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DSY - Discovery Holdings Limited - Acquisition by Discovery of Standard Life
Healthcare (UK) and Withdrawal of Cautionary
DISCOVERY HOLDINGS LIMITED
(Registration number 1999/007789/06)
(Incorporated in the Republic of South Africa)
JSE share code: DSY & ISIN: ZAE000022331
("Discovery" or "the Company")
ACQUISITION BY DISCOVERY OF STANDARD LIFE HEALTHCARE (UK) AND WITHDRAWAL OF
CAUTIONARY
1. Introduction
Discovery shareholders are hereby advised that Discovery has entered into an
agreement dated 11th May 2010 to acquire the entire share capital of
Standard Life Healthcare, a wholly-owned subsidiary of the Standard Life
Group, for R1.56bn (GBP138m) ("the transaction"). The transaction is
strategically consistent with Discovery`s ambition to increase its scale and
relevance in the UK, as well as to acquire a majority shareholding in
Prudential Health Holdings ltd, the holding company of PruHealth and
PruProtect, the joint ventures between Discovery and Prudential Assurance
Company ("Prudential") of the United Kingdom.
Discovery anticipates effecting the transaction by funding the entire
purchase consideration, and contributing Standard Life Healthcare to
PruHealth as a capital investment. This will result in Discovery increasing
its interest in both PruHealth and PruProtect from 50 per cent, to 75 per
cent.
The effective date of the transaction is expected to be 31 July 2010.
2. Overview of Standard Life Healthcare
Standard Life Healthcare is the UK`s fourth-largest private medical insurer,
with a market share of approximately 8 per cent* and 490,000 members.
Standard Life Healthcare had net assets of R1.1bn (GBP97.1m), as at 31
December 2009. On acquisition, Standard Life Healthcare will have a minimum
of R848m (GBP75m) in tangible net asset value.
In addition, Standard Life Healthcare has a strong track record of
profitability, with IFRS underlying profit before tax of R106m (GBP9.4m) for
the year ended 31 December 2009.
3. Rationale
Since the launch of PruHealth in 2004, the UK has been a key focus in
Discovery`s international strategy. The UK has a large, well-developed
financial services market which is receptive to the consumer-driven product
philosophy that Discovery has brought to both the health insurance and
protection industries. The continued trend towards wellness and consumerism,
as well as the increased financial pressure that the National Health Service
("NHS") is expected to face as a result of tighter public spending, creates
significant growth opportunities for Discovery`s innovative, integrated
model.
Discovery`s joint venture with Prudential has created a strong foothold in
both the health insurance and protection markets in the UK; the acquisition
of Standard Life Healthcare is likely to accelerate the attainment of both
PruHealth and PruProtect`s UK strategies. In health insurance, where scale
is important, the transaction creates a new competitor covering
approximately 700,000 lives and attracting annual premiums of R4.1bn
(GBP370m). In addition, the acquisition will provide PruHealth with
opportunities to sell Vitality into Standard Life Healthcare`s existing
client base. In the protection market, Standard Life Healthcare`s large,
high-quality client base provides growth opportunities for PruProtect, and
enhances Discovery`s ability to implement its integrated model in the UK.
4. Consideration
Discovery will pay the entire purchase consideration of R1.56bn (GBP138
million) using its own internal resources. As part of its capital management
plan, Discovery will use a limited amount of debt to fund the future growth
of its existing South African businesses, as required.
5. Relationship with Prudential
Discovery will fund the purchase of the Standard Life Healthcare
transaction, and intends to contribute Standard Life Healthcare to PruHealth
as a capital investment. Once completed, this will result in Discovery`s
shareholding in both PruHealth and PruProtect increasing from the current
level of 50 per cent, to 75 per cent. As well as Prudential providing
operational expertise in key areas, the joint venture will continue to
benefit from using the Prudential brand.
As a result of its increased shareholding, Discovery will amend the articles
of association of PruHealth and PruProtect in conformance with the JSE
Limited Listings Requirements.
6. Appointment of new CEO of PruHealth
Discovery and Prudential previously announced management changes to their UK
joint ventures that sought to more closely align the strategic direction of
PruHealth and PruProtect. As part of this process, Herschel Mayers was
appointed as interim CEO of both PruHealth and PruProtect.
Given PruHealth`s enhanced scale and growth potential following the
acquisition of Standard Life Healthcare, it was thought prudent to appoint a
dedicated health insurance CEO in the UK. As a result, Neville Koopowitz,
currently CEO of Discovery Health, will take over as CEO of PruHealth and
will be relocating to the UK. Dr Jonathan Broomberg, currently Deputy CEO of
Discovery Health, will replace Neville Koopowitz as CEO of Discovery Health
on his departure. Herschel Mayers will retain his position as CEO of
PruProtect.
7. Conditions precedent
The transaction is subject to obtaining the necessary regulatory approvals
from the:
- Financial Services Authority (UK); and
- South African Reserve Bank.
8. Financial effects
The table below sets out the unaudited pro forma financial effects of the
transaction on earnings per share ("EPS"), headline EPS, net asset value
("NAV") and net tangible asset value ("NTAV") per share based on the
unaudited results of the Company for the six months ended 31 December 2009.
The unaudited pro forma financial effects are the responsibility of the
directors and have been prepared for illustrative purposes only to provide
information about how the transaction may impact shareholders on the
relevant reporting date. Because of its nature, these effects may not give a
fair reflection of the Company`s financial position, changes in equity,
results of operations or cashflows after implementation of the transaction,
or of the Company`s future earnings.
Before the After the Change
transaction transaction (per
(cents)(1) (cents) cent)
EPS 149.6 235.2 57.2
Headline EPS 136.4 112.1 -17.8
NAV per share 1319.0 1427.5 8.2
TNAV per share 1253.6 1161.3 -7.4
Number of shares in 591 953 180 591 953 180 -
issue
Weighted average 553 795 798 553 795 798 -
number of shares in
issue
*Source: Laing and Buisson, 2008.
Notes:
1. Extracted from the published unaudited results of the Company for the
six months ended 31 December 2009
2. Adjustments to the EPS and headline EPS have been made on the
assumption that:
a. the transaction was effective on 1 July 2009;
b. the cash consideration of R1 574 million (GBP138 million at an
exchange rate of R11.403:GBP on 1 July 2009) was funded from
internal resources and reduced Discovery`s average cash balance;
and
c. a company tax rate of 28 per cent.
3. Adjustments to NAV and TNAV per share have been made on the assumption
that:
a. the transaction was effective on 31 December 2009; and
b. the cash consideration of R1 642 million (GBP138 million at an
exchange rate of R11.897:GBP on 31 December 2009) was funded from
internal resources and reduced Discovery`s average cash balance.
9. Withdrawal of cautionary
Further to the above, shareholders are advised that they no longer need to
exercise caution when dealing in their Discovery securities.
Sandton
11 May 2010
Merchant bank and sponsor
RAND MERCHANT BANK (A division of FirstRand Bank Limited)
Date: 11/05/2010 11:15:09 Supplied by www.sharenet.co.za
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