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Massmart Holdings Limited - Black Economic Empowerment Transaction
Massmart Holdings Limited
(Incorporated in the Republic of South Africa)
(Registration number 1940/014066/06)
(Share code: MSM ISIN: ZAE000029534)
("Massmart" or "the Company")
Black Economic Empowerment Transaction
Transaction highlights
- Fully company-funded black economic empowerment transaction
equivalent to approximately 10% of Massmart"s current issued share
capital ("the new issue") with an approximate value of R1.1
billion.
- Participation by the Massmart"s general staff and
previously disadvantaged managers and non-executive directors.
- Massmart"s general staff - 83% of whom are previously
disadvantaged - will be allocated 85% of the new issue.
- Massmart"s current and future previously disadvantaged
managers will be allocated 10% of the new issue.
- Massmart"s current and future previously disadvantaged non-
executive directors will be allocated 5% of the new issue.
- Previously disadvantaged individuals will be participants in
8.6% (approximately R1.0 billion) of Massmart"s equity.
1. Introduction and rationale
Massmart is pleased to announce that it has, subject to
fulfilment of the conditions precedent set out in paragraph 4
below, resolved to enter into a Black Economic Empowerment
("BEE") transaction pursuant to which shares equivalent to
approximately 10% of Massmart"s current issued share capital
will be issued to trusts representing a broad base of
Massmart"s and all its subsidiaries"("Massmart Group" or "the
Group") staff, previously disadvantaged Massmart Group
managers and previously disadvantaged non-executive directors
of Massmart ("the BEE Transaction").
The BEE Transaction has a value of approximately R1.1 billion
based on the closing price of a Massmart ordinary share
("ordinary share") on 15 May 2006, of R55.00.
The Board of Directors of Massmart ("the Board") is totally
committed to the spirit and principles supportive of BEE and
believes BEE to be essential to the redress of past inequities
and the transformation and normalisation of South African
society.
The Board believes that the BEE Transaction is both morally
defensible and entirely appropriate at this time in the
history of the Company and country. The BEE Transaction will
better align the Massmart Group with: its staff whose efforts
have been the origin of the value created over the past 18
years; its customers whose continued patronage is highly
valued; and with broader society whose respect it strives to
earn.
Prior to the publication of the first draft of the Codes of
Good Practice on Broad-based BEE and in the absence of a
charter defining BEE for South African retailers, the Board
approved a policy in early 2004 to focus on every aspect of
BEE and the Massmart Group has established programmes and
targets to do so. Massmart was recently rated the 4th most
empowered company among South African retailers and will
continue to pursue its BEE objectives.
One of these objectives is to share the ownership of Massmart
with previously disadvantaged individuals. In considering who
would contribute the most to Massmart"s vision, the Board felt
that the permanent employees of the Massmart Group were the
people who most deserved to be recognised for the part they
have played in the Group"s progress. Furthermore, the Board
decided that those who had served the Massmart Group the
longest deserved a greater participation.
The BEE Transaction, if approved, is one of the largest and
most important transactions in the history of Massmart.
2. Structure of the BEE Transaction
The BEE Transaction will be structured as follows:
- the general staff trust ("Thuthukani Empowerment Trust") will
be created for the benefit of all of the Massmart Group"s permanent
employees in South Africa who are employed on 1 October 2006,
regardless of race and gender and who are not beneficiaries of
Massmart"s existing share ownership scheme. These approximately
14,500 employees (approximately 83% of whom are previously
disadvantaged individuals) will immediately have vested rights that
are similar to those of existing Massmart shareholders, including
the right to dividends, the right to vote at shareholder meetings
through elected trustees, and the right to acquire, after a certain
period and pursuant to the conversion of the undermentioned `A"
preference shares, ordinary shares, and thereafter to retain or
sell them;
- the Black Management Trust ("Management Trust") will be
created for the benefit of the Massmart Group"s current and future
previously disadvantaged management in South Africa. This trust
will initially benefit approximately 30 of the Massmart Group"s
previously disadvantaged management; and
- the Black Non-Executive Directors" Trust ("Non-Executive
Directors Trust") will be created for the benefit of the Massmart
Group"s current and future previously disadvantaged non-executive
directors. This trust will currently benefit three previously
disadvantaged non-executive directors.
3. Mechanics of the BEE Transaction
Massmart will, subject to shareholder approval, create two new
classes of preference shares to be issued to the three trusts.
Convertible Redeemable Participating Non-cumulative `A"
Preference Shares ("A preference shares") and Convertible
Redeemable `B" Preference Shares ("B preference shares") will
be created and authorised for this purpose. The main
difference between the two classes of preference shares is
that the holders of the `A" preference shares will receive
dividends and other distributions whilst the `B" preference
shares will not. In addition, the capital distribution
profiles of these two classes of preference shares are
different.
Massmart will issue the newly created preference shares to the
three trusts in the following manner:
- a maximum of 17,000,000 `A" preference shares will be issued
to the Thuthukani Empowerment Trust, at their par value of one cent
each, for a total consideration of a maximum of R170,000. The
Thuthukani Empowerment Trust will be funded by means of a capital
contribution made by the Massmart Group;
- a maximum of 2,000,000 `B" preference shares will be issued to
the Management Trust, at their par value of one cent each, for a
total consideration of a maximum of R20,000. The Management Trust
will be funded by means of a capital contribution made by the
Massmart Group; and
- a maximum of 1,000,000 `B" preference shares will be issued to
the Non-Executive Directors Trust, at their par value of one cent
each, for a total consideration of a maximum of R10,000, which will
be funded by the participating non-executive directors.
The terms specific to each of the trusts are dealt with below.
3.1. The Thuthukani Empowerment Trust
3.1.1. Issue and vesting
The number of `A" preference shares allocated by the
Thuthukani Empowerment Trust to each employee
beneficiary will be based on the length of service
the employee beneficiary has with the Massmart
Group. An initial allocation of 400 `A" preference
shares each will be made to all employee
beneficiaries, irrespective of the length of
service, with extra "A" preference shares being
allocated based on length of service with the
Massmart Group. The total number of `A" preference
shares allocated to any individual will be subject
to a likely maximum of 2,400 `A" preference shares.
The allocation of the `A" preference shares will be
once-off and any employees joining the Massmart
Group after 1 October 2006 will not be allocated any
`A" preference shares.
The rights to the `A" preference shares will vest in
each employee beneficiary as soon as the employee
beneficiary accepts his allocation.
3.1.2. Capital distribution
Employee beneficiaries will be entitled to elect to
receive their `A" preference shares on the following
basis:
- 33.33% at the end of year four (being
1 October 2010) ("First Trigger Date");
- 33.33% at the end of year five ("Second Trigger Date"); and
- 33.33% at the end of year six ("Third Trigger Date").
The number of `A" preference shares to be received
will be calculated by reference to the formula set
out in paragraph 3.1.4. The employee beneficiaries
have to be in the employ of the Massmart Group on
the respective Trigger Dates in order to be eligible
to receive the `A" preference shares.
Employee beneficiaries who leave the employ of the
Massmart Group for any reason other than death,
disability, sale of business or retirement will
forfeit their rights to the `A" preference shares.
3.1.3. Dividends
Eligible employees will be vested employee
beneficiaries of the Thuthukani Empowerment Trust
from inception. The `A" preference shares will pay a
dividend equivalent to a percentage of the ordinary
share dividend and any other distributions in the
following manner:
- 25% of the ordinary share dividend and
any other distributions in year one (being the
financial year to June 2007);
- 50% of the ordinary share dividend and any
other distributions in year two;
- 75% of the ordinary share dividend and
any other distributions in year three; and
- 100% of the ordinary share dividend and any other
distributions in year four and thereafter.
These dividends will be paid in addition to those
paid to ordinary shareholders and the Company"s
dividend cover policy will continue to apply in
relation to the ordinary shares.
3.1.4. Capital distribution formula
After becoming entitled to distributions in terms of
paragraph 3.1.2, employee beneficiaries will be able
to elect the date on which they will receive the
formula-determined number of `A" preference shares
which will thereafter be converted on a one-for-one
basis into ordinary shares. The formula-determined
number of `A" preference shares will, seven days
after the employee beneficiary has required a
distribution, convert into ordinary shares and will
thereafter rank pari passu with all other ordinary
shares then in issue.
If no election is made when the employee beneficiary
is entitled to do so, the formula-determined number
of `A" preference shares will automatically be
transferred to the employee beneficiary at maturity
of the scheme, being 1 October 2012, unless an
election is made prior thereto.
Any `A" preference shares not delivered to employee
beneficiaries during the life of the Thuthukani
Empowerment Trust will be forfeited for no
consideration by the employee beneficiaries and
redeemed at their par value by the Company.
The number of `A" preference shares that each
employee beneficiary will be entitled to receive
after they notify the trustees in terms of 3.1.2
will be calculated using the following formula:
N = EP x (1-RP/P)
Where:
N = number of `A" preference
shares that an employee
beneficiary will be entitled to
receive and which shall be
distributed to him
EP = the distributable portion,
being ' (one third) of the
employee beneficiary"s initial
allocation on each of the First,
Second and Third Trigger Dates,
provided that the distributable
portion shall accumulate if the
employee beneficiary does not
transmit a distribution notice
to the trustees when he becomes
entitled to receive his `A"
preference shares
RP = reference share price, being
the five day Volume Weighted
Average Price ("VWAP") on the
last practicable date prior to
the issue of the circular to
shareholders
P = the VWAP of an ordinary share
for the five trading days prior
to the 15th day of the month in
which an employee beneficiary
makes an election to receive a
distribution, provided that if
he makes his election after the
12th day of the month, then the
VWAP of an ordinary share for
the five trading days prior to
15th day of the following month
3.1.5. Trustees and voting
More than 50% of the trustees of the Thuthukani
Empowerment Trust will be previously disadvantaged
and 1 of the 9 trustees will be a previously
disadvantaged external trustee, independent of
Massmart. The majority of the trustees will be
elected by the employee beneficiaries.
Trustees will be able to vote the shares on behalf
of the employee beneficiaries.
3.2. The Management Trust
Current and future previously disadvantaged managers in
the Massmart Group will be eligible to participate in the
Management Trust.
The mechanics of the Management Trust are the same as for
the Thuthukani Empowerment Trust in all respects apart
from the differences noted below.
3.2.1. Allocation and vesting
The allocation of the rights to the `B" preference
shares will be done by the trustees of the
Management Trust after instructions from the
Massmart Nomination and Remuneration Committee.
3.2.2. Capital distribution
Employee beneficiaries will, based on the formula
set out in 3.1.4, become entitled to receive the `B"
preference shares on the following basis:
- 25% at the end of year two (from the date of issue);
- 25% at the end of year three;
- 25% at the end of year four; and
- 25% at the end of year five.
Employee beneficiaries who leave the employ of the
Massmart Group for any reason other than death,
disability, sale of business or retirement will
forfeit their rights to the `B" preference shares.
3.2.3. Dividends
The `B" preference shares will carry no right to
dividends until the employee beneficiaries elect to
receive their `B" preference shares which will then
automatically convert into ordinary shares on a one-
for-one basis and seven days thereafter rank pari
passu with the ordinary shares then in issue.
3.2.4. Trustees and Voting
More than 50% of the trustees of the Management
Trust will be previously disadvantaged and 1 of the
3 trustees will be a previously disadvantaged
external trustee, independent of Massmart. The
majority of the trustees will be appointed by the
employee beneficiaries.
Trustees will be able to vote the `B" preference
shares on behalf of the employee beneficiaries.
3.3. Non-Executive Directors Trust
Current and future previously disadvantaged non-executive
directors will be allocated vested rights in the `B"
preference shares. The terms of the trust are the same as
those of the Management Trust, except as noted below.
3.3.1. Allocation and vesting
The allocation of the rights to the `B" preference
shares will be made by the Non-Executive Directors
Trust to all current previously disadvantaged non-
executive directors in equal proportions. Each of
the current previously disadvantaged non-executive
directors will have an economic interest of 0.1% of
the issued share capital of Massmart prior to the
implementation of the BEE Transaction. The balance
of 0.2% of the existing issued share capital of
Massmart will be allocated to future previously
disadvantaged non-executive directors.
3.3.2. Capital distribution
As per the Management Trust.
3.3.3. Dividends
As per the Management Trust.
3.3.4. Trustees and voting
More than 50% of the trustees of the Non-Executive
Directors Trust will be previously disadvantaged and
1 of the 3 trustees will be an external previously
disadvantaged trustee, independent of Massmart.
Trustees will be able to vote the `B" preference
shares on behalf of employee beneficiaries.
3.3.5. Participating directors
The following previously disadvantaged non-executive
directors have been invited to participate in the
Non-Executive Directors Trust:
- Mr. Zitulele ("KK") Combi;
- Ms. Phumzile Langeni; and
- Ms. Dawn Mokhobo.
4. Conditions precedent
The BEE Transaction is subject, inter alia, to the fulfillment
of the following conditions precedent:
- the passing of all necessary resolutions by the requisite
majority of shareholders at a general meeting of Massmart;
- registration of the special resolutions by the Registrar of
Companies; and
- the approval of the JSE Limited.
5. Estimated economic cost
Massmart has estimated the economic cost of entering into the
BEE Transaction for the Massmart Group and its shareholders to
be approximately R240 million. This represents approximately
2.30% of the market capitalisation of Massmart at 15 May 2006.
This figure was calculated with reference to the requirements
of International Financial Reporting Standard ("IFRS") 2 -
Share Based Payments.
6. Financial effects of the BEE Transaction
The principles underlying the accounting treatment are in
compliance with IFRS. IFRS 2 - Share-Based Payments requires
the total charge to be amortised over the period of the BEE
Transaction, being six years. This amortised charge will
commence in the June 2007 financial year.
The table below sets out the unaudited pro forma financial
effects of the BEE Transaction, based on the assumptions set
out below. The unaudited pro forma financial effects have been
prepared for illustrative purposes only and may not give a
fair reflection of the Company"s financial position, changes
in equity, results of operations or cash flows after
completion of the BEE Transaction.
The financial effects based on the interim results for 2006
(being for the six months ended December 2005) are set out
below and are the responsibility of the directors of the
Company. The purpose of the pro forma financial information is
to illustrate the effects of the BEE Transaction.
For the six months to Before Pro Increase/
December 2005 the BEE forma (decrease
Transacti after ) (%)
on the BEE
Transact
ion
Basic earnings per 258.5 247.6 (4.2)
ordinary share (cents)
Headline earnings per 258.2 247.3 (4.2)
ordinary share (cents)
Fully diluted basic 250.0 239.5 (4.2)
earnings per ordinary
share (cents)
Fully diluted headline 249.8 239.3 (4.2)
earnings per ordinary
share (cents)
Net asset value per 970.6 968.2 (0.2)
ordinary share ("NAV")
(cents)
Tangible net asset value 336.1 333.7 (0.7)
per ordinary share
(cents)
Actual number of 199 741 199 741 0.0
ordinary shares in issue
(000s)
Weighted number of 199 293 199 293 0.0
ordinary shares in issue
(000s)
Weighted average number 206 006 206 006 0.0
of fully diluted
ordinary shares in issue
(000s)
Notes:
1. The tangible NAV excludes intangible assets.
2. The following assumptions have been made in the
preparation of the financial effects:
- the earnings and headline earnings per share reflected
in the "Before" column were extracted from published
interim unaudited results for 31 December 2005;
- the NAV and tangible NAV per share reflected in the
"Before" column were extracted from published interim
unaudited results for 31 December 2005;
- the effect on NAV and tangible NAV per share reflected
in the "After" column assumes that the transaction was
effective 31 December 2005; and
- the effect on earnings and headline earnings per share
reflected in the "After" column assumes that the transaction was
effected on 1 July 2005 and is after reflecting half of the IFRS 2
charge for the six months to December 2005.
7. Opinion
Deloitte & Touche Corporate Finance has been appointed by the
Board to consider the terms of the BEE Transaction and to
provide an opinion as to whether they are fair and reasonable
to shareholders. The opinion from Deloitte & Touche Corporate
Finance will be contained in the circular to shareholders.
8. Important dates and times
2006
Circular and notice of general meeting Thursday 8 June
posted to shareholders on or about
Last day for receipt of proxies in Wednesday 12
respect of the general meeting by July
10:00 on
General meeting to be held at 10:00 on Friday 14 July
Results of general meeting published Friday 14 July
on SENS on
Results of general meeting published Monday 17 July
in the press on
Special resolutions lodged with the Thursday 20 July
Registrar of Companies on or about
Note:
Any material changes to the above dates and time will be
published on SENS and in the press.
9. Documentation
A circular containing the full details of the BEE Transaction,
including a notice of general meeting, will be posted to
shareholders on or about 8 June 2006.
Sandton
16 May 2006
Merchant bank and Corporate law advisers to
transaction sponsor Massmart
RAND MERCHANT BANK (A Edward Nathan (Pty) Ltd
division of FirstRand
Bank Limited)
Independent expert Reporting accountants and
Deloitte & Touche auditors
Corporate Finance Deloitte & Touche
Sponsor
Deutsche Securities (SA)
(Pty) Ltd
Date: 16/05/2006 08:47:55 AM Supplied by www.sharenet.co.za
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