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ECSPONENT LIMITED - Proposed Rights Offer, Combined Pro Forma Financial Effects, Notice of General Meeting and Withdrawal of Cautionary

Release Date: 17/07/2014 07:05
Code(s): ECS     PDF:  
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Proposed Rights Offer, Combined Pro Forma Financial Effects, Notice of General Meeting and Withdrawal of Cautionary

ECSPONENT LIMITED
(formerly John Daniel Holdings Limited
Incorporated in the Republic of South Africa
Registration number: 1998/013215/06
JSE Code: ECS - ISIN: ZAE000179594
("the Company" or "ECS" or "the Group")


PROPOSED RIGHTS OFFER, COMBINED PRO FORMA FINANCIAL EFFECTS, NOTICE OF
GENERAL MEETING AND WITHDRAWAL OF CAUTIONARY ANNOUNCEMENT


INTRODUCTION
The Directors of Ecsponent are pleased to advise shareholders of the successful conclusion of
negotiations in respect of the Company’s expansion strategy.

As previously announced on 7 November 2013, 20 December 2013, 10 January 2014, 25 February 2014,
7 March 2014, 23 April 2014 and 4 June 2014, the board of Ecsponent has decided to expand its financial
services business in Africa and requires an injection of capital and debt in order to grow the underlying
operations, acquire new businesses in Africa and begin Greenfield operations in certain countries.

In terms of the injection of capital required, shareholders have been advised that the Company is
proceeding with a rights offer of R100 100 000 through the issue of 715 000 000 new shares at an issue
price of 14 cents per share. The rights offer will be partially underwritten by its controlling shareholder,
Ecsponent Capital (RF) Limited (formerly Escalator Capital (RF) Limited) (“Escalator”) through the
capitalisation of its loan account in Ecsponent expected to amount to approximately R45 million at the
date of the rights offer. In addition, Escalator has advised of its intention to provide a funding facility to
Ecsponent up to R55 million, being the R100 million rights offer less the proceeds of the intended rights
offer inclusive of the underwritten amount. The funding facility will be convertible into ordinary shares in
Ecsponent at the rights offer price, subject to any necessary shareholder approval (“the Convertible
Loan”). Details of the Convertible Loan are included in a circular to shareholders dated 26 June 2014 for
approval by unrelated shareholders in General Meeting on 25 July 2014. The circular also contains
details of the three related party acquisitions (“Acquisitions”) as previously announced. Irrevocable
undertakings to approve the various resolutions have already been secured by the directors of
Ecsponent.

The capital raised from the Rights Offer or Convertible Loan will be utilised to further strengthen the
balance sheet of the group and then fund the continued organic growth of the existing operations as well
as the new Acquisitions. Ecsponent also intends to establish a financial services business in Zambia.

The details of the Rights Offer are set out below:

.    RATIONALE FOR THE RIGHTS OFFER
     It is the view of the Directors that the recapitalisation of Ecsponent by way of the Rights Offer is
     required to enable the Ecsponent Group to strengthen its balance sheet by way of capitalisation of
     borrowings, to continue to fund the working capital of the enlarged group and to facilitate the future
     growth of the Group. The working capital requirements of Ecsponent during the year were
     facilitated by the Escalator Loan.
     
     The potential R100 100 000 raised through the Rights Offer of 715 000 000 shares at 14 cents per
     share, should the Rights Offer be fully subscribed, will be utilised on an approximate basis, as
     follows:

     -     R45 million to capitalise the Escalator Loan, which will incorporate the cost of the
           Acquisitions;
     -     R55 million to settle group trade creditors, to inject working capital and to fund expansion of
           the Ecsponent Group in relation to the proposed Acquisitions.

2.   PARTICULARS OF THE RIGHTS OFFER

     2.1   TERMS OF THE RIGHTS OFFER
           715 000 000 Shares will be offered for subscription to Shareholders recorded in the Register
           at the close of trade on a date still to be finalised. Qualifying Shareholders will receive rights
           to subscribe for Rights Offer Shares on the basis of 159.90815 new Shares for every 100
           Shares held on the Record Date at the Rights Offer Price. The Rights Offer will raise equity
           capital of R100 100 000 if it is fully subscribed.

           The Rights Offer Price is fixed at 14 cents per Share and will reflect an increase in the stated
           capital account. The Rights Offer Price also represents a discount of 19.81% to the volume-
           weighted average price (“VWAP”) of the Shares on the JSE for the 30 days ended 7
           November 2013, being 17.46 cents and the date that the Rights Offer was initially approved
           by the board. The board of directors agreed to a slightly discounted Rights Offer price to act
           as an incentive to Ecsponent shareholders to follow their Rights.

     2.2   UNDERWRITING OF THE RIGHTS OFFER
           Escalator, which is a related party of Ecsponent, will be partly underwriting the Rights Offer
           in the amount of up to R45 million, which amount is anticipated will be settled by the
           capitalisation of loans owing by Ecsponent to Escalator as at 31 July 2014, pursuant to the
           anticipated separate approval by Shareholders of the Acquisitions at a General Meeting of
           Ecsponent Shareholders to be held on 25 July 2014.

           Should a large number of Ecsponent shareholders follow their rights and/or apply for large
           numbers of shares in terms of excess applications allowed, resulting in Escalator not being
           required to underwrite all or a portion of the R45 million, such additional cash will be not be
           used to settle the Escalator loans as the intention is for Escalator to follow its rights through
           the part capitalisation of its loan and any additional cash raised will be used to grow the
           Ecsponent group going forward.

           It is anticipated that the majority of the Escalator loan will be capitalised through the
           underwriting of the Rights Offer. However in the event that a facility remains, shareholders
           will be asked to approve the conversion of any loan up to a maximum of R55 million as
           detailed in the previously published announcements relating to the Convertible Loan. This
           final amount can however only be established after the separate approval of the Acquisitions
           and after the Rights Offer has closed.

           Escalator or its nominee may, as a consequence of fulfilling its proposed Rights Offer
           underwriting obligations of R45 million hold 65.92% in Ecsponent in the event that none of
           the existing shareholders follow their rights. Should Escalator follow their 41.42% rights in
           addition to the R45 million in terms of the underwriting, the shareholding of Escalator would
           be approximately 75.40%. A mandatory offer will not be required as Escalator is already the
           controlling shareholder of Ecsponent.

           The board of directors have made due and careful enquiry to confirm that Escalator can
           meet its commitments in terms of the Escalator Underwriting Agreement. It should be noted
           that R28 million of the underwritten amount has already been advanced to the Company in
           the form of loans to the Company as at the practicable date and the loan amount due is
           expected to exceed R45 million by 31 July 2014, pursuant to the approval of the
           Acquisitions.

     2.3   CONVERTIBLE LOAN
           In the event that the Rights Offer is not fully subscribed then Escalator will, subject to
           Shareholder approval on 25 July 2014, provide the shortfall in the R100 100 000 Rights Offer
           by way of a convertible loan, with a proposed conversion share price of 14 cents per share.

           In the event that all shareholders follow their rights, the need for the Convertible Loan will not
           arise.

3.   PRO FORMA FINANCIAL INFORMATION

     The pro forma financial effects have been prepared to illustrate the impact of the proposed Rights
     Offer on the reported financial information of Ecsponent for the year ended 31 December 2013,
     had the proposed Rights Offer occurred on 1 January 2013 for statement of profit and loss and
     other comprehensive income purposes and on 31 December 2013 for statement of financial
     position purposes.

     In addition, the combined pro forma financial effects have been prepared to illustrate the impact of
     the proposed Rights Offer at the underwritten amount of R45 million and the proposed Acquisitions
     and the Convertible Loan as described in the circular to shareholders dated 26 June 2014 (“the
     Transactions”), on the reported financial information of Ecsponent for the year ended 31 December
     2013, had the Transactions occurred on 1 January 2013 for statement of profit and loss and other
     comprehensive income purposes and on 31 December 2013 for statement of financial position
     purposes. In addition, the effect of the post balance sheet disposal of certain Vinguard assets has
     also been reflected.

     The pro forma financial effects have been prepared using accounting policies that comply with
     IFRS and that are consistent with those applied in the audited results of Ecsponent for the year
     ended 31 December 2013.

     The pro forma financial effects set out below are the responsibility of Ecsponent’s directors and
     have been prepared for illustrative purposes only and because of their nature may not fairly present
     the financial position, changes in equity, results of operations or cashflows of Ecsponent after the
     Rights Offer or the Transactions.

     The pro forma financial effects have been prepared in accordance with the JSE Listings
     Requirements and the Guide on Pro Forma Financial Information issued by The South African
     Institute of Chartered Accountants. These pro forma financial effects are the responsibility of the
     Board. The material assumptions on which the pro forma financial effects are based are set out in
     the notes following the table.

     Rights offer only
                                                     Audited
                                                 31 December        Adjustment         Pro forma
                                                        2013        for Rights         financial
                                                      Before             Offer     effects after            %
                                                         (1)           (3 - 6)      Rights Offer       Change

     Attributable earnings per ordinary
     share (cents)                                      0.48            (0.18)              0.30        (38%)
     Headline earnings per share
     (cents)                                            0.53            (0.22)              0.31        (40%)
     Fully diluted attributable earnings                0.48            (0.18)              0.30        (38%)
     per ordinary share (cents)
     Fully diluted weighted headline
     earnings per share (cents)                         0.53            (0.22)             0.314        (40%)
     Fully diluted headline earnings per
     share (cents)                                      0.53            (0.22)              0.31        (40%)
     Net asset value per share (cents)                  5.35              5.29             10.64          99%
     Net tangible asset value per share
     (cents)                                            5.19              5.39             10.58         104%
     Fully diluted net asset value per
     share (cents)                                      5.35              5.29             10.64          99%
     Fully diluted net tangible asset
     value per share (cents)                            5.19              5.39             10.58         104%

     Weighted average shares in issue
     (000’s)                                         444 132           715 000         1 159 132         161%
     Fully diluted weighted shares in
     issue (000’s)                                   444 132           715 000         1 159 132         161%
     Ordinary shares in issue at period
     end (000's)                                     444 132           715 000         1 159 132         161%
     Fully diluted shares in issue (000’s)           444 132           715 000         1 159 132         161%

Notes and assumptions:
1.  The "Before" column is extracted from the ESCPONENT Group`s audited, published results for
    the year ended 31 December 2013.
2.  For Statement of Financial Position purposes, it has been assumed that the Rights Offer
    occurred on 31 December 2013 and for the Statement of Profit and Loss and other
    Comprehensive Income it has been assumed that the Rights Offer occurred on 1 January
    2013.
3.  The Rights Offer of 715 000 000 new ECSPONENT shares at 14 cents per share has been
    assumed to be fully subscribed at an issue price of 14 cents per share.
4.  For Statement of Financial Position purposes, the proceeds of the Rights Offer have been
    assumed to increase share capital and to settle the Escalator loan facility and other creditors
    with the balance applied to cash and cash equivalents. This will have a continuing effect on
    ECSPONENT going forward. Transaction costs of R600 000 pretax have been assumed and
    treated as share issue expenses. This will be a once off effect on ECSPONENT.
5.  For the Statement of Profit and Loss and other Comprehensive Income, it has been assumed
    that the full interest expense provided at the current Escalator loan terms had not been
    incurred. This will have a continuing effect on ECSPONENT going forward.
6.  Normal taxation has been calculated at the corporate rate of 28%, where appropriate.

Combined pro forma financial effects on the Statement of Financial Position

                                     After the   After the   After the
                                   acquisition acquisition        100%    After
                                    of 100% in      of the acquisition     R45m        After
              Audited       After    Escalator     Sanceda          in   Rights         R55m    Combined
 Group         31 Dec Disposal of    Financial       going   Ecsponent    Offer  Convertible   pro forma
 Balance         2013    Vinguard     Services     concern    Botswana (minimum)        Loan     effects
 Sheets           (1)         (3)          (4)         (5)         (6)    (7, 8)         (9)        (10)
 Net asset
 value per
 share
 (cents)        5.353       5.665        3.121       1.987       0.545     6.129       6.129       8.793
 Net
 tangible
 asset
 value per
 share          5.194       5.506        2.962       1.828       0.386     6.037       6.037       8.732
 Number       444 132     444 132      444 132     444 132     444 132   765 561     765 561   1 159 132
 of shares
 in issue
 (‘000)

Notes to pro forma statement of financial position
1.  The information presented in column 1 has been extracted from the audited financial
    information as published on SENS for the year ended 31 December 2013.
2.  The related party acquisitions of Escalator Financial Services, Sanceda and Ecsponent
    Botswana are deemed to be common control transactions in terms of IFRS 3, Business
    Combinations. Common control transactions are specifically excluded from the scope of
    IFRS 3. The Group has adopted the following accounting policy to account for common
    control transactions:
        “The Group applies merger accounting for all its common control transactions which
        requires that the assets and liabilities of the purchased business be incorporated at the
        consolidated book value (by the ultimate parent) and the difference between the purchase
        consideration and the book value of the assets and liabilities be recorded in equity as a
        common control reserve. The financial statements of the purchaser incorporate the
        combined companies’ results and cash flows as if the companies have always been
        combined, including the re-presentation of the comparative figures”
3.  The shareholders of Vinguard Limited approved the disposal of the gas sheet division in a
    general meeting held on 24 January 2014, in terms of Section 112 of the Companies Act,
    2008. The effective date of the transaction was determined as 31 January 2014 subsequent
    to the 31 December 2013 financial period. The consideration comprised R6.3 million for the
    going concern assets paid in cash.
4.  The acquisition of 100% of Escalator Financial Services has been accounted for at a
    purchase consideration of R15.0 million, which is expected to result in a transfer of R11.1
    million to the common control reserve in terms of Ecsponent’s merger accounting policy.
    The information has been extracted from the audited annual financial statements of
    Escalator Financial Services for the year ended 31 December 2013 without adjustment. The
    acquisition is considered to have a once-off effect on the statement of financial position of
    Ecsponent.
5.  The acquisition of the business and assets of Sanceda has been accounted for at a
    purchase consideration of R7.0 million. The Sanceda Acquisition purchase consideration is
    expected to result in a transfer of R2.3 million to the common control reserve in terms of
    Ecsponent’s merger accounting policy. The information has been extracted from the audited
    annual financial statements of Sanceda for the year ended 31 December 2013 without
    adjustment. The acquisition is considered to have a once-off effect on the statement of
    financial position of Ecsponent.
6.  The acquisition of the business and assets of Ecsponent Botswana has been accounted for
    at a purchase consideration of R5.0 million. The Ecsponent Botswana acquisition purchase
    consideration is expected to result in a transfer of R6.2 million to the common control reserve
    in terms of Ecsponent’s merger accounting policy. The information has been extracted from
    the audited annual financial statements of Ecsponent Botswana for the year ended 31
    December 2013 without adjustment, other than converting the financial information reported
    in Botswana Pula to South African Rand. The acquisition is considered to have a once-off
    effect on the statement of financial position of Ecsponent.
7.  The Rights Offer is partly underwritten by Escalator and will result in the capitalisation of
    approximately R45 million of the existing loan account with Escalator as well as settlement of
    other liabilities. The Rights Offer is assumed to be at the minimum subscription level of
    R45.0 million. The increase in issued capital and equity will have a continuing effect on the
    calculation of the earnings per share. The increased capital raised will have a once off effect
    on the statement of financial position.
8.  The “Pro Forma financial effects after Ecsponent R45.0 million Rights Offer” column for
    statement of financial position purposes assumes the Rights Offer Proceeds of R45.0 million
    were received in cash as at 31 December 2013, net of costs, and were assumed to be
    applied to settling interest bearing borrowings of R42.3 million and other financial liabilities of
    R2.2 million. The rights offer proceeds will have a once off effect on the statement of
    financial position. The settlement of interest bearing liabilities with the proceeds of the rights
    offer will have a continuing effect on the Statement of profit and loss and other
    comprehensive income.
9.  The introduction of a Convertible Loan of R55.0 million has been assumed to be received
    and applied to settle the balance of other financial liabilities of R7.9 million and trade and
    other payables of R14.3 million with the balance of approximately R32.8 million being
    applied to cash and cash equivalents. The incurring of interest bearing liabilities will have a
    continuing effect on the Statement of Financial Position in the event that the Convertible
    Loan is not capitalised.
10. The Convertible Loan of R55.0 million is assumed to be settled through the issue of
    Ecsponent shares at 14 cents per share. It is further assumed that the fair value of the
    Ecsponent shares at the conversion date will be 14 cents a share equal to the conversion
    price. The settlement of interest bearing liabilities through the capitalisation of the
    Convertible Loan will have a once-off effect on the Statement of Financial Position.

Combined pro forma financial effects on the Statement of Profit and Loss and Other
Comprehensive Income

                                             After                                              Pro
                                               the                    After                   forma
                                       Acquisition                     100%                 effects
                Audited        After    of 100% in              acquisition                   after    Combined
                     31     Disposal     Escalator       After           in     After          R55m         pro
               December           of     Financial acquisition    Escalator    Rights   Convertible       forma
                   2013     Vinguard      Services  of Sanceda     Botswana     Offer          Loan     effects
                     (1)         (2)           (3)         (4)          (5)    (7, 8)          (12)        (13)

 Headline
 earnings /
 (loss) for
 the period       2 335       3 935          1 384     (4 568)      (5 489)     1 167       (8 337)       1 167
 Earnings
 (loss) per
 share
 (cents)          0.478       1.151          0.593     (0.747)      (0.954)     0.316       (0.926)       0.209
 Headline
 earnings(l
 oss) per
 share
 (cents)          0.526       0.886          0.312     (1.029)      (1.236)     0.152       (1.089)       0.101
 Number
 of shares
 in issue
 (‘000)         444,132     444,132        444,132     444,132      444,132   765 561       765 561   1 159 132



Notes to the pro forma Statement of Profit and Loss and Other Comprehensive Income
1.    The information has been extracted from the audited financial information as published on
      SENS for the year ended 31 December 2013.
2.    The shareholders of Vinguard Limited approved the disposal of the gas sheet division in a
      general meeting held on 24 January 2014, in terms of Section 112 of the Companies Act,
      2008. The effective date of the transaction was determined as 31 January 2014 subsequent
      to the 31 December 2013 financial period. The consideration comprised R6.3 million for the
      going concern assets paid in cash.
3.    The acquisition of 100% of Escalator Financial Services has been accounted for assuming
      the consolidation of the results for the 12 month year ended 31 December 2013 as though
      the acquisition occurred on 1 January 2013. The information has been extracted from the
      audited annual financial statements of Escalator Financial Services for the year ended 31
      December 2013 without adjustment. The acquisition is considered to have an on-going
      effect on the Statement of profit and loss and other comprehensive income of Ecsponent.
4.    The acquisition of the business and assets of Sanceda has been accounted for assuming
      the consolidation of the results for the 12 month period ended 31 December 2013 as though
      the acquisition occurred on 1 January 2013. The information has been extracted from the
      audited annual financial statements of Sanceda for the year ended 31 December 2013
      without adjustment. The acquisition is considered to have an on-going effect on the
      Statement of profit and loss and other comprehensive income of Ecsponent.
5.    The acquisition of the business and assets of Ecsponent Botswana has been accounted for
      assuming the consolidation of the results for the 12 month year ended 31 December 2013 as
      though the acquisition occurred on 1 January 2013. The information has been extracted
      from the audited annual financial statements of Ecsponent Botswana for the year ended 31
      December 2013 without adjustment. The acquisition is considered to have an on-going
      effect on the Statement of profit and loss and other comprehensive income of Ecsponent.
6.    The acquisitions will be financed through the existing Escalator facility at the current loan
      terms. It was assumed that the purchase consideration funded via the facility remained in
      place throughout the 12 months to 31 December 2013 and additional funding costs of R7.4
      million provided. (Escalator Financial Services R3.6 million, Sanceda R2.2 million and
      Ecsponent Botswana R1.6 million).
7.    The Rights Offer is partly underwritten by Escalator and will result in the capitalisation of
      approximately R45 million of the existing loan account with Escalator as well as other
      liabilities. Accordingly it has been assumed that Ecsponent would not incur any interest on
      the loan from Escalator with effect from 1 January 2013. The interest adjustment has been
      extracted from the actual interest charged for the 12 months ended 31 December 2013.
8.    The “Pro Forma financial effects after Ecsponent R100 million Rights Offer” column assumes
      that the R100 million Rights Offer proceeds were received at the beginning of the period for
      statement of profit and loss and other comprehensive income purposes and that the interest
      and loan transaction fees savings were realised over the period. The saving includes the
      assumed interest provided for in the pro forma results of the individual acquisitions, refer
      notes 2 to 5 above. The interest saving will have a continuing effect whilst the loan
      transaction fees will have a once off effect. The interest saving and transaction costs would
      impact the holding company's Statement of profit and loss and other comprehensive income
      only and therefore no non-controlling shareholder adjustment would arise.
9.    The interest saving and transaction costs would impact the holding company's Statement of
      profit and loss and other comprehensive income only and therefore no non-controlling
      shareholder adjustment would arise.
10.   Transaction costs of R496 819 excluding VAT have been assumed. These costs will have a
      once off effect on Ecsponent The costs of the circular have been assumed to be incurred
      directly with the three acquisitions detailed in notes 3, 4 and 5 above as well as the
      Convertible Loan in note 12 below.
11.   Notional taxation at a rate of 28% has been assumed where appropriate.
12.   The introduction of a Convertible Loan of R55 million has been assumed to be received at
      the beginning of the period and assumed to attract an interest rate of 24% as per the signed
      agreement. The incurring of interest bearing liabilities will have a continuing effect on the
      Statement of profit and loss and other comprehensive income in the event that the
      Convertible Loan is not capitalised. The option is held by Escalator and not Ecsponent and it
      will not have a cost or value in Ecsponent’s accounts;
13.   The Convertible Loan of R55 million is assumed to be capitalised through the issue of
      Ecsponent shares at 14 cents per share. The settlement of interest bearing liabilities
      through the capitalisation of the Convertible Loan will have a continuing effect on the
      Statement of profit and loss and other comprehensive income.

NOTICE OF GENERAL MEETING
Shareholders are advised that the circular to shareholders relating to the Acquisitions and the Convertible
Loan has been posted to shareholders during June 2014 and the General Meeting will be held at Acacia
House, Green Hill Village Office Park, Cnr of Nentabos and Botterklapper Street, The Willows, Pretoria
East, 0181, at 10h00 on Friday, 25 July 2014 in order to approve the Acquisitions and Convertible Loan
as well as the approval by shareholders to issue more than 30% new shares.

TERMINATION OF GRAYPAGES ACQUISITION
The board of ECS announced to shareholders on 7 March 2014 that the company had entered into an
agreement with the shareholders of Graypages Financial Solutions (“Graypages”) of Zambia for the
acquisition of 86% of the issued share capital in Graypages. The acquisition was subject to a full due
diligence by the management of ECS. The board would like to advise that after reviewing the result of the
due diligence the board has decided not to proceed with the proposed acquisition and have duly advised
the shareholders of Graypages of their decision.

INCORPORATION OF NEW FINANCIAL SERVICES COMPANY
In accordance with the Group’s expansion strategy the board has decided to proceed with the
incorporation of a new financial services company in Zambia subject to the approval of the South African
and Zambian regulatory authorities. ECS has entered into an agreement with Graypages Financial
Services to acquire the company’s client base subject to certain conditions precedent. Shareholders will
be advised of the progress of the new company in due course.

WITHDRAWAL OF CAUTIONARY ANNOUNCEMENT AND RIGHTS OFFER DOCUMENTATION
Following the publication of the above information, shareholders are advised that the cautionary
announcement is now withdrawn. It is expected that the Rights Offer circular to shareholders will be
finalised and posted to shareholders during July or August 2014. The salient dates of the Rights Offer will
be published on SENS and in the press in due course once the dates have been finalised.

By order of the board

Pretoria
17 July 2014

Sponsor
Arcay Moela Sponsors Proprietary Limited

Date: 17/07/2014 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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