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Detailed cautionary in respect of an acquisition and renewal of cautionary
HUGE GROUP LIMITED
(Registration number 2006/023587/06)
Share code: HUG ISIN: ZAE000102042
(“Huge” or “the Company”)
DETAILED CAUTIONARY IN RESPECT OF AN ACQUISITION AND RENEWAL OF
CAUTIONARY ANNOUNCEMENT
Further to the cautionary announcements dated 28 April 2015, 10
June 2015, 22 July 2015, 30 July 2015, 10 September 2015 and 23
October 2015 respectively regarding discussions relating to
strategic acquisitions which would require the approval of the
shareholders of Huge, shareholders are advised that Huge has
signed a Memorandum of Agreement with Centratel Group
Investments Proprietary Limited and the Trustees for the time
being of the Centracom Employees Trust (collectively the
“Relevant Shareholders”).
TERMS OF THE MEMORANDUM OF AGREEMENT
In terms of the Memorandum of Agreement, Huge and the Relevant
Shareholders (collectively “the Parties”) are considering a
transaction (the “Proposed Transaction”), the core commercial
terms of which are as follows:
- Huge shall purchase 100% of the issued share capital of
Centracom Proprietary Limited (“Centracom”) and the total
amount owing by Centracom to the Relevant Shareholders on
shareholders’ loan accounts from the Relevant Shareholders
for a total purchase consideration of R81 600 000 (the
“Purchase Consideration”). Based on the Purchase
Consideration, the Proposed Transaction will likely be a
category 2 transaction for the Company;
- 90% (ninety percent) of the Purchase Consideration shall
be settled by Huge through the issue of vendor shares
(“Vendor Shares”) to the Relevant Shareholders.
- The Vendor Shares will be that number of Huge ordinary
shares as is equivalent to the Purchase Consideration
divided by the issue price (“Issue Price”).
- The Issue Price will be determined by Huge in its sole
discretion , but will be a price that is no more than (i)
a 10% discount to the 30 business day weighted average
traded price prior to the date that the placing is
authorised by the directors of Huge or (ii) a 10% discount
to the 3 business day weighted average traded price prior
to the date of the placing of the shares so issued;
- the Relevant Shareholders shall be entitled to elect (the
“Election”) on written notice to Huge delivered on the
first business day after the date of fulfilment or waiver
of the conditions precedent to the transaction agreements
(“Transaction Agreements”) relating to the Proposed
Transaction that Huge shall procure that the Vendor Shares
shall be placed with third parties (“Placement Parties”)
on the basis that the Placement Parties will purchase the
Vendor Shares from the Relevant Shareholders at the Issue
Price, such that the aggregate cash consideration payable
by the Placement Parties to the Relevant Shareholders
shall be equal to 90% of the Purchase Consideration; and
- 10% (ten percent) of the Purchase Consideration shall be
paid by Huge on the closing date of the Transaction
Agreements in cash, free of deduction or set off, to the
trust account of an escrow agent.
In terms of the Memorandum of Agreement, the Relevant
Shareholders have granted Huge an exclusivity period of 180
days in which to negotiate the Transaction Agreements and close
the Proposed Transaction.
CONDITIONS PRECEDENT TO THE MEMORANDUM OF AGREEMENT
The Memorandum of Agreement is subject to the following
conditions precedent:
- Huge delivering a certified copy of a resolution of the
board of directors of Huge authorising Huge to conclude
the Memorandum of Agreement to the Relevant Shareholders
on or before 17h00 on Friday, 30 October 2015;
- Huge delivering expressions of interest (“Expressions of
Interest”) from third parties interested in participating
as Placement Parties in respect of the Vendor Shares on or
before 17h00 on Friday, 27 November 2015; and
- the Relevant Shareholders (acting reasonably) confirming
in writing that the Expressions of Interest are acceptable
to them on or before 17h00 on Friday, 27 November 2015.
CONDITIONS PRECEDENT TO THE TRANSACTION AGREEMENTS
The Proposed Transaction and the coming into force and effect
of the resultant Transaction Agreements shall be subject to the
following conditions precedent:
- the delivery by the Relevant Shareholders to Huge of a
certified copy of a resolution of its board of directors
or trustees (as the case may be) authorising the
conclusion of the Transaction Agreements;
- the delivery by Huge to the Relevant shareholders of a
certified copy of a resolution of its board of directors
authorising the conclusion of the Transaction Agreements;
- the receipt of all shareholder and regulatory approvals
required for the implementation of the Transaction
Agreements, either unconditionally or subject to
conditions as are reasonably acceptable to all parties
including the approval of the following to the extent
required:
- the JSE;
- the TRP;
- ICASA; and
- the Competition Authorities, as applicable.
- in the event that the Relevant Shareholders shall have
exercised the Election, the procuring by Huge of
unconditional and irrevocable undertakings from Placement
Parties in favour of the Relevant Shareholders to purchase
the Vendor Shares at no less than the Issue Price supported
by such proof of funding as may be required under the Listing
Requirements and reasonably acceptable to the Relevant
Shareholders;
- the procuring by the Relevant Shareholders of access to the
books and records of Centracom in order for Huge to complete
the Due Diligence;
- the completion by Huge of a comprehensive legal, financial
and technical due diligence investigation into the business
and affairs of Centracom and its subsidiary companies (“Due
Diligence”) within 45 days of the signature date of the
Transaction Agreements;
- the delivery by Huge to the Relevant Shareholders of a
written notification that Huge is satisfied with the results
of the Due Diligence within 45 days of the signature date of
the Transaction Agreements;
- on or before the last business day prior to the closing date
of the Transaction Agreements, there has not occurred any:
- revocation, or amendment of the terms and/or conditions
of any licence or agency or distribution agreements in
respect of the operations of Centracom or any subsidiary
company of Centracom regarded by Huge in its sole
discretion as being material to Huge; or
- change in legislation or licensing dispensation
applicable to the operations of Centracom or any
subsidiary company of Centracom regarded by Huge in its
sole discretion as being material to Huge; or
- other act or event, which, upon occurrence, has or is
reasonably likely to have, when measured on the day
prior to the closing date of the Transaction Agreements
(individually or in aggregate), a material adverse
effect (as defined);
- the conclusion of restraint of trade agreements with certain
key employees of Centracom identified by Huge in its sole
discretion and subject to terms customary in South Africa for
agreements of this nature;
- where such consent is necessary, the consent for the
transactions contained in the Transaction Agreements being
obtained from the relevant counterparties to certain key
contracts identified during the course of the Due Diligence;
The transactions contemplated in the Transaction Agreements
shall be subject to warranties customary in South Africa for
transactions of their nature. In addition, the Transaction
Agreements shall contain warranties that in the period
between the signature date of the Transaction Agreements and
the closing date of the Transaction Agreements:
- Centracom has not proposed, declared or paid any
distribution (including, without limitation, a dividend)
to its shareholders; and
- the shareholders of Centracom have not passed any
special resolution (other than to approve of and give
effect to the Proposed Transaction).
DESCRIPTION OF THE BUSINESS OF HUGE TELECOM
Huge Telecom Proprietary Limited (“Huge Telecom”), the
principal operating subsidiary of Huge, provides communications
services to corporate organisations and residential customers
in South Africa. It is the only significant provider in the
market of connectivity services using GSM and fixed-cellular
customer premises equipment, which is a fixed-wireless service
that it calls ‘Fixed Cellular Routing’ or ‘FCR’. Huge Telecom’s
connectivity services integrate seamlessly with private
automated branch exchanges (“PABXs”).
The advantage of Huge Telecom’s service offering lies in its
simplicity and ease of installation and accordingly Huge
Telecom’s network maintenance costs are considered to be the
lowest in the market and result in higher operating profit
margins. Monthly service fault requests in the last 12 months
have averaged less than 0.16% of the total installed telephone
line base.
Huge Telecom builds and controls a ‘last mile’ network or
‘local loop’ between its customers and the mobile network
operators. The last mile of any network is the touch point
with the end-customer and commentators therefore suggest that
this can be considered to be that part of a communications
network with the greatest value. The cost of installing a
subscriber telephone line is approximately R5 000 and Huge
Telecom’s last mile network therefore represents a significant
infrastructure investment.
FCR is a viable, cost-effective substitute for fixed-line
public switched telephone (“PST”) networks like those provided
by Telkom. Huge Telecom is partnering with Telkom by providing
Telkom Mobile’s connectivity as a substitute for Telkom’s
fixed-line or PST connectivity.
Huge Telecom’s connectivity services are distributed primarily
to the SMME market. As it succeeds in demonstrating the
mainstream characteristics of its services and as the adoption
rate of the solution improves, penetration into the mid and
upper segments of the market is increasing.
Huge Telecom’s dominance at present lies in the SMME segment of
the market - this segment is recognised as the last unconquered
frontier or the ‘holy grail’ of customers because of the high
level of penetration in the enterprise market.
Huge Telecom provides services to over 11 000 customers.
Huge Telecom has no more than a 1.3% exposure to its single
largest customer and accordingly, customer concentration risk
is very low.
Huge Telecom has more than 500 Business Partners, each of which
employ a sales force, and this significant distribution
capability underpins Huge Telecom’s true potential as a
distribution business.
The value in Huge Telecom lies in its base of annuity revenues
and the resultant cash flow generation, as well as in its last
mile network which connects to its corporate and residential
customers.
DESCRIPTION OF THE BUSINESS OF CENTRACOM
Centracom aggregates converged voice, connectivity and cloud
solutions services utilising multiple leading technology brands
and is engaged in the provision of these services within South
Africa. Centracom offers connectivity through DSL, Diginet,
Fibre, LTE and Wireless and aggregates its connectivity from a
number of networks into its MPLS core, allowing it to offer
cost-effective pricing through economies of scale. It offers
its customers an infrastructure footprint covering 98% of South
Africa. Centracom has partnered with leading hardware and
network providers to deliver an infrastructure solution that is
first-class, resilient, secure, competitive and, most
importantly, that promotes business growth.
Centracom’s cloud solutions are hosted in multiple data
centres, ensuring that customers have access anytime and
anywhere and are managed and supported at the Centracom
national operations centre.
RATIONALE FOR THE TRANSACTION
Huge is intent on supplementing its high rate of organic growth
by growing earnings aggressively through strategic
acquisitions.
Huge’s proposed acquisition of Centracom is expected to result
in:
1. An increase of 20% in its customer base to more than 13
000 customers;
2. An increase of more than 50% in Huge’s number of billed
minutes;
3. Enhanced annuity revenue cash flows;
4. A substantial increase in the number of connections to
corporate and residential customers;
5. An increase of at least 20% in the number of resellers
(Business Partners);
6. Improved purchasing power with upstream suppliers;
7. An alternative last mile technology choice and the ability
to aggressively compete with voice over Internet protocol
(VoIP) competitors;
8. A platform to provision additional products and services
such as data and cloud based services to its existing
customer base;
9. The ease of integration of the operations of each company
in each of the geographical locations in which Huge
operates;
10. Enhanced intellectual property and human capital; and
11. Significant economies of scale which are achievable
through the elimination of duplicate costs.
In summary, an acquisition of Centracom will provide benefits
which will result from economies of scale and which are
expected to be significant and immediately realisable. The
levels of synergy in terms of eliminating duplicated costs
within the two businesses are high and the board of directors
of Huge therefore believes that the Centracom Purchase
Consideration is priced at a historical price-earnings multiple
of approximately 6.6 when measured for the year ended 28
February 2015.
Based on Centracom’s revenues for the twelve months to 28
February 2015 and the Company’s most recently published
results, had the Proposed Transaction taken place at the
beginning of that financial year, it would have the had the
effect of increasing Huge’s revenues by 42%. This statement,
which is the responsibility of the directors, is for
illustrative purposes only and to provide information about how
the Proposed Transaction could have affected the financial
results of Huge for twelve months to 28 February 2015.
However, this may not be a fair reflection of what the effect
on Huge’s financial results could have been.
Shareholders are advised that any forecast financial
information that may be contained in this announcement has not
been reviewed by the Group’s auditors.
FINANCIAL INFORMATION
As at 28 February 2015, Centracom’s net asset value was
R2.079m, it generated profit after tax of R4.382m and cash flow
from operations of R8.681m.
JSE LIMITED: LISTINGS REQUIREMENTS: CONTINUING OBLIGATIONS
If Huge Proposed Transaction is implemented, Huge will have an
obligation to ensure that the memorandum of incorporation of
Centracom is aligned with its own and as such the Proposed
Transaction will not be permitted to frustrate or relieve Huge
in any way from complying with its obligations in terms of the
JSE Limited’s Listings Requirements.
RENEWAL OF CAUTIONARY
Details announced above relate to the Proposed Transaction.
However, shareholders are advised to continue to exercise
caution when dealing in the Company’s securities until the
conditions precedent to the Memorandum of Agreement have been
fulfilled and the Transaction Agreements are formalised.
In addition, the Company is involved in other negotiations with
additional parties which may affect the price at which the
Company’s securities trade.
Certain of these discussions are also now at an advanced stage
and accordingly, shareholders are again advised to continue to
exercise caution when dealing in the Company's securities until
a further announcement is made.
Johannesburg
30 October 2015
Designated Adviser: Stellar Advisers (Pty) Ltd
Date: 30/10/2015 08:45:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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