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Update on the Vukile offers: posting of the response circular, the independent expert opinion and updated proformas
SYNERGY INCOME FUND LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 2007/032604/06)
JSE share code: SGA ISIN: ZAE000161550
JSE share code: SGB ISIN: ZAE000162293
(Approved as a REIT by the JSE)
(“Synergy” or “the Company”)
UPDATE ON THE OFFERS BY VUKILE PROPERTY FUND LIMITED: POSTING OF OFFEREE
RESPONSE CIRCULAR, THE INDEPENDENT EXPERT’S OPINION, THE OPINION OF THE
INDEPENDENT BOARD AND UPDATED PRO FORMA FINANCIAL EFFECTS
1. INTRODUCTION
Holders of both Synergy A linked units (“A Linked Units”) and Synergy B linked units (“B Linked Units”)
(collectively, “Linked Unitholders”) are referred to the announcement released by Vukile Property Fund
Limited (“Vukile”) on SENS on 5 December 2014, wherein Synergy Linked Unitholders were advised of the
posting of circular containing details of a mandatory offer by Vukile to acquire the remaining B Linked Units
that it does not already own (“Vukile B Offer”) and a comparable offer to acquire up to 100% of the A Linked
Units (“Vukile A Offer”) (collectively, “the Vukile Offers”) .
2. POSTING OF THE OFFEREE RESPONSE CIRCULAR
Linked Unitholders are hereby advised that the independent members of the board of directors of Synergy
(“the Independent Board”) has, today, posted a circular to Linked Unitholders (“the Synergy Response
Circular”) setting out, inter alia –
2.1. the opinion of PSG Capital, the independent expert appointed by the Independent Board (“the
Independent Expert”), to advise on whether the terms and conditions of the Vukile Offers are fair
and reasonable to Linked Unitholders;
2.2. the opinions and recommendations of the Independent Board in relation to the Offers; and
2.3. the comments of the Independent Board on certain statements contained in the Vukile Offer
Circular.
3. INDEPENDENT EXPERT’S OPINION
The Independent Expert has considered the terms and conditions of the Vukile Offers and is of the opinion
that both the Vukile B Offer and the Vukile A Offer are unfair but reasonable.
A copy of the opinion letter of the Independent Expert setting out, inter alia, the sources of information on
which it relied, its procedures, valuation approach, assumptions and opinion is included in the Synergy
Response Circular.
4. OPINION OF THE INDEPENDENT BOARD
The Independent Board has considered the terms and conditions of both the Vukile B Offer and the Vukile
A Offer and recommends rejection of both the Vukile B Offer and the Vukile A Offer.
The Independent Board’s recommendation has been made after taking into account the following factors.
4.1. The Independent Board’s opinion on the Vukile B Offer
4.1.1. The Vukile B Offer represents a discount to fair value
The Independent Expert has concluded that, based on the midpoint of the indicative range
per Synergy B Linked Unit prior to the Offers and the midpoint of the indicative market value
per Vukile Linked Unit, calculated like-for-like exchange ratios would equate to 1 Vukile
Linked Unit for every 2.16 Synergy B Linked Units. The Vukile B Offer therefore represents
a discount of 19.1% to the fair value per Synergy B Linked Unit based on the midpoint values
noted.
4.1.2. The Vukile B Offer consideration represents a discount to the 30 and 60-day volume
weighted average share price (“VWAP”)
The table below shows the market value of the Vukile B Offer calculated using the VWAP as
at the date immediately prior to the firm intention announcement.
Vukile Linked Synergy B Synergy B
Unit Linked Unit Linked Unit
(30-day VWAP) (60-day VWAP)
30-day VWAP on 4 Nov 2014 1 701 cents 654 cents -
60-day VWAP on 4 Nov 2014 1 689 cents - 665 cents
Equivalent price applying the - 637 cents 632 cents
ratio to the VWAP of Vukile on 4
Nov 14
Discount to the VWAP - (2.6%) (4.9%)
4.1.3. Risk of forfeiting the half-year distribution
Linked Unitholders must be mindful, that, to the extent that the Vukile B Offer closes prior to
the last day to trade to be eligible to receive Synergy’s distribution for the six months ending
31 December 2014, those Synergy Linked Unitholders who accept the Vukile B Offer will not
participate therein. Furthermore, unlike the parties from whom Vukile acquired the B Linked
Units in November 2014, Synergy Linked Unitholders who accept the Vukile B Offer will not
be entitled to participate in the distribution declared by Vukile on 26 November 2014, in an
amount of 59.086 cents per Vukile Linked Unit for the period from 1 April 2014 to 30
September 2014, which will be paid on 22 December 2014.
4.1.4. Diminished future distributions
Based on the guidance for the 2015 financial years issued by both Synergy and Vukile, Linked
Unitholders who accept the Vukile B Offer will suffer a material dilution in distribution per B
Linked Unit for the 2015 financial year, whether the Vukile B Offer goes unconditional as to
acceptances before or after the last day to trade in order to receive the distribution to Synergy
B Linked Unitholders for the six months ending 31 December 2014.
Furthermore, the Independent Board is of the view that, in the absence of unprecedented and
significantly above-market growth in Vukile’s distributions, this dilution in distributions will
persist well beyond the 2015 financial year.
4.1.5. Relinquishment of specialised focus
Synergy is a specialised retail property fund, focused on community and regional shopping
centers in high-growth, low LSM commuter nodes. In comparison, Vukile has a highly
diversified portfolio, which, according to its recently published interim results, comprises some
54% retail and 22% office with the balance comprising industrial and other. Linked Unitholders
accepting the Vukile B Offer will significantly dilute their exposure to this high growth sector,
which is, in fact, what attracted Vukile to Synergy.
4.1.6. Strong track record and active asset management
Under Synergy’s strong executive management team, Synergy has been successful in
growing its property portfolio by 197% to R2.4 billion since its listing in December 2011.
Synergy has a track record of meeting its distribution expectations and has enjoyed growth
in distributable income per B Linked Unit of 78.2% and 12% for the financial years ended 30
June 2013 and 30 June 2014, respectively, being the two full financial years since listing on
the JSE on 14 December 2011. The Independent Board is confident that Synergy’s asset
manager, Capital Land Asset Management’s, energetic and experienced team, from centre
management to executive level, will continue to deliver a superior, bespoke service to
Synergy in order for it to achieve its strategic and operational objectives.
4.1.7. Tax leakage for certain Linked Unitholders
The Independent Board also wishes to highlight to B Linked Unitholders that acceptance of
the Vukile Offer may, for South African tax residents that are not exempt from tax, be subject
to capital gains tax (for Linked Units held on the capital account) or income tax (where Linked
Units are not held on the capital account). Linked Unitholders should take the tax effect of the
acceptance of the Offer into account in deciding to accept the Vukile Offer, particularly in light
of the fact that the B Offer Consideration does not include a cash alternative and accordingly,
any tax cash payments due may need to be funded from other sources. The information in
this paragraph is provided as a general guide. The information provided in this
paragraph is not intended as comprehensive tax advice, nor does it purport to take
into account all of the considerations that may be relevant to a Linked Unitholder in
relation to the Vukile Offers. Linked Unitholders should consult their tax advisors for
advice on the particular tax consequences applicable to them.
4.2. The Independent Board’s opinion on the Vukile A Offer
4.2.1. The Vukile A Offer represents a discount to fair value
The Independent Expert has concluded that, based on the midpoint of the indicative range
per Synergy A Linked Unit prior to the Offers and the midpoint of the indicative market value
per Vukile Linked Unit, calculated like-for-like exchange ratios would equate to 1 Vukile
Linked Unit for every 1.49 Synergy A Linked Units. The Vukile A Offer therefore represents a
discount of 9.7% to the fair value per Synergy A Linked Unit based on the midpoint values
noted.
4.2.2. The Vukile A Offer consideration represents a discount to the 30 and 60-day VWAP
The table below shows the market value of the Vukile A Offer calculated using the VWAP as
at the date immediately prior to the firm intention announcement:
Vukile Linked Synergy A Synergy A
Unit Linked Unit Linked Unit
(30-day VWAP) (60-day VWAP)
30-day VWAP on 4 Nov 2014 1 701 cents 1 063 cents -
60-day VWAP on 4 Nov 2014 1 691 cents - 1 125 cents
Equivalent price applying the - 1 031 cents 1 023 cents
ratio to the VWAP of Vukile on
4 Nov 14
Discount to the VWAP - (3.0%) (9.0%)
4.2.3. Risk of forfeiting the half-year distribution
In addition, Linked Unitholders must be mindful, that, to the extent that the Vukile A Offer
closes prior to the last day to trade to be eligible to receive Synergy’s distribution for the six
months ending 31 December 2014, those Synergy Linked Unitholders who accept the Vukile
A Offer will not participate therein. Furthermore, Synergy Linked Unitholders who accept the
Vukile A Offer will not be entitled to participate in the distribution declared by Vukile on 26
November 2014, in an amount of 59.086 cents per Vukile Linked Unit for the period 1 April
2014 to 30 September 2014, which will be paid on 22 December 2014.
4.2.4. Diminished future distributions
Based on guidance for the 2015 financial years issued by Vukile, Linked Unitholders who
accept the Vukile A Offer will suffer a material dilution in distribution per A Linked Unit for the
2015 financial year, whether the Vukile A Offer goes unconditional as to acceptances before
or after the last day to trade in order to receive the distribution to Synergy A Linked Unitholders
for the six months ending 31 December 2014.
Furthermore, the Independent Board is of the view that, in the absence of unprecedented and
significantly above-market growth in Vukile’s distributions, this dilution in distributions will
persist well beyond the 2015 financial year.
4.2.5. Risk and return profile
The attention of Synergy A Linked Unitholders is drawn to the very different risk profiles of
the Synergy A Linked Unit and the Vukile Linked Units to be issued pursuant to the Vukile A
Offer. In terms of the debenture trust deed applicable to A Linked Unitholders, A Linked Units
enjoy a preferred status in relation to the calculation of interest on the debenture forming part
of the A Linked Unit (“A Debenture”). To the extent that Synergy has generated sufficient
distributable income, in respect of financial years ending 30 June 2014 to 30 June 2017,
inclusive, the distribution per A Debenture is equivalent to 105% of distribution in respect of
the immediately preceding financial year. For financial years ending 30 June 2018 until
repayment of the A Debentures, the distribution per A Debenture will be equivalent to the
prior year’s distribution per A Debenture, escalated by an amount equal to the lesser of 5%
and the most recently available CPI figure. The Vukile Linked Units that will be issued to
Synergy A Linked Unitholders that accept the Vukile A Offer will enjoy no such preference in
relation to distributions and will rank pari passu with all other Vukile Linked Units in issue. A
Linked Unitholders that invested in Synergy for the bond-like risk profile of the A Linked Unit
will not enjoy a similar risk profile in the Vukile Linked Units issued as consideration for the
Vukile A Offer, which units have equity qualities.
4.2.6. Tax leakage for certain Linked Unitholders
The Independent Board similarly also wishes to highlight to A Linked Unitholders that
acceptance of the Vukile Offer may, for South African tax residents that are not exempt from
tax, be subject to capital gains tax (for Linked Units held on the capital account) or income
tax (where Linked Units are not held on the capital account). Linked Unitholders should take
into account the tax effect of the acceptance of the Offer into account in deciding to accept
the Vukile Offer, particularly in light of the fact that the A Offer Consideration does not include
a cash alternative and accordingly, any tax cash payments due may need to be funded from
other sources. The information in this paragraph is provided as a general guide. The
information provided in this paragraph is not intended as comprehensive tax advice,
nor does it purport to take into account all of the considerations that may be relevant
to a Synergy Linked Unitholder in relation to the Vukile Offers. Linked Unitholders
should consult their tax advisors for advice on the particular tax consequences
applicable to them.
5. UPDATED PRO FORMA FINANCIAL EFFECTS
Synergy Linked Unitholders are referred to the pro forma effects on Vukile’s statement of financial position
and statement of comprehensive income as contained in the offer circular posted by Vukile on 5 December
2014 (“Vukile Offer Circular”). The financial statements of Synergy are not impacted by the Offer, on a pro
forma basis or otherwise.
The pro forma financial effects of the Offers on Synergy B Linked Units and Synergy A Linked Units as set
out below are shown for illustrative purposes only and to provide information about how the Offers may
have affected the earnings, headline earnings, net asset value, tangible net asset value and distributions
attributable to the Synergy B Linked Units and Synergy A Linked Units held by those Synergy Linked
Unitholders who accept the Offer(s). Because of their nature, these pro forma financial effects may not fairly
present the financial impact on those Synergy Linked Unitholders who accept the Offer(s).
The table below sets out the pro forma financial effects of the offers on a Synergy B Linked Unitholder who
accepts the Vukile B Offer, and on a Synergy A Linked Unit who accepts the Vukile A Offer, based on the
financial results of Synergy for the six month period ended 30 June 2014, assuming that the Offers had
been implemented on 1 April 2014 for purposes of the statement of comprehensive income and on
30 September 2014 for purposes of the statement of financial position.
The reporting accountant appointed by Synergy, Moore Stephens BKV Inc., has provided a reasonable
assurance report on the pro forma financial effects. A copy of the reasonable assurance report is included
in the Synergy Response Circular, posted today, or can be viewed at the offices of Synergy during
ordinary business hours for a period of 30 business days following the date of this announcement.
Synergy B Linked Unit Before the Offers After the Offers (b) Change
(a)
(cents) %
(cents)
NAV per linked unit 873 610 (30.1)
TNAV per linked unit 873 594 (32.0)
Earnings per share 118.62 40.10 (66.2)
Earnings per linked unit 148.66 66.04 (55.6)
Headline earnings per 26.77 24.58 (8.2)
linked unit
Distribution per linked unit 30.03 24.18 (19.5)
Synergy A Linked Unit Before the Offers After the Offers (b) Change
(a)
(cents) %
(cents)
NAV per linked unit 1 099 963 (12.4)
TNAV per linked unit 1 099 937 (14.7)
Earnings per share 118.62 63.30 (46.6)
Earnings per linked unit 163.08 104.24 (36.1)
Headline earnings per 41.19 38.79 (5.8)
linked unit
Distribution per linked unit 44.45 38.16 (14.1)
Notes and assumptions:
a) The financial information in the “Before the Offers” column has been prepared based on the financial results
of Synergy for the six-month period ended 30 June 2014, as extracted from Synergy’s audited annual
results for the 2014 financial year and Synergy’s interim financial results for the period ended 31 December
2013.
b) The financial information in the “After the Offers” column has been prepared based on Vukile’s pro forma
financial information as contained in the Vukile Offer Circular for the six-month period ended 30 September
2014 and applying the exchange ratio offered by Vukile for the Synergy B and Synergy A Linked Units of
2.67 and 1.65 respectively in order to arrive at the pro forma financial effects for Synergy Linked Unitholders
who accept the Offer.
15 December 2014
Corporate Advisor and Transaction Sponsor
Questco (Pty) Limited
Independent Expert
PSG Capital
Reporting Accountant
Moore Stephens BKV Inc.
Date: 15/12/2014 02:47:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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