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Joint announcement regarding the repositioning and recapitalisation of eXtract and further cautionary announcement
EXTRACT GROUP LIMITED ENX GROUP LIMITED
(previously Eqstra Holdings Limited) (Incorporated in the Republic of South Africa)
(Incorporated in the Republic of South Africa) (Registration number 2001/029771/06)
(Registration number 1998/011672/06) JSE share code: ENX ISIN: ZAE000222253
JSE share code: EXG ISIN: ZAE000223202 (“enX”)
(“eXtract”)
JOINT ANNOUNCEMENT REGARDING THE REPOSITIONING AND RECAPITALISATION OF EXTRACT INCLUDING:
- THE CONVERSION TO EQUITY AND UNBUNDLING OF ENX’s INVESTMENTS IN EXTRACT;
- THE RESTRUCTURE OF EXTRACT’s BANKING FACILITIES; AND
- A FURTHER CAUTIONARY ANNOUNCEMENT
1. INTRODUCTION AND RATIONALE
Introduction
Further to the cautionary announcements released on SENS by eXtract on 13 March 2017 and 31 March 2017
and by enX on 31 March 2017, shareholders of eXtract ("eXtract Shareholders") and shareholders of enX
("enX Shareholders") are notified, in the paragraphs that follow, of the outcomes of the strategic review
conducted by eXtract. Furthermore, agreements have been reached between eXtract, its lending consortium
("Lenders"), its wholly owned subsidiary, MCC Contracts Proprietary Limited ("MCC"), enX and its wholly
owned subsidiary, Eqstra Corporation Limited ("Eqstra Corp") of which details are also provided further
below. enX is a material shareholder of eXtract, holding 20.9% of its ordinary shares as well as being a
significant financier.
Background
Through a series of related and inter-conditional transactions in November 2016 (the "Eqstra transaction") -
- enX acquired the industrial equipment and fleet management and logistics divisions from what was
known at the time as Eqstra Holdings Limited (“Eqstra Holdings”) for a consideration of 52.7 million
enX shares. The enX shares were subsequently unbundled by Eqstra Holdings to its shareholders. As a
result of these disposals, Eqstra Holdings’ sole remaining operation was its contract mining and plant
rental division. Eqstra Holdings’ name was changed to eXtract;
- enX raised R1.5 billion through an issue of shares for cash of which R1.4 billion was utilised to make
various investments in eXtract as follows:
- R101.4 million for the subscription of new eXtract ordinary shares (20% of eXtract’s issued
ordinary shares) for cash;
- R700 million was advanced by enX to MCC by way of a mezzanine loan, subordinated in favour
of the Lenders ("First Mezzanine Loan"); and
- R600 million preference shares were subscribed for by enX in MCC, subordinated in favour of the
Lenders ("MCC Preference Shares");
- enX through its subsidiary Eqstra Corp, assumed approximately R900 million of senior debt owing
by MCC to eXtract ("Second Mezzanine Loan") resulting in cumulative loans subordinated in
favour of the Lenders of approximately R1.6 billion. (The First Mezzanine Loan, the Second
Mezzanine Loan and the MCC Preference Shares are collectively referred to hereinafter as the
"eXtract Debt")
The Eqstra transaction also resulted in the composition of the board of directors of eXtract ("eXtract Board")
changing to comprise predominantly mining-focused directors.
The following key events materialised between the date the Eqstra transaction closed and the date of this
announcement -
- A dispute in respect of a major eXtract contract in Botswana resulted in the customer withholding
payment towards the end of November 2016. On 21 December 2016 a petition was lodged with the High
Court of Botswana for the winding up of eXtract’s Botswana subsidiary (“Eqstra Botswana”) which on
24 February 2017 was placed in final liquidation. This negatively impacted cash flows and overhead
recovery in South Africa and resulted in the need to settle a secured lender to Eqstra Botswana out of the
South African asset pool;
- The contract mining agreement with Sedibelo Platinum Mines Limited ("PPM") remains sub-optimal.
Accordingly, the contract has been terminated by mutual agreement with effect from 30 June 2017;
- Tharisa Minerals Proprietary Limited ("Tharisa") notified eXtract of its intention to pursue an owner-
operator model. eXtract is currently in negotiations with Tharisa to give effect to this;
- A season of heavy summer rains hampered mining production on certain of eXtract’s contracts, resulting
in lost revenues;
- The current and future capital expenditure required by eXtract to maintain its fleet on key contracts
exceeded the cash being generated from those contracts, resulting in net cash outflows;
- Fewer mining contracts together with reduced profitability and cash flows could no longer support the
eXtract engineering and group support infrastructure which had been established to manage what was
previously a much larger operation.
Despite the recent improvement in commodity prices, the long-term outlook for the contract mining sector
remains poor. There is an oversupply of contract mining services in the market and the new eXtract Board does
not believe that the pricing power of contractors will improve sufficiently in the medium term to provide an
acceptable return on capital.
Rationale for eXtract to reposition and recapitalise
As a result of the events and conclusions reached, the reconstituted eXtract Board analysed eXtract’s
performance and its existing contracts and critically assessed the long-term vision of the company with a view
to maximising shareholders’ returns.
The eXtract Board has accordingly concluded that it wishes to -
- engage in a structured exit of its sub-optimal contract mining contracts over time which includes:
- the disposal of all excess assets;
- a significant reduction in the eXtract group’s overhead costs, including a reduction in head-count;
- the restructure and repayment within 18 months of eXtract’s R665 million lending facility; and
- the conversion of eXtract Debt into equity and the subsequent unbundling by enX of the shares which it
will cumulatively hold in eXtract;
- create an exciting sustainable future for eXtract by -
- introducing new and experienced mining industry executives; and
- establishing a new funding model for future diverse resource investments, via the creation of a
significant black owned and controlled investment company to co-fund and identify funding
opportunities (“Investment Fund”).
The restructure of eXtract's banking facilities and the conversion of the eXtract Debt to equity will enable
eXtract to:
- attract credible and experienced management talent to oversee the repositioning;
- align eXtract’s long term capital structure with the new strategy; and
- create the necessary time for management to execute their repositioning plan and to unlock value for
shareholders.
Rationale for enX to convert the eXtract Debt to equity and unbundle its eXtract shares
enX has worked closely with eXtract to create greater certainty regarding its investment in eXtract and to
unlock value for enX shareholders. In support of the outcome of eXtract’s strategic review process, enX
believes that the recapitalisation of eXtract and the subsequent unbundling of enX’s shareholding in eXtract as
described in paragraph 2 of this announcement -
- moulds enX into a pure-play industrial company with high quality industrial assets;
- unlocks value in enX by removing the uncertainty for investors created by enX’s investment in eXtract;
- improves enX’s return on equity;
- simplifies the analysis of enX’s performance;
- enables easier access to debt and equity capital markets;
- improves enX’s ability to use its shares as acquisition currency; and
- focuses management time and attention on enX’s industrial businesses and growth opportunities.
Following the unbundling of the eXtract shares, enX Shareholders will have -
- direct see-through to eXtract’s net asset value;
- the opportunity and option to participate in the value that the eXtract board aims to create through the
repositioning of eXtract;
- the support of a credible and experienced eXtract leadership team to execute the repositioning plan and
create a significant black owned and controlled investment company to co-fund and identify funding
opportunities; and
- a liquidity option to directly monetise their exposure to eXtract should they so choose.
2. RESTRUCTURE TRANSACTION
eXtract Shareholders and enX Shareholders are informed that on 13 April 2017, eXtract, MCC, enX and Eqstra
Corp concluded an agreement (“the Agreement”) in terms of which, inter alia -
(i) all of the debt owed by MCC to Eqstra Corp under the Second Mezzanine Loan will be delegated to
enX, as a result of which MCC will be indebted to enX in an amount equal to the debt so delegated (the
"enX Claim");
(ii) the eXtract Debt, less an amount of R22 million, will be discharged in full by enX subscribing for new
shares in MCC for a consideration which equates to the aggregate value of such net debt and the
subscription price payable by enX for these MCC shares being set off against MCC’s net debt owed to
enX.
The Agreement is constituted by a single composite indivisible transaction made up of the undermentioned
steps (collectively referred to herein as the ‘Restructure’), the cumulative effect of which will be as follows:
- Step 1 - MCC delegates to enX its debt owing to Eqstra Corp under the Second Mezzanine Loan;
- Step 2 - MCC voluntarily redeems for cash the preference shares held by enX in MCC ("MCC
Preference Shares") in accordance with the terms attaching to the MCC Preference Shares;
- Step 3 - the inter-company loan between eXtract and MCC is settled by the issue of a new share in MCC
to eXtract;
- Step 4 - enX subscribes for new ordinary shares in MCC at a subscription price which equates to the
aggregate value of MCC’s debt to enX totalling approx. R2.1 billion (less an amount of R22 million);
- Step 5 - enX exchanges all of the shares it holds in MCC for 5 213 202 682 shares in eXtract at 40.38
cents per share in terms of an asset for share transaction under section 42 of the Income Tax Act. This
exchange price represents an approximate 40% premium to the 60 day volume weighted average price of
eXtract’s shares as traded on the JSE at the time the conversion price was agreed; and
- Step 6 - enX unbundles and distributes to its shareholders registered as such on the relevant record date
(in compliance with section 46 of the Income Tax Act and section 46 of the Companies Act),
5 314 602 682 shares which it then holds in eXtract. This equates to approximately 29.5 eXtract shares
for every enX share held.
The Agreement is subject to the fulfilment of, inter alia, the following material conditions precedent -
- to the extent necessary, approval of the Agreement by the South African Competition Authorities;
- all relevant approvals in terms of the JSE Listings Requirements being obtained from enX Shareholders;
- to the extent legally required, eXtract shareholders agreeing to waive the benefit of a mandatory offer in
the manner provided for in paragraph 86(4) of the regulations to Companies Act, inasmuch as
immediately prior to the unbundling in step 6 of the Restructure enX will hold more than 35% of the
eXtract ordinary shares in issue;
- the Takeover Regulation Panel granting all approvals and exemptions that may be required to implement
the Agreement and Restructure;
- the shareholders of MCC, eXtract and enX passing the requisite resolutions (including in terms of the JSE
Listings Requirements and the Companies Act) to authorise and approve the implementation of the
Agreement and Restructure;
- the board of directors of each of eXtract, MCC and enX approving and adopting all resolutions required
to implement the Agreement and Restructure;
- the achievement of certain commercial milestones regarding the disposal of assets; and
- the Lenders consenting in writing to the Restructure.
The Agreement includes normal and customary warranties and undertakings pertaining to the Restructure
generally and to enX's subscription for shares in MCC and eXtract.
3. RESTRUCTURE OF BANK FACILITIES
eXtract, enX and the Lenders have with effect from 11 April 2017, agreed inter alia:
- to the restructuring of the repayment profile of eXtract’s senior term banking facilities and general
short term banking facilities such that these facilities shall be repaid or cancelled in terms of a
payment waterfall by no later than 31 September 2018;
- to the disposal of the majority of the fleet and inventory of MCC, the proceeds of which are to be
applied, based on a predetermined payment waterfall, towards the repayment of senior term banking
facilities, the funding of operations and the capitalisation of the Investment Fund;
- not to voluntarily or mandatorily pay, prepay, redeem or make any other payments or distributions in
relation to or on account of the eXtract Debt;
- to an 18 month debt standstill, which includes the amendment and suspension of certain financial
covenants contained in the Common Terms Agreement entered into on 21 October 2016 between,
inter alios, the Lenders, eXtract, MCC and enX;
- to allow the Lenders to take security over additional assets belonging to Eqstra Corp and MCC; and
- to enable eXtract to establish and make capital contributions into the Investment Fund.
4. FINANCIAL ASSISTANCE GRANTED BY ENX
FirstRand Bank Limited, acting through its Rand Merchant Bank division, (“RMB”) has furnished a guarantee
in favour of a secured lender to Eqstra Botswana in respect of the payment by MCC of an outstanding amount
of approximately R44 million, in circumstances where MCC has already paid this lender R113 million as part
consideration for its purchase of the lender’s liquidation dividend to be received in due course from Eqstra
Botswana. enX deposited cash collateral of approximately R44 million into an account in its name with RMB
before RMB issued the aforesaid guarantee and over which RMB holds a security cession. enX’s deposit will
be reduced by the amount of a liquidation dividend to be received by the secured lender from Eqstra Botswana.
5. CATEGORISATION OF THE TRANSACTIONS
The Restructure is classified as a Category 1 related party transaction for eXtract in terms of the JSE Listings
Requirements and accordingly requires shareholder approval. The disposal of assets to facilitate the exit from
eXtract’s sub-optimal contract mining contracts is classified as a Category 1 transaction for eXtract in terms of
the JSE Listings Requirements and accordingly requires shareholder approval. A circular, detailing the terms of
both the Restructure and asset disposals, incorporating a notice convening a general meeting in order to pass the
necessary resolutions to implement the restructure transaction and asset disposals, will be posted to eXtract
shareholders in due course.
The Restructure will result in eXtract’s share capital increasing by more than 50% requiring revised listing
particulars to be issued in terms of the JSE Listings Requirements. These will be posted to eXtract’s
shareholders in due course.
The Restructure is classified as a Category 1 transaction for enX in terms of the JSE Listings Requirements and
accordingly requires shareholder approval. A circular, detailing the terms of Restructure and incorporating a
notice convening a general meeting in order to pass the necessary resolutions to implement the restructure
transaction, will be posted to enX shareholders in due course.
6. RELATED PARTY TRANSACTION AND FAIRNESS OPINION
As part of the Restructure MCC will be issuing shares to a material shareholder (enX) of its holding company
(eXtract) and eXtract will in turn be acquiring MCC shares from a material shareholder (enX). Consequently,
the restructure transaction constitutes a transaction with related parties in terms of section 10.1(b)(i) of the JSE
Listings Requirements.
Accordingly, the transaction is subject to approval of eXtract shareholders. Although enX and its associates will
be taken into account in determining a quorum at the general meeting, the JSE requires that the resolution must
be approved by a simple majority of eXtract shareholders, excluding the votes cast by enX and its associates.
eXtract’s board is in the process of appointing an independent expert to provide an independent opinion on the
fairness of the transaction for inclusion in eXtract’s circular.
7. FINANCIAL INFORMATION AND FURTHER CAUTIONARY ANNOUNCEMENT
Shareholders are advised that further announcements setting out the financial information pertaining to the
transactions will be released on SENS in due course.
Shareholders are advised to continue to exercise caution when dealing in securities of both eXtract and enX
until further announcements are made.
enX shareholders are advised made aware that a presentation summarising the transaction described in this
announcement is available on the enX website, www.enxgroup.co.za from today.
18 April 2017
Sponsor to enX and eXtract Joint corporate advisor to eXtract
Corporate advisor to enX BSM Black
Joint corporate advisor to eXtract
Java Capital
Legal advisor to enX and eXtract
Legal advisor to the Lenders
enS Africa
For further information, please contact:
eXtract Group Limited
Clinton Halsey +27(0) 11 990 6700 +27(0) 83 289 5422
clinton@2tp.co.za
FTI Consulting
Frank Ford +27(0)21 487 9022 +27(0)767 881 926
frank.ford@fticonsulting.com
enX Group Limited
Paul Mansour +27(0)72 286 3897
paul.mansour@enxgroup.co.za
Date: 18/04/2017 03:10:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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