such as the remaining term of the Dreams municipal
casino licences in Chile. Given that Sun International’s Ocean Sun Casino in Panama only opened at the end of 2014 and
the time it has taken to ramp up, it was included with a price adjustment (up or down) that will be made if the 2016
audited EBITDA of the property varies from US$8 million (the downward adjustment is capped at an amount of US$16
million). Similarly if the Dreams’ Peruvian casinos’ audited 2016 EBITDA exceeds the EBITDA on which the Proposed Merger
was based, then there will be an upward adjustment to its valuation.
The Sun Nao Casino in Cartagena, Colombia, which has been completed at an estimated cost of US$25 million, will be fully
funded from the cash resources of the Merged Entity. The Merged Entity will still be under geared post this acquisition,
enabling it to take advantage of other near term growth opportunities.
Immediately after the Proposed Merger is completed Sun International will acquire the Additional Shares that will
increase its shareholding to 55%. The equity top-up will be acquired from EdS for approximately US$51.3 million.
It is the intention of the parties, provided that market conditions are appropriate, to list the Merged Entity in terms
of an Initial Public Offering ("IPO") on the Santiago Stock Exchange in Chile or another appropriate public market,
within two years from the date that the Proposed Merger is consummated. This would create liquidity in the shares of the
Merged Entity and would enable EdS to exit its shareholding if it desires to do so. Sun International intends to
maintain its shareholding above 50% in the event of a listing.
The exit mechanisms for EdS and Pacifico are detailed as follows:
5.1.1 If at any time after 18 months from the Proposed Merger the market conditions are appropriate and
Sun International decides, for its own strategic reasons, not to proceed with an IPO within 24
months from the Proposed Merger, then both EdS and Pacifico will have a put option of their
interest in the Merged Entity to Sun International subject to certain criteria as set out in the
Merger Agreement being met.
5.1.2 If the Merged Entity is not listed within two years from the date of the Merger Agreement, then
EdS may trigger a valuation process within 12 months of such second anniversary in order to
determine the value of the Merged Entity. Based on this valuation EdS will have a put option of
its interest in the Merged Entity to Sun International and Sun International shall have a call
option in relation to EdS’s interest in the Merged Entity.
5.1.3 If the Merged Entity is not listed within four years from the date of the Merger Agreement, then
Pacifico may trigger a valuation process within 12 months of such fourth anniversary in order to
determine the value of the Merged Entity. Based on this valuation, Pacifico will have a put option
of its interest in the Merged Entity to Sun International and Sun International will have a call
option in relation to Pacifico’s interest in the Merged Entity.
The specific criteria for defining appropriate market conditions and the basis of valuing the put and call options
described above are detailed in the Transaction Agreements.
5.2. Conditions precedent
The Proposed Merger is conditional upon the fulfilment or waiver of conditions precedent normal for a transaction of
this nature namely:
- the approval by Sun International shareholders in accordance with the JSE Listings Requirements;
- the approval of the applicable regulatory bodies including the relevant gambling regulators in Latin America,
South African Reserve Bank which approval, if conditional, must be to the satisfaction of the Parties; and
- a waiver of the rights from lenders, who have the right to accelerate repayment of loans as a result of the
Proposed Merger or the Parties securing replacement financing for these loans.
5.3. Net assets acquired and profits attributable to those assets
The net asset value of the existing Dreams portfolio per the unaudited management accounts as at 30 June 2015 was
US$364.5 million (R4 847.9 million). The EBITDA associated with these assets for the year then ended was US$56 million
(R744.8 million) and the profit after taxation was US$13.2 million (R175.6 million).
6. CATEGORISATION OF THE PROPOSED MERGER
The Proposed Merger is classified as a Category 1 transaction in terms of section 9 of the JSE Listings Requirements,
requiring shareholder approval.
7. CIRCULAR TO SHAREHOLDERS
Sun International shareholders are advised that a circular will be posted to shareholders in due course containing
further details of the Proposed Merger, together with a notice of general meeting to vote on the resolutions required to
implement the Proposed Merger.
Sandton
1 September 2015
Joint Financial Adviser and Sponsor Joint Financial Adviser
RAND MERCHANT BANK (A division of FirstRand Bank Limited) LARRAIN VIAL SERVICIOS PROFESIONALES LIMITADA
Date: 01/09/2015 05:07:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct,
indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on,
information disseminated through SENS.
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