Wrap Text
Tsogo to acquire control of Hospitality and withdrawal of cautionary announcement
TSOGO SUN HOLDINGS LIMITED HOSPITALITY PROPERTY FUND LIMITED
(Incorporated in the Republic of South Africa) (Incorporated in the Republic of South Africa)
Registration number: 1989/002108/06 Registration number 2005/014211/06
Share Code: TSH Share code for A shares: HPA
ISIN: ZAE000156238 ISIN for A shares: ZAE000203022
(“Tsogo”) Share code for B shares: HPB
ISIN for B shares: ZAE000203030
(Approved as a REIT by the JSE)
(“Hospitality”)
TSOGO TO ACQUIRE CONTROL OF HOSPITALITY BY VENDING A PORTFOLIO OF HOTELS
INTO HOSPITALITY IN EXCHANGE FOR HOSPITALITY SHARES AND WITHDRAWAL OF
CAUTIONARY ANNOUNCEMENT
1. Introduction
Further to the joint announcement to Tsogo and Hospitality shareholders on 18 November 2015,
the boards of directors of Tsogo and Hospitality are pleased to announce the salient terms of the
transaction between Tsogo and Hospitality in terms of which Hospitality will acquire from Southern
Sun Hotels Proprietary Limited (“SSH”) (an indirect wholly-owned subsidiary of Tsogo) a portfolio
of 10 hotel properties described in paragraph 4.1 below (the “Properties”) and each of the property
letting businesses conducted in respect of such Properties (the “Tsogo Portfolio”), through the
acquisition of 100% of the issued shares of a newly incorporated company which will own the
Tsogo Portfolio, in exchange for the issue to SSH of 145 000 000 Hospitality ordinary shares
(“Consideration Shares”) which number may be subject to adjustment on the basis referred to in
paragraph 3.2.1 below (“the Transaction”). The Transaction is conditional upon, inter alia, the
restructure of Hospitality’s dual-class share capital structure to a single-class share capital
structure based on a swap ratio of 3.5 Hospitality B ordinary shares (“B Shares”) for every 1
Hospitality A ordinary share (“A Shares”), on the basis described in paragraph 3.1 below (“the
Restructure”), such that, as a result of SSH's holding of the Consideration Shares as well as
SSH’s existing holding of 78.3 million Hospitality B shares, Tsogo will hold, indirectly via SSH, in
excess of 50% of Hospitality’s ordinary shares in issue post the implementation of the Restructure
and the Transaction.
A formal sale of shares agreement in respect of the Transaction was signed on 14 December 2015,
between SSH, Southern Sun Hotel Interests Proprietary Limited ("SSHI"), Eglin Investments No
12 Proprietary Limited and Fezisource Proprietary Limited (“Newco”) (all indirect wholly-owned
subsidiaries of Tsogo) and Hospitality (the “Agreement”).
2. Rationale
2.1. Rationale for Tsogo
Tsogo highlighted in its March 2015 results that it is considering creating an entertainment
and hospitality focused Real Estate Investment Trust (“REIT”), into which it would transfer
its extensive hotel, retail and office property portfolio.
The Transaction represents the initial steps toward implementing this strategy, with
Hospitality’s core portfolio representing an attractive spread of hotel properties
Page 1 of 7
complementing Tsogo’s portfolio of hospitality assets. It is intended that Hospitality, as a
listed REIT, will provide the platform for Tsogo’s property strategy going forward.
The Transaction also broadens Tsogo’s strategy in relation to its hotel business and allows
Tsogo to invest in non-Tsogo branded and managed hotels. Tsogo believes that this
strategy will provide it with exciting and lucrative expansion opportunities in the hotel sector
in partnership with leading third party hotel brands and managers.
2.2. Rationale for Hospitality
Following the conversion of its linked unit capital structure, Hospitality currently has a dual-
class share capital structure consisting of A Shares and B Shares. The A Shares have a
preferential right to net income distributions made by Hospitality, with the B Shares having
the right to participate only in that portion of Hospitality’s net income distributions that
remains following payment of the fixed amount due in respect of the A Shares.
As previously disclosed to Hospitality shareholders (most recently in the Integrated Annual
Report 2015), the board of directors of Hospitality (the “Hospitality Board”) is, and has for
some time been, of the view that the dual-class share capital structure is not in the best
interests of the company and that it has been a major impediment to the effective operation
of Hospitality’s business. The Hospitality Board believes that a simplified capital structure
will allow Hospitality to deliver more easily on its strategic objectives in the longer term, and
the possibility of converting to a single-class share capital structure has therefore been a
key focus area for Hospitality in recent years.
Following engagement with shareholders, indications are now that there is a high level of
shareholder support for such a conversion insofar as it is implemented in the broader context
of the Transaction. The Transaction therefore presents a mechanism by which Hospitality
can achieve the desired restructure of its share capital.
In addition, the Transaction presents a highly attractive acquisition for Hospitality, with the
Tsogo Portfolio comprising ten successful and established hotel properties which are well
located within their respective nodes. The Transaction will contribute to a broadening of
Hospitality’s earnings base and should introduce an element of stability to earnings, through
exposure to the relatively predictable cash flows generated by the Tsogo Portfolio. As the
Tsogo Portfolio will be acquired free of any debt, the Transaction will also bring about the
reduction of Hospitality’s gearing ratio from 36.2% as at 30 June 2015 to 26.9% which,
together with Hospitality’s greater scale and inclusion as part of the Tsogo group, is expected
to reduce Hospitality’s cost of funding.
It is also anticipated that the Transaction will see Hospitality forming the platform for Tsogo’s
strategy of growing a hospitality-focussed REIT. It therefore provides Hospitality with
exciting future growth prospects and an attractive pipeline of acquisitions in the medium
term, both in terms of Tsogo properties and properties owned by third parties.
Ultimately, while the Restructure will in the short-term dilute the net income distributions to
holders of A Shares, it will (together with the Transaction) result in the long-term
sustainability of Hospitality’s business in the best interests of Hospitality shareholders. This,
in the Hospitality Board’s view, provides sound and compelling justification for the
implementation of both the Transaction and the Restructure.
3. Restructure of Hospitality’s share capital and terms of the Transaction
3.1. Overview of the Restructure
Hospitality’s dual-class share capital will be restructured to a single-class share capital by
way of:
3.1.1. the consolidation of the B Shares in a ratio of 3.5 : 1;
Page 2 of 7
3.1.2. the conversion of each A Share into a B Share, by way of a scheme of arrangement
proposed in terms of sections 114 and 115 of the Companies Act, 2008
("Companies Act");
3.1.3. the reclassification of the B Shares as ordinary shares and the subsequent
increase in the number of authorised ordinary shares; and
3.1.4. the adoption of a new memorandum of incorporation to take account of the change
in Hospitality's capital structure.
3.2. Terms of the Transaction
3.2.1. Salient terms
In terms of the Agreement, Hospitality will acquire 100% of the shares in Newco
(which will own the Tsogo Portfolio) (the “Newco Shares”) from SSH in exchange
for the issue by Hospitality to SSH of the Consideration Shares. If the amount of
Hospitality’s indebtedness as at the first day of the month immediately following
the month in which the last of the conditions precedent to the Transaction is fulfilled
or waived (“Effective Date”) is greater than R1.7 billion, the number of
Consideration Shares to be issued to SSH will be increased to compensate SSH
for the diminution in the agreed value of the Hospitality portfolio of assets.
Ownership, risk and benefit in and to the Newco Shares will pass to Hospitality
with effect from the Effective Date. While ownership, risk and benefit in and to the
Consideration Shares will vest in SSH with effect from the Effective Date, they will
only be issued to SSH on the day following the date on which the Restructure is
implemented such that Hospitality's capital structure consists of ordinary shares
only. Following the implementation of the Restructure and the Transaction, Tsogo
will (indirectly, through SSH) hold in excess of 50% of Hospitality’s ordinary shares
in issue.
Hospitality will appoint five nominees of SSH as directors of Hospitality, effective
on the Effective Date.
3.2.2. Clean-out dividend
Hospitality will, subject to the provisions of its memorandum of incorporation and
the Companies Act, declare a dividend to those Hospitality A and B shareholders
who are registered as such on the record date for participation in the Restructure,
of an amount equal to Hospitality’s distributable profit as at the Effective Date, and
pay such dividend to Hospitality A and B shareholders on the date on which the
Restructure is implemented.
4. Overview of the Tsogo Portfolio
4.1. Snapshot of the Tsogo Portfolio
The details of the Properties are as follows:
Hotel property Location Rooms Valuation4,5 (R)
Garden Court South Beach South Beach, Durban 414 453 612 000
Garden Court O.R.Tambo Kempton Park, Johannesburg 253 287 404 600
Garden Court Milpark Auckland Park, Johannesburg 251 240 031 000
Garden Court Polokwane Polokwane 180 159 236 000
Stay Easy Century City Milnerton, Cape Town 175 178 353 000
Garden Court Kimberley Kimberley 135 129 050 000
Southern Sun Newlands Newlands, Cape Town 162 117 906 000
Stay Easy Rustenburg Rustenburg 125 85 108 000
Southern Sun Bloemfontein Bloemfontein 147 89 855 000
Sun Square Cape Town Gardens, Cape Town 136 39 318 000
1 779 873 600
1. The properties are classified as being in the Hospitality sector.
Page 3 of 7
2. The weighted average lease expiry period in respect of each Property is expected to be for an initial period of
20 years with a 10 year renewal option. Each time the lessee exercises its option to extend the lease, a further
option renewal period of 10 years will be applicable (see paragraph 4.2 below).
3. As the properties are being acquired by Hospitality through its acquisition of 100% of the issued shares in
Newco, no purchase price per property has been ascribed.
4. As at 30 September 2015.
5. Independent valuation performed by Bryan Nyagah, an independent and registered professional valuer (Reg.
No 6091/4) registered without restrictions in terms of the Property Valuers Professional Act No. 47 of 2000, for
JHI Valuation & Advisory Services.
4.2. Overview of the lease terms
The Properties will be leased from Hospitality (through Newco) by Reshub Proprietary
Limited (“ResHub”) and managed by SSHI, both of which are indirect wholly-owned
subsidiaries of Tsogo.
Fixed and variable lease agreements in respect of each of the Properties (“Lease
Agreements”), which will be classified as operating leases, are expected to be concluded
for an initial period of 20 years with a 10 year renewal option. Each time the lessee exercises
its option to extend the lease, a further option of 10 years will be applicable.
The rentals payable in terms of the Lease Agreements comprise a 50% fixed component
and an approximately 50% variable component which is calculated as 98% of earnings
before interest, tax, depreciation, amortisation and rental less the fixed component. The
Lease Agreements are subject to additional terms and conditions which are customary for
leases of this nature, including performance conditions.
4.3. Forecast financial information
Set out below are the forecast revenue, rental income - contractual, operational net income,
net profit after tax and earnings available for distribution (“the forecasts”) for the years
ending 30 June 2016 and 30 June 2017 (“the forecast periods”). The forecasts have been
prepared on the assumption that the Restructure and the Transaction were implemented on
30 June 2015 and on the basis that the forecasts include forecast results for the duration of
the forecast periods.
The forecasts, including the assumptions on which they are based and the financial
information from which they are prepared, are the responsibility of the directors of
Hospitality. The forecasts have not been reviewed or reported on by independent reporting
accountants.
The forecasts have been prepared in accordance with Hospitality’s accounting policies and
in compliance with International Financial Reporting Standards.
Forecast for Forecast for the
the year ending 30 year ending
June 20162 30 June 2017
R’000 R’000
Revenue 171 820 197 925
Rental income – contractual1 171 820 197 925
Operational net income 171 820 197 925
Finance cost3 (5 178) (6 832)
Fair value adjustment on investment
properties4 96 391 239 503
Net profit after tax 263 032 430 595
Earnings available for distribution 166 642 191 093
Notes and assumptions
1. The forecasts for the year ending 30 June 2016 and 30 June 2017 have been based on
information derived from the management accounts of Tsogo and Hospitality. The rental income
was determined based on the Lease Agreements.
Page 4 of 7
2. The forecasts for the year ending 30 June 2016 include the actual results of the respective
Properties for the three month period ended 30 September 2015.
3. Finance costs have been calculated based on the weighted average cost of debt for Hospitality
as at 30 June 2015, published in the 30 June 2015 Integrated Annual Report. The finance costs
have been calculated based on the total capital expenditure as forecast by Tsogo management.
It is assumed that Hospitality will raise external debt in order to finance the respective Properties’
budgeted capital expenditure.
4. The fair value adjustment on investment properties has been derived from the rental income
applying the weighted average capitalisation rate of 10.9% to the year-on-year rental income
increase.
5. No straight-lining of leases has been assumed.
6. No transaction costs have been assumed.
5. Conditions precedent
5.1. Restructure conditions precedent
The Restructure will be subject to, inter alia, the fulfilment or, if applicable, waiver of the
following conditions precedent:
5.1.1. the passing of all resolutions required to approve the Restructure by the requisite
majorities of Hospitality shareholders;
5.1.2. receipt of confirmation by the Companies and Intellectual Property Commission
that it has accepted and placed on file the relevant documents required to effect
the Restructure;
5.1.3. all applicable regulatory and statutory approvals being obtained, including but not
limited to, receipt of the requisite compliance certificate in respect of the scheme
of arrangement from the Takeover Regulation Panel (“TRP”), as contemplated in
section 121 of the Companies Act;
5.1.4. shareholders holding more than 5% of Hospitality’s total issued shares not validly
exercising their rights in terms of section 164 of the Companies Act in respect of
the Restructure, within the timeframes specified in that section; and
5.1.5. all conditions to the Transaction being duly fulfilled or, if applicable, waived in
accordance with its terms, save for any condition precedent to the Transaction
relating to the Restructure.
5.2. Transaction conditions precedent
The Transaction will be subject to the fulfilment or waiver (where applicable) of the following
conditions precedent:
5.2.1. all conditions precedent to which the Restructure is subject being duly fulfilled or,
if applicable, waived in accordance with its terms, save for the condition precedent
relating to the Transaction becoming unconditional;
5.2.2. the passing of all resolutions required both in terms of the Companies Act and the
JSE Listings Requirements to approve the Transaction by the requisite majorities
of Hospitality shareholders;
5.2.3. the passing of an ordinary resolution waiving the requirement for either SSH and/or
Tsogo to make a mandatory offer to Hospitality shareholders as a consequence of
the implementation of the Transaction by the requisite majority of Hospitality
shareholders;
5.2.4. a Lease Agreement between Newco (as lessor) and ResHub (as lessee) being in
force and enforced as an operating lease in respect of each of the Properties;
5.2.5. a License Agreement between SSHI (as licensor) and ResHub (as licensee) and
a Management Agreement between SSHI (as manager) and ResHub (as owner),
being in force in respect of each of the hotel businesses conducted from the
Properties;
5.2.6. the JSE unconditionally granting a listing for the Consideration Shares and, to the
extent required, approving the documentation to be published and/or issued for
the purposes of the Transaction;
5.2.7. the TRP, to the extent required, inter alia:
Page 5 of 7
5.2.7.1. approving the documentation to be published and/or distributed for the
purposes of the Transaction; and
5.2.7.2. dispensing, in writing, with the obligation on the part of either SSH
and/or Tsogo to make a mandatory offer as a consequence of the
implementation of the Transaction;
5.2.8. the Competition Commission, the Competition Tribunal and/or the Competition
Appeal Court, as the case may be, providing unconditional written approval of the
joint application for permission for SSH to acquire control of Hospitality, or where
such written approval is granted subject to any one or more conditions, Tsogo
and/or Hospitality consenting to the imposition of such conditions, as required
5.2.9. the Properties being registered in the name of Newco in the appropriate Deeds
Registry; and
5.2.10. to the extent necessary, third party consents in relation to the change of control
provisions in certain contracts to which Hospitality or companies within the
Hospitality group are party, being obtained.
6. Recommendation and fairness opinion
Hospitality has appointed Mazars Corporate Finance Proprietary Limited as the independent
expert (“Independent Expert”) to make appropriate recommendations in the form of a fair and
reasonable and/or fairness opinion, as the case may be:
6.1. as required in terms of section 114(2) of the Companies Act and the Companies
Regulations, 2011 in relation to the scheme of arrangement required to implement the
Restructure;
6.2. as required in terms of regulation 86(7) in relation to the waiver of the obligation on the part
of either SSH and/or Tsogo to make a mandatory offer as a consequence of the
implementation of the Transaction; and
6.3. as required in terms of paragraph 10.4 of the JSE Listings Requirements as a result of the
Transaction constituting a related party transaction in terms of Section 10 of the JSE Listings
Requirements.
Whilst the contents of the Independent Expert’s advice and opinions and the final views of the
Hospitality Board will be detailed in the circular referred to in paragraph 7, the Independent Expert
has formed an initial view that the scheme of arrangement and the Transaction are fair and
reasonable to Hospitality shareholders.
Based on the above, the Hospitality Board is supportive of the Transaction and anticipates making
a recommendation to Hospitality shareholders to vote in favour of the resolutions to be proposed
at the general meetings of Hospitality shareholders to be convened to consider the Restructure
and the Transaction.
7. Categorisation of the Transaction
In terms of the JSE Listings Requirements, the Transaction constitutes a Category 1 transaction
and a related party transaction for Hospitality and, accordingly, requires the approval of Hospitality
shareholders. A circular providing further information on the Transaction (including a report
prepared by the Independent Expert as to the fairness of the Transaction and including revised
listing particulars) and containing a notice of general meeting of Hospitality shareholders to be
convened in order to approve the resolutions necessary to implement the Transaction will be
distributed to Hospitality shareholders in due course.
Similarly, a circular providing further information on the Restructure (including a report prepared
by the Independent Expert in terms of section 114(3) of the Companies Act) and containing notices
of general meetings of Hospitality shareholders to be convened in order to approve the resolutions
necessary to implement the Restructure will be distributed to Hospitality shareholders in due
course.
Page 6 of 7
In terms of the JSE Listings Requirements, the Transaction is a Category 2 transaction for Tsogo
and, accordingly, does not require approval by Tsogo shareholders.
8. Withdrawal of Hospitality cautionary announcement
Hospitality shareholders are referred to the cautionary announcements issued in relation to the
Restructure and Transaction, the last of which was released on SENS on 18 November 2015 and
are advised on the basis of the above that caution is no longer required to be exercised by
shareholders when dealing in their Hospitality shares.
15 December 2015
Corporate advisor and transaction sponsor to Tsogo
Investec Bank Limited
Corporate law advisor to Tsogo
Tabacks
Sponsor to Tsogo
Deutsche Securities (SA) Proprietary Limited
Corporate advisor and transaction sponsor to Hospitality
Java Capital
Corporate law and tax advisor to Hospitality
ENS Africa
Independent Expert
Mazars Corporate Finance Proprietary Limited
Sponsor to Hospitality
Rand Merchant Bank (A division of FirstRand Bank Limited)
Page 7 of 7
Date: 15/12/2015 12:00:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct,
indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on,
information disseminated through SENS.