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Announcement of the proposed acquisition of a 51% interest in the Building Manufacturing Companies of DAWN by Grohe
DISTRIBUTION AND WAREHOUSING NETWORK LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 1984/008265/06)
Share code: DAW
ISIN: ZAE000018834
(“DAWN”)
ANNOUNCEMENT OF THE PROPOSED ACQUISITION OF A 51% INTEREST IN THE
BUILDING MANUFACTURING COMPANIES OF DAWN (“the WATERTECH
COMPANIES”) BY GROHE LUXEMBOURG FOUR S.A. (“Grohe”) FROM DAWN AND
THE ENTERING INTO OF APPROPRIATE DISTRIBUTION AGREEMENTS TO
ENSURE THE ENHANCEMENT TO THE DISTRIBUTION FOOTPRINT OF DAWN; AND
WITHDRAWAL OF CAUTIONARY ANNOUNCEMENT
1. INTRODUCTION
Shareholders are advised that DAWN and Grohe Luxembourg Four
S.A., a company incorporated under the laws of Luxembourg
have entered into, inter alia, an Acquisition of Shares
Agreement and a Shareholders Agreement (collectively “the
Agreements”) which were signed on Monday, 30 June 2014,
(“Signature Date”) whereby Grohe will acquire 51% of the
shares issued in Main Street 1254 Proprietary Limited (“JV
Co”), a wholly owned subsidiary of DAWN (“the Transaction”).
JV Co, being a newly established company that has been
created for this purpose, is an intermediate holding company
within the DAWN group. In preparation for the Transaction,
the Watertech Companies will be transferred to JV Co (“the
Preparatory Steps”). The assets of JV Co prior to the
effective date of the Transaction (which date shall be no
later than 30 November 2014 or an extended date agreed
between DAWN and Grohe which extension shall not be later
than 30 April 2015) ("the Effective Date"), will be as
follows:
- Cobra Watertech Proprietary Limited (“Cobra”) – 100%;
- Apex Valves South Africa Proprietary Limited (“Apex”) –
100%;
- Expiro Manufacturing Proprietary Limited (“Expiro”) – 49%;
- Vaal Sanitaryware Proprietary Limited (“Vaal”) – 100%;
- ISCA Proprietary Limited (“ISCA”) –100%; and
- Libra Bathrooms Proprietary Limited (“Libra”) – 100%
The above companies being “the Watertech Companies”.
Pursuant to the conclusion of the Transaction, DAWN and Grohe
(each through their relevant group companies) have entered
into the following distribution and services agreements
which will become effective on the Effective Date:
- an exclusive distribution agreement between Grohe, JV Co
and the Watertech Companies in terms of which JV Co and
the Watertech Companies are entitled to distribute Grohe's
products in agreed African territories ("the JV
Territories");
- an exclusive distribution agreement between Joyou
International Trading Company Limited (a Grohe group
company), JV Co and the Watertech Companies in terms of
which JV Co and the Watertech Companies are entitled to
distribute Joyou's products in the JV Territories;
- an exclusive distribution agreement between Grohe and the
Watertech Companies in terms of which Grohe is entitled to
distribute the Watertech Companies' products in all global
territories other than the JV Territories ("the Watertech
Companies Distribution Agreement");
- a service agreement between the Watertech Companies and
Wholesale Housing Supplies Proprietary Limited ("WHS") (a
DAWN group company) in terms of which WHS will (i) provide
certain operational and distribution and warehousing
services to the Watertech Companies and (ii) sell the
Watertech Companies’ products (which will include the
Grohe and Joyou products) in the JV Territories; and
- a service agreement between the Watertech Companies and
Africa Saffer Trading Proprietary Limited ("AST") (a DAWN
group company) in terms of which AST will sell the
Watertech Companies products (which will include the Grohe
and Joyou products) in the JV Territories (other than
South Africa, Lesotho and Swaziland),
(collectively referred to as the "Distribution and Services
Agreements").
2. PRINCIPAL TERMS OF THE TRANSACTION
The principal terms of the Transaction are as follows:
The acquisition consideration for the Transaction will be
R880 000 000 (Eight Hundred and Eighty Million Rand), to be
settled in cash (“Acquisition Consideration”). Proceeds of
the Transaction shall be applied by DAWN to repay debt and to
acquire businesses as they are identified in our areas of
core competency.
The Acquisition Consideration will be subject to a price
adjustment as at the Effective Date in respect of 51% of the
net debt and a 51% net working capital adjustment should net
working capital be less than R500 million on the Effective
Date (or R450 million if the Effective Date occurs in
December 2014).
JV Co will distribute a minimum of 33% of its net profit each
year, after providing for financial debt servicing should
there be any, as a distribution to shareholders.
In terms of the Agreements, Grohe shall have a call option to
increase its proportionate share in JV Co to 75.1% which call
option will be exercisable after 10 years but before the end
of the 12th year and at a minimum price of R9 billion
multiplied by the proportionated shareholding acquired.
In the event that Grohe exercises the call option, DAWN shall
have the right to put its remaining shareholding in JV Co to
Grohe on the same terms as the call option.
Grohe has completed its due diligence investigation. The
Transaction is subject to warranties and indemnities that are
normal in a transaction of this nature.
The Transaction is subject to the confirmation by Grohe that
no material adverse change (“MAC”) has occurred in the
businesses of the Watertech Companies prior to the Effective
Date. The MAC is related solely to:
(i) the average EBITDA for the 12 months ending on the
Effective Date, in comparison to the EBITDA achieved for
the 12 months ended 30 June 2013, not having decreased by
more than 20%; and/or
(ii) there shall not have been a general banking moratorium,
state of national emergency or declaration of war in South
Africa.
3. CONDITIONS PRECEDENT
The Transaction is subject to the fulfilment or waiver, as
the case may be, of the following conditions precedent:
3.1 the shareholders of DAWN approving the Transaction at a
general meeting with the requisite majority;
3.2 all regulatory approvals, including approvals, as
required, from the Financial Surveillance Department of
the South African Reserve Bank, the Takeover Regulation
Panel (“the TRP”) and the JSE Limited (“the JSE”), will
have been obtained and/or complied with;
3.3 the approval in writing of the applicable competition
authorities and other applicable African jurisdiction as
contemplated by chapter 3 of the Competition Act, no. 89
of 1998, as amended and such other applicable legislation;
3.4 the consent being obtained from the relevant
counterparties to certain material contracts (as required)
of each Watertech Company;
3.5 the acquisition of the shares in Apex not already owned
by JV Co and the consent by the relevant counterpart to
the sub-licencing by Apex of its distribution rights to
Grohe in terms of the Watertech Companies Distribution
Agreement;
3.6 termination of certain inter-related agreements between
DAWN and its group companies and the Watertech Companies;
3.7 DAWN and Grohe agreeing new Memoranda of Incorporation
for each of the Watertech Companies;
3.8 the completion of the implementation of the Preparatory
Steps; and
3.9 Grohe confirming in writing that it is satisfied that
there is no material adverse change event.
4. RATIONALE
The DAWN group has over the last 15 years evolved from its
core competency of trading and distribution of building
products throughout the geographical reaches of South Africa
into a Southern African and Indian Ocean Islands regional
manufacturer, trader and distributor of branded building and
infrastructural products.
DAWN’s key competencies continue to be distribution and
trading and in this regard DAWN’s goal is to be a leading
force in the distribution of building and infrastructural
products. In order to achieve this goal it is necessary to
also be a leading trader of the products distributed to
ensure maximum volumes of product into the distribution
channel.
In order to have meaningful influence on the branded products
traded and distributed by DAWN, DAWN embarked on a strategy
of acquiring significant stakes in manufacturers of such
branded products. The strategy led to the investments in the
Watertech Companies. These brands only account for a portion
of the products traded and distributed by DAWN but provide
the core volume which sustains the cost effectiveness of the
DAWN distribution division. In order to sustain the cost
effectiveness of and grow the core distribution competency of
DAWN, it is a core requirement to be the master trader of
branded products. This includes brands in which DAWN has an
investment but also those of manufacturers in which DAWN have
no investment.
DAWN has for a number of years sought to globalise its
manufacturing operations. However, to be globally competitive
from a manufacturing of product point of view it is necessary
to have full access to global technology, global
manufacturing expertise (people) and global dispersion of
manufactured products through established channels. Southern
Africa cannot always provide the volumes to factories in the
longer term to warrant the investment in technologically
advanced high volume equipment. Therefore to become a truly
global manufacturer of product with all the required elements
described above, DAWN decided to bring globalization to its
Southern African factories through the introduction of a
global manufacturing partner in the form of Grohe.
5. BRIEF OVERVIEW OF THE WATERTECH COMPANIES
5.1 COBRA
Cobra, a brassware manufacturer established in 1951, is
one of South Africa’s most recognisable and popular brands
with a proud heritage and a reputation for world-class
standards. In 1967, Cobra was the third company to be
listed by the South African Bureau of Standards. Cobra is
known for providing total solutions and one of the most
comprehensive ranges of plumbing fittings in the world
including a wide variety of taps, mixers, wastes,
overflows, traps, valves and spares. However, today most
imported brassware products are also SABS approved and
therefore compete directly with Cobra on this point. Cobra
has a factory infrastructure which is not fully utilised.
The volume which can be gained from the Southern African
markets will not be sufficient to utilise this capacity
and hence new markets are needed. In addition the global
technology is changing and to warrant investment in
technology and research and development on a global scale
additional volumes are a prerequisite.
5.2 ISCA
Founded in 1980, ISCA is a leading assembler of imported
componentry for high-quality brass taps and mixers for all
domestic applications at lower price points than Cobra.
ISCA is differentiated in the market through its business
model in the industry which it serves. The business has
flexibility to react quickly to market trends as it is not
restricted to a specific production line and has the
capability to design products for optimal cost and quality
effectiveness through its competencies around the design,
development, plating and assembling processes. ISCA is
growing into a larger and more mature business. In the
medium term ISCA will of necessity need to change its
business model to include more production line facility.
As this happens and to ensure that it keeps its service
levels in tact it will also need to find additional
markets outside South Africa. In addition a business such
as ISCA is dependent on cost effective volume purchases to
compete with fully imported products.
5.3 LIBRA
Libra, which operates under the brands Libra and Plexicor,
is differentiated in its activities in the marketplace
through its technology in respect of cast acrylic
surrounds for the free-standing bath market, which is the
market trend in the international bath industry. The
division’s in-house research and development team ensures
innovation in the bathroom and spa industry through its
ability to manufacture exclusive products for specific
markets.
Libra has grown rapidly over the years to become the
premier manufacturer of acrylic baths and spas in Africa.
These products together with high quality branded bathroom
products are distributed from Libra warehouses in the
major centres in South Africa and through various partners
worldwide.
The Libra factory has substantial spare capacity and also
needs additional volume.
5.4 VAAL
Vaal is the only sanitaryware supplier offering fireclay
products (including medical products) in South Africa.
The business is highly focused on the specification side
of the industry, working closely with architects and
designers, providing them with a total solution. Vaal’s
competitive advantage lies in its strong brand, visibility
and relationships with architects and professionals and it
is also one of the only two ceramic manufacturers in South
Africa. Vaal is presently expanding its factory with new
technology equipment which will add in the region of 50%
capacity. This capacity was added for the medium term
South African market but can be utilised in the short term
for additional exports.
5.5 APEX
Apex is a local manufacturer (under license) of control
valves, mainly for domestic hot water applications. Apex
supports the product offering of Cobra in this market
space, but at lower price points.
5.6 EXIPRO
DAWN acquired a 49% shareholding in Exipro in February
2014. Exipro specialises in the manufacturing of brass
products used in the plumbing market (taps and valve
bodies) and manufactures rubber waste traps. Exipro is an
important supplier of tap and valve bodies to Cobra, ISCA
and Apex.
6. PRO FORMA FINANCIAL EFFECTS OF THE TRANSACTION
The pro forma financial information has been prepared for
illustrative purposes only to provide information on how the
Transaction might have impacted the financial position and
results of the DAWN Group. The pro forma financial
information are presented in accordance with the Listings
Requirements of the JSE, the Guide on Pro Forma Financial
Information issued by The South African Institute of
Chartered Accountants (“SAICA”), ISAE 3420 and the
measurement and recognition requirements of International
Financial Reporting Standards (“IFRS”).
The pro forma financial effects have been presented for
illustrative purposes only and, because of their nature may
not fairly present DAWN’s financial position or results of
operations after the Transaction.
The pro forma financial information is presented in a manner
that is consistent with the accounting policies of the Group.
The Directors of DAWN are responsible for the preparation of
the pro forma financial information.
Pro forma effects on the six months to 31 December 2013
Before the After the
Transaction 1 Transaction Change %
Basic earnings per
Share (cents) 2 41.35 347.04 739.2
Basic headline earnings
per Share (cents) 2 41.11 33.44 (18.7)
Net asset value per
Share (cents) 3 652.57 963.68 47.7
Net tangible asset value
per Share (cents) 3 521.38 897.18 72.1
Weighted average number
of Shares in issue (‘000) 234 455 234 455
Number of Shares in
issue (‘000) 233 450 233 450
Notes:
1. Extracted from the unaudited condensed consolidated financial
results of DAWN for the six months ended 31 December 2013.
2. Pro forma earnings and headline earnings per share are
presented based on the following principal assumptions:
a. The Transaction was effective 1 July 2013;
b. Proceeds from the Transaction shall be applied in
acquiring businesses as they are identified. However,
until such investment opportunities are actioned, the
proceeds, net of transaction costs, will firstly be
utilised to settle debt at an average rate of 9% per
annum, with the balance being placed on call, earning
interest at an average rate of 4.5% per annum.
c. In terms of IAS27: Equity Accounting, the retained 49%
interest in the Watertech Companies is to be fair valued,
assumed at R725.6 million. The assumed fair value is
further assumed, based on a provisional fair value
allocation exercise, to be allocated as follows:
Value Depreciation/
Asset category (R’million) Amortisation period
Existing net
asset value 249,796
Upliftment in
carrying values:
Land and buildings 12,250 25 years
Plant and equipment 68,649 Between 8 to 15 years
Intangible assets 142,653 Between 10 and 20 years
Deferred tax (62,595)
Goodwill 314,809
Total 725,563
d. Once off transaction costs of R17.8 million are assumed
and expensed to the income statement.
3. Pro forma net asset and net tangible asset value per share
are presented based on the following principal assumptions:
a. The Transaction was effective 31 December 2013;
b. Proceeds from the Transaction shall be applied in
acquiring businesses as they are identified. However,
until such investment opportunities are identified, the
proceeds, net of transaction costs and capital gains taxes
arising as a consequence of the Transaction, will firstly
be utilised to settle debt, with the balance being placed
on call.
c. In terms of IAS28: Investments in Associates and Joint
Ventures (as amended in 2011), the retained 49% interest
in the Watertech Companies is to be fair valued, assumed
at R725.6 million.
d. The call option granted to Grohe to increase its
proportionate share in JV Co to 75.1% is to be recognised
at its fair value to the extent that the fair value of the
additional 24.1% interest exceeds the strike price of the
option. Based on a provisional fair value exercise, no
liability is currently raised for the call option. A fair
value exercise will need to be performed at each reporting
date to determine the fair value of the call option and a
liability raised through the income statement to the
extent that the fair value of the additional 24.1%
interest exceeds the strike price of the option.
e. The put option granted to DAWN to sell its remaining
shareholding in JV Co to Grohe is also to be recognised at
its fair value. Based on a provisional fair value
exercise, assuming a discount rate of 14.1% and a
probability of the call option being exercised of 5%, an
asset of R4 million is recognised. A fair value exercise
will need to be performed at each reporting date to
determine the fair value of the put option and an asset
raised through the income statement to the extent that the
fair value of the remaining 24.9% interest is below the
strike price of the option.
f. Once off transaction costs of R17.8 million are assumed
and expensed.
4. All effects are of a recurring nature except where otherwise
stated.
5. Effect of exercise of the call and put options:
The call option is exercisable after 10 years but before the
end of the 12th year. The exercise price is based on a
minimum price of R9 billion multiplied by the proportionate
shareholding acquired.
The put option is exercisable by DAWN after Grohe has
exercised its call option, or where Grohe’s proportionate
share of JV Co has otherwise increased to 75.1% after the 10
year period. The exercise price of the put option is at the
same terms as that of the call option.
The initial financial impact of call option is discussed in
note 3 above. Upon exercise of the call option, the proceeds
from the exercise of the call option shall be applied in
acquiring businesses as they are identified. However, until
such investment opportunities are identified, the proceeds,
net of transaction costs arising as a consequence of the
exercise of the call option are currently expected to be
placed on call earning interest at the market rate.
Following the exercise of the call option, 24.9% of the
earnings from the JV Co will be equity accounted compared to
49%, until the date of the exercise of the put option, at
which point the investment in associate will be derecognised
and a gain on disposal of the investment will be recognised
in the income statement. DAWN is currently expected to earn
interest on the proceeds from the exercise of the call option
and put option until such time as investment opportunities
are identified. The gain on exercise of the call and put
options will be calculated as the proceeds less the carrying
value of the investment at the effective date of the exercise
of the call or put option less any transaction costs.
Pro forma effects on the year to 30 June 2013
Before the After the
Transaction 1 Transaction Change %
Basic earnings per
Share (cents) 2 66.65 367.93 452.1
Basic headline earnings
per Share (cents) 2 66.10 54.46 (17.6)
Net asset value per
Share (cents) 3 620.76 945.77 52.4
Net tangible asset value
per Share (cents) 3 505.05 888.54 75.9
Weighted average number of
Shares in issue (‘000) 234 517 234 517
Number of Shares in
issue (‘000) 234 517 234 517
Notes:
1. Extracted from the restated condensed consolidated financial
results of DAWN for the year ended 30 June 2013.
2. Pro forma earnings and headline earnings per share are
presented based on the following principal assumptions:
a. The Transaction was effective 1 July 2012;
b. Proceeds from the Transaction shall be applied in
acquiring businesses as they are identified. However,
until such investment opportunities are actioned, the
proceeds, net of transaction costs and capital gains tax
arising as a consequence of the Transaction, will firstly
be utilised to settle debt at an average rate of 9% per
annum, with the balance being placed on call, earning
interest at an average rate of 4.5% per annum.
c. In terms of IAS27: Equity Accounting, the retained 49%
interest in the Watertech Companies is to be fair valued,
assumed at R725.6 million. The assumed fair value is
further assumed, based on a provisional fair value
allocation exercise, to be allocated as follows:
Value Depreciation/
Asset category (R’million) Amortisation period
Existing net asset
value 249,796
Upliftment in
carrying values:
Land and buildings 12,250 25 years
Plant and equipment 68,649 Between 8 to 15 years
Intangible assets 142,653 Between 10 and 20 years
Deferred tax (62,595)
Goodwill 314,809
Total 725,563
d. Once off transaction costs of R17.8 million are assumed
and expensed to the income statement.
3. Pro forma net asset and net tangible asset value per share
are presented based on the following principal assumptions:
a. The Transaction was effective 30 June 2013;
b. Proceeds from the Transaction shall be applied in
acquiring businesses as they are identified. However,
until such investment opportunities are identified, the
proceeds, net of transaction costs and capital gains taxes
arising as a consequence of the Transaction, will firstly
be utilised to settle debt, with the balance being placed
on call.
c. In terms of IAS28: Investments in Associates and Joint
Ventures (as amended in 2011), the retained 49% interest
in the Watertech Companies is to be fair valued, assumed
at R725.6 million.
d. The call option granted to Grohe to increase its
proportionate share in JV Co to 75.1% is to be recognised
at its fair value to the extent that the fair value of the
additional 24.1% interest exceeds the strike price of the
option. Based on a provisional fair value exercise, no
liability is currently raised for the call option. A fair
value exercise will need to be performed at each reporting
date to determine the fair value of the call option and a
liability raised through the income statement to the
extent that the fair value of the additional 24.1%
interest exceeds the strike price of the option.
e. The put option granted to DAWN to sell its remaining
shareholding in JV Co to Grohe is also recognised at its
fair value. Based on a provisional fair value exercise,
assuming a discount rate of 14.1% and a probability of the
call option being exercised of 5%, an asset of R4 million
is recognised. A fair value exercise will need to be
performed at each reporting date to determine the fair
value of the put option and an asset raised through the
income statement to the extent that the fair value of the
remaining 24.9% interest is below the strike price of the
option.
f. Once off transaction costs of R17.8 million are assumed
and expensed.
4. All effects are of a recurring nature except where otherwise
stated.
5. Effect of exercise of the call and put options:
The call option is exercisable after 10 years but before the
end of the 12th year. The exercise price is based on a
minimum price of R9 billion multiplied by the proportionate
shareholding acquired.
The put option is exercisable by DAWN after Grohe has
exercised its call option, or where Grohe’s proportionate
share of JV Co has otherwise increased to 75.1% after the 10
year period. The exercise price of the put option is at the
same terms as that of the call option.
The initial financial impact of call option is discussed in
note 3 above. Upon exercise of the call option, the proceeds
from the exercise of the call option shall be applied in
acquiring businesses as they are identified. However, until
such investment opportunities are identified, the proceeds,
net of transaction costs arising as a consequence of the
exercise of the call option are currently expected to be
placed on call earning interest at the market rate.
Following the exercise of the call option, 24.9% of the
earnings from the JV Co will be equity accounted compared to
49%, until the date of the exercise of the put option, at
which point the investment in associate will be derecognised
and a gain on disposal of the investment will be recognised
in the income statement. DAWN is currently expected to earn
interest on the proceeds from the exercise of the call option
and put option until such time as investment opportunities
are identified. The gain on exercise of the call and put
options will be calculated as the proceeds less the carrying
value of the investment at the effective date of the exercise
of the call or put option less any transaction costs.
7. IRREVOCABLE UNDERTAKINGS
DAWN intends to procure irrevocable undertakings from certain
of its shareholders to vote in favour of the resolutions
required to implement the Transaction. Details of such
irrevocable undertakings will be included in the circular to
shareholders referred to below.
8. CATEGORISATION, DOCUMENTATION AND SALIENT DATES
In terms of the Listings Requirements of the JSE, the
categorisation of the Transaction is a category 1
transaction. Further, in terms of section 112 of Companies
Act of 2008, as amended, the Transaction is regarded as a
fundamental transaction and will require TRP approval as well
as a special resolution to be passed by shareholders in
general meeting.
Details of the Transaction will be included in a Circular to
be sent to shareholders in due course. The salient dates will
be published on the date of the posting of the Circular.
The Board has appointed BDO Corporate Finance Proprietary
Limited as an independent expert (“Independent Expert”), to
determine whether the terms and conditions of the Transaction
are fair and reasonable. The Independent Experts opinion will
be included in the circular to shareholders as well as a
notice of general meeting and a form of proxy (“the
Circular”).
9. RESPONSIBILITY STATEMENT
The Board accepts responsibility for the information
contained in the announcement. To the best of their knowledge
and belief, the information contained in this announcement is
true and nothing has been omitted which is likely to affect
the importance of the information included.
10. WITHDRAWAL OF CAUTIONARY ANNOUNCEMENT
Shareholders are referred to the cautionary announcement
dated 16 May 2014, and are advised that shareholders are no
longer needed to exercise caution when dealing in DAWN’s
securities.
Johannesburg
2 July 2014
Corporate Advisor and Transactional Sponsor
PricewaterhouseCoopers
Lawyer
Webber Wentzel in alliance with Linklaters
Independent Expert
BDO Corporate Finance Proprietary Limited
Ongoing Sponsor
Deloitte & Touche Sponsor Services Proprietary Limited
Reporting Accountants and Auditors
PricewaterhouseCoopers
Date: 02/07/2014 07:05:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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