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Proposed Acquisition and Cautionary Announcement
Sun International Limited
(Registration number: 1967/007528/06)
Share code: SUI
ISIN: ZAE000097580
("Sun International" or "the Company")
PROPOSED ACQUISITION OF AN ADDITIONAL EFFECTIVE 54.7% IN SAN FRANCISCO INVESTMENTS
S.A. TRADING AS MONTICELLO GRAND CASINO & ENTERTAINMENT WORLD ("MONTICELLO") AND
CAUTIONARY ANNOUNCEMENT
1. INTRODUCTION
Sun International currently owns an effective 44.2% in Monticello through a holding company which
is jointly held with Austrian partners, Novomatic AG ("Novomatic"), and which controls 88.4% of
Monticello.
Sun International has on 30 June 2014 reached agreement to acquire Novomatic's 44.2% effective
interest in Monticello and a further 10.5% interest held by a minority shareholder, Chilean
Enterprises S.p.A., giving the Company an effective 98.9% of Monticello ("the Transaction"). As
further detailed in 4.1 the purchase consideration is split into an initial payment and a potential top-
up payment. The initial payment will be approximately US$114 million (R1 200 million). Sun
International will also acquire, from Novomatic, shareholder loans and cash of approximately US$32
million (R340 million).
In addition, Sun International has extended an offer on the same terms to acquire the remaining
1.1% interest in Monticello held by Lasud Chile S.A.
2. BACKGROUND TO MONTICELLO
Monticello, which was developed at a cost of US$262 million, was opened in 2008 and is equipped
with 1 880 slot machines, 80 tables and 300 bingo positions. Monticello also includes a 155-room five
star hotel and spa, a conference centre and extensive retail and entertainment areas. It was, at the
time of opening, the largest ever private investment in South America’s leisure sector.
Situated in Mostazal, 57 kilometres from the heart of Santiago, Monticello is one of two casinos that
service the Santiago market. Sun International has been responsible for the development and
management of Monticello since inception, for which it receives management fees. Since opening,
the property has established itself as the pre-eminent casino resort in the country. It achieved
EBITDAM (EBITDA plus management fees) of around US$40 million in the year to 30 June 2013,
despite the significantly negative impact of anti-smoking legislation introduced from March 2013.
In the last publicly recorded results for the six months ended 31 December 2013, Monticello's
revenue was down 22% on the comparative period due to the impact of the anti-smoking legislation.
Four new smoking decks, compliant with the new health requirements, were opened towards the
end of 2013 and these have had a positive effect on casino revenue, in particular in the past few
months where revenue for March to May 2014 was up 28.4% on the 2013 comparative period
(unaudited).
A comprehensive restructure of the property's cost base was undertaken in September 2013 which
has resulted in the EBITDA margin improving from 13.9% in the first quarter to 20.4% in the second
quarter and 23.5% in the quarter ending 31 March 2014 (unaudited). Monticello's share of the
Santiago market has also increased from 65.3% in the quarter ended 30 June 2013 to 72.5% for the
quarter ended 31 March 2014. Furthermore, Monticello’s share of the total Chilean casino industry
has increased from 27.4% to 29.2% as at 31 March 2014.
3. RATIONALE FOR THE TRANSACTION
Sun International has previously stated its strategic intention to grow its Latin American ("Latam")
portfolio of assets which currently consists of Monticello and the soon to be opened Ocean Club
Casino in Panama. In addition Sun International has applied for a casino licence in Cartagena,
Colombia. The success of Monticello has given Sun International the track record and confidence to
look for more opportunities in the region, including other opportunities in Chile.
Chile, with a strong growth rate and stable, business orientated economy, is a compelling investment
destination. Fitch Ratings has issued Chile with an A+ sovereign credit rating which is supported by
the World Bank’s real GDP growth forecasts of between 4.1% and 4.5% in the short to medium term.
Chile has well-established gambling laws and a robust and well regulated gambling industry and Sun
International has invested a significant amount of its intellectual property, systems and effort in
Monticello.
Whilst Sun International's strategy for growth in the region has been gaining momentum, in recent
months it has become apparent that the Company’s strategic intentions for Monticello and the
creation of a Latam portfolio differ from the strategic intentions of the other shareholders in
Monticello, who are content to remain with a single asset. Furthermore, the other shareholders have
expressed a desire to make the property more autonomous, and this is not in line with
Sun International’s investment philosophy, which considers management control a strategic
imperative.
The Transaction provides the Company with the opportunity to positively leverage its investment in
Monticello, which is well entrenched as the leading gaming and entertainment destination in Chile. It
provides the opportunity for Sun International to acquire an increased economic interest in, and gain
strategic control over, what is regarded as one of Latam's best casinos. The Transaction acts as a
catalyst for the establishment of a portfolio of premier assets in the region as well as providing the
platform for further growth and consolidation of Sun International’s strategic position in the casino
industry.
4. SALIENT TERMS OF THE TRANSACTION
4.1. Purchase Consideration
The Transaction is based in Chilean pesos but for ease of understanding is described in US$. It has
been structured as follows:
- a primary payment as set out in 1 above, which is based on an enterprise value equating to
US$318 million, derived from a multiple of 8x applied to the 2013 year end EBITDAM. This
payment will be due within 10 days of the fulfilment of all conditions precedent; and
- a potential "top-up" payment, which will be calculated with reference to the EBITDAM actually
achieved for the 12 month period ending 31 December 2015 and an EBITDAM multiple of 8x.
Given the recent strong recovery of the property from the smoking ban the top-up payment
allows the exiting shareholders a once off benefit from any incremental profit achieved above
the 2013 levels of profitability. If earned, this payment will be due by not later than
31 March 2016.
The maximum top up payment has been capped at a level which caps the enterprise value for the
Transaction to US$350 million (i.e. an incremental US$32 million). This effectively allows the exiting
shareholders to benefit from their share of the first US$4 million of incremental EBITDAM above the
2013 profit level of the business.
The enterprise value for the top-up payment will be adjusted with the normal adjustments to
determine the equity value and will also be reduced by certain identified contingent liabilities, if
these materialise in the manner agreed to by the parties.
4.2. Conditions precedent
The Transaction is conditional upon the fulfilment of conditions precedent normal for a transaction
of this nature including, inter alia:
- the unconditional approval of the Chilean gambling board (Superintendencia de Casinos de
Juegos); and
- approval from Sun International shareholders in accordance with the JSE Limited ("JSE") Listings
Requirements.
4.3 Unaudited pro forma financial effects of the Transaction
As at the date of this announcement, the pro forma financial effects relating to the Transaction have
not yet been finalised and shareholders are hereby advised that the pro forma financial information
will be disclosed in a circular to shareholders.
5. RELATED PARTY AND CATEGORISATION OF THE TRANSACTION
In terms of Section 10 of the JSE Listings Requirements, as Sun International is transacting with a
material shareholder in a material subsidiary, the Transaction is deemed a related party transaction.
As the value of the Transaction exceeds 5% of Sun International's market capitalisation, an
independent expert’s fairness opinion is required to be given to the Sun International board of
directors on the fairness of the Transaction. In this regard an independent expert will be appointed
to provide the fairness opinion report which will be included in a circular to be posted to
shareholders.
In addition, the Transaction requires the approval of Sun International shareholders, and accordingly
a general meeting of shareholders will be convened.
6. CIRCULAR TO SHAREHOLDERS
Sun International shareholders are advised that a circular to shareholders will be issued in due course
containing further details on the Transaction, together with the fairness opinion report and a notice
of the general meeting to vote on the ordinary resolution required to implement the Transaction.
7. CAUTIONARY
Shareholders are advised to exercise caution when trading in Sun International shares until such time
as the circular setting out the full details of the Transaction is available.
Sandton
2 July 2014
Sponsor
RAND MERCHANT BANK (A division of FirstRand Bank Limited)
Date: 02/07/2014 08:30:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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