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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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