HUDACO INDUSTRIES LIMITED - Acquisition of trading assets and liabilities of Miro Distribution (Proprietary) Limited and an operational update

Acquisition of trading assets and liabilities of Miro Distribution (Proprietary) Limited and an operational update

HUDACO INDUSTRIES LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 1985/004617/06)
Share code: HDC & ISIN: ZAE000003273
(“Hudaco”)


ANNOUNCEMENT REGARDING THE ACQUISITION OF THE TRADING ASSETS AND LIABILITIES OF
MIRO DISTRIBUTION (PROPRIETARY) LIMITED (“MIRO”) AND AN OPERATIONAL UPDATE


 ACQUISITION OF THE TRADING ASSETS AND LIABILITIES OF MIRO DISTRIBUTION (PROPRIETARY)
 LIMITED (“MIRO”)

 1. INTRODUCTION
    Shareholders are advised that on 29 April 2016 Hudaco signed an Agreement with Miro to
    acquire its trading assets and liabilities with effect from 1 May 2016 (“the effective date”)
    (“the Transaction”).


 2. DESCRIPTION OF MIRO
    Miro is a distributor of wireless, networking, VoIP and video products sourced from leading
    international producers. Miro services the growing IP convergence industries and focuses on
    supplying reliable and reputable products, providing strong after-sales service and technical
    support. Miro employs 127 staff in four locations in South Africa and generates sales of R292
    million per annum.


 3. RATIONALE FOR THE TRANSACTION
    Hudaco is a South African group of companies specialising in the importation and distribution
    of selected high quality branded consumer-related and industrial products, mainly in the
    southern African region. One of Hudaco’s key strategies is to acquire new businesses in similar
    fields of activity when the opportunity arises.

    The acquisition of Miro is consistent with Hudaco’s strategy of diversifying its portfolio to
    further reduce the percentage of its income that is derived from the mining and
    manufacturing sectors. The business of Miro is an ideal fit for the consumer-related products
    segment of Hudaco in that it focuses on selling quality, branded products, while providing
    significant value-add for the customer, which is an area of core competency of Hudaco.
    Hudaco will be able to utilise its experience and expertise in value-added distribution to
    enhance Miro’s position, resulting in long term benefits to shareholders.


 4. DETAILS OF THE TRANSACTION
       4.1 Purchase consideration
           The purchase consideration will be a multiple of the average annual profit after tax
           (but excluding interest received) of Miro for the three years ending 30 April 2019. If
           the business grows profits at 20% per annum for the three year earn-out period, which
           is considered a realistic prospect, the total consideration will be R172 million. The
                maximum consideration is R327 million, which would require compound annual
                growth of 57% over the three years. The purchase consideration will be funded from
                cash generation, existing and (if necessary) new facilities and paid as follows:
                    - an initial amount of R75 million payable in cash on the effective date; and
                    - three tranches payable in cash on 4 July 2017, 2018 and 2019 respectively,
                       based on actual average levels of profitability achieved in each of those years.
            
            4.2 Management
                The two shareholders, Bertus van Jaarsveld and Jaco Malan (“the shareholders”), have
                entered into service contracts for a period of three years and restraint of trade
                agreements in favour of Hudaco for a period of five years after their employment
                ceases.

            4.3 Conditions precedent
                All conditions have been fulfilled, including approval by the Competition Commission,
                satisfactory due diligence, service agreements, main supplier approvals and approval
                by the Hudaco board of directors.

            4.4 Value of net assets and profit attributable to Miro
                The shareholders have committed to deliver a minimum of R42 million net trading
                assets on the effective date, which assets produced R21 million net profit after
                taxation in Miro’s last financial year ending 29 February 2016.


5   CATEGORISATION
    The Transaction has been classified as a category 2 transaction in terms of Section 9 of the JSE
    Limited Listing Requirements and, accordingly, shareholder approval is not required.


OPERATIONAL UPDATE

Two important factors that were central to the good results in our consumer-related products
segment in the first half of 2015 may not be repeated this year. There has been no load shedding so
far this year so sales into the alternative energy market are well down; and no large contract for
communications equipment has been secured thus far. Furthermore, the difficult trading conditions
experienced in the second half of 2015 by the engineering consumables businesses which supply
mainly to the mining and manufacturing sectors, have persisted into 2016. As a result, the board
expects that results for the six months ending 31 May 2016 will be down on those for the equivalent
period in 2015.

The board is not yet in a position to provide more definitive information because only four months’
results are available and those include the traditionally slow months of December and January, as well
as the Easter period. When adequate information becomes available, stakeholders will be updated if
appropriate. Hudaco’s management remains focused on optimising those aspects of our businesses
that can be managed in these tough economic conditions and, although we are disappointed that
earnings will decline, we are confident that the results will nevertheless be satisfactory under the
circumstances.


Johannesburg
3 May 2016
Investment bank and sponsor
Nedbank Corporate and Investment Banking

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