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GROUP FIVE LIMITED - Announcement regarding an agreement concluded with the South African government

Release Date: 11/10/2016 12:46
Code(s): GRF     PDF:  
Wrap Text
Announcement regarding an agreement concluded with the South African government

Group Five Limited
(Incorporated in the Republic of South Africa)
(Registration number 1969/000032/06)
Share code: GRF ISIN: ZAE 000027405
("Group Five" or "the Company" or "the group")


ANNOUNCEMENT REGARDING AN AGREEMENT CONCLUDED WITH THE SOUTH AFRICAN
GOVERNMENT

Shareholders are advised that Group Five has entered into an agreement (the “Settlement
Agreement”) with the government of the Republic of South Africa (the “Government”),
together with five other construction companies (collectively, the “Construction Companies”),
to implement a programme of initiatives that will significantly accelerate transformation of
the South African construction sector, as well as address the Construction Companies’
exposure to potential claims for damages from certain identified public entities projects (the
“Claims”) arising primarily from the fast-track settlement process launched by the South
African Competition Authorities in February 2011 (the “Fast-Track Settlement Process”) (the
“Arrangement”).
Following an extensive period of negotiation, the Government and the Construction
Companies have concluded the Settlement Agreement which comprises a financial
contribution by the Construction Companies into a jointly administered trust fund (the
“Fund”), as well as certain transformation commitments over and above the current broad-
based black economic empowerment sector requirements.

The Arrangement will focus on the development and transformation of the industry through:

1. Increasing investment in the sector to promote development, educational and upliftment
   opportunities for all, especially for black people;
2. Creating employment and entrepreneurial opportunities, especially for young South
   Africans;
3. Promoting and supporting black-owned construction companies and small business
   development and assisting them to be competitive and sustainable;
4. Identifying opportunities for South African companies in infrastructure projects elsewhere
   on the African continent; and
5. Building deeper partnerships with regulators and other key stakeholders such as
   Government and organised labour.


The Settlement Agreement commits to a plan which will ensure the repositioning of the South
African construction sector. All parties to the Settlement Agreement acknowledge the need
to foster a better relationship between the Government and the construction industry going
forward.

The Settlement Agreement promotes three elements:
                                                                                          
1.   Financial Socio-economic

     The Construction Companies will collectively contribute R1,25 billion over 12 years to the
     Fund, which will be established for socio-economic development. The objective of the
     Fund will be the development, enhancement and transformation of the construction
     industry, as well as the promotion of social infrastructure for all South Africans.

     Initiatives will include the development and promotion of construction companies owned
     and managed by black people, the provision of bursaries for black students, and providing
     support for learning institutions through bursary programmes and infrastructure
     development. It also includes funding the appointment of professionals to provide the
     Government with engineering, project management and other services to strengthen its
     capacity to deliver the public infrastructure needed through, amongst others, the
     secondment to state departments and entities of skilled personnel from organisations
     operating in South Africa.

     This financial contribution is in addition to existing annual socio-economic development
     investment spend by these companies.

     In summary, the Settlement Agreement stipulates that:

     -   Over the next 12 years, the Construction Companies will be required to make a
         collective, annual payment of R 104 million into the Fund. In the case of Group Five,
         the annual payment amounts to R21,25 million per year, totalling R255 million over
         the 12-year contribution period. The Fund will be constituted as a trust (“the Trust”).
         25% of the first R21,25 million annual payment is payable by Group Five within five
         business days following the Effective Date of the Settlement Agreement, with the
         remainder to be paid no later than 90 days following the Effective Date. Thereafter,
         each subsequent instalment will be payable annually on 1 July. The Effective Date of
         the Settlement Agreement is defined as the date on which the condition precedent,
         that SANRAL withdraws its SANRAL claims against the Construction Companies, is
         fulfilled.

     -   The Trust will use the payments made to the Fund to:
            o implement initiatives that will develop and enhance the construction industry,
              in conformity with the Government's transformation objectives; and
            o promote the development of emerging contractors and suppliers in South
              Africa. The Trust will be co-operatively governed by a Board of Trustees
              appointed by the Government, the Construction Companies and the South
              African Forum of Civil Engineering Contractors.

     -   The total payment to be made to the Trust by the Company may be reduced by any
         claims or potential claims for damages that certain, identified public entities have
         made, or may be entitled to make, against the Construction Companies in relation to
         projects listed in the Settlement Agreement. The value of claims paid by the Company
         that can be set off against the amount to be paid to the Trust is limited to the total
         contribution of R255 million over the 12-year period.
                                                                                               
        The Settlement Agreement does not address or eliminate any outstanding claims by
        the Competition Commission of South Africa with regards to administrative penalties
        which have been or are to be levied on any of the Construction Companies.

2.   Transformation

     In addition to existing enterprise development programmes, each of the Construction
     Companies will commit to initiatives that will result in each of the companies mentoring
     up to 3 emerging black-owned enterprises so that they develop the necessary skills,
     systems, status and quantity of work to be able to sustain a cumulative combined annual
     revenue equal to at least 25% of each of the mentor companies’ annual revenue by 2024.
     The referenced revenue is from civil engineering and building works delivered in South
     Africa.

     The development of these emerging black-owned enterprises will be broadly in line with
     the Construction Charter Codes with respect to enterprise development.

     The Settlement Agreement stipulates that the Construction Companies have individually
     undertaken to launch development initiatives with the aim of identifying, developing and
     mentoring up to three emerging contractors (“Emerging Contractor/s”), to ensure that
     the Emerging Contractor will have the necessary skills and quantity of work required to
     generate a cumulative combined annual turnover equal to at least 25% of the annual
     construction works turnover of the relevant Construction Company within 7 years.
     Aligned to this obligation are fixed interim period transformation targets on each
     Construction Company, as well as penalties calculated in accordance with a formula for a
     failure to meet such targets.

     The Settlement Agreement also stipulates that the Company will be released from its
     responsibility for the development initiatives of the Emerging Contractors above if the
     Company disposes of not less than a 40% economic interest in its South African civil
     engineering and general building construction business, to an enterprise that is more than
     51% black owned, managed and controlled.

3.   Integrity Commitment

     This involves the Construction Companies, as leading companies in the industry and
     Government, committing to business practices that are based on integrity, transparency
     and fair competition. As part of the Settlement Agreement, each company has signed a
     declaration to promote ethical and legal operations, free of collusion or corruption and to
     confirm that they will expose, confront and eradicate any sign of wrong-doing in the
     industry.

Additional salient features of the Settlement Agreement include:

1.   Limitation of liability
     The maximum notional aggregate liability of Group Five per the Settlement Agreement
     arising from: (i) its annual contribution payments described under the socio-
     development section above; and (ii) from any financial effects from the transformation                                                                                        
     activities above, shall notionally not exceed R884 million as at the signature date of the
     Settlement Agreement. This notional amount would be reached only in the unlikely
     event that the Company did not deliver against any of its undertakings in terms of the
     Settlement Agreement.
2.   Benefits of concluding the Settlement Agreement
     (a)      Creates a concrete new working platform between the construction industry
              and the Government focused on:
              (i)      increasing investment in the sector,
              (ii)     creating quality jobs and entrepreneurial opportunities (including for
                       young South Africans),
              (iii)    driving transformation in the sector,
              (iv)     promoting innovation,
              (v)      combatting collusion and corruption,
              (vi)     identifying opportunities for South African companies in infrastructure
                       projects elsewhere on the African continent,
              (vii)    promoting industry supply chains and helping them to be competitive,
                       and
              (viii)   building deeper partnerships with regulators and other key
                       stakeholders including labour.
     (b)      Allowing the Construction Companies to focus on their businesses as opposed
              to engaging in lengthy, costly and protracted litigation.
     (c)      Gives certainty to stakeholders that any existing or potential claims from
              identified public entities on identified projects, as well as the associated
              litigation costs and disruptions to operations are addressed.
     (d)      By committing to the critical transformation initiatives of the Settlement
              Agreement, the construction sector in South Africa will be a more sustainable
              and competitive industry, ready to partner with Government and related
              public sector entities for the advancement of infrastructure development in
              South Africa and across the African continent for the benefit of all South
              Africans.
     (e)      This settlement brings resolution and conclusion to the Construction Industry
              Development Board (“CIDB”) enquiry and proceedings against the companies
              who are signatories to the Settlement Agreement.

The impact of entering into the Settlement Agreement, with its resulting financial effects,
would not have been incorporated within the segmental revenue & margin guidance or
prospect statement as contained in audited group results for the year ended 30 June 2016,
released on SENS on 15 August 2016.
                                                                                              
The settlement signifies the Government’s and Construction Companies’ commitment in
promoting growth, investment, sustainability, inclusivity and transformation in the
construction sector.


Sandton
11 October 2016
Investment bank and sponsor
Nedbank Corporate and Investment Banking




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