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SUN INTERNATIONAL LIMITED - Proposed merger of the Latin American assets of Sun International with Dreams S.A.

Release Date: 13/02/2015 17:00
Code(s): SUI     PDF:  
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Proposed merger of the Latin American assets of Sun International with Dreams S.A.

Sun International Limited
(Registration number: 1967/007528/06)
Share code: SUI
ISIN: ZAE000097580
("Sun International" or "the Company")

PROPOSED MERGER OF THE LATIN AMERICAN ASSETS OF SUN INTERNATIONAL WITH DREAMS S.A.
("DREAMS")

1.   INTRODUCTION

     Sun International has previously stated its strategic intention to grow its Latin American portfolio of assets
     which consists of Monticello in Chile, the Ocean Club Casino in Panama and a casino currently under
     development in Cartagena, Colombia, which is expected to be operational in the first half of 2015 ("Latam
     portfolio"). Sun International owns 100% of the businesses in Panama and Cartagena and has recently
     increased its interest in Monticello to 99% in order to have control over the strategic direction of these
     assets, including the possibility of merging them with others in order to create a more diverse and
     meaningful portfolio.

     Sun International has on 13 February 2015 reached agreement and concluded a Memorandum of
     Understanding ("MOU") with the shareholders of Dreams S.A. ("Dreams") to merge its casino and hotel
     portfolio of assets with Sun International's Latam portfolio ("the Proposed Merger"). It is anticipated that
     the merger of assets will give Sun International approximately 50% of the combined entity ("the Merged
     Entity"). As part of the Proposed Merger, Sun International will increase its shareholding to 55% and
     consolidate the results of the Merged Entity. The effective date of the Proposed Merger of assets will be
     upon the fulfillment or waiver of the conditions precedent detailed in paragraph 5.2 below.

2.   BACKGROUND TO DREAMS

     Dreams is a Chilean based company and is a leader in the gaming and entertainment industry with
     operations in Chile and Peru. The Dreams properties have similar components to those of Sun
     International, including hotels, casinos, entertainment and food & beverage facilities. The company has
     built a strong base in Chile where it now has six casinos and it has more recently expanded into Peru where
     it operates four smaller gaming establishments focused on Lima, with well advanced plans to expand in
     this region. The Dreams portfolio of properties comprises:

                               CASINO                          HOTEL                        FOOD & BEVERAGE
                                        Table              Convention Centre     SPA
PROPERTY                   Slot
                         machines       Games     Rooms         Delegates        sqm     Restaurant     Bar/Clubs
CHILE                         2,736        147       378                5,300    6,500           12              9
Iquique                         700         22         -                    -        -              -            1
Temuco                          617         36        96                1,500    1,700             5             2
Valdivia                        380         22       104                1,200    1,200             2             2
Puerto Voros                    468         36        50                1,200    1,500             2             2
Coyhaique                       150         11        40                  400      500             1             1
Punta Arenos                    421         20        88                1,000    1,600             2             1
PERU                          1,141         16         -                    -        -             2             2
Lima (New York)                 496         12         -                    -        -             1             1
Lima (Eden)                     200           -        -                    -        -              -             -
Lima (Mirosol)                  178          4         -                    -        -              -             -
Lima (Pachanga)                 267           -        -                    -        -             1             1
Total                         3,877        163       378                5,300    6,500            14             11

     Dreams has a strong locally based executive management team that has been involved in building the
     business from inception and has extensive knowledge of the wider Latin America region. This executive
     team will lead the Merged Entity.

     The shareholders of Dreams comprise the Fischer Family which holds a 51% interest with the remaining
     49% owned by Entretenimientos del Sur (the "Fund") a private equity investment vehicle controlled by
     Citigroup and currently advised by the Rohatyn Group. The Fischer Family is a well-established Chilean
     family with many business interests including the development of the Dreams portfolio over a period of
     more than 15 years. The Fischer Family wishes to remain as medium to long term shareholders in the
     Merged Entity as an anchor partner for the region and the Fund and its adviser, which have an in-depth
     knowledge of the region are seeking to grow the business and increase its value as part of the Fund's
     ultimate exit strategy.

3.   PROFILE OF THE MERGED ENTITY

     The Merged Entity will comprise a portfolio of premier assets, initially consisting of:

                                    CASINO                         HOTEL                       FOOD & BEVERAGE
                                                                  Convention
                                             Table                  Centre          SPA
                                Slot
                              machines       Games     Rooms       Delegates         MR    Restaurant    Bar/Clubs
Chile                              4,591        229       533            7,100    6,987            19           15
  Monticello                       1,855         82       155            1,800      487             7            6
  Dreams operations                2,736        147       378            5,300    6,500            12            9
Peru (Dreams)                      1,141         16                                                 2            2
Panama (Sun)                         600         34                                                 3            2
Colombia (Sun)                       310         16                                                 1            1
Total                              6,642        295       533           7,100     6,987            25           20

     In the year ended 31 December 2014, based on the unaudited results, the combined businesses generated
     EBITDA of approximately US$100 million.

     Given the strong local executive management there will be no requirement for significant day-to-day
     support from Sun International Management Limited and, accordingly, there will be no need for a separate
     management contract.

4.   RATIONALE FOR THE PROPOSED MERGER

     Over the past years, Sun International has made a substantial balance sheet commitment to Latin America
     and assembled an attractive portfolio of assets which forms the basis to leverage off its growth strategy in
     the region to form a business of scale. Sun International believes that in order to achieve critical mass in
     Latin America the Company needs to make acquisitions or merge its assets with another meaningful player
     in the region. In addition to expediting its growth strategy, a merger also diversifies Sun International's
     concentration risk. It has been looking for a partner in Latin America for some years and Dreams provides:

     -   a strong presence in Chile, which is a country that Sun International understands well and desires
         further exposure to. All Chilean casino licenses have already been allocated and so acquisition/merger
         opportunities are all that remain in order to expand in this jurisdiction;

     -   an expansion strategy that has seen Dreams grow a presence in Peru, which is complementary to Sun
         International's expansion into Panama and Colombia;

     -   an executive management team that comes from Latin America and has significant operational
         experience in the region; and

     -   strong local shareholders, in the form of both the Fischer family who have been in the industry for
         more than a decade and the Fund, which has an in-depth knowledge of the region and is seeking to
         grow the business and increase its value as part of its ultimate exit strategy. These partners are
         experienced investors in casino assets in Latin America and will bring a wealth of experience in adding
         value to the merged portfolio.

     From a Dreams perspective, its strategic objective is to be a regional leader in the casino and
     entertainment industry and the combination of Dreams and Sun International immediately achieves this
     goal. The introduction of Sun International as a long term strategic shareholder with an aligned vision gives
     significant momentum to the company's growth aspirations and also opens the possibility for a medium
     term exit by the Fund.

     The Proposed Merger results in the creation of Latin America's largest gaming group which will have the
     profile, critical mass and balance sheet to expand to the rest of the continent, make meaningful
     acquisitions and take on larger projects. The Proposed Merger should also unlock synergies between the
     combined Chilean properties as a result of its scale.

     The Merged Entity will be structured with a relatively low level of gearing (below 2x EBITDA) which will
     ensure that it is self-sustaining in the near term and will operate without having to leverage off Sun
     International's South African balance sheet.

5.   SALIENT TERMS OF THE PROPOSED MERGER

     5.1. Mechanics of the Proposed Merger

         The Sun International and Dreams portfolios were valued as a merger of equals utilising a relative
         EBITDA multiple basis. The valuation benchmark used was the recent acquisition by Sun International
         of a significant additional shareholding in Monticello. The valuation factored in specific risks such as
         the remaining term of the Dreams municipal casino licences in Chile. Given that Sun International's
         Panama property only opened at the end of 2014, it was included at cost and an adjustment (up or
         down) will be made if the 2016 EBITDA of the property falls outside an agreed range. The Cartagena
         development (currently under construction with an estimated cost of US$30 million) will be fully
         funded from the cash resources of the Merged Entity.

         The valuations are based on respective performance for the year ended 31 December 2014 and are
         currently being finalised. Based on preliminary valuations it is anticipated that after the Proposed
         Merger is completed Sun International will hold an approximately 50% interest in the Merged Entity.
         In order to consolidate the Merged Entity and entrench its position as the long term strategic
         shareholder, Sun International will acquire additional shares that will increase its shareholding to 55%.
         These shares will be acquired in the Merged Entity by way of a subscription of new shares into the
         Merged Entity (anticipated to be approximately US$25 million) and an acquisition of shares from the
         Dreams shareholders (anticipated to be approximately US$40 million).

         It is the intention of the parties, provided that market conditions are appropriate, to list the Merged
         Entity in terms of an Initial Public Offering ("IPO") on the Santiago Stock Exchange in Chile or another
         appropriate public market, within 2 years from the date that the Proposed Merger is consummated.
         This would create liquidity in the shares of the Merged Entity and would enable the Fund to exit its
         shareholding if it desires to do so. Sun International intends to maintain its shareholding above 50% in
         the event of a listing.

         If at any time after 18 months from the Proposed Merger the market conditions are appropriate and
         Sun International decides for its own strategic reasons not to proceed with an IPO then both the Fund
         and the Fischer Family will have a put option of their interest in the Merged Entity to Sun
         International. If for any reason an IPO has not taken place in 2 years, the Fund will have a put option of
         its interest in the Merged Entity to Sun International. If Sun International has not listed the Merged
         Entity within 5 years then the Fischer Family has a put option to Sun International for its interest in the
         Merged Entity. The guidelines for what is deemed appropriate market conditions and the basis of
         valuing the put options have been agreed to and are contained in the MOU.

     5.2. Conditions precedent

         The Proposed Merger is conditional upon the fulfilment or waiver of conditions precedent normal for
         a transaction of this nature namely:
          -   entering into the definitive agreements and the approval of the parties' respective boards of
              directors and shareholders;
          -   satisfactory outcome of the due diligence of the respective businesses by Sun International and
              Dreams;
          -   the approval of the applicable regulatory bodies including gambling boards, South African Reserve
              Bank and competition authorities in the various jurisdictions in which the businesses operate in,
              which approval, if conditional, is to the satisfaction of the parties;
          -   waiver of the rights of lenders, who have the right to accelerate repayment of loans as a result of
              the Proposed Merger or the parties securing replacement financing for these loans; and
          -   approval from Sun International shareholders in accordance with the JSE Limited ("JSE") Listings
              Requirements.

      5.3. Net assets acquired and profits attributable to those assets

           The net asset value of the Dreams portfolio per the unaudited management accounts as at
           30 September 2014 was US$228.0 million (ZAR2 576.0 million). The EBITDA associated with these
           assets for the year then ended was US$53 million (ZAR600 million) and the profit after taxation was
           US$14.7 million (ZAR 166.6 million).

6.   CATEGORISATION OF THE PROPOSED MERGER

     The Proposed Merger is classified as a category 1 transaction in terms of section 9 of the JSE Listings
     Requirements, requiring shareholder approval.

7.   CIRCULAR TO SHAREHOLDERS

     Sun International shareholders are advised that a circular will be issued to shareholders in due course
     containing further details of the Proposed Merger, together with a notice of general meeting to vote on
     the resolutions required to implement the Proposed Merger.


Sandton
13 February 2015

Joint Financial Adviser and Sponsor
RAND MERCHANT BANK (A division of FirstRand Bank Limited)

Joint Financial Adviser
LARRAIN VIAL SERVICIOS PROFESIONALES LIMITADA

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