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CLOVER INDUSTRIES LIMITED - Proposed restructure: further cautionary announcement

Release Date: 30/01/2017 13:00
Code(s): CLR     PDF:  
Wrap Text
Proposed restructure: further cautionary announcement

Clover Industries Limited
(Incorporated in the Republic of South Africa)
Registration number 2003/030429/06
NSX Ordinary Share Code: CLN
Ordinary Share Code: CLR ISIN No: ZAE000152371
("Clover" or "the Company" or "the Group")

PROPOSED RESTRUCTURE: FURTHER CAUTIONARY ANNOUNCEMENT

Introduction

Shareholders are referred to the "Proposed Restructure, Cautionary Announcement and
Further Voluntary Operational Update" released on SENS on 5 December 2016 ("First
Cautionary Announcement"). In the First Cautionary Announcement, shareholders
were advised that Clover is in the process of restructuring its business ("Restructure")
to give effect to its stated objective of developing higher margin, value added products
in dairy and other related food categories and to eliminate Clover's exposure to the
cyclical nature of its low margin business.

Clover advises shareholders that the Restructure is ongoing. The purpose of this further
Cautionary Announcement is to:

-   provide further clarity as to the rationale for the Restructure;
-   expand upon, and provide more details as to, the terms of the Restructure; and
-   update shareholders as to progress made in respect of the Restructure.

Rationale for the Restructure

While the rationale for the Restructure was summarised in the First Cautionary
Announcement, Clover believes it is in the interest of shareholders that the rationale be
further explained and that certain queries or questions put to Clover after the First
Cautionary Announcement be addressed in more detail.

Clover's business presently comprises two main elements. Firstly, it has a low margin
business where profitability is primarily driven by volumes ("the Low Margin
Business"). The Low Margin Business relates, inter alia, to the marketing and selling of
non-value added fresh milk, Ultra Pasteurised Milk and Ultra-high temperature milk to
third parties (customers and/ or consumers) in various forms. Secondly, Clover sells and
supplies certain high margin or value-added products ("the High Margin Business")
including (but not limited to) custards, yoghurts, certain cheeses, infant products and
the like to third parties (customers and/ or consumers). Unlike the Low Margin Business
where profitability is driven primarily by volumes profitability in the High Margin Business
is less dependent on volumes.

The key objectives for the Restructure are as follows:

1 To address misconceptions about the pricing of Raw Milk

  Clover presently determines the price paid to producers ("Producers") for raw milk
  ("Raw Milk"). There is a misconception by capital market investors and other
  market participants that Clover, in setting the price for Raw Milk, may favour
  Producers at the expense of profitability. There is likewise a misconception by
  Producers that Clover, in setting the price for Raw Milk, is improving profitability at
  the expense of Producers. The Restructure, as more fully described below, will
  result in the Raw Milk price being determined by a party other than Clover, namely
  Dairy Farmers South Africa Proprietary Limited ("DFSA").

  DFSA will determine the price at which it purchases Raw Milk from Producers as well
  as the price at which it sells Raw Milk to third parties (customers and/ or
  consumers). Importantly, DFSA will be entitled to sell Raw Milk to parties other
  than Clover. This will result in the price of Raw Milk being unequivocally driven by
  market forces. Clover will purchase milk from DFSA at the average national milk
  price at which DFSA purchases the Raw Milk from Producers. This should result in
  the unfounded speculation that Clover is favouring profitability over the interest of
  Producers (and vice versa) being dispelled.

2 To improve access to new volume based growth markets

  Clover's attention is currently split between driving the High Margin Business and,
  to improve profitability in the Low Margin Business, by driving volumes. It is
  anticipated that a second entity focussed exclusively in driving volumes in the Low
  Margin Business will enable Clover in line with its stated objectives to focus on the
  High Margin Business. The focus on the High Margin Business is in keeping with
  Clover's stated objectives to promote and develop value added products in dairy
  and other related food categories, to expand its non-alcoholic beverages portfolio
  and to develop and enhance its key competencies in brand development,
  production, distribution and merchandising. This is not to say Clover will not benefit
  through DFSA's focus on driving volumes through the Low Margin Business.
  Increased volumes will benefit Clover as such volumes will result in the use of
  capacity which currently exists in Clover's infrastructure pursuant to the provision
  of services by Clover to DFSA (details of which are set out below) for which Clover
  will be paid additional service fees.

3 To facilitate the formation of synergistic partnerships and/or alliances

  Clover has been approached by various parties with whom partnerships or alliances
  may be possible to the benefit of shareholders. Clover has built significant capacity
  in its infrastructure and if such capacity were used by third party partners with
  whom Clover formed alliances, the scale of Clover's business could be significantly
  increased. To date parties that have approached Clover have ultimately decided not
  to pursue matters based on Clover's exposure to the cyclical Low Margin Business.

Further details relating to the Restructure

Many of the details set forth below have already been disclosed in the First Cautionary
Announcement. Clover however would like to update the market on further details and
developments relating to the Restructure

It is anticipated that the Restructure will comprise the transfer of the Low Margin
Business to DFSA for a nominal amount. The Low Margin Business transferred to DFSA
will include:

- all delivery/supply agreements which Clover has with its Producers. The position of
  Producers should remain unchanged;
- employees attached to the Low Margin Business; and
- customer    agreements    relating   to   the   Low   Margin   Business,   milk   collection
  agreements etc.

Pursuant to the transfer of the Low Margin Business to DFSA, DFSA will have the ability
to focus on driving volumes to grow the profitability of the Low Margin Business.
Inextricably linked to the transfer of the Low Margin Business to DFSA, Clover will enter
into a suit of agreements with DFSA pursuant to which, inter alia, –

    - DFSA will be obliged to meet Clover's requirements for Raw Milk to be used in the
      High Margin Business;
    - Clover will provide certain essential management and support services to DFSA
      including warehousing services, distribution services and merchandising services;
      and
    - Clover will enter into a licence agreement with DFSA pursuant to which DFSA will
      pay Clover a royalty on turnover in respect of products sold by DFSA under the
      Clover brand.

      It is anticipated that:

      - 74% of the shares in DFSA will be made available to Producers on or after
        30 June 2017 and that Clover's initial 100% shareholding in DFSA will,
        accordingly, be reduced to 26%. The Producers will be allocated shares based
        on the Raw Milk supplies to Clover over the last three years; and

      - DFSA will have its own independent board of directors comprised of nine
        directors of whom two will be representatives of Clover in light of its 24%
        shareholding. The new board of directors will be free to appoint their own
        management team. DFSA, with its own board and management team, will be an
        appropriate entity to focus on growing volumes in the Low Margin Business for
        the benefit of Producers.

The financial effects of the Restructure

The financial effects of the Restructure will be more fully disclosed in due course. It is
worth noting the following, namely –

- the Restructure will not affect Clover's profitability. In short, the current profit made
  from the Low Margin Business will be recovered through the fees payable (including
  but not limited to a management fee) by DFSA to Clover for the services Clover will
  render to DFSA;
- DFSA will, at commencement of operations, be in a break even position in the sense
  that its profits will all initially be paid across to Clover for the essential services
  Clover will be rendering to it. DFSA will need to grow volumes in the Low Margin
  Business to become profitable. That DFSA will initially conduct business on a break
  even basis in keeping with the fact that DFSA will acquire the Low Margin Business
  for a nominal amount; and

- Clover's turnover will be reduced by approximately R1.75 billion per annum, but the
  impact on operating income/profitability should be neutral given the fees payable by
  DFSA to Clover. Clover's balance sheet may be immaterially impacted given the
  nature of some of the assets to potentially be transferred to DFSA as part of the Low
  Margin Business.

Protections

Clover believes that the Restructure will not threaten its ability to source Raw Milk in that
it will merely be doing so through DFSA as opposed to engaging directly with Producers.
DFSA will, in turn, source Raw Milk from Producers using the same delivery/supply
agreement system as Clover currently has in place (and which DFSA will acquire as part
of the Restructure). In addition, it is anticipated that Clover will, enjoy an option to
reacquire the Low Margin Business from DFSA should certain predetermined events
occur.

Approvals required

Shareholder approval is not required for the Restructure as it is categorised as a
category 2 transaction in terms of the JSE Listings Requirements. Shareholders will
nevertheless be regularly updated and advised of progress in giving effect thereto.

A further meeting of the Board of Clover to be held on 28 February 2017 at which time
the Restructure should be further advanced having regard to engagements with Producer
representatives. It is hoped that the Board will finally approve the Restructure and all of
its terms at that meeting.

Presentation
It should be noted that the Company expects to publish a more detailed presentation
regarding the restructuring ("Presentation") on its website (www.clover.co.za) on or
before Tuesday, 31 January 2017.

Amendments
Shareholders   are   advised   that   the   terms   set   out   in   this   Further   Cautionary
Announcement and the Presentation remains subject to the signing of the final suite of
agreements between Clover and DFSA. The final agreed full terms of the Restructure will
be set out in a SENS announcement in due course.

Further Cautionary Announcement
In light of the ongoing Restructure, Clover shareholders are advised to continue to
exercise caution when dealing with the Company securities until a further or full
announcement is made.



Johannesburg
30 January 2017

Sponsor
RAND MERCHANT BANK (A division of FirstRand Bank Limited)

NSX Sponsor
IJG SECURITIES

Attorneys
Werksmans

Date: 30/01/2017 01:00:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). 
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