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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)
("AEL")
Tiso Group Limited
(Incorporated in the Republic of South Africa)
(Registration number 1999/010875/07)
("Tiso")
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
systems.
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
employees.
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
resources.
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
years.
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
Board.
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 -
Notes:
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.
Woodmead
21 April 2004
Financial adviser and sponsor
to AECI
Cazenove
Attorneys to AECI
WWB
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
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