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HUGE GROUP LIMITED - Conclusion of Memorandum of Agreement and renewal of cautionary announcement

Release Date: 05/09/2016 16:10
Code(s): HUG     PDF:  
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Conclusion of Memorandum of Agreement and renewal of cautionary announcement

HUGE GROUP LIMITED
(Registration number 2006/023587/06)
Share code: HUG ISIN: ZAE000102042
(Huge or the Company)




CONCLUSION OF MEMORANDUM OF AGREEMENT AND RENEWAL OF
CAUTIONARY ANNOUNCEMENT

Shareholders are referred to the previous cautionary announcements
released by Huge, the latest of which was released on 2 September 2016,
and are advised that Huge has signed a Memorandum of Agreement with
CNET Empowerment Proprietary Limited (CNET), DataWireless Proprietary
Limited (DataWireless), DM Holdco Proprietary Limited (DM Holdco),
Stephanus Marius Oberholzer and Unwire Communications Proprietary
Limited (Unwire) (collectively, the Relevant Shareholders), in terms of which
Huge will purchase 100% of the shares in and shareholder loan account
claims against Connectnet Broadband Wireless Proprietary Limited
(ConnectNet) from the Relevant Shareholders (the Proposed Transaction) for
a total initial purchase consideration of R275 000 000 (two hundred and
seventy-five million Rand only) (the Initial Purchase Consideration).

ConnectNet has entered into a five year term loan agreement (the Loan
Agreement) with a long term senior debt provider. The principal amount
outstanding under the Loan Agreement is currently R142.9 million, resulting in
an enterprise value (the Enterprise Value) of the Proposed Transaction of
R417.9 million.

ConnectNet Financial Performance
The ConnectNet Group (comprising ConnectNet and its wholly-owned
subsidiary company, Sainet Internet Proprietary Limited (Sainet)) has a track
record of sustained growth. Consolidated earnings before interest, taxation,
depreciation and amortisation (EBITDA) to 29 February 2016 (FY 2016)
amounted to R68.6 million, with after tax earnings (excluding exceptional
items) amounting to R37.4 million. Adjusting for interest of R5.5 million on the
five-year term loan referenced above, which was not tax deductible, the
ungeared after tax earnings for FY 2016 attributable to the Enterprise Value
would amount to R42.9 million.

Revenue, which is largely annuity based, reached R180.3 million for FY 2016.

The ConnectNet Group is a predictable and cash generative business,
having paid out dividends of R23.0 million, R28.0 million and R37.0 million for
the 2014, 2015 and 2016 financial years respectively – representing more than
40% of EBITDA in each of those years.
TERMS OF THE MEMORANDUM OF AGREEMENT
The Memorandum of Agreement records the following core commercial
terms of the Proposed Transaction as agreed by Huge and the Relevant
Shareholders (collectively, the Parties):
   -  45% (forty-five percent) of the Initial Purchase Consideration
      (R123 750 000) shall be paid by Huge to the Relevant Shareholders in
      cash (the Cash Portion), raised through the issue of shares to certain
      third parties (the Subscribers) already identified by Huge;
   -  55% (fifty-five percent) of the Initial Purchase Consideration
      (R151 250 000) (the Share Portion) shall be settled by Huge through the
      issue to the Relevant Shareholders of as many ordinary shares (the
      Consideration Shares) as may be required to be issued to discharge
      the Share Portion. The Consideration Shares will be issued on the same
      terms and conditions as the shares issued to the Subscribers.
   -  the Initial Purchase Consideration may be subject to an upward
      adjustment should the cumulative aggregate profit of the ConnectNet
      Group for the financial years ending 28 February 2018, 28 February 2019
      and 29 February 2020 be equivalent to or exceed 120% of a three year
      cumulative profit target, which target is still to be agreed in writing
      between the Relevant Shareholders and Huge;
   -  the Initial Purchase Consideration may be subject to a downward
      adjustment (the Downward Adjustment Payment) should the
      cumulative aggregate profit of the ConnectNet Group for the financial
      years ending 28 February 2018, 28 February 2019 and 29 February 2020
      be equivalent to or less than 80% of the aforementioned three-year
      cumulative profit target;
   -  the Relevant Shareholders have agreed to certain provisions that will
      preclude them from disposing of any of the Consideration Shares for a
      period of time, namely:
          o the Relevant Shareholders shall pledge 59% of the Consideration
             Shares (the Pledged Shares) to Huge as security for (i) the
             payment of any claims by Huge against the Relevant
             Shareholders that may arise from a breach of any warranties
             given by the Relevant Shareholders to Huge or a breach of any
             other terms of the transaction agreements (the Transaction
             Agreements) to be concluded by the Parties during the warranty
             period (the Warranty Period) and (ii) the Downward Adjustment
             Payment; and
          o the Warranty Period covers a period of 36 (thirty-six) months
             following the closing date of the Transaction Agreements; and
          o the Downward Adjustment Payment will be determined after the
             audited financial statements of ConnectNet for 29 February 2020
             are published; and
          o the Relevant Shareholders shall undertake not to dispose of the
             remaining 41% of the Consideration Shares (the Lock-in Shares)
             for a period of 24 (twenty-four) months from the closing date of
             the Transaction Agreements.
CONDITIONS PRECEDENT WITH REGARD TO THE MEMORANDUM OF AGREEMENT
The Memorandum of Agreement is subject to the following remaining
conditions precedent:
   - Huge delivering expressions of interest (the Expressions of Interest) from
      Subscribers interested in subscribing for as many Huge shares as are
      required to settle the Cash Portion of the Initial Purchase Consideration,
      on or before 17h00 on Monday, 3 October 2016; and
   - the Relevant Shareholders (acting reasonably) confirming in writing
      that the Expressions of Interest are acceptable to them on or before
      17h00 on Tuesday, 4 October 2016.

CONDITIONS PRECEDENT WITH REGARD TO THE PROPOSED TRANSACTION
The Proposed Transaction is subject to the Parties entering into formal
Transaction Agreements and the coming into force and effect of the
resultant Transaction Agreements shall be subject to the following conditions
precedent:
   -   the delivery by CNET, DataWireless, DM Holdco, and Unwire to Huge of
       certified copies of resolutions of their boards of directors authorising the
       conclusion of the Transaction Agreements on the terms and conditions
       set out in the Transaction Agreements;
   -   the delivery by ConnectNet’s long term senior debt provider to Huge of
       its written approval for the implementation of the transactions set out in
       the Transaction Agreements either unconditionally or subject to such
       conditions as are acceptable to Huge in its sole discretion;
   -   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 of the
       Parties, including the approval of the following to the extent required:
           o the JSE Limited (the JSE);
           o the Independent Communications Authority of South Africa
               (ICASA);
           o the Competition Commission, as applicable; and
           o any other regulatory approvals required.
   -   the procuring by Huge of unconditional and irrevocable undertakings
       from Subscribers to subscribe for as many Huge shares as are required
       to settle the Cash Portion of the Initial Purchase Consideration
       supported by such proof of funding as may be reasonably acceptable
       to the Relevant Shareholders;
   -   on or before the last business day prior to the closing date of the
       Transaction Agreements, there has not occurred any:
       o 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; and
       o any event of default as defined in the Loan Agreement;
   -   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 a due diligence; and
   -   the transactions contemplated in the Transaction Agreements shall be
       subject to other warranties customary in South Africa for transactions of
       this nature.

The Proposed Transaction will become effective on the first business day
following the day on which the conditions precedent to the Proposed
Transaction are fulfilled or, where applicable, waived.

DUE DILIGENCE
Huge will carry out a comprehensive legal, financial and technical due
diligence investigation (the Due Diligence) into the business and affairs of the
ConnectNet Group during the 40 (forty) business days following the fulfilment
of all of the conditions precedent to the Memorandum of Agreement.

EXCLUSIVITY PERIOD
In terms of the Memorandum of Agreement, the Relevant Shareholders grant
Huge an exclusivity period of 180 days (the Exclusivity Period) (from the date
on which the Memorandum of Agreement becomes unconditional) in which
to conclude the Transaction Agreements.          The Exclusivity Period will
commence on the date on which the Memorandum of Agreement becomes
unconditional.

DESCRIPTION OF THE BUSINESS OF CONNECTNET
Overview of ConnectNet
ConnectNet was established in November 2004 to provide connectivity
services to the card payment terminals of the commercial banks in South
Africa by making use of, primarily, secure dual SIM connectivity over GSM
data networks. These card payment terminals are referred to as credit card
or debit card machines – which are used for processing credit card and
debit card transactions at points of sale.

ConnectNet has also expanded into other market segments by providing
connectivity to automated teller machines (ATMs), integrated points of sale
(POS), medical/script verifications, telemetry applications, micro lending
institutions and cash vaults. ConnectNet also specialises in providing solutions
designed around mobile data, wide area networks (WAN) and Cloud
Services.

ConnectNet's ability to take its products and solutions to the market has
secured blue chip clients in the retail, financial, security, telemetry,
healthcare and pharmaceutical sectors. It has approximately 114 000 active
devices and SIM cards, of which around 11 500 are located in foreign
countries.

In 2014 it expanded its operations and offering with the acquisition of Sainet.
Sainet is a network service provider and data communications company that
offers a variety of products, including Internet data services, managed
network solutions, branch connectivity, hosting services, and website and
system development.

ConnectNet holds the following accreditations:
   -   GSM Networks - ConnectNet devices are network approved by both
       Vodacom and MTN;
   -   Financial Institutions – ConnectNet’s entire portfolio of devices has
       been approved by all of the South African acquiring banks;
   -   Type Approvals - All ConnectNet devices are type approved by ICASA
       and by the respective regulators in the countries outside of South
       Africa.
   -   ICASA Licence - ConnectNet owns a Class Electronic Communications
       Service Licence (No.0546/CECS/NOV/08) and Sainet owns both an
       Individual Electronic Communications Service Licence (iECS) and an
       Individual Electronic Communications Network Service Licence (iECNS)
       and
   -   PCI Compliance - Sysnet Global Solutions (Sysnet) - Qualified Assessor
       Company - ConnectNet’s initial assessment as a Service Provider to the
       Payment Card Industry Data Security Standard (PCI DSS v3.1) was
       completed and it received its Attestation of Compliance (AoC) in
       August 2015. ConnectNet is busy currently with its next annual
       assessment.


The head office of ConnectNet is located in Centurion, with branches in
Cape Town, Durban, Port Elizabeth, Klerksdorp, East London and
Bloemfontein.   ConnectNet is capable of providing installation and
maintenance services countrywide through its network of employed
technicians and outsourced support companies at more than 60 points of
presence.

South Africa remains ConnectNet’s largest geographical market.
ConnectNet services are also provided in Botswana, Lesotho, Mozambique,
Namibia, Swaziland, Zambia and Zimbabwe.

ConnectNet Services
Mobility Solutions
ConnectNet is a leader in the provision of secure data communications over
various platforms for Machine-to-Machine (M2M) data communications. The
ConnectNet core network is PCI DSS version 3.1 compliant providing all of its
clients, especially the financial institutions, with a safe and secure
environment for financial transactions.

ConnectNet’s Mobility Solutions are designed with redundancy in mind and
utilise multiple GSM networks to ensure secure data connectivity.
ConnectNet utilises Multiple Private Access Point Names (APNs) per mobile
network and the APNs terminate at redundant hosting facilities. ConnectNet
actively monitors and manages call detail records (CDRs) to manage any
potential abuse on SIM card activity.

Mobile Payments
ConnectNet has made a strategic investment into a mobile payment
solutions provider, and through this company is actively seeking to grow its
presence in this market. ConnectNet believes it will be well positioned to
capitalise on attractive opportunities in this sector.

Managed Wide Area Networks
ConnectNet’s Managed Data Networks offers the provision of secure, reliable
and managed data communication solutions, leveraging the ConnectNet in-
house Next Generation Network (NGN) consisting of multiple access mediums
all interconnected into a single platform.

Services are provided by ConnectNet on access mediums such as GSM data,
ADSL/VDSL, FTTx, Diginet, WAN-E, Microwave, Satellite and Fibre.

Solutions are tailored to meet the unique requirements of all Customers and
ConnectNet assists in the design of a turnkey communication solution.

Internet Service Provider (ISP) services
ConnectNet also offers traditional, full-service ISP services, offering dedicated
Internet access, Web and virtual domain hosting, server co-location, and
network-related professional solutions (for example: design, installation and
management).

Data Centre Services
ConnectNet’s Data Centre Services include dedicated hosting facilities,
cPanel hosting (a Linux-based web hosting control panel that provides a
graphical interface and automation tools designed to simplify the process of
hosting a web site) and mail hosting.

ConnectNet Management
The ConnectNet Group has an experienced management team with a
proven track record of delivering superior returns.
ConnectNet is managed by Andre Lessing, who holds a B.Eng (Electrical &
Electronic) from Rand Afrikaans University and a Masters in Business
Administration (MBA) from the University of Pretoria. Andre has over 24 years’
experience in telecommunications, 5 of those being spent with Telkom, 9
years with Swiftnet and 11 years with ConnectNet. Andre’s management
team includes Keven Sinclair and Kurt Schmulian. Keven holds a National
Technical Diploma in Electronics (N6) and a B Com from UNISA. Kurt holds a
National Higher Diploma in Electrical Engineering and an MBA. Keven has
over 29 years’ experience in telecommunications, 8 of those being spent with
Telkom, 10 years with SwiftNet and 11 years with ConnectNet. Kurt has 29
years of telecommunications experience – 23 years with Telkom and 6 years
with ConnectNet.

Sainet is managed by Dr. Marius Oberholzer, who holds a National Diploma in
Electrical Engineering, a Masters in Business Administration and a Doctorate
of Business Administration. Marius has 26 years of business experience. He
spent 5 years with Grinaker Avitronics and 4 years with Walter Sisulu University,
and has managed Sainet for the last 17 years.

ConnectNet competes with XLink (owned by Vodacom), FastNet (owned by
Telkom) and Metacom, which is privately owned.

RATIONALE FOR THE TRANSACTION
In the Integrated Report of the Company for the year ended
29 February 2016, it was stated that Huge was embarking on a period of
growth and that it intended to do so organically and by acquisition.

Huge Group has a strong customer base with over 13 400 active customers
with more than 35 000 connections countrywide. The ConnectNet Group
also has a strong customer base with over 29 000 unique customer sites
located across South Africa.

Huge, enlarged by the ConnectNet Group, will be even better placed to
unlock significant growth through (i) marketing new offerings to the existing
customer bases of each group company (ii) introducing existing offerings to
new customers (iii) focusing on offshore operations and expansion into new
territories, and (iv) the development of complimentary products and services
that cater to advertising financed Wi-Fi hotspots, mobile payments, and M2M
communications.

There is also a clear opportunity to unlock additional growth from the
ConnectNet Group customer base, which provides an effective channel
through which to market Huge Telecom’s fixed-location-voice-only telephony
service. Huge Telecom’s telephony service is very well suited to the bulk of
the ConnectNet customer base and the opportunity to increase the average
revenue per ConnectNet customer by overlaying Huge Telecom’s services is
estimated to be significant.
Huge has thus far been unable to take advantage of the significant
opportunity to provide data services to its own customers. It is expected that
the services of Sainet will create a critical entry for Huge into the data market,
which has been an obvious gap in Huge’s value proposition. The products
and services of Sainet will also assist Huge greatly in increasing its own
average revenue per customer.

The acquisition of the ConnectNet Group by Huge will augment the senior
management capacity of the enlarged group by adding more diverse
telecommunications sector skills.

The ConnectNet Group fits perfectly with Huge’s overall telecommunications
strategy and particularly with its focus on building its business around
connectivity services.    Its revenue, which is largely annuity based,
supplements the quality annuity revenue that Huge generates currently.

CATEGORISATION OF TRANSACTION
In terms of section 9.5(b) of the Listings Requirements of the JSE, the Proposed
Transaction is a Category 1 transaction and will be subject to the approval of
Huge shareholders in general meeting. Should the Transaction Agreements
be concluded successfully, a circular, together with a notice of meeting, will
be prepared and dispatched to shareholders.

RENEWAL OF CAUTIONARY
Shareholders are advised that negotiations remain underway with other third
parties, which may have an effect on the price at which Huge shares are
traded. Accordingly, shareholders are advised to continue to exercise
caution when trading in their Huge shares.

Johannesburg
5 September 2016

Sponsor: Questco Proprietary Limited

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