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Conclusion of agreements, specific issue of shares for cash and renewal of the cautionary announcement
HUGE GROUP LIMITED
(Registration number 2006/023587/06)
Share code: HUG ISIN: ZAE000102042
(Huge or the Company)
CONCLUSION OF A SUBSCRIPTION AND REPURCHASE AGREEMENT, CESSION
AND PLEDGE AGREEMENTS AND AN ESCROW AGREEMENT, AND AN
ANNOUNCEMENT REGARDING INDICATIVE LOAN FUNDING, THE TRANSACTION
CIRCULAR, A SPECIFIC ISSUE OF SHARES FOR CASH AND A RENEWAL OF
CAUTIONARY ANNOUNCEMENT
INTRODUCTION
Shareholders are referred to the previous detailed cautionary announcement
released by Huge on 5 September 2016, which announcement detailed the
signing of a Memorandum of Agreement (the MoA) between Huge and
CNet Empowerment Proprietary Limited (CNet), DataWireless Proprietary
Limited (DataWireless), DM Holdco Proprietary Limited (DM Holdco),
Stephanus Marius Oberholzer (Oberholzer) and Unwire Communications
Proprietary Limited (Unwire) (collectively the Relevant Shareholders).
In terms of the MoA, Huge and the Relevant Shareholders (collectively the
Parties) were considering a transaction (the Proposed Transaction), which
would include, amongst a number of core commercial terms, the following:
- that Huge would purchase 100% of the shares in and claims against
Connectnet Broadband Wireless Proprietary Limited (Connectnet) from
the Relevant Shareholders for a total initial purchase consideration of
R275 000 000 (two hundred and seventy-five million Rand only) (the
Initial Purchase Consideration);
- that 45% (forty-five percent) of the Initial Purchase Consideration would
be paid by Huge to the Relevant Shareholders in cash, and 55% (fifty-
five percent) of the Initial Purchase Consideration would be settled by
Huge through the issue to the Relevant Shareholders of as many Huge
ordinary shares as may be required to be issued to discharge the
remainder of the Initial Purchase Consideration (the Proposed
Transaction Consideration Shares);
- that the Initial Purchase Consideration would be subject to upward or
downward adjustment should the aggregate profit of the Connectnet
Group (comprising Connectnet and its wholly-owned subsidiary, Sainet
Internet Proprietary Limited (Sainet Internet)) for the financial years
ended 28 February 2018, 28 February 2019 and 29 February 2020
exceed / not reach agreed upon targets;
- that the Relevant Shareholders undertook to pledge 59% of the
Proposed Transaction Consideration Shares to Huge as security for the
payment of any claims of Huge against the Relevant Shareholders that
may arise from a breach of any warranties given by the Relevant
Shareholders to Huge, a breach of any other terms of the transaction
agreements (the Proposed Transaction Agreements) to be signed by
the Parties or any downward adjustment to the Initial Purchase
Consideration; and
- that the Relevant Shareholders undertook not to dispose of 41% of the
Proposed Transaction Consideration Shares for a period of 24 months
following the closing date of the Proposed Transaction Agreements to
be signed by the Parties.
The MoA also recorded that the Proposed Transaction could be
implemented by means of an alternative structure, including without
limitation, a subscription and share buyback structure.
Shareholders are advised that Huge:
- has concluded a subscription and repurchase agreement (the
Subscription and Repurchase Agreement) with the Relevant
Shareholders and Connectnet;
- has concluded cession and pledge agreements with each of the
Relevant Shareholders (the Cession and Pledge Agreements); and
- is in the process of concluding an escrow agreement with the Relevant
Shareholders and TMF Corporate Services (South Africa) Proprietary
Limited (TMF Corporate Services), (collectively the Transaction and the
Transaction Agreements).
TERMS OF THE SUBSCRIPTION AND REPURCHASE AGREEMENT
In terms of the Subscription and Repurchase Agreement:
- Huge shall subscribe for 185 new ordinary shares in Connectnet (the
Subscription) for a total subscription consideration of R418 000 000 (the
Subscription Consideration):
o R266 750 000 of the Subscription Consideration shall be settled by
Huge in cash (the Connectnet Subscription Shares Cash Price) on
the closing date through the payment of the Connectnet
Subscription Shares Cash Price to Connectnet; and
o R151 250 000 of the Subscription Consideration shall be settled by
Huge on the closing date through the issue of renounceable
letters of allocation (the RLAs) to Connectnet in respect of such
number of Huge ordinary shares (the Transaction Consideration
Shares) as is equivalent to an amount of R151 250 000;
- subject to and conditional upon the implementation of the
Subscription, Connectnet shall repurchase (the Repurchase) 122
Connectnet ordinary shares (the Connectnet Sale Shares)
(representing 100% of the ordinary shares in issue prior to the
Subscription), from the Relevant Shareholders for an initial repurchase
consideration of R275 000 000 (the Initial Repurchase Consideration):
o R123 750 000 of the Initial Repurchase Consideration shall be
settled by Connectnet in cash (the Initial Repurchase Cash
Consideration) on the closing date by making payment of the
Initial Repurchase Cash Consideration to the Relevant
Shareholders; and
o R151 250 000 of the Initial Repurchase Consideration shall be
settled by Connectnet on the closing date by renouncing the
RLAs in favour of the Relevant Shareholders;
- the Transaction Consideration Shares will be issued by Huge at a price
of 600 cents per share. Other than the price per share, the Transaction
Consideration Shares will rank pari passu with the Huge ordinary shares
issued to qualifying investors in terms of the specific issue of shares for
cash, detailed below. Shareholders are reminded that in terms of the
MoA, the Proposed Transaction Consideration Shares were to be issued
on the same terms and conditions as the Subscription Shares (as that
term is defined below). The issue of the Transaction Consideration
Shares at a price of 600 cents per share is therefore a change to the
terms of the MoA agreed between the Parties;
- Connectnet shall cancel the Connectnet Sale Shares, which shares
shall revert to authorised and unissued shares of Connectnet;
- the Initial Repurchase Consideration shall be subject to upward
adjustment in the event that the sum of the aggregate operating profit
of the Connectnet Group (comprising Connectnet and its wholly-
owned subsidiaries) for the financial years ended 28 February 2018, 28
February 2019 and 29 February 2020 (the Connectnet Group
Cumulative Aggregate Operating Profit) is greater than 120% of the
Connectnet Group Cumulative Aggregate Operating Profit target of
R239 900 000 (the Connectnet Group Cumulative Aggregate Operating
Profit Target), provided that in no event shall the final repurchase
consideration upward adjustment amount be greater than
R75 625 000;
- on the closing date, and pursuant to the renunciation by Connectnet
of the RLAs in favour of the Relevant Shareholders, the Relevant
Shareholders shall exercise their rights, and Huge shall perform its
obligations, under the RLAs, and Huge shall issue and allot the
Transaction Consideration Shares to the Relevant Shareholders in the
Relevant Shareholders’ proportions;
- 59% of the Transaction Consideration Shares (the Transaction Pledged
Shares) shall be pledged by the Relevant Shareholders to Huge as
security for the payment of any claims of Huge instituted against the
Relevant Shareholders for, amongst other things, a breach of the Profit
Warranty (as defined below), on the terms and subject to the
conditions of the Cession and Pledge Agreements;
- the Relevant Shareholders warrant in favour of Huge that the
Connectnet Group Cumulative Aggregate Operating Profit shall be
equivalent to at least 80% of the Connectnet Group Cumulative
Aggregate Operating Profit Target (the Profit Warranty);
- the Relevant Shareholders, severally in the Relevant Shareholders’
proportions, indemnify Huge against all loss which Huge may incur or
suffer as a result of, or which may be attributable to, any breach by the
Relevant Shareholders of the provisions of the Subscription and
Repurchase Agreement, including without limitation, the Relevant
Shareholders warranties;
- in the event of a breach of the Profit Warranty, the loss incurred by
Huge (the Huge Deemed Loss) in consequence of such breach shall be
capped at an amount of R75 625 000 (the Huge Deemed Loss Cap
Amount);
- an independent accountant (the Independent Accountant) shall
determine whether a Huge Deemed Loss has occurred and, if so, the
quantum thereof with reference to the financial statements of
Connectnet and Sainet Internet for the financial years ended 28
February 2018, 28 February 2019 and 29 February 2020 and the Huge
Deemed Loss Cap Amount, within 15 business days of date of
finalisation of the financial statements of Connectnet for the financial
year ended 29 February 2020. The Relevant Parties shall procure that
the Independent Accountant shall give notice immediately (the Huge
Deemed Loss Notice) to the Relevant Parties as to whether a Huge
Deemed Loss has occurred and, if so, the quantum thereof;
- in the event that the Independent Accountant determines that a Huge
Deemed Loss has occurred, a Huge Deemed Loss Notice shall be
delivered to the Relevant Shareholders. The indemnity obligations of
the Relevant Shareholders to Huge arising from or in connection with a
breach of the Profit Warranty shall be discharged by means of the
Relevant Shareholders selling to Huge, in the Relevant Shareholders’
Proportions, and with effect from the date that is 10 business days after
the date of delivery of the Huge Deemed Loss Notice (Designated
Date), such number of Transaction Pledged Shares as is equivalent to
the Huge Deemed Loss divided by the volume weighted average price
of Huge ordinary shares calculated as at the Designated Date, such
that the number of Transaction Pledged Shares so sold have an
aggregate sale price (Transaction Pledged Shares Sale Price)
equivalent to the Huge Deemed Loss, and provided that the obligation
of Huge to effect payment to the Relevant Shareholders of the
Transaction Pledged Shares Sale Price shall be discharged by way of
set-off against the Relevant Shareholders’ obligation to effect payment
to Huge of the Huge Deemed Loss; and
- the Relevant Shareholders and Connectnet will appoint TMF Corporate
Services as the escrow agent to hold the Pledged Shares.
CONDITIONS PRECEDENT WITH REGARD TO THE TRANSACTION AGREEMENTS
The Transaction Agreements shall be subject to the following conditions
precedent:
- the delivery by CNet, DataWireless, DM Holdco and Unwire to Huge of
a certified copy of directors’ resolutions authorising the conclusion of
the Transaction Agreements on the terms and conditions set out
therein;
- the delivery by Connectnet’s existing long term senior debt provider
(Existing Lender) 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 directors authorising the conclusion of the Transaction
Agreements on the terms and conditions set out therein;
- approval by Huge shareholders in general meeting;
- the receipt of all 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;
o the Takeover Regulation Panel (TRP); and
o the Competition Authorities, as applicable.
- the Relevant Shareholders, Huge and Connectnet (collectively the
Relevant Parties) have complied with the provisions of section 48(8)
and sections 114 and 115 of the Companies Act, 61 of 2008, in relation
to the Repurchase;
- the procuring by Huge of unconditional and irrevocable undertakings
from third parties to subscribe for as many Huge shares (the Placement
Shares) as are required to settle R123 750 000 of the Connectnet
Subscription Shares Cash Price, supported by such proof of funding as is
reasonably acceptable to the Relevant Shareholders;
- Huge obtaining loan funding from an institutional funder amounting to
not less than R143 000 000, on terms and conditions acceptable to
Huge, for the purpose of funding the remaining portion of the
Connectnet Subscription Shares Cash Price;
- on or before the last business day prior to the closing date, there has
not occurred any:
o other act or event, which, upon occurrence, has or is
reasonably likely to have, when measured on the day prior to
the closing date (individually or in aggregate), a material
adverse effect on Connectnet; and
o any event of default as defined in the facilities agreement
regulating the terms of the senior debt provided to
Connectnet by the Existing Lender (Existing Facilities
Agreement);
- on or before the last business day prior to the closing date, there has
not occurred any other act or event, which, upon occurrence, has or is
reasonably likely to have, when measured on the day prior to the
closing date (individually or in aggregate), a material adverse effect
on Huge;
- where such consent is necessary, consent to the transactions
contained in the Transaction Agreements being obtained from the
relevant counterparties to certain key contracts identified during the
course of the due diligence;
- the Transaction Agreements (other than any condition whereby one
Transaction Agreement is conditional upon another Transaction
Agreement) have been duly executed by the parties thereto and shall
have become unconditional in accordance with their terms;
- each of the Relevant Shareholders has irrevocably and in perpetuity
waived all and any pre-emptive rights in relation to the Subscription
and the Repurchase;
- the Relevant Shareholders have notified Huge in writing that the
Relevant Shareholders, acting in their sole discretion, are satisfied with
the outcome of any due diligence undertaken by the Relevant
Shareholders with regard to Huge; and
- Huge has notified the Relevant Shareholders and Connectnet in writing
that Huge, in its sole discretion, is satisfied with the outcome of its due
diligence exercise with regard to Connectnet.
The effective date of the Transaction shall be the first business day following
the date on which the abovementioned conditions precedent to be fulfilled
or waived, are fulfilled or, where applicable, waived.
TERMS OF THE CESSION AND PLEDGE AGREEMENTS
Cession and Pledge Agreements have been signed with each of the
Relevant Shareholders, in terms of which the Relevant Shareholders shall
cede the Transaction Pledged Shares to Huge as security for any claims of
Huge instituted against the Relevant Shareholders for a breach of any of the
warranties in the Subscription and Repurchase Agreement, including a
breach of the Profit Warranty.
The Cession and Pledge Agreements shall come into force with effect from
the closing date, and the Relevant Shareholders shall notify their CSDP(s) of
the cession and pledge of their Transaction Consideration Shares within five
business days of the closing date.
The Cession and Pledge Agreements shall terminate on the Designated Date,
being the date on which any notification of default (if any) of the terms and
conditions of the Subscription and Repurchase Agreement by the Relevant
Shareholders, is delivered to the Relevant Shareholders.
TERMS OF THE ESCROW AGREEMENT
In terms of the Escrow Agreement to be signed by Huge, the Relevant
Shareholders and TMF Corporate Services, TMF Corporate Services has been
appointed as the escrow agent (the Escrow Agent). The Escrow Agent shall
hold the Transaction Pledged Shares pledged by the Relevant Shareholders
in terms of the Cession and Pledge Agreements in escrow until such time as
the cession and pledge is cancelled.
DESCRIPTION OF THE BUSINESS OF CONNECTNET
Connectnet is a telecommunications solutions company with a focus on
growing its mobile payment offering. It was established in 2004 and provides
connectivity to the card payment terminals of the commercial banks in South
Africa by making use of secure dual SIM connectivity over GSM data
networks. It is estimated that over a million transactions are handled per day
through the Connectnet ecosystem. The company has also expanded into
other markets, including ATMs, integrated points-of-sale, medical/script
verifications, telemetry applications, micro-lending applications and cash
vaults.
Sainet Internet is a network service provider and data communications
company that markets and sells a variety of products and services including
Internet data services, managed network solutions, branch connectivity,
hosting services and website and system development.
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.
The combination of Connectnet, Huge Telecom and Huge Connect is
compelling. Firstly, the bulk of Connectnet’s 29 000 customers fit squarely into
Huge Telecom’s target market of customer (with little overlap). It is therefore
expected that Connectnet will assist Huge Telecom in expanding its base of
13 000 customers and 35 000 telephone lines. Secondly, Sainet Internet will
create a critical entry for Huge Telecom and Huge Connect to participate in
the data market.
Huge, enlarged by Connectnet and Sainet Internet, is building an investment
theme focused on connectivity, mobile payments and Financial Technology.
People live in a connected world – everyone and everything needs to be
connected – Huge Telecom, Huge Connect, Connectnet and Sainet Internet
make connections possible. Connectnet and Sainet Internet provide Huge
with an entry into the data telecommunications and mobile payments
markets, and an opportunity to participate in the expected explosive growth
as the Internet transforms from being a source of information to one focused
on value and its movement. Connectnet’s participation as a trusted
payments service provider, makes it invaluable real-estate for expansion into
Fintech-type opportunities.
FINANCIAL INFORMATION
Connectnet concluded a repurchase agreement in October 2015 (the
October 2015 Repurchase Agreement). At the time of concluding the
October 2015 Repurchase Agreement, Connectnet also concluded the
Existing Facility Agreement with the Existing Lender. In terms of the Existing
Facilities Agreement, the Existing Lender advanced a principal amount of
R152.7 million to Connectnet for the purpose of funding the repurchase (the
October 2015 Repurchase) contemplated in the October 2015 Repurchase
Agreement. In terms of the October 2015 Repurchase, Connectnet acquired
158 ordinary shares from certain shareholders for the sum of R152 391 685. It
also paid a pre-closing dividend of R36 957 090 (the Pre-closing Dividend).
The net asset value of Connectnet on 1 March 2015 was R62 906 879. Profit
after tax for the year ended 29 February 2016 amounted to R32 942 450.
Connectnet issued 2 ordinary shares (the 2015 Share Issue) during the 2016
financial year, which ended on 29 February 2016, for a subscription price of
R1 771 000. Ignoring the impact of the October 2015 Repurchase, the 2015
Share Issue and the Pre-closing Dividend, the net asset value of Connectnet
at 29 February 2016 would have been R95 849 329. As a result of the October
2015 Repurchase, the 2015 Share Issue and the Pre-closing Dividend, the net
asset value of Connectnet at 29 February 2016 was negative, in the amount
of R91 728 446. After the Subscription and Repurchase, the net asset value of
Connectnet will be positive. Using the net asset value at 29 February 2016
and taking into account the impact of the Subscription and Repurchase, the
pro-forma net asset value of Connectnet at 29 February 2016 is R51 271 554.
The after tax profits attributable to the net assets that are the subject of the
Transaction for the year ended 29 February 2016 is R32 942 450.
The financial information contained in this announcement, including the pro
forma financial information, is the responsibility of the board of directors of
Huge and has not been reviewed or reported on by the auditors of Huge.
ANNOUNCEMENT REGARDING INDICATIVE LOAN FUNDING
The principal amount owing by Connectnet to the Existing Lender under the
Existing Facilities Agreement currently is approximately R142 900 000.
Huge is in advanced discussions with the Existing Lender in respect of new
funding to Huge in the amount of R163 000 000, to be utilised by Huge to:
- fund R143 000 000 of the Connectnet Subscription Shares Cash Price;
and
- refinance the R20 000 000 mezzanine loan owed by Huge Software and
Technologies Proprietary Limited to Stellar Specialised Lending
Proprietary Limited.
MEMORANDUM OF INCORPORATION
Huge undertakes to ensure that nothing contained in the Memorandum of
Incorporation of Connectnet (or any of its subsidiaries) will frustrate Huge in
any way from compliance with its obligations in terms of the Listings
Requirements or relieve Huge from compliance with the Listings
Requirements.
CATEGORISATION OF TRANSACTION
In terms of section 9.5(b) of the Listings Requirements of the JSE, the
Transaction is a Category 1 transaction and will be subject to the approval of
the shareholders of Huge in general meeting. Consequently, a circular,
together with a notice of meeting, is in the process of being prepared and
will be dispatched to shareholders in due course. The Company has
approached its major shareholders for indications of support to vote in favour
of the Transaction. The Company intends securing irrevocable undertakings
to vote in favour of the resolution of shareholders authorising the Transaction.
Shareholders will be advised when these irrevocable undertakings have been
secured.
SPECIFIC ISSUE OF SHARES FOR CASH
Subject to market conditions and the necessary shareholder approvals, it is
the intention of Huge to offer new ordinary shares (the Subscription Shares),
to be issued pursuant to a specific issue of shares for cash (the Specific Issue
of Shares for Cash), to institutional investors, and by invitation, individuals who
are regarded as “public shareholders” in terms of the Listings Requirements
(the Qualifying Investors), with a value of up to a maximum amount of
R300 000 000 (the Maximum Amount).
The Specific Issue of Shares for Cash will be subject to the following terms and
conditions:
- The Subscription Shares will be offered to the Qualifying Investors by
way of a bookbuild process (the Bookbuild Process);
- The subscription price (the Subscription Price) payable in respect of
each Subscription Share shall be determined in accordance with the
Bookbuild Process;
- The Bookbuild Process is the process whereby Qualifying Investors will
submit their price and volume orders into a book of demand and a
single clearing price, being the Subscription Price, will be established;
- The placement of the Subscription Shares with Qualifying Investors at
the Subscription Price will be determined in accordance with the
Bookbuild Process (the Bookbuild Placement);
- The number of Subscription Shares to be issued pursuant to the Specific
Issue of Shares for Cash shall not exceed 50 000 000 ordinary shares;
- All participants in the Specific Issue of Shares for Cash will pay the
Subscription Price;
- Existing shareholders of Huge who are Qualifying Investors will be able
to participate in the Bookbuild Process; and
- An amount of R123 750 000 is required to be raised by Huge in the
Bookbuild Placement in order to settle the Initial Repurchase Cash
Consideration.
Shareholders are reminded that Huge has secured a letter of commitment
from a leading South African financial institution to underwrite the Placement
Shares.
To the extent that the Maximum Amount is raised by Huge, any excess of
funds raised over the Initial Repurchase Cash Consideration will be utilised:
- to finance future acquisitions by Huge;
- to augment the existing working capital capacity of Huge; or
- to possibly reduce debt in Huge or Connectnet.
A circular in this regard, together with a notice of meeting, is in the process of
being prepared and will be dispatched to shareholders in due course. The
Company has approached its major shareholders for indications of support to
vote in favour of the Specific Issue of Shares for Cash. The Company intends
securing irrevocable undertakings to vote in favour of the resolution of
shareholders authorising the Specific Issue of Shares for Cash. Shareholders
will be advised when these irrevocable undertakings have been secured.
RENEWAL OF CAUTIONARY
In light of the information set out above and the fact that negotiations in
respect of other, unrelated transactions remain underway, which may have
an effect on the price at which Huge shares are traded, shareholders are
advised to continue to exercise caution when trading in their Huge shares.
Johannesburg
17 November 2016
Sponsor: Questco Proprietary Limited
Date: 17/11/2016 04:30:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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