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GROUP FIVE LIMITED - Proposed amendements to the existing Group Five BEE transaction

Release Date: 16/10/2012 08:15
Code(s): GRF     PDF:  
Wrap Text
Proposed amendements to the existing Group Five BEE transaction

Group Five Limited
(Incorporated in the Republic of South Africa)
(Registration number 1969/000032/06)
Share code: GRF ISIN: ZAE 000027405
(“Group Five” or “the company”)



PROPOSED AMENDMENTS TO THE EXISTING GROUP FIVE BLACK
ECONOMIC EMPOWERMENT TRANSACTION INVOLVING INTER ALIA
THE DISPOSAL BY MVELAPHANDA GROUP LIMITED (“MVELAPHANDA”)
OF ITS SHAREHOLDING IN GROUP FIVE AND THE SUBSTITUTION OF
MVELAPHANDA BY THE BLACK PROFESSIONALS STAFF TRUST AND
THE IZAKHIWO IMFUNDO TRUST (COLLECTIVELY “THE TRUSTS”) (“THE
AMENDED BEE TRANSACTION”)

1.    Introduction, background and rationale

Pursuant to the conclusion by Group Five of the series of transactions described hereunder
during 2005 (“the BEE transaction”), Group Five introduced direct black ownership. Details of
the BEE transaction (which was subsequently approved of by Group Five shareholders), were
set out in the circular dated 6 September 2005.

The BEE transaction comprised the following three principal components:

     - a broad-based employee scheme, relating to 0.6% of Group Five’s shares in issue at
       the time (“the broad-based employee scheme”);

     - a black management scheme, relating to 3.9% of Group Five’s shares in issue at the
       time (“the black management scheme”); and

     - the iLima transaction (“the iLima transaction”) and the Mvelaphanda transaction (“the
       Mvelaphanda transaction”), jointly relating to 21.6% of Group Five’s shares in issue at
       the time.

Several factors, including the unwinding of the iLima transaction (the specifics of which were
announced on SENS on 29 May 2012), the winding up of the broad-based employee scheme
and the impending expiry of the black management scheme, has necessitated Group Five
reviewing its black economic empowerment (“BEE”) ownership status.

In addition, Mvelaphanda has committed to a process of realising value of its assets for its
shareholders, including its interest in Group Five. This presented Group Five with the
opportunity to engage in discussions with Mvelaphanda, relating to the possible sale of the 12
356 865 Group Five shares (“the subject Group Five shares”) held by Lexshell 650
Investments Proprietary Limited (“Lexshell”) (a wholly owned subsidiary of Mvelaphanda),
and the utilisation of the subject Group Five shares in the amended BEE transaction.

Pursuant to such discussions, Group Five and Mvelaphanda have reached agreement, in
terms of which, subject to the requisite shareholder approvals being obtained, the Black
Professionals Staff Trust and the Izakhiwo Imfundo Trust, both to be established by Group
Five, will, between them, acquire the subject Group Five Shares.

Group Five believes its employees, particularly its professional staff are key to its success
and future growth. Group Five further believes that the introduction of the Black Professionals
Staff Trust into its shareholder body pursuant to the implementation of the amended BEE
transaction, will entrench a sense of ownership amongst the Black Professionals Staff Trust
beneficiaries, as well as assist Group Five in the incentivisation and retention of such
employees.

Furthermore, as a key component to the sustainability and growth of the construction industry
is the education and training of suitably qualified staff, Group Five believes that the
introduction of the Izakhiwo Imfundo Trust into its shareholder body and the pursuance by
that trust of its objects, will complement Group Five’s existing endeavors in this regard, by
providing funding for the education of the Izakhiwo Imfundo Trust beneficiaries.

Group Five is fully committed to its broad-based black economic empowerment goals and
targets. Accordingly, the board of Group Five is proposing the establishment of the trusts,
which will acquire the subject Group Five shares (representing 11.16% of Group Five’s
shares in issue) in order to ensure that Group Five continues to achieve meaningful BEE
ownership.

The amended BEE transaction will result in (i) the introduction of key broad-based BEE
participants, (ii) an overall enhancement to Group Five’s BEE ownership credentials due to
the beneficiary profiles of the trusts and (iii) an extension of the period during which these
benefits will accrue to Group Five, in each instance with minimal additional dilution to existing
shareholders.

2.    Salient terms of the Mvelaphanda transaction

In terms of the subscription and sale agreement entered into between Lexshell, Mvelaphanda
and Group Five in 2005 (the “subject agreement”):

     2.1     Lexshell subscribed for 10 478 662 Group Five shares (“the subscription
             shares”), at a subscription price of R0.01 per share;

     2.2     the subscription shares were issued at a notional price of R14,43 per share. The
             difference between such notional price and the subscription price constitutes
             notional funding, accruing notional interest at a rate of 12% naca, over the
             transaction term, being a maximum of 10 years from 1 November 2005 (“the
             transaction term”);

     2.3     Lexshell is obliged to utilise the proceeds of all Group Five distributions received
             by it, to subscribe for additional Group Five shares at the market value at the
             date of such distribution;

     2.4     at the end of the transaction term, and taking into account the market value of
             Group Five shares at such time, Lexshell is obliged to sell to Group Five such
             number of Group Five shares held by it, at a price per Group Five share equal to
             the original subscription price of R0.01 per Group Five share, as are required to
             settle the notional funding and the accrued notional interest; and

     2.5     for a period of 30 business days succeeding the end of the transaction term,
             Lexshell has the right to subscribe for the same number of Group Five shares as
             were repurchased by Group Five in terms of paragraph 2.4 at the then market
             value thereof.


3.   Details of the amended BEE transaction
     In order to facilitate the amended BEE transaction it is proposed that the following
     principal amendments to the subject agreement (“the amended subject agreement”) be
     approved:

     3.1     substituting each reference to Lexshell and Mvelaphanda with a reference to the
             Black Professionals Staff Trust and the Izakhiwo Imfundo Trust;

     3.2     the transaction term being extended to no later than 1 November 2020 (“the
             revised term”);

     3.3     Group Five distributions being paid in cash and utilised by the trusts in
             accordance with the provisions of the relevant trust deeds (and not in the
             manner set out in paragraph 2.3 above); and

     3.4     the notional funding rate being reduced from 12% naca to 9% naca with effect
             from the date of implementation of the amended BEE transaction.

4.    Implementation of the amended BEE transaction

Subject to the fulfilment of the conditions precedent set out in paragraph 8 it is proposed that
the amended BEE transaction be implemented as follows:

      4.1     the Black Professionals Staff Trust

               4.1.1   the Black Professionals Staff Trust enter into a sale agreement in
                       terms of which the Black Professionals Staff Trust will acquire from
                       Lexshell, for a purchase consideration of R30 million, the 10 356 865
                       Black Professionals Staff Trust shares and the 2 000 000 Izakhiwo
                       Imfundo Trust shares (to be on-sold to the Izakhiwo Imfundo Trust)
                       (collectively comprising the subject Group Five shares).

               4.1.2   such purchase consideration be loaned to the Black Professionals
                       Staff Trust by Group Five Construction Proprietary Limited (“Group
                       Five Construction”), a wholly owned subsidiary of Group Five, (the
                       “Group Five Construction loan”).

      4.2    the Izakhiwo Imfundo Trust, following its formation, and registration as a Public
             Benefit Organisation (“PBO”) by the South African Revenue Service, will acquire
             the 2 000 000 Izakhiwo Imfundo Trust shares from the Black Professionals Staff
             Trust, for a purchase consideration of R20 000 which will remain owing on loan
             account (“the subject loan account”).

      4.3    Group Five Construction contribution

               4.3.1   Group Five Construction will make a donation of R20 000 to the
                       Izakhiwo Imfundo Trust (“the subject donation”) and a contribution of
                       R84 787 to the Black Professionals Staff Trust (“the subject
                       contribution”) (the subject donation and the subject contribution being
                       in an aggregate amount of R104 787).
              4.3.2    The Izakhiwo Imfundo Trust will utilise the subject donation to settle
                       the subject loan account.

              4.3.3    The Black Professionals Staff Trust will in turn utilise the proceeds of
                       the subject contribution and of repayment of the subject loan account
                       to settle a corresponding portion of the Group Five Construction loan.

Following implementation of the amended BEE transaction: (i) Lexshell will no longer hold
any Group Five shares, (ii) the Black Professionals Staff Trust will hold 10 356 865 subject
Group Five shares (comprising 9.35% of Group Five’s shares in issue) and (iii) the Izakhiwo
Imfundo Trust will hold 2 000 000 subject Group Five shares (comprising 1.81% of Group
Five’s shares in issue). The subject Group Five shares held by the trusts will remain subject
to the notional funding arrangements recorded in the subject agreement and referred to in
paragraph 2 above, as amended pursuant to the amendments recorded in the amended
subject agreement.

5.   Salient features of the Black Professionals Staff Trust

     5.1     Objective

             The Black Professionals Staff Trust will be established to benefit qualifying black
             employees of Group Five and its subsidiaries (the “Group”) referred to in
             paragraph 5.2 below, and will hold the Black Professionals Staff Trust shares
             and distribute the benefits derived there from to those beneficiaries from time to
             time (“Black Professionals Staff Trust beneficiaries”).

     5.2     Beneficiaries

             Black employees of the Group that have obtained a performance score of 3 or
             better in terms of Group Five’s performance rating system and fall within Group
             Five’s current employment bands 6, 7, 8, 9 and 10 (or such similar bands
             applicable to any alternative employment grading system) at the time of a
             distribution will qualify as beneficiaries of the Black Professionals Staff Trust.

     5.3     Beneficiary allocations

             The Black Professionals Staff trustees will distribute distributable income to the
             Black Professionals Staff Trust beneficiaries who are employed by the Group on
             the applicable distribution date in accordance with an allocation formula.

             Pursuant to the allocation formula, Black Professionals Staff Trust beneficiaries
             in higher bands will receive a proportionally higher percentage of annual
             remuneration in comparison to those in lower bands.

6.    Salient features of the Izakhiwo Imfundo Trust

     6.1     Objective

             6.1.1       The principal object of the Izakhiwo Imfundo Trust is to provide
                         scholarships, bursaries and awards in a field of study which is aligned
                         to the requirements of the construction industry.

             6.1.2       The Izakhiwo Imfundo Trust must carry on its activities in a non-profit
                         manner and with an altruistic or philanthropic intent.
    
    6.2     Beneficiaries

            Izakhiwo Imfundo Trust beneficiaries shall be selected by Izakhiwo Imfundo
            trustees acting on the recommendation of a selection committee and with
            reference to the selection criteria set out below.

            An Izakhiwo Imfundo Trust beneficiary must:

              6.2.1   be a black person;

              6.2.2   intend to pursue further education at a university or other educational
                      institution approved of by the Izakhiwo Imfundo trustees from time to
                      time and in a field of study which is in-line with the current and future
                      business and skills needs of the construction industry;

              6.2.3   have proven academic merit or performance; and

              6.2.4   meet all of the selection criteria stipulated by the relevant university or
                      institution, or have been accepted for study by the relevant university
                      or institution.

            The Izakhiwo Imfundo trustees will endeavour to ensure the benefits are spread
            equitably amongst black men and black women.

7.   Result of the amended BEE transaction

     Subject to the requisite shareholder approval being obtained, the implementation of the
     amended BEE transaction will result in the following:

     7.1    Mvelaphanda (through Lexshell) selling its shareholding in Group Five to the
            Black Professionals Staff Trust, for R30 million paid in cash by the Black
            Professionals Staff Trust, utilising funding provided by Group Five Construction
            in the form of a loan;

     7.2    The Black Professionals Staff Trust and the Izakhiwo Imfundo Trust (in the
            instance of the latter, pursuant to the implementation of the sale referred to in
            paragraph 4.2 above) replacing Mvelaphanda as Group Five shareholders;

     7.3    Certain amendments being made to the Mvelaphanda transaction which are
            intended to extend the value and longevity of BEE ownership in Group Five until
            2020 and which are furthermore intended to allow the Black Professionals Staff
            Trust and the Izakhiwo Imfundo Trust to achieve their respective trust objects in
            relation to their respective beneficiaries;

     7.4    The interest of the trusts as long-term shareholders of Group Five, and that of
            the trusts’ beneficiaries, are wholly aligned with the professional staff retention
            and ownership intentions of Group Five and education and training priorities of
            the construction industry at large; and

     7.5    The total costs of implementation of the amended BEE transaction are
            considered fair and reasonable to current shareholders, as confirmed by the
            independent expert’s opinion included in the circular to be posted to Group Five
            shareholders on or about 29 October 2012.

8.   Conditions precedent

     The historic transaction amendments are subject to the following conditions precedent:

     By no later than 27 March 2013:

     8.1     all resolutions required to effect the historic transaction amendments shall have
             been approved by the requisite majority of Group Five shareholders at the
             general meeting to be held at the registered office of Group Five, 371 Rivonia
             Boulevard, Rivonia, Sandton on Tuesday, 27 November 2012, at 12:00;

     8.2     the first trustees of the Black Professionals Staff Trust shall have been issued
             letters of authority by the Master of the South Gauteng High Court,
             Johannesburg and that the Black Professionals Staff Trust shall have acceded
             to the revised and restated subscription and sale agreement and the Group Five
             Construction loan agreement;

     8.3     the first trustees of the Izakhiwo Imfundo Trust shall have been issued letters of
             authority by the Master of the South Gauteng High Court, Johannesburg; and

     8.4     regulatory approvals, if any, required for the amended BEE transaction have
             been received.

     In relation to the acquisition of the Izakhiwo Imfundo Trust shares by the Izakhiwo
     Imfundo Trust, by no later than 31 December 2013:

     8.5     the Izakhiwo Imfundo Trust shall have been registered as an approved PBO and
             shall have acceded to the revised and restated subscription and sale agreement
             and the inter-trust sale agreement.

9.   Financial effects

     The unaudited pro forma financial effects included below as of and for the year ended
     30 June 2012 have been prepared for illustrative purposes to show the impact of Group
     Five entering into the historic transaction amendments, as if the historic transaction
     amendments had occurred on 1 July 2011, for purposes of the pro forma income
     statement, and on 30 June 2012, for purposes of the pro forma statement of financial
     position. The unaudited pro forma financial information is presented for illustrative
     purposes only and because of its nature may not fairly reflect Group Five’s results or
     financial position nor the effect and impact of the amended BEE transaction going
     forward.

     The unaudited pro forma financial information has been prepared using accounting
     policies that are consistent with International Financial Reporting Standards and with the
     basis on which the historical financial information has been prepared in terms of the
     accounting policies adopted by Group Five.

     The board is responsible for the compilation, contents and preparation of the unaudited
     pro forma financial information contained below and for the financial information from
     which it has been prepared. Their responsibility includes determining that: the
     unaudited pro forma financial information has been properly compiled on the basis
     stated; the basis is consistent with the accounting policies of Group Five; and the pro
     forma adjustments are appropriate for the purposes of the unaudited pro forma financial
     information disclosed in terms of the Johannesburg Stock Exchange Listings
     Requirements.

      9.1      Financial effects

               The tables below set out the unaudited pro-forma financial effects of the
               amended BEE transaction on the earnings per share (“EPS”), headline earnings
               per share (“HEPS”), net asset value (“NAV”) per share and net tangible asset
               value (“NTAV”) per share of Group Five based on the audited financial results
               for the year ended 30 June 2012.

        Consolidated                           Before(1)           After(2)         % change
        EPS (rands)                            (2.88)              (3.09)              (7.3)
        Diluted EPS (rands)                    (2.88)              (3.09)              (7.3)
        HEPS (rands)                            1.16                0.87              (25.0)
        Diluted HEPS (rands)                    1.15                0.87              (24.3)
        NAV per share (rands)                   18.72               17.98             (3.95)
        TNAV per share (rands)                  18.72               17.98             (3.95)
        Notes:

        (1)   Based on the Group Five audited consolidated financial statements for the year ended 30 June 2012.
        (2)   Represents the financial effects after the historic transaction amendments have been implemented.
        (3)   Adjustments are based on the following principal assumptions:
                   a.  Cash settled share based payment charge is calculated over the assumed vesting period to
                       November 2020 for the Black Professionals Staff Trust and a once off equity settled share
                       based payment expense of R12.7 million recognised on the Izakhiwo Imfundo Trust based
                       on current inputs. The actual share based payment charge will be calculated with reference
                       to the share price, volatility and risk free rate based on the market information on the actual
                       grant date.
                   b.  The Black Professionals Staff Trust is controlled by the Group and consolidated, as a result
                       there is no increase in the number of shares for per share calculations. The Izakhiwo
                       Imfundo Trust is not controlled by the Group hence the shares issued to the Izakhiwo
                       Imfundo Trust increases the number of shares issued for per share calculations.
                   c.  Non-recurring transaction costs of R6.1 million reduced earnings.
                   d.  Interest forfeited on the R30 million payment made to Mvelaphanda and on the R6.1 million
                       non-recurring transaction costs paid net of tax reduced earnings based on a 3.25% interest
                       rate earned on current accounts for the year ended 30 June 2012.


10.    Salient dates and times

                                                                                                     2012

Circular posted to shareholders on or about                                            Monday, 29 October

Last day to trade to be eligible to vote at the general meeting                        Friday, 9 November

Record date to be eligible to vote at the general meeting                             Friday, 16 November

Forms of proxy to be received by 12:00 on                                             Friday, 23 November

General meeting to be held at the registered office of Group Five, 371               Tuesday, 27 November
Rivonia Boulevard, Rivonia, Sandton on

Results of the general meeting released on SENS on                                   Tuesday, 27 November
Results of the general meeting published in the press on                           Wednesday, 28 November


11.    Further details

      A circular, setting out further details of the amended BEE transaction, will be posted to
      shareholders on or about 29 October 2012.


Johannesburg

16 October 2012

Investment bank and sponsor

Nedbank Capital

Attorneys

Webber Wentzel

Prinsloo, Tindle & Andropoulos

Independent reporting accountants

PricewaterhouseCoopers Inc.

Independent experts

KPMG

Date: 16/10/2012 08:15:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). 
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