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STEINHOFF INTERNATIONAL HOLDINGS LTD - Detailed terms announcement of the acquisition by Steinhoff of a controlling interest in Pepkor and related matters

Release Date: 25/11/2014 08:58
Code(s): SHF     PDF:  
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Detailed terms announcement of the acquisition by Steinhoff of a controlling interest in Pepkor and related matters

Steinhoff International Holdings Limited
(Incorporated in the Republic of South Africa)
(Registration Number 1998/003951/06)
Share Code: SHF
ISIN: ZAE000016176
(“Steinhoff” or “the Company”)



DETAILED TERMS ANNOUNCEMENT RELATING TO THE ACQUISITION BY
STEINHOFF OF A CONTROLLING INTEREST IN PEPKOR HOLDINGS
PROPRIETARY LIMITED (“PEPKOR”) AND RELATED MATTERS

1. Introduction

    The board of directors of Steinhoff is pleased to announce that agreements have been
    concluded between, inter alia, Steinhoff, Titan Premier Investments Proprietary Limited
    (“Titan”), Thibault Square Financial Services Proprietary Limited (“Thibault”), Brait
    Mauritius Limited (“Brait”) and Pepkor management in terms of which Steinhoff or its
    nominated subsidiary will acquire an effective 92.34% interest in the equity share capital of
    Pepkor for a total purchase consideration of R62.8 billion (“the Acquisition”). In terms of the
    Acquisition, Steinhoff intends acquiring Titan’s effective equity interest in Pepkor of 52.47%
    from Titan (“the Titan Transaction”), 37.06% from Brait (“the Brait Transaction”) and 2.81%
    from Pepkor management (“the Management Transaction”). The remaining shares in Pepkor
    are held by Pepkor management. Titan and Thibault are privately held companies. Dr.
    Christo Wiese, who is a non-executive director of Steinhoff, is a beneficiary of a family trust,
    which is the ultimate controlling shareholder of Titan and Thibault. The effective date of the
    Acquisition will be the second business day after the fulfillment, or waiver, as the case may
    be, of the last condition precedent as outlined in paragraph 7.

    Shareholders holding, collectively, 50% of the issued share capital of Steinhoff have
    indicated their support for the Acquisition and intend voting in favour of all resolutions
    required for its implementation.

2. Background to Pepkor

    Founded in 1965, Pepkor manages a portfolio of retail chains operating in 16 countries across
    3 continents. Pepkor reported revenue of R38.2 billion for the financial year ended 30
    June 2014, which was generated in the following geographies:

    -    South Africa and surrounding countries (63%);
    -    Rest of Africa (5%);                                                                                                  
    -    Australia (23%); and
    -    Eastern Europe (9%).

    Pepkor trades from approximately 1.7 million square metres of retail space and provides
    employment to more than 32 000 people. Its 12 main retail brands are mainly focused on the
    discount and value market segments and also include some specialty and service brands.

    The combined product range comprises:

    -    clothing, footwear and apparel; and
    -    homewares, household goods and cellular products and services.

    Pepkor operates on a decentralised business model supported by central group services, and
    focuses on supply chain optimisation to protect and enhance its discount positioning.

3. Rationale for the Acquisition

    Steinhoff was listed on the Johannesburg Stock Exchange (“JSE”) in 1998 through the
    merger of European and South African furniture and household goods businesses under
    Steinhoff as their common holding company. Steinhoff is a vertically integrated retailer
    operating in the value conscious segment of the European, Southern African and Pacific Rim
    furniture and household goods markets. For the financial year ended 30 June 2014, the
    proportion of revenues and operating profits that Steinhoff generated from its non-South
    African operations were 74% and 90%, respectively. In addition to its South African property
    division, Steinhoff’s investments in South Africa comprise investments in three separately
    listed companies, JD Group Limited (86%), KAP Industrial Holdings Limited (44.7%) and
    PSG Group Limited (19%).

    As announced on SENS on 4 August 2014, Steinhoff completed an equity capital raising of
    R18.2 billion and, in conjunction with an Austrian incorporated holding company (“Holdco
    AG”), is in the process of preparing for Holdco AG’s listing on the Frankfurt Stock
    Exchange (“FSE”), accompanied by an Inward listing on the JSE (“the Listings”). Should all
    Conditions Precedent listed in paragraph 7 below be fulfilled, or waived, as the case may be,
    the implementation of the Acquisition will be concluded prior to the Listings becoming
    effective.

    Pepkor is an attractive acquisition opportunity for Steinhoff given its strong market position,
    robust operating model, well executed multi-brand strategy, positioning for future growth
    opportunities and highly experienced management team. Additional key business attributes
    include:

-   Highly recognisable brands, including Pep, Africa’s largest retailer;                                                                                               
-   Pepco, the number 1 non-food retailer in Poland and one of the fastest growing in
    Eastern Europe;
-   Strong multinational footprint, operating in 16 countries across 3 continents;
-   Excellent track-record of double digit sales growth;
-   Pepkor operates in the high-growth, value-orientated market segment (LSM 1-6),
    providing goods to lower-end consumers;
-   Pepkor’s high cash generative sales model with limited credit sales allows the business
    to rapidly grow from internally generated resources with average cash conversion over
    the past 3 financial years:
    i.      pre-capex: 99% of EBITDA, and
    ii.     post-capex: 69% of EBITDA.
-   Successful growth track-record in Eastern Europe and Southern Africa with substantial
    future growth potential, and its ideal positioning to embark on expansion into Europe.

The Acquisition is also particularly compelling given that it will strengthen Steinhoff’s
position within the discount retail market segment. Discount retailers have benefited from the
recent “flight to value” trend which has been most noticeable among less affluent customers.
Customers across the spectrum are “trading down” as discount retailers have become more
socially acceptable, offering improved variety and quality. In addition, discount retailers have
expanded operations through rapid new store openings, thereby gaining market share from
traditional retailers. This underlying consumer trend is expected to continue even after the
anticipated economic recovery due to the:

-   increased market presence of discount retailers providing greater access to consumers;
-   increasing transparency (especially online) across retailers’ prices allowing consumers
    to bargain hunt more effectively; and
-   increased transaction volumes and basket spend as the discount channel is increasingly
    accepted as a complementary shopping channel.

Steinhoff believes that the Acquisition will further enhance its position as a leading listed
global vertically integrated retail group in terms of size, geographic spread, operating scale
and product diversity. The Acquisition will provide, inter alia, the following additional
benefits to Steinhoff, thereby further enhancing the Company’s growth prospects:

-   diversification into faster moving clothing, apparel and cellular retail product ranges
    allowing Steinhoff to enhance its earnings and revenue mix;
-   bolstering of the complementary retail activities of Steinhoff and Pepkor, through
    existing product, customer and footprint overlap, adding to the scale and growth profile                                                                                              
    of the combined business. Steinhoff’s product offerings include a large portion of goods
    and products that are similar to Pepkor’s retail proposition;
-   the ability of the combined business to accelerate its expansion throughout Europe,
    including, inter alia, the roll-out of Pepkor’s formats in terms of a ‘one-stop shop’
    offering to common discount sector customer bases, by utilising Steinhoff’s existing
    large format store footprint;
-   significant cost synergies through combining purchasing, sourcing and logistics
    infrastructure, greater volume discounts from suppliers and more favourable shipping
    and other logistic rates from key sourcing destinations; and
-   potential for meaningful omni-channel, cross pollination and footprint optimisation
    opportunities within existing trading formats of the Steinhoff and Pepkor networks.

    Upon implementation of the Acquisition, Steinhoff’s pro forma revenues and EBITDA will
    have amount to R156 billion and R18.7 billion, respectively, in respect of its financial year
    ended 30 June 2014.

4. Purchase Consideration

    The purchase consideration payable for Titan’s (acting through certain of its wholly-owned
    subsidiaries) effective 52.47% directly and indirectly held equity interest in Pepkor will be
    settled through a series of transaction steps, resulting in Thibault, subscribing for
    approximately 609.1 million ordinary shares in Steinhoff (“Steinhoff Shares”) at an issue
    price of R57.00 per Steinhoff Share (“Titan Purchase Price”). The Titan Transaction
    constitutes a related party transaction for Steinhoff in terms of the JSE Listings Requirements
    (“Listings Requirements”) and will require a fairness opinion and, in terms of section 41(1)
    of The Companies Act, 2008 as amended (‘the Act”), the approval of 75% of Steinhoff
    shareholders ("Steinhoff Shareholders"), other than Titan and its associates. Thibault and
    Titan (in respect of their existing shareholding in Steinhoff) will collectively hold 19.9% of
    the issued ordinary shares in Steinhoff post the implementation of the Acquisition, which
    Steinhoff shares will be subject to the Voting Pool as described in paragraph 5 below.

    The purchase consideration payable for Brait’s 37.06% directly and indirectly held equity
    interest in Pepkor will be settled by the issue of 200 million Steinhoff Shares (“Brait
    Consideration Shares”) at R57.00 per Steinhoff Share and a payment of R15 billion in cash,
    translating to a total consideration of R26.4 billion (the “Brait Purchase Price”).

    The Brait Consideration Shares will be subject to:

        -    pre-emptive rights in favour of Steinhoff should Brait wish to sell any of the Brait
             Consideration Shares, enabling Steinhoff and Brait to co-operate towards an orderly
             execution of Brait’s exit of any of the Brait Consideration Shares. Accordingly the

                                                                                                 
             Brait Consideration Shares will be included in the Voting Pool arrangements
             referred to in paragraph 5 below; and
        -    a guarantee from Steinhoff that minimum gross proceeds of R57.00 per Brait
             Consideration Share will be realised, if Brait disposes of any of the Brait
             Consideration Shares during the period of 12 months from the date of issue thereof,
             which contingent liability has been laid off by Steinhoff to a financial institution.

    Steinhoff will fund the cash element of the Brait Purchase Price from its existing cash
    resources, debt facilities and funding commitments.

    The purchase consideration payable in respect of the Management Transaction will be settled
    by the issue of 29.9 million Steinhoff Shares (“Management Consideration Shares”) at
    R57.00 per Steinhoff Share.

5. Voting Pool, Change of Control and Waiver of Mandatory Offer to minorities

    Upon the implementation of the Acquisition and after the transfer by Steinhoff of its rights of
    pre-emption in respect of the Brait Consideration Shares to the Voting Pool, in particular
    after the condition precedent in paragraph 7.4 below has been fulfilled, Titan, Thibault, Brait,
    the Steinhoff family and certain of the directors and management of Steinhoff and Pepkor
    (“Voting Parties”), will collectively hold or control more than 35% of the issued Steinhoff
    Shares, and will enter into the voting pool agreement (“the Voting Pool”). The Voting Pool is
    considered by the directors of Steinhoff to be in the long term interests of Steinhoff and all its
    stakeholders in terms of continuity and succession planning.

    As the Voting Parties will jointly control more than 35% of the voting rights attached to the
    Steinhoff Shares after the implementation of the Acquisition, its conclusion will give rise to
    an obligation on the Voting Parties to make a mandatory offer in terms of section 123 of the
    Act to the remaining Steinhoff Shareholders (“the Mandatory Offer”). Accordingly,
    independent Steinhoff Shareholders, being the Steinhoff Shareholders other than the Voting
    Parties, will be asked by ordinary resolution to waive the Mandatory Offer (“the Waiver”) in
    terms of Regulation 86(4) of the Companies Regulations, 2011 (“the Companies
    Regulations”). The Takeover Regulation Panel (“the TRP”) has indicated that it is willing to
    consider the application to grant an exemption from the obligation to make the Mandatory
    Offer if the majority of independent Steinhoff Shareholders waive their entitlement to receive
    the Mandatory Offer as aforesaid. Steinhoff Shareholders who wish to make representations
    to the TRP relating to the exemption shall be given an opportunity after the posting of the
    circular referred to in paragraph 10 below and before the TRP ruling is considered.
                                                                                                   
6. Fairness opinion

    Dr. Christo Wiese, a non-executive director of Steinhoff, is a beneficiary of a family trust,
    which is the ultimate controlling shareholder of Titan and Thibault. In terms of paragraph
    10.1(b)(i) and (ii) of the Listings Requirements, Dr. Christo Wiese is a related party to the
    Titan Transaction as he is both a director of Steinhoff and a director and majority shareholder
    of Pepkor. As such, in terms of paragraph 10.4(f) of the Listings Requirements, a fairness
    opinion is required from an independent professional expert acceptable to the JSE, indicating
    whether the terms of the Acquisition are fair to Steinhoff Shareholders. In addition, as the
    Waiver will be governed by the Companies Regulations, a fairness opinion from an
    independent expert acceptable to the TRP will be required as to the Waiver’s fairness in
    respect of Steinhoff Shareholders. KPMG Services Proprietary Limited has been appointed
    by Steinhoff as the independent professional expert to consider the terms and conditions of
    the Acquisition and the Waiver.

7. Conditions Precedent

    The Acquisition will be subject to the fulfillment of or, where applicable, waiver, as the case
    may be, inter alia, the following conditions precedent by 31 May 2015, or such later date as
    the contracting parties may agree in writing:

   7.1. the JSE and the TRP approving the circular to Steinhoff Shareholders including the
        notice of general meeting to be convened for the purposes of seeking Steinhoff
        Shareholders’ approval of all resolutions required pursuant to the Listings Requirements,
        the Act, and the Companies Regulations. Steinhoff Shareholders holding collectively,
        50% of the issued Steinhoff Shares, support the Acquisition and intend to vote in favour
        of all of the resolutions required for its implementation, including the Waiver;

   7.2. the JSE granting a listing of the 609.1 million Steinhoff Shares to be issued in respect of
        the Titan Transaction by no later than 7 February 2015, and the 200 million Brait
        Consideration Shares and the 29.9 million Management Consideration Shares by no later
        than 31 May 2015;

   7.3. the agreement recording the Voting Parties being concluded and the Waiver being
        approved by the requisite majority of independent Steinhoff Shareholders in general
        meeting;

   7.4. the TRP exempting the Voting Pool from the obligation to make the Mandatory Offer
        and such exemption becoming final;

   7.5. the required Regulatory approvals being obtained, in particular, the unconditional
        approval of the South African and any other relevant Competition Authorities;
                                                                                               
   7.6. Steinhoff Shareholders holding not more than 5% of the issued Steinhoff Shares exercise
         their Appraisal Rights pursuant to the provisions of the Act in respect of a specific
         Special Resolution which will be required to be approved at the general meeting referred
         to in paragraph 9 below;

   7.7. a fairness opinion (referred to in paragraph 6 above) being obtained to the effect that: (i)
         the agreements recording the Acquisition; and (ii) the Waiver are fair to Steinhoff
         Shareholders;

   7.8. the consent of counterparties being obtained to the acquisition in respect of any change of
         control covenants which are applicable to all Pepkor’s agreements which are agreed to be
         material to its business; and

   7.9. the agreements recording the Titan Transaction and the Brait Transaction becoming
         unconditional in accordance with their terms and conditions, in addition to the conditions
         precedent not listed in paragraph 7.1 to paragraph 7.8 above.

8. Pro forma financial effects

   The pro forma financial effects set out in the announcement have been prepared for
   illustrative purposes only in order to provide information about the impact of the Transaction
   on Steinhoff had the Transaction occurred on 1 July 2013 for income statement purposes and
   on 30 June 2014 for statement of financial position purposes.


   The pro forma financial effects are presented in accordance with the Listings Requirements,
   the Guide on Pro Forma Financial Information issued by SAICA, ISAE 3420 and the
   measurement and recognition requirements of International Financial Reporting Standards
   (IFRS).


   The pro forma financial information has been prepared for illustrative purposes only and,
   because of its nature, may not give a fair reflection of Steinhoff’s financial position, changes
   in equity, results of operations or cash flows after the Transaction.


   The accounting policies applied in quantifying pro forma adjustments are consistent with
   Steinhoff’s accounting policies as at 30 June 2014. The pro forma financial information
   incorporates the audited results of Pepkor for the twelve months ended 30 June 2014.
   Steinhoff is satisfied with the quality of these results of Pepkor, as extracted from the audited
   accounts to 30 June 2014.

                                                                                                   
  The table below sets out the pro forma financial effects of the Acquisition on Steinhoff
  Shareholders for the following key metrics in respect of Steinhoff and Pepkor’s financial years
  ended 30 June 2014:

                                                                           Pro forma
                                                                               after
                                                                              rights
                                                                            offer of        Pro forma
                                                                As       350 million        after the    Change
30 June 2014                                                 Reported         shares      Acquisition      (%)


Continuing and discontinued operations:

Headline earnings per share (cents)                               443.5         415.7           343.4     -17.4%

Fully diluted headline earnings per share (cents)                 402.0         384.3           329.2     -14.3%

Basic earnings per share (cents)                                  496.8         460.9           375.6     -18.5%

Diluted earnings per share (cents)                                444.3         421.3           358.9     -15.3%

Net asset value per share (cents)                                 3 946         4 111           4 510       9.7%

Tangible net asset value per share (cents)                          797         1 412           2 500      77.1%

Number of shares in issue (million)                               2 100         2 450           3 289      34.2%

Weighted average number of shares in issue (million)              1 977         2 327           3 166      36.0%

Fully diluted weighted average number of shares in                2 488         2 838           3 677      29.6%
issue (million)


    Notes and assumptions:

    1.   The "As Reported" column represents the audited Basic earnings, Headline earnings, Diluted
         earnings and Diluted headline earnings per share from continuing and discontinued operations as
         reported in respect of the year ended 30 June 2014.

    2.   The “Pro forma after rights offer of 350 million shares” column represents the reported audited
         numbers, but as adjusted for the effects of the rights offer which closed on 1 August 2014 and
         raised net proceeds, after transaction costs of R341 million, of R17.9 billion in equity capital. The
         rights offer entailed the issue of 350 million Steinhoff shares at R52 per share. It has been
         assumed that the net proceeds had been received for Income statement purposes on 1 July 2013,
         used to reduce interest bearing debt and assuming a reduction in interest charges of 6% before
         taxation. The interest adjustment is of a continuing nature. For the purposes of the net asset value
         effect, it is assumed that the net proceeds of the rights offer had been received on 30 June 2014.

    3.   The "Pro forma after the Acquisition" column includes 92.34% of the audited attributable profits
         of Pepkor in respect of the year ended 30 June 2014, and has been calculated on the assumption
         that the acquisition had been effective on 1 July 2013, as well as providing for the interest effect
         on R15 billion borrowed funds at an after taxation interest rate of 5.82% for income statement
         purposes. The interest adjustment is of a continuing nature. Pepkor had net profits of R2.1 billion
         for the financial period ended 30 June 2014.
                                                                                                            
    4.   The "As reported" net asset value and tangible net asset value per share represents the calculation
         based on the 30 June 2014 statement of financial position of Steinhoff and the "Pro forma after
         Acquisition" column includes the value of the 839 million consideration shares at R57 per share
         that are to be issued in respect of the Acquisition based on the assumption that the Acquisition
         took place on 30 June 2014. As at 30 June 2014, Pepkor had a net asset value of R7 billion.

    5.   Once-off transaction costs of R40 million and Securities Transaction Tax of R157 million have
         been deducted against equity.

    6.   There are no other post balance sheet events which need adjustment to the pro forma financial
         information.



    Post the Acquisition, Steinhoff’s gearing ratio (net interest bearing debt : equity), based on its
    30 June 2014 Statement of Financial Position (as adjusted for the proceeds of the R18.2
    billion capital raise concluded on 1 August 2014) will increase from 12% to 19%, while its
    EBITDA interest cover will decrease from 15.9 times to 8.3 times.

9. General Meeting

    The Company will convene a general meeting of Steinhoff Shareholders in order to obtain
    the necessary shareholder approvals to implement the Acquisition ("General Meeting"). It
    should be noted that Titan and its associates, including Dr. Christo Wiese, will be precluded
    from voting on all of the JSE resolutions in respect of the approval of the Acquisition,
    whereas the Voting Parties will be precluded from voting in respect of the Waiver.

    Further details of the Acquisition, including salient dates, as well as further particulars of the
    Listings and its separate shareholder and other approvals required, will be published in due
    course.

10. Documentation

    A circular, detailing the Acquisition and a notice of General Meeting, will, subject to the
    approval of the JSE and TRP, be posted to Steinhoff Shareholders on or about
    15 December 2014.

By order of the Steinhoff Board

Wynberg, Sandton

25 November 2014




                                                                                                          
Transaction Sponsor and financial advisor to Steinhoff

Investec Bank Limited


Company Sponsor

PSG Capital (Pty) Ltd


Financial advisers to Steinhoff

Citigroup Global Markets Limited, Deutsche Bank, Barclays, Commerzbank


Joint financial advisers to Titan

Rand Merchant Bank (a division of FirstRand Bank Limited), HSBC Bank plc


Financial adviser to Brait

Rand Merchant Bank (a division of FirstRand Bank Limited)


Attorneys to Steinhoff

Werksmans Incorporated

Cliffe Dekker Hofmeyr Incorporated

Girard Hayward Incorporated


Attorneys to Titan

Werksmans Incorporated

Attorneys to Brait

Webber Wentzel


Independent professional expert to Steinhoff

KPMG Services (Proprietary) Limited


International Counsel to Steinhoff

Linklaters


Reporting accountants to Steinhoff

Deloitte & Touche

PricewaterhouseCoopers Inc




                                                                         

Date: 25/11/2014 08:58:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). 
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