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Offer to Acquire Shares in Ceramic, Details of the Italtile Rights Offer and Renewal of Cautionary Announcement
Italtile Limited
Incorporated in the Republic of South Africa
(Registration number 1955/000558/06)
Share code: ITE ISIN: ZAE000099123
(“Italtile” or “the Company” or “the Group”)
OFFER TO ACQUIRE SHARES IN CERAMIC, DETAILS OF THE ITALTILE RIGHTS OFFER AND RENEWAL OF CAUTIONARY ANNOUNCEMENT
1. INTRODUCTION
Further to the cautionary announcement dated 11 February 2016, and the subsequent renewal of
cautionary announcement dated 29 March 2016, the board of directors of Italtile (“the Italtile Board”) is
pleased to advise shareholders that Italtile has submitted a non-binding expression of interest to
Ceramic Industries Proprietary Limited (“Ceramic”) to acquire the entire issued share capital of
Ceramic, other than the shares beneficially owned and held by Italtile Ceramics Proprietary Limited, a
wholly owned subsidiary of Italtile ("Italtile Ceramics"), the treasury shares held by National Ceramic
Industries Proprietary Limited and the shares issued to David Robert Alston, Lance Andrew Foxcroft and
Tshepo Molefakgotla, being the Chief Financial Officer, the Chief Executive Officer and the Chief
Operations Officer of Ceramic respectively, on or about 24 March 2016 in terms of an equity incentive
arrangement concluded in accordance with the provisions of sections 40(5) and 40(6) of the Companies
Act, (Act 71 of 2008), as amended (“Companies Act”) (“Target Shares”). The Target Shares make up
approximately 75% of the issued share capital of Ceramic and the purchase consideration, which shall
equate to approximately R3.75 billion (“Acquisition Consideration”), is to be settled 50% in cash and
50% by the issue of Italtile shares at R11.57 per share (“the Acquisition”).
Furthermore, in order to ensure equitable treatment of all shareholders and afford minority shareholders
the opportunity to avoid dilution of their shareholding as a result of the Acquisition, Italtile intends to
undertake a renounceable rights offer (“Rights Offer”). In terms of the Rights Offer, Italtile will offer a
total of 22 shares for every 100 shares held in Italtile at the close of business on the record date for the
Rights Offer (“Rights Offer Shares”) at a subscription price of R11.57 per Rights Offer Share. The
Rights Offer ratio was determined based on the number of Italtile shares that Rallen Proprietary Limited
(“Rallen”), the current majority shareholder of Ceramic and majority shareholder of Italtile, would
receive as part of the Acquisition Consideration compared to the number of Italtile shares currently held
by Rallen. In order to ensure minority shareholders have the opportunity to limit the dilution from the
Acquisition Consideration, Rallen will undertake not to follow nor to dispose of its rights in terms of the
Rights Offer. As a result, a maximum number of 105 million Rights Offer shares could be taken up
resulting in the raising of approximately R1.2 billion.
2. THE ACQUISITION
2.1 Implementation of the Acquisition
The Acquisition is to be implemented by way of a scheme of arrangement in terms of section 114,
as read with section 115 of the Companies Act ("the Ceramic Scheme").
The Ceramic Scheme will be proposed by the board of directors of Ceramic ("the Ceramic Board")
and shall be between Ceramic and the shareholders of Ceramic, other than Italtile Ceramics and
the holders of those shares which have been excluded, as set out in paragraph 1 above ("the
Ceramic Scheme Participants").
2.2 Nature of Ceramic
The major assets of Ceramic and its subsidiaries and associates (“the Ceramic Group”)
comprises five tile factories, one sanitaryware factory and one acrylic bath factory, based in South
Africa, as well as one tile factory based in Australia.
The tile factories (Samca Floor, Samca Wall, Vitro, Pegasus, Gryphon and Centaurus)
manufacture a combination of pressed and extruded tiles in various sizes, textures and finishes,
while the sanitaryware factory (Betta) manufactures a wide range of vitreous china sanitaryware,
the main focus being on water closets, basins, cisterns and pedestals.
Ceramic’s acrylic bath factory manufactures a comprehensive range of baths and shower trays,
catering for all sectors of the local market.
2.3 The rationale for the Acquisition
Italtile believes that the Acquisition is beneficial for both Italtile and Ceramic for the following
reasons:
2.3.1 the long term success and sustainability of both Italtile and Ceramic are inextricably
intertwined and have been for the last two decades. The risk of reliance on a single large
customer for the Ceramic Group and the reliance on a single large supplier for Italtile and its
subsidiaries and associates (“the Italtile Group”) has been highlighted as a significant risk
by both groups’ risk committees;
2.3.2 combined high level strategic decision making by Italtile and Ceramic should ensure the
sustainable delivery of returns to shareholders through better allocation of capital and
alignment of long term growth strategies;
2.3.3 the integration of Ceramic into Italtile will allow Ceramic access to better, real time market
information and therefore improved production planning ability, both in the short and long
term;
2.3.4 the future growth of both businesses will benefit from the integration of the supply chain to
improve efficiencies and reduce costs;
2.3.5 the roll out of Italtile’s Business Optimisation Programme into Ceramic will lead to clear
visibility of sell through of products as well as assist with identifying trends on individual
ranges and products for Ceramic; and
2.3.6 the combination and integration of Ceramic and Italtile’s respective management teams will
enhance the level of experience and skill in the combined organisation and add depth to the
management structure, affording better succession planning at the combined group level.
2.4 Acquisition Consideration
The Acquisition Consideration is to be settled:
2.4.1 50% through the issue and allotment to the respective Scheme Participants of approximately
160 million Italtile ordinary shares at an issue price of R11.57 per share, being the volume
weighted average price of Italtile shares traded on the JSE for the month of February 2016
(the month in which negotiations commenced); and
2.4.2 50% in cash, payable in five equal instalments, the first of which shall be made on the 28 th
day of the month succeeding that in which the Acquisition becomes unconditional in
accordance with its terms (“Closing”) and the remaining four instalments shall be paid on
the 28th day of each successive four month period, together with interest fixed at 8.25%
annually payable from the date of Closing. The first instalment will be settled from available
cash resources with the remaining four instalments being settled from the cash generated
from the operations of the Italtile Group going forward.
2.5 Conditions Precedent and effective date
The Acquisition is subject to the fulfilment or waiver, as the case may be, of inter alia the following
conditions precedent:
2.5.1 the completion of a limited commercial, financial and legal due diligence in respect of
Ceramic and its subsidiaries and the Italtile Board being satisfied with the results of such due
diligence;
2.5.2 the approval of the Acquisition by the Italtile Board;
2.5.3 a formal and binding implementation agreement being entered into between Ceramic and
Italtile;
2.5.4 the approval of the Acquisition by the relevant competition authorities on an unconditional
basis, or upon such conditions which are acceptable to Italtile;
2.5.5 the Ceramic Scheme being implemented;
2.5.6 the completion of a fairness opinion in respect of the Acquisition prepared by an independent
expert acceptable to the JSE in accordance with Schedule 5 to the JSE Listings
Requirements (“the Fairness Opinion”);
2.5.7 the shareholders of Italtile passing in general meeting all such resolutions as are required to
approve the implementation of the Acquisition, including the issue of ordinary shares in
Italtile in terms of sections 41(1) and 41(3) of the Companies Act;
2.5.8 the Ceramic Board resolving to recommend to the shareholders of Ceramic to vote in favour
of the Scheme; and
2.5.9 the required regulatory approvals for the implementation of the Acquisition being obtained.
The effective date of the Acquisition shall be the first day of the month following the month in which
the fulfilment or waiver of the last of the conditions precedent took place.
2.6 Pro forma financial effects
The value of 100% of net assets that are the subject of the Acquisition as at 30 June 2015 was
R1.4 billion. The profit before interest and tax attributable to the net assets that are the subject of
the Acquisition for the year ended 30 June 2015 was R346 million.
The pro forma financial effects of the Acquisition on the reported financial information of Italtile are
in the process of being finalised and will be announced to shareholders in due course.
2.7 Related party implications
A portion of the Target Shares will be acquired from Rallen. As Rallen is a material shareholder of
Italtile, it is therefore considered to be a related party in terms of the JSE Listings Requirements.
Accordingly, in terms of paragraph 10.4(f) of the JSE Listings Requirements, as the Acquisition is
from a related party, the Company is required to obtain a fairness opinion on the Acquisition from
an independent expert and the Italtile Board are required to include a statement in the circular to be
issued to shareholders confirming whether the Acquisition is fair to shareholders.
Furthermore, Rallen and its associates are precluded from voting on the Acquisition at the general
meeting. However, as shareholders in Italtile, they may be taken into account in determining a
quorum for the purposes of the general meeting.
2.8 Classification of the Acquisition and Acquisition circular
The Acquisition, which is classified as a related party Category 1 transaction in terms of the JSE
Listings Requirements, requires shareholder approval. Accordingly, an Acquisition circular
containing full details of the proposed Acquisition, the Fairness Opinion and, a notice to convene a
general meeting of Italtile shareholders in order to consider and if deemed fit, to pass with or
without modification, the resolutions necessary to approve and implement the Acquisition, will be
sent to Italtile shareholders.
3 RIGHTS OFFER
3.1 Salient terms and purpose of the Rights Offer
As set out in paragraph 1 above, in terms of the Rights Offer, Italtile will offer a total of
approximately 227 million Rights Offer Shares at a subscription price of R11.57 per Rights Offer
Share in the ratio of 22 Rights Offer Shares for every 100 shares held in Italtile on the close of
business on the record date. Given the rationale and motivation for the Rights Offer, Rallen, the
current majority shareholder of Ceramic and majority shareholder of Italtile, has undertaken not to
follow or dispose of its rights in terms of the Rights Offer. Therefore, the maximum number of
Rights Offer shares that can be taken up in terms of the Rights Offer is approximately 105 million.
The purpose of the Rights Offer is to afford minority shareholders the opportunity to limit the
dilution of their shareholding as a result of the Acquisition. The maximum capital raised from the
Rights Offer, being approximately R1.2 billion, will be used to satisfy future working capital
requirements and fund further capital expenditure in terms of the Group’s future strategy.
Upon their issue, the Rights Offer Shares will rank pari passu in all respects with the existing Italtile
Shares.
3.2 Nature of the business of Italtile
Italtile is a franchisor and retailer of local and imported tiles, sanitaryware, bathware, laminated
flooring and other related home-finishing products. The Italtile Group’s retail brands are CTM,
Italtile Retail and Top T, represented through a total network of 141 stores, 16 of which are located
in the rest of Africa. The Group’s offering targets homeowners in the LSM 4 to 10 categories.
The Italtile Group’s Retail brand operation is strategically supported by a vertically integrated
Supply Chain, investments in key suppliers, and an extensive property portfolio.
3.3 Further announcement on the Rights Offer
The Rights Offer declaration announcement, which will include inter alia the final terms, salient
dates and times, will be released on SENS in due course.
4 RENEWAL OF CAUTIONARY ANNOUNCEMENT
As the Acquisition is still subject to Italtile board approval and the signing of a binding formal agreement
between Italtile and Ceramic, shareholders are advised to continue exercising caution when dealing in
Italtile securities until a further announcement, incorporating the pro forma financial effects of the
Acquisition, is made.
Johannesburg
26 April 2016
Sponsor and Corporate Advisor
Merchantec Capital
Date: 26/04/2016 07:05:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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