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The acquisition of international multi-channel retailer Phase Eight and withdrawal of cautionary announcement
THE FOSCHINI GROUP LIMITED
(Incorporated in the Republic of South Africa)
(Registration number: 1937/009504/06)
Ordinary share code: TFG
Ordinary share ISIN: ZAE000148466
Preference share code: TFGP
Preference share ISIN: ZAE000148516
(“TFG” or “the Company”)
THE ACQUISITION OF INTERNATIONAL MULTI-CHANNEL RETAILER PHASE EIGHT AND
WITHDRAWAL OF CAUTIONARY ANNOUNCEMENT
1. Introduction
TFG announces it has entered into an agreement to acquire c.85% of Poppy Holdco Limited,
which trades as Phase Eight (www.phase-eight.com) and is the holding company of Phase
Eight (Fashion & Designs) Limited (“Phase Eight”) (“the Acquisition”). TFG has acquired the
group from funds advised by TowerBrook Capital Partners L.P., who are exiting the business
completely, and management, who will become c.15% shareholders alongside TFG in a new
holding company.
Through put/call arrangements, it has been agreed that TFG will have the right to acquire and
management the right to sell all shares held by management following completion of the
Acquisition in three equal tranches, on the earlier of (i) the publication of the audited accounts
of the group for each of the fourth, fifth and sixth years following completion of the Acquisition
or (ii) 6 months following the fourth, fifth and sixth year anniversaries of completion of the
Acquisition. The exercise of these put/call arrangements would result in TFG owning 100% of
the shares in Phase Eight.
2. Overview of Phase Eight
Phase Eight was established in 1979 and operates as a retailer of clothing, footwear and
accessories for women. Phase Eight’s target market is 35-55 year old women in the ABC1
demographic which, in South African terms, would broadly translate into the mid to upper LSM
grouping. The clothing style is contemporary and elegant and products are of a high quality.
Phase Eight has 107 stores and 203 concessions throughout the United Kingdom and Ireland
as well as 15 stores and 113 concessions in 16 international markets including Germany,
Switzerland, Sweden, the Netherlands, the Middle East, Hong Kong, Singapore, Malaysia and
Australia. In total Phase Eight trades out of 438 outlets globally. Phase Eight has an
established footprint in department stores in the countries in which it operates with strong
relationships with John Lewis, House of Fraser and Debenhams in the United Kingdom and
partners including Ahlens, Alshaya, Breuninger, de Bijenkorf, El Palacio de Hierro, Karstadt,
Manor and Tangs in international markets.
In addition to its established UK base, Phase Eight has expanded successfully into international
markets over the past three years using a business model that is cost effective, capital light and
ensures market appropriate solutions. The current management and operational structure of
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Phase Eight is designed to continue this expansion into several new jurisdictions and significant
international growth is anticipated for the business.
3. Rationale for the Acquisition
Phase Eight has achieved consistent growth in sales and profitability through continuous
incremental evolution of the brand’s operating model, product breadth and routes to market.
Phase Eight satisfies four specific criteria in TFG’s expansion strategy:
- A good track record – being highly profitable and cash generative;
- Multi-channel business - with an established e-commerce platform (currently 17% of
revenue);
- An experienced and self-sufficient management team - with senior management having on
average in excess of 10 years’ experience in operating the business; and
- Strong growth prospects – arising from its established position in the UK and opportunities
to further expand in international developed and emerging markets.
In addition, the Phase Eight acquisition has the following attractive features and benefits for
TFG:
- Impressive track record of growing sales (18.9% compound average growth over the past
5 years) and increasing market share; and substantial EBITDA growth (27.5% compound
average growth over the past 5 years)
- Scalable business model which allows significant footprint growth and roll out of outlets
without excessive capex requirements;
- Strong earnings enhancement anticipated from continued international expansion;
- Enhancement of the geographic diversification of the TFG group by increasing its
operating presence from 8 countries to 26 countries;
- The opportunity to take certain TFG brands outside Africa using Phase Eight’s proven
expansion methodology;
- Expansion of TFG’s outlet footprint from 2 205 to 2 643;
- Alignment with TFG’s business model being a product category and market segment
which is well understood by TFG; and
- Increases the proportion of cash sales in the overall TFG sales mix to c.54% on an
annualised basis.
TFG believes that the product and value offering of Phase Eight will combine exceptionally well
with TFG’s current brands, with the store and concession portfolio creating a potential platform
for the expansion of TFG brands internationally. Consideration will be given to introducing
Phase Eight into South Africa on a basis that complements TFG’s existing operations.
4. Acquisition consideration
The Acquisition has been fully hedged. All figures in this announcement are calculated using a
ZAR:GBP exchange rate of 18.29 being the relevant hedged rate.
The Acquisition of Phase Eight is at an enterprise value of GBP238m (ZAR4 353m) with an
equity value of GBP159.2m (ZAR 2 912m) after taking into account net debt and related
adjustments. TFG acquires c.88% of the equity value for a consideration of GBP140m (ZAR 2
561m), excluding transaction costs. Taking into account the c.3% equity set aside for
management incentivisation, TFG’s effective shareholding is c.85%. TFG is financing the
Acquisition through a combination of proceeds from the sale of RCS Group and South African
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cash resources. In addition, the existing indebtedness of Phase Eight has been refinanced
through a new UK facility of GBP80m which has been raised on a non-recourse basis to TFG.
As referred to above, TFG will have the right to acquire and management the right to sell all the
shares held by management in three equal tranches following completion of the Acquisition.
The value of the management shares will be calculated according to a c.9.36x EBITDA multiple
applied to the audited financial results of Phase Eight at the applicable time.
5. Net assets acquired and profits attributable to those assets
After adjusting for shareholder funding, the Net Assets of Phase Eight at 31 January 2014
(being the date of the most recent audited financial statements) were GBP44.4m (ZAR811.4m).
For the year ended 31 January 2014, Phase Eight generated sales of GBP140.7m (ZAR2
573m) and EBITDA of GBP23.8m (ZAR435.5m).
TFG will consolidate 2 months of Phase Eight trading in its 31 March 2015 results. The impact
of these trading results (excluding one-off acquisition costs) is not expected to have a material
impact on TFG’s earnings for the 2015 financial year. As TFG did not issue any shares to fund
the Acquisition and Phase Eight earnings are expected to approximate incremental costs, the
Acquisition is anticipated to be earnings-neutral in the 2016 financial year. Thereafter the
Acquisition is anticipated to be accretive as earnings are expected to exceed incremental costs.
This statement is based on management forecasts which have not been audited by TFG’s
auditors and is provided for information only.
6. Conditions precedent
The Acquisition is unconditional and is not subject to any regulatory approvals.
7. Effective date
The effective date of the Acquisition is 15 January 2015.
8. JSE categorisation
The Acquisition is categorised as a category 2 transaction in terms of section 9.5(a) of the JSE
Listings Requirements and accordingly no shareholder approval is required.
9. Acquisition presentation
Shareholders are referred to the acquisition presentation on the TFG website
(www.tfglimited.co.za) for additional information regarding the Acquisition.
10. Withdrawal of cautionary announcement
Shareholders are advised that, as a result of the publication of this announcement, the
cautionary announcement is now withdrawn and caution is no longer required to be exercised
by shareholders when dealing in their shares.
Cape Town
15 January 2015
Joint financial advisors to TFG
Rand Merchant Bank (A division of FirstRand Bank Limited)
Gleacher Shacklock L.L.P.
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Legal advisors to TFG
ENS Africa
Berwin Leighton Paisner L.L.P.
Sponsor to TFG
UBS South Africa (Proprietary) Limited
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