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Category 2 transaction announcement: Proposed subscription by GPI for 10% of Spur Corporation Limited
GRAND PARADE INVESTMENTS LIMITED
(Incorporated in the Republic of South Africa)
(Registration number: 1997/003548/06)
Share code: GPL
ISIN: ZAE000119814
(“GPI” or “the Company”)
CATEGORY 2 TRANSACTION ANNOUNCEMENT: PROPOSED SUBSCRIPTION BY GPI
FOR 10% OF SPUR CORPORATION LIMITED
Introduction
GPI is pleased to announce that it has, through a wholly owned
subsidiary (“BEECo”), entered into definitive agreements to
subscribe for 10.0% of the issued ordinary share capital of Spur
Corporation Limited (“Spur”) as part of a strategic Broad-Based
Black Economic Empowerment (“B-BBEE”) transaction for a total
purchase consideration of R294.7 million (the “Proposed
Transaction”).
Description of the business carried on by Spur
Spur is a leading multi-brand restaurant franchisor, headquartered
in Cape Town, and listed in the travel and leisure sector of the
JSE. Spur franchises four table service sit down restaurant brands:
Spur Steak Ranches, Panarottis Pizza Pasta (“Panarottis”), John
Dory’s Fish Grill Sushi (“John Dory’s”) and The Hussar Grill
Steakhouse (“Hussar Grill”). Spur is also the franchisor of Captain
DoRego’s (“DoRegos”), a takeaway restaurant chain which it acquired
in March 2012.
The Spur restaurant network currently includes 309 Spur Steak
Ranches, 39 of which are located outside of South Africa; 79
Panarottis (11 international); 33 John Dory’s (all located locally);
63 DoRegos (2 international); and 6 Hussar Grills. Almost all of
Spur’s local restaurants are franchised.
Spur also manufactures, bottles and distributes certain of the
sauces used in group restaurants. In addition, the group supports
franchisees by managing the procurement function between suppliers,
the group’s outsourced logistics service provider and its
franchisees. In Spur’s 2013 financial year the manufacturing and
distribution division was responsible for 32.7% and 30.2% of the
Spur group’s turnover and EBITDA respectively.
Spur has a strong, stable and experienced management team with many
years of collective experience. This team has helped the Spur group
deliver consistent growth through both network development and
continuous improvements to internal processes. Management have also
overseen Spur’s expansion internationally into 12 African countries,
as well as Australia and the UK.
Particulars of the Proposed Transaction
In terms of the Proposed Transaction GPI will, through BEECo,
subscribe for 10 848 093 ordinary shares in the issued listed
ordinary share capital of Spur (the “Spur Shares”). The Spur Shares
will be issued for a total subscription consideration of R294.7
million which equates to an issue price of R27.16 per Spur Share
(the “Subscription Price”).
The Subscription Price represents a 10.0% B-BBEE lock-in discount to
the volume-weighted average trading price (“VWAP”) of Spur shares on
the JSE Limited (“JSE”) for the 90 trading days prior to 30 July
2014. GPI and BEECo will be restricted, without the express consent
of Spur, from trading the Spur Shares for a period of five years
from the effective date of the Proposed Transaction. Both GPI and
BEECo are required to maintain their B-BBEE ownership credentials
for the full five year period. GPI and BEECo will be free to trade
the Spur Shares once the five year period has lapsed.
The Proposed Transaction will be funded through a combination of
cash and preference share funding. The Standard Bank of South Africa
Limited will subscribe for A class and B class preference shares in
BEECo with a combined subscription value of R150.0 million (the
“Bank Funding”). Spur will subscribe for C class preference shares
in BEECo with a total subscription value of R72.3 million (the “Spur
Funding”). GPI will provide the remaining funding of R72.3 million
through existing cash resources.
As part of the Proposed Transaction GPI will, subject to compliance
with the relevant JSE Listings Requirements and ratification by Spur
shareholders, be entitled to nominate and appoint one non-executive
director to the Spur board of directors.
Rationale for the Proposed Transaction
GPI has a track record of adding value to its investments and the
board believes that the Proposed Transaction represents an
attractive investment opportunity. The Proposed Transaction is in-
line with GPI’s strategy to grow and diversify its investment
portfolio beyond the gaming sector, focussing on businesses that
meet management’s target IRR and other strategic objectives.
GPI has identified a number of advantages of the Proposed
Transaction, including, but not limited to:
i. The Proposed Transaction represents a meaningful equity stake
in a well-established, multi-brand restaurant franchisor
with solid growth prospects and a track record of delivering
value to shareholders;
ii. Spur has a resilient operating model, proven over time and
through difficult trading conditions;
iii. An opportunity to possibly form a meaningful partnership
with a leading franchise restaurant operator – Spur has
extensive experience across Africa as well as in more
developed international markets; and
iv. Potential to exploit synergies with certain of GPI’s
existing businesses in the quick service restaurant market
and related food sectors, including BURGER KING® and
MacBrothers Catering Equipment.
Conditions precedent
The Proposed Transaction is subject to the fulfilment of the
following outstanding conditions precedent:
i. Approval to the extent required by the shareholders of Spur of
the Proposed Transaction by not later than 31 October 2014;
ii. Approval to the extent required by the shareholders of Spur
of the Spur Funding by not later than 31 October 2014;
iii. Fulfilment of the conditions precedent relating to the Spur
Funding by not later than 31 October 2014;
iv. Fulfilment of the conditions precedent relating to the Bank
Funding and related agreements by not later than 31 October
2014;
v. Confirmation by GPI that no material adverse change has taken
place within Spur; and
vi. Written approval by the JSE of the listing of the Spur
Shares.
Effective date of the Proposed Transaction
The effective date of the Proposed Transaction will be 5 business
days after the fulfilment or waiver, as the case may be, of the
conditions precedent, as detailed herein.
Parent company guarantee and financial assistance
At the annual general meeting held on 11 December 2013, GPI’s
shareholders authorised GPI to give direct and/or indirect financial
assistance to any of its subsidiaries at that time and future
subsidiaries in accordance with the provisions of sections 44 and 45
of the Companies Act, 2008 (“Act”).
In terms of the Bank Funding agreements, GPI shall provide certain
guarantees and indemnities in favour of the Bank in respect of
liabilities incurred by GPI or its subsidiaries, which are deemed to
be financial assistance as defined in the Act.
In accordance with the provisions of section 45(5)(a) of the Act,
notification is hereby given by GPI that in terms of a resolution
passed by the board of directors of GPI on 10 July 2014, GPI has
been authorised to provide guarantees and indemnities in favour of
the Bank for an amount equal to the value of the B class preference
shares, being an amount of R60.0 million, which amount exceeds one
tenth of one per cent of GPI’s net worth.
Pro forma financial effects
The pro forma financial effects of the Proposed Transaction are
presented for illustrative purposes only and because of their nature
may not give a fair reflection of GPI’s financial position nor of
the effect on future earnings after the Proposed Transaction. The
pro forma financial information is presented in accordance with the
JSE Listings Requirements, the Guide on Pro Forma Financial
Information issued by SAICA and the measurement and recognition
requirements of International Financial Reporting Standards. The pro
forma adjustments to the statement of financial position have been
calculated on the assumption that the Proposed Transaction was
implemented on 31 December 2013. The pro forma adjustments to the
statement of comprehensive income have been calculated on the
assumption that the Proposed Transaction was implemented on 1 July
2013. The pro forma financial effects are presented in a manner that
is consistent with the accounting policies of GPI.
Set out below are the unaudited pro forma financial effects of the
Proposed Transaction, based on the unaudited condensed consolidated
interim group financial results for the six months ended 31 December
2013. The directors of GPI are responsible for the preparation of
the unaudited pro forma financial information.
Unaudited Unaudited
before the Pro Forma Percentage
Proposed after the increase/
Transaction Proposed (decrease)
Transaction
Headline earnings per share
(cents) 13.95 12.27 (12.0%)
Earnings per share (cents) 26.21 24.52 (6.4%)
Net asset value per share
(cents) 368.72 373.60 1.3%
Tangible net asset value per
share (cents) 314.63 319.52 1.6%
Number of shares in issue
('000) 469 588 469 588 Nil
Weighted average number of
shares in issue (‘000) 461 358 461 358 Nil
Number of treasury shares
('000) 3 418 3 418 Nil
Assumptions:
(a) The pro forma results listed above do not take into
consideration the transactions referred to in the circular sent to
shareholders on 21 July 2014 and published on SENS on 13 May 2014
and 11 June 2014. Therefore the changes in the earnings per share
and net asset value per share listed above only take into
consideration the Proposed Transaction with Spur.
(b) It has been assumed that the Proposed Transaction took place on
1 July 2013 when determining the effect of the transaction on the
statement of comprehensive income.
(c) It has been assumed that the Proposed Transaction took place on
31 December 2013 when determining the effect of the transaction on
the statement of financial position.
(d) Where applicable the tax rate has been assumed at 28% for income
tax and 18.67% for capital gains tax.
(e) It has been assumed that the GPI Group has foregone dividend
income on the cash portion of the Purchase Consideration which could
have been invested in preference share investments which accrue
dividends (net of tax) at a rate of 5.16% per annum.
(f) It has been assumed that the 90 day Volume Weighted Average
Price ("VWAP") of Spur is R30.18.
(g) It has been assumed that all interest payments have been made
monthly and no interest has been accrued.
Notes:
(1) Spur declared an interim dividend of R57.0 million in December
2013, which equates to 51.3 cents per share after taking into
account the issue to GPI. GPI's total share of the dividend equates
to R5.6 million. No Dividend Withholding Tax has been deducted from
the dividend as it is between two South African companies.
(2) The cash portion of the investment in Spur amounts to R72.3
million and was paid out of available cash. Had the purchase not
taken place the cash would have been invested in preference share
investments, therefore the revenue has been reduced by R1.9 million
being the dividends that the surplus cash would have earned from the
preference share investment. The dividends are exempt from income
tax.
(3) A total of R2.0 million transaction fees have been incurred.
None of these costs have been deducted for income tax purposes as
they are capital in nature.
(4) The Proposed Transaction has been funded by issuing a total of
R222.3 million cumulative redeemable preference shares.
R90.0 million A class preference shares were issued to Standard Bank
at a rate of 95% of prime and are redeemable in full after 5 years;
R60.0 million B class preference shares were issued to Standard Bank
at a rate of 80% of prime and are redeemable in full after 5 years;
and R72.3 million C class preference shares were issued to Spur at a
rate of 90% of Prime and redeemable at the end of five years. For
the six months ended 31 December 2013, a total of R9.4 million in
dividends were paid under finance expenses, which consists of R4.0
million A class preference share dividends, R2.3 million B
Preference Share dividends and R3.1 million C class preference share
dividends.
(5) The Spur Shares were acquired at a 10% B-BBEE lock-in discount
to the 90 day VWAP of the Spur shares traded on the JSE. The
investment in Spur has been classified as an Available-for-sale
investment under IAS39: Financial instruments - initial recognition
and subsequent measurement, and it is GPI's policy to measure these
investments at fair value with any unrealised gains or losses
recognised as other comprehensive income. The investment in Spur was
initially measured at its acquisition value of R294.7 million,
however was revalued at 31 December 2013 to R325.3 million (GPI's
10.8 million Spur shares multiplied by the Spur share price at 31
December 2013 of R29.91 per share). This has resulted in an
unrealised fair value gain of R30.7 million against which R5.7
million in deferred tax, at the effective capital gains tax rate of
18.67% has been deducted to get the after tax unrealised fair value
gain of R25.0 million recognised under other comprehensive income.
(6) Cash and cash equivalents have decreased by R74.3 million. The
decrease is as a result of R72.3 million cash consideration paid for
the acquisition of Spur shares and R2.0 million paid in respect of
transaction fees (refer to note 3).
(7) Total equity increased by R23.0 million as a result of a R25.0
million unrealised fair value gain (net of tax) on the investment in
Spur (refer to note 5), which has been reduced by R2.0 million in
transaction fees related to the Proposed Transaction (refer to note
3).
Classification of the Proposed Transaction
The Proposed Transaction is classified as a Category 2 transaction
in terms of the JSE Listings Requirements and no further action is
required from GPI shareholders.
Conclusion
The Proposed Transaction offers GPI a unique opportunity to
subscribe for a meaningful stake in Spur on attractive terms. The
Proposed Transaction also offers GPI and its group businesses an
opportunity to partner with a leading franchise restaurant operator
to potentially unlock meaningful synergies for the benefit of both
parties.
31 July 2014
Sponsor and corporate adviser
PSG Capital
Lead corporate adviser
Leaf Capital
Legal adviser
Bernadt Vukic Potash & Getz
Date: 31/07/2014 08:00:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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