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Terms announcement relating to Hulamin's proposed Broad-based Black Economic Empowerment Transaction
Hulamin Limited
Incorporated in the Republic of South Africa
Registration number: 1940/013924/06
JSE share code: HLM
ISIN: ZAE000096210
("Hulamin" or "the Company" or "the Group")
TERMS ANNOUNCEMENT RELATING TO HULAMIN'S PROPOSED BROAD-BASED BLACK ECONOMIC
EMPOWERMENT ("BEE") TRANSACTION ("BEE TRANSACTION")
Highlights
- Broad-based BEE ownership transaction including employees, black management and long-standing
strategic black partners;
- In aggregate, the transaction will place 17% of votes and 13% of Hulamin's equity under the control of
the strategic black partners and the new ESOP;
- Demonstrates Hulamin's on-going commitment to transformation and broad-based black economic
empowerment;
- Significant employee participation through a broad-based employee share trust for eligible employees
and black management within the Hulamin group, enhancing the attraction and retention of core skills;
- Five-year employee and eight-year strategic partner participation period promotes long-term mutual
value creation for all stakeholders; and
- Transaction structure ensures high probability of financial returns to BEE participants, whilst limiting
impact on dividend flows and dilution to ordinary shareholders on vesting.
1. Introduction and rationale
Hulamin implemented a BEE transaction during 2007 ("Initial BEE Transaction") upon the unbundling of
the Company from the Tongaat Hulett Group, which involved both an employee element and a strategic
partner element. The employee share ownership plan implemented during 2007 ("Initial ESOP")
matured during 2012 and resulted in minimal value vesting in the hands of the management participants
and no value vesting in the hands of non-management employee participants. The strategic partners'
BEE transaction implemented during 2007 ("Initial Strategic Partners' Transaction") matured on or about
9 July 2014 and, as a result of the decline in Hulamin's share price since 2007, resulted in no value
vesting in the hands of the strategic black partners.
As a large South African manufacturer, Hulamin's own strategy is closely aligned with the
industrialisation and beneficiation objectives of the South African government. Hulamin is a key
participant in the local aluminium industry, an industry that supports the South African government's
broad-based BEE initiatives and recognises the importance of these in achieving meaningful
participation by black people in the mainstream economy.
Hulamin is committed to the implementation and success of broad-based empowerment throughout the
Group and has already implemented a number of initiatives relating to employment equity, skills
development, preferential procurement, enterprise development and corporate social investment.
Given the above, and in light of the requirements of the Revised DTI Codes of Good Practice, Hulamin
intends implementing a new strategic partners' BEE transaction ("Strategic Partners' BEE Transaction")
and a new employee share ownership plan ("ESOP"), collectively referred to herein as the BEE
Transaction, as a replacement for the Initial BEE Transaction.
The BEE Transaction will advance Hulamin's empowerment objective of increasing participation by black
people in the Group by transferring long-term economic benefits of its success to a broad spectrum of
black South Africans.
The inclusion of eligible employees in the BEE Transaction is intended to spread a significant portion of
the benefits of the BEE Transaction among Hulamin's permanent employees. The sustainability and
prospects of Hulamin will be enhanced by:
- improving Hulamin's ability to attract, incentivise and retain black employees and managers;
- aligning the interests of employees and Hulamin shareholders; and
- recognising and rewarding employees who have contributed to the success of the Group.
The BEE Transaction has been structured in a manner which will provide a high probability of value
vesting in the hands of the participants.
Hulamin Shareholders are advised that, in accordance with the JSE Limited Listings Requirements, a
circular to Hulamin shareholders containing further details of the BEE Transaction, including inter alia
the pro forma financial effects with a more detailed description of the assumptions used to arrive at the
pro forma financial effects and the full fairness opinion as issued by KPMG as independent expert,
together with a notice of a general meeting to Hulamin shareholders, will be issued within 70 calendar
days of this announcement, following approval thereof by the JSE Limited ("the Circular"). An
announcement will be released on the Stock Exchange News Service to notify Hulamin shareholders of
the posting date of the Circular, including the details of the general meeting.
2. Details of the BEE Transaction
The Strategic Partners' BEE Transaction will entail the issue of three tranches of B ordinary shares (B1
ordinary shares, B2 ordinary shares and B3 ordinary shares) to the strategic black partners. The B1
ordinary shares and the B2 ordinary shares will carry both economic and voting rights and will be issued
on a notional vendor financed ("NVF") basis. The B3 ordinary shares will carry only voting rights. The B
ordinary shares will entitle the entity through which the strategic partners hold their interest ("BEE
SPV") to approximately 9.3% of the voting rights in Hulamin. The term of the Strategic Partners' BEE
Transaction will be a total of eight years, consisting of a vesting period of five years and a three-year
post-vesting lock-in period.
The shareholders in BEE SPV are essentially the same shareholders as those involved in the Initial
Strategic Partners' BEE Transaction. The vehicle invested in the Initial Strategic Partners' Transaction,
Chaldean Trading 67 Proprietary Limited ("Chaldean"), was 40% held by the Makana Consortium and
60% held by the Imbewu Consortium. BEE SPV, the entity invested in Hulamin through the Strategic
Partners' BEE Transaction is also 40% held by the Makana Consortium and 60% held by the Imbewu
Consortium (there have been some small changes to the shareholding of the Imbewu Consortium).
The ESOP will entail the issue of two tranches of A ordinary shares (A1 ordinary shares and A2 ordinary
shares) to the trust established to hold the A ordinary shares on behalf of eligible employees (the "ESOP
Trust"). The A1 ordinary shares are grant (free) shares and the A2 ordinary shares will be issued on a
NVF basis. The A ordinary shares will have both economic and voting rights. The A ordinary shares will
provide the ESOP Trust with an 8.1% interest in Hulamin. Black management and all non-management
employees will participate in the ESOP. The term of the ESOP will be five years.
2.1 Proposed Conversion and Proposed Creation
In order to ensure that Hulamin has sufficient authorised but unissued ordinary share capital to
implement the BEE Transaction, Hulamin proposes creating the A1 ordinary shares, the A2 ordinary
shares, the B1 ordinary shares, the B2 ordinary shares and the B3 ordinary shares, which are no par
value shares ("Proposed Creation"). Hulamin further proposes cancelling the existing unissued A
ordinary shares and B1, B2 and B3 ordinary shares that were created for purposes of the Initial BEE
Transaction.
In terms of the Regulations promulgated under the Companies Act No. 71 of 2008, a company is not
permitted to create any new par value shares, or shares having a nominal value, on or after 1 May
2011. Accordingly, Hulamin proposes converting its authorised (unissued and issued) par value shares
into no par value shares so that all Hulamin ordinary shares are no par value shares ("Proposed
Conversion").
2.2 Amending Hulamin's Memorandum of Incorporation
Hulamin proposes amending its current Memorandum of Incorporation ("MOI") in order to give effect
to the cancellation of the shares created for the Initial BEE Transaction and the Proposed Creation and
the Proposed Conversion as contemplated in paragraph 2.1 above.
2.3 Details of BEE SPV participation
2.3.1 Details of the BEE SPV
BEE SPV is a special purpose vehicle established for the purpose of holding the interests of the
strategic black partners in Hulamin. BEE SPV will be 40% owned by the Makana Consortium and
60% owned by the Imbewu Consortium.
The shareholders of Makana Consortium are Makana Investment Corporation (60%) and
Makana Investment KZN (40%).
The Makana Consortium is led by the Makana Investment Corporation, a broad-based BEE
company established to enable former political prisoners to participate in the South African
economy. The majority shareholder of Makana Investment Corporation is the Makana Trust
which was established in 1996 for the benefit of former political prisoners.
Peter-Paul Ngwenya is a founder member and executive chairman of Makana Investment
Corporation. Peter-Paul is a 22.5% shareholder in Makana Investment Corporation through
African Sky Consortium.
Makana Investment KZN was formed to enable KwaZulu-Natal-based former political prisoners
to benefit from growth opportunities in KwaZulu-Natal by participating in SMME business
opportunities in the province.
The Imbewu Consortium is led by Imbewu Capital Partners, a black controlled private equity
and investment holding company. Gcina Zondi is the founding Chief Executive of Imbewu
Capital Partners and J B Magwaza is the Non-Executive Chairman. The shareholders of the
Imbewu Consortium are:
Shareholder Percentage interest in Imbewu
Imbewu Capital Partners 48.70%
Moputso Investments 16.67%
J B Magwaza 16.29%
Monica Malunga 14.27%
Omame Investments 4.07%
Peter-Paul Ngwenya and J B Magwaza have served on the Hulamin board of directors for a
number of years.
2.3.2 Issue of B ordinary shares to BEE SPV
The salient terms of the B ordinary shares will be as follows:
- 9,018,000 B1 ordinary shares will be issued to BEE SPV at a 50% discount to the volume-
weighted average price ("VWAP") of the Hulamin ordinary shares as calculated for the 30
JSE trading days preceding the date upon which the B1 ordinary shares are subscribed for.
The B1 ordinary shares will be NVF funded with no funding cost attached thereto. The B1
ordinary shares will have a five-year vesting period and a three-year post-vesting lock-in
period. B1 ordinary shares will carry voting rights which rank pari passu with Hulamin
ordinary shares;
- 9,018,000 B2 ordinary shares will be issued to BEE SPV at the VWAP of the Hulamin
ordinary shares as calculated for the 30 JSE trading days preceding the date upon which
the B2 ordinary shares are subscribed for. The B2 ordinary shares will be NVF funded with
no funding cost attached thereto. The B2 ordinary shares will have a five-year vesting
period and a three-year post-vesting lock-in period. B2 ordinary shares will carry voting
rights which rank pari passu with Hulamin ordinary shares.
The values of the B1 ordinary shares and B2 ordinary shares on vesting will be capped (i.e.
no incremental value will accrue to the holders of the B1 ordinary shares and the B2
ordinary shares should Hulamin's share price exceed the share price cap at the date upon
which these shares vest) such that the aggregate economic cost of the B1 ordinary shares
and B2 ordinary shares will not exceed R20 million as at the date of issue. Details of the
cap will be included in the Circular; and
- 18,036,000 B3 ordinary shares will be issued to BEE SPV at nominal value. B3 ordinary
shares will carry voting rights which rank pari passu with Hulamin ordinary shares and will
have an eight-year term.
- All B ordinary shares will carry no right to dividends.
2.3.3 Subscription for the BEE SPV Shares
Hulamin will issue the B ordinary shares to BEE SPV, at the relevant subscription amounts, on
the effective date, which is expected to be on or about 1 June 2015. Hulamin will contribute the
BEE SPV subscription amount to BEE SPV in order to enable BEE SPV to subscribe for the B
ordinary shares.
The B ordinary shares will be held by BEE SPV for five years post the date of issue thereof. BEE
SPV will be restricted from encumbering or transferring the B ordinary shares before the expiry
of such period.
2.3.4 BEE SPV Repurchase Shares and Conversion to Hulamin Ordinary Shares
Hulamin shall repurchase a number of the B1 ordinary shares and B2 ordinary shares,
determined in accordance with the relevant BEE SPV repurchase formulae, at a nominal
amount on the vesting date. The BEE SPV repurchase formulae will effectively allow Hulamin to
recover the outstanding amount of the NVF on the vesting date.
On the vesting date, the remaining B1 ordinary shares and B2 ordinary shares will be converted
to Hulamin ordinary shares. The BEE SPV will be restricted from encumbering or transferring
these shares until after the three-year post-vesting lock-in period.
Hulamin will repurchase all of the issued B3 ordinary shares at the conclusion of the eighth
anniversary of the subscription date.
2.3.5 Salient terms of the Relationship Agreement
The Relationship Agreement has been entered into between Hulamin, BEE SPV, shareholders of
BEE SPV and direct and certain indirect shareholders of BEE SPV shareholders and regulates,
inter alia, the ongoing relationship between the parties for the duration of the BEE Transaction.
In terms of the relationship agreement, Hulamin undertakes to pay to BEE SPV a BEE support
fee of R850 000 per year (in quarterly instalments) for the eight-year term of the transaction,
escalating at a rate of 6% per annum to cover the reasonable operating expenditure
requirements of BEE SPV.
The Relationship Agreement requires that BEE SPV and shareholders thereof maintain a
specified minimum shareholding percentage in respect of black ownership and black women
ownership ("Required BEE Shareholding Threshold"), failing which a compulsory option is
triggered in terms of which Hulamin is entitled to purchase the shares from BEE SPV at a
determinable discounted purchase price.
Further to the above, the Relationship Agreement incorporates numerous safeguards which
seek to maintain the current relationship in order to attain the BEE objectives.
2.4 Details of the ESOP Trust
2.4.1 Establishment of the ESOP Trust
The Company has established the ESOP Trust for the purpose of holding the A ordinary shares
for the benefit of the employee beneficiaries. The employee beneficiaries will become vested
beneficiaries to the capital and income thereof by accepting an offer to become employee
beneficiaries as contained in an allocation notice.
The ESOP Trust and trust property will be managed by the ESOP Trust trustees. Three of the
ESOP Trust trustees will be elected by the employee beneficiaries and two of the ESOP Trust
trustees will be appointed by Hulamin.
Around 95% of the employee beneficiaries of the ESOP Trust will be historically disadvantaged
employees.
2.4.2 Structure of the ESOP
The ESOP will be allocated two different tranches of A ordinary shares (A1 ordinary shares and
A2 ordinary shares). The shares will bear the following characteristics:
- 4,721,600 A1 ordinary shares will be issued at nominal value (i.e. will be free shares). To
the extent that ordinary dividends are declared on Hulamin ordinary shares, dividends will
accrue to the A1 ordinary shares. The A1 ordinary shares will have a five-year vesting
period; and
- 26,755,733 A2 ordinary shares will be issued at the VWAP of the Hulamin ordinary shares
for the 30 JSE trading days preceding the date upon which the A2 ordinary shares are
subscribed for. The A2 ordinary shares will be NVF funded with no funding cost attached
thereto. The A2 ordinary shares will have a five-year vesting period. To the extent that
dividends are declared on Hulamin ordinary shares, dividends that accrue to the A2
ordinary shares will be utilised to service the NVF against those shares.
The value of the A2 ordinary shares on vesting will be capped (i.e. no incremental value
will accrue to holders of A2 ordinary shares should Hulamin's share price exceed the share
price cap at the date upon which the A2 ordinary shares vest) such that the aggregate
economic cost of the A1 and A2 shares will equal 3.4% of Hulamin's market capitalisation
on the date of issue. Details of the cap will be included in the Circular.
2.4.3 Subscription for the Employee Shares
Hulamin will issue the A ordinary shares to the ESOP Trust on the effective date, which is
expected to be on or about 1 June 2015. Hulamin employer companies will contribute the
employee subscription amount to the ESOP Trust in order to enable the ESOP Trust trustees to
subscribe for the A ordinary shares.
2.4.4 Employee Repurchase Shares and Conversion to Hulamin Ordinary Shares
Hulamin shall repurchase a number of A2 ordinary shares, determined in accordance with the
employee repurchase formula, at a nominal amount on the vesting date. The employee
repurchase formula will effectively allow Hulamin to recover the outstanding amount of the
NVF on the vesting date.
On the vesting date, all A1 ordinary shares and the remaining A2 ordinary shares will be
converted to Hulamin ordinary shares and the trustees will distribute these ordinary shares to
each employee beneficiary according to the beneficiary's allocation rights.
2.5 Vesting and lock-in
The BEE SPV and ESOP Trust ("BEE Vehicles") may not dispose of or encumber their subscription shares
during the five-year period following the issue date thereof. The strategic black partners will be locked
in for three years post the vesting date of the B ordinary shares, during which time the strategic black
partners may not dispose of or encumber their shares.
2.6 Dividends and other distributions
During the five-year period following the issue of the A and B ordinary shares, the holders of the A
ordinary shares will be entitled to dividends to the extent that these are declared and paid on Hulamin
ordinary shares. Dividends accruing to the A1 ordinary shares will be paid in cash, and dividends
accruing to the A2 ordinary shares will be applied to reduce the notional vendor finance against these
shares. The B ordinary shares will not be entitled to receive dividends.
2.7 Voting
The BEE Vehicles will be entitled to exercise all voting rights attached to the A and B ordinary shares of
which they are the registered owner until such shares are either repurchased by Hulamin or are
converted to Hulamin ordinary shares and are transferred to the participants, following which the new
holders of the Hulamin ordinary shares shall be entitled to exercise all voting rights attached to the
shares received. The ESOP Trust trustees will vote the A ordinary shares on behalf of the ESOP
according to the instructions received from the beneficiaries.
2.8 Corporate Actions
In the event of a change in control of Hulamin:
- In relation to the B ordinary shares, the BEE SPV shall be entitled to elect that the vesting date is
accelerated and that any lock-in period falls away; and
- In relation to the A ordinary shares, Hulamin shall be entitled to accelerate the vesting date thereof.
3. Estimated economic cost
The estimated economic cost of implementing the BEE Transaction for the Company and Hulamin
shareholders, excluding the BEE support fee referred to in 2.3.5, is R103 million, based on Hulamin’s
market capitalisation of R2.44 billion on 11 December 2014, and is allocated to the BEE Vehicles as
follows:
- R83 million relating to the ESOP Trust (representing approximately 3.4% of the market
capitalisation of Hulamin on 11 December 2014) which is to be amortised over the vesting period;
and
- R20 million relating to BEE SPV (representing approximately 0.8% of the market capitalisation of
Hulamin on 11 December 2014) which is to be expensed in full on the date of issue of the B
ordinary shares.
In total, this represents approximately 4.2% of the market capitalisation of Hulamin on 11 December
2014.
This figure was calculated with reference to the requirements of IFRS, including IFRS 2 – Share Based
Payments.
The actual economic cost of the BEE Transaction will depend on the market capitalisation of Hulamin on
the date of issue of the A ordinary shares and B ordinary shares to the BEE parties.
4. Unaudited pro forma financial effects of the BEE Transaction
The unaudited pro forma financial effects of Hulamin presented below are the responsibility of the
Directors of Hulamin and are based on the most recently published unaudited interim results of Hulamin
for the 6 months ended 30 June 2014.
The accounting policies of Hulamin for the 6 months ended 30 June 2014 have been used in preparing
the unaudited pro forma financial effects.
The unaudited pro forma financial effects are the responsibility of the Directors of Hulamin and were
prepared for illustrative purposes only and may, due to the nature thereof, not fairly present Hulamin's
financial position, changes in equity, and results of its operations or cash flows as at the relevant
reporting date. The unaudited pro forma financial effects do not purport to be indicative of what the
financial results would have been, or will be, had the BEE Transaction been implemented on a different
date.
The Company wishes to highlight that the earnings and headline earnings per share impacts shown
below are magnified as the BEE SPV related economic cost will be expensed in full at the date of issue of
the B ordinary shares. In accordance with IFRS 2 requirements, the economic cost relating to the ESOP
Trust will be amortised over the NVF period. As a result, the total IFRS 2 charge will reduce in years two
to five. The BEE support fee and the transaction costs of the BEE Transaction, which are expensed up
front, will also not impact the earnings and headline earnings per share in years two to five.
Unaudited pro forma per share information for the half-year ended 30 June 2014
The unaudited pro forma historical financial effects of the BEE Transaction are as follows:
Pro forma Pro forma
Before the After the
BEE BEE Net %
For the half-year ended 30 June 2014 Before Transaction Transaction Impact change
Net asset value (NAV) per share (cents) 1,112 1,110 1,107 (3) (0.27%)
Tangible net asset value (TNAV) per share
(cents) 1,098 1,096 1,093 (3) (0.27%)
Earnings per share (cents) 41 40 27 (13) (32.50%)
Diluted Earnings per share (cents) 40 39 26 (13) (33.33%)
Headline earnings per share (cents) 41 40 27 (13) (32.50%)
Diluted Headline earnings per share (cents) 40 39 26 (13) (33.33%)
Weighted average number of shares in issue
(million) 319,432,181 319,432,181 319,432,181
Diluted weighted average number of shares
in issue (million) 325,082,965 325,082,965 333,672,033
Notes:
1. The EPS, diluted EPS, HEPS, NAV and TNAV per Hulamin Ordinary Share "Pro forma Before the BEE
Transaction" are based on the unaudited interim results for the half-year ended 30 June 2014 after adjusting
for the pro forma effect of the unwinding of the Initial Strategic Partners' BEE Transaction which matured on
or about 9 July 2014.
2. The EPS, diluted EPS and HEPS "Pro forma After the BEE Transaction" for 30 June 2014 are based on the
assumption that the BEE Transaction was implemented on 1 January 2014, and includes the following:
2.1. an IFRS 2 charge of R 28.3 million (of which R20.0 million relates to the BEE SPV) for the half-year
ended 30 June 2014, estimated based on the market capitalisation of Hulamin on 11 December 2014 of
R2.44 billion;
2.2. transaction costs associated with the implementation of the BEE Transaction, estimated at R 9.4
million, which are not recurring in nature; and
2.3. an up-front provision for the BEE support fee, determined as the present value of the BEE support fee
payments over the 8-year term of the BEE Transaction, in the amount of R5.1 million.
2.4. for accounting purposes, the shares issued to the BEE Vehicles are treated in a manner similar to that
of an option. Consequently, these shares are being treated as potential Hulamin Shares for the purpose
of calculating diluted EPS.
3. For a full understanding of Hulamin's ordinary share capital and weighted average number of shares before
the BEE Transaction, refer to Hulamin's June 2014 interim results, read with Hulamin's December 2013 annual
financial statements.
4. There are no material post balance sheet events other than the maturing of the Initial Strategic Partners'
Transaction which require adjustment to the unaudited pro forma financial effects.
5. Conditions precedent
All the provisions of the BEE Transaction agreements are subject to the fulfilment of the following
conditions:
- all the relevant shareholder approvals as set out in the Circular being duly obtained;
- the amendments to Hulamin's MOI, as set out in the Circular, being filed with the Companies and
Intellectual Property Commission ("CIPC");
- the directors or trustees, as the case may be, of each of the parties authorising the entry into and
implementation of the BEE Transaction agreements to which that party is a party;
- the BEE SPV MOI being adopted, and filed with the CIPC;
- the MOI (in the case of a company) and/or the trust deed (in the case of a trust) of each of the
relevant BEE Parties (other than the BEE SPV) being amended to take into account the relevant
provisions of the BEE Transaction documents (in so far as it is applicable to it), and any such
amendments being filed with the CIPC;
- the ESOP Trust Deed being filed with the relevant office of the Master of the High Court;
- Hulamin being satisfied that there has been no change in the BEE status, the shareholding structures
and accompanying contractual arrangements of the BEE SPV;
- Hulamin confirming in writing (after having consulted with BEE SPV) that it is satisfied that, through
the implementation of the BEE Transaction, the BEE SPV and the direct shareholders of the BEE SPV
will have met the Required BEE Shareholding Threshold; and
- there being no breach of any of the representations, warranties or undertakings contained in the
BEE Transaction agreements between the period commencing on the signature date and ending on
the completion date thereof.
6. Director's opinion and fairness opinion
The Hulamin Board has considered the terms and conditions of the BEE Transaction and is of the
opinion that the BEE Transaction is in the best interests of all of the Hulamin shareholders and,
accordingly, recommends that Hulamin shareholders vote in favour of the resolutions required to
implement the BEE Transaction.
KPMG has been appointed by Hulamin to prepare an independent fairness opinion, as required in terms
of the JSE Listings Requirements and the Companies Act, due to the BEE Transaction involving related
parties as defined in the JSE Listings Requirements, the issue of unlisted voting instruments, the issue of
shares at a discount as well as provisions of financial assistance. KPMG has considered the terms and
conditions of the BEE Transaction and is of the opinion that these are fair to Hulamin shareholders.
Details of the opinion will be provided in the Circular.
Pietermaritzburg
15 December 2014
For enquiries:
CapitalVoice
Johannes van Niekerk
+27 82 921 9110
Merchant bank and sponsor
RAND MERCHANT BANK (A division of FirstRand Bank Limited)
Legal adviser
Bowman Gilfillan Inc.
Independent reporting accountants
PricewaterhouseCoopers
Independent expert
KPMG
Empowerment adviser
Empowerdex
Date: 15/12/2014 02:03:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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