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Acquisition of an indirect 34.94% interest in Safaricom
Vodacom Group Limited
(Incorporated in the Republic of South Africa)
(Registration number 1993/005461/06)
Share code: VOD ISIN: ZAE000132577
ADR code: VDMCY ISIN: US92858D2009
("Vodacom Group" or “the company”)
ACQUISITION OF AN INDIRECT 34.94% INTEREST IN SAFARICOM
1. Introduction
Shareholders are advised that, on 14 May 2017 ("signature date"), Vodacom Group entered into
an agreement ("the agreement") in terms of which Vodacom Group will acquire a 34.94% indirect
interest in Safaricom Limited ("Safaricom") from Vodafone International Holdings B.V.
("Vodafone") by acquiring 87.5% of the issued share capital of Vodafone Kenya Limited
("Vodafone Kenya") and Vodafone will subscribe for new Vodacom Group shares. The purchase
consideration payable by Vodacom Group is the sum of an amount equal to the subscription price
payable by Vodafone for 226.8 million new ordinary Vodacom Group shares ("new Vodacom
Group shares"), which will be set off against the same amount of the purchase consideration, and
a maximum amount of KES393.75 million (R51 million) payable to Vodafone in cash (the
"proposed transaction").
2. Nature of business of Vodafone Kenya and Safaricom
Vodafone Kenya holds, as its only material asset, a 39.93% interest in Safaricom and is wholly
owned by Vodafone. Vodafone will retain a 12.5% interest in Vodafone Kenya, equivalent to
4.99% interest in Safaricom, after completion of the proposed transaction.
Vodafone Kenya currently has a right to appoint, remove and/or replace four of Safaricom’s ten
directors. Following the proposed transaction, Vodafone Kenya will retain this right. Vodafone will
have the right to nominate one of the four directors appointed by Vodafone Kenya to Safaricom's
board of directors for so long as it retains at least 12.5% of the issued share capital of Vodafone
Kenya.
Safaricom, established in 1997 and listed on the Nairobi Securities Exchange ("NSE") with a
market capitalisation of c.US$8 billion, provides a range of integrated telecommunications
services, including mobile and fixed voice, SMS, data, internet and mobile money (“M-Pesa”) to
over 28.1 million total customers, including both consumer and enterprise.
Safaricom is owned by the government of Kenya (35%), Vodafone Kenya (39.93%), public
investors (25%) and Safaricom employees (0.07%).
3. Rationale for the proposed transaction
The proposed transaction presents a unique opportunity to acquire a significant strategic interest
in the premier telecom operator in East Africa.
Safaricom is the market leader in Kenya with a 71% mobile customer market share, has one of
Kenya’s most recognisable brands and a highly experienced management team. Safaricom is a
high growth, high margin, and high cash generating business. In its 2017 financial year, Safaricom
delivered 8.8% revenue growth, adjusted earnings before interest, tax, depreciation and
amortisation ("EBITDA") margin of 48.1% and cash flow conversion of 65.9%. The company
benefits from well-invested state-of-the-art infrastructure and is the only operator with a nation-
wide network which currently provides 3G and 4G coverage to 85% and 25% of the population
respectively.
Safaricom has a track-record of sustainable growth, having delivered a compound annual growth
rate in revenue of 14.8% over the last five years whilst its future growth potential is underpinned
by a broad range of fundamental drivers. The proposed transaction will expose Vodacom Group
to the attractive high growth Kenyan market, being one of the largest and most advanced
economies in east and central Africa that has made significant strides in technological innovation.
According to the International Monetary Fund, the Kenyan economy is projected to grow at 6%
per annum over the next five years.
Kenya has a mobile penetration of 88%, which is well below South Africa’s mobile penetration of
146%. Kenya has an emerging, urban middle class with an appetite for high value goods and
services. Kenya has high potential for further growth in mobile penetration and data usage is
expected to continue to grow, which will increase customer demand for Safaricom’s 3G and 4G
mobile, fixed line and digital services. Safaricom’s leading mobile money platform, M-Pesa, is an
important driver of Kenyan economic growth, providing essential financial services to over
19 million 30-day active customers.
Vodacom Group sees scope to create further value through closer cooperation between both
companies, including best practice sharing; replication of Safaricom’s success in M-Pesa in
Vodacom Group’s other territories; and the creation of new pan-African enterprise solutions in
contiguous markets in East Africa.
The proposed transaction also offers an opportunity to diversify Vodacom Group’s economic
exposure and earning’s profile in a single transaction. Its interest in Safaricom will contribute
approximately 15% of its earnings (before amortisation for the fair value adjustment of assets on
acquisition) based on Vodacom Group’s net profits as reported in its preliminary results for the
year ended 31 March 2017.
Following the proposed transaction, Vodacom Group will occupy a leading position in its markets
with approximately one third of sub-Saharan Africa’s gross domestic product.
4. Purchase consideration for the proposed transaction
The purchase consideration, payable by Vodacom Group for the sale and transfer of 87.5% of the
issued share capital of Vodafone Kenya, is the sum of an amount equal to the subscription price
payable by Vodafone for the new Vodacom Group shares, which will be set off against the same
amount of the purchase consideration, and a maximum amount of KES393.75 million (R51 million)
in cash. As at the signature date, the subscription price amounts to R34.6 billion, based on the
Vodacom Group share price on Friday 12 May 2017.
Vodafone Kenya holds 16 000 000 000 shares in Safaricom. The implied share subscription and
set-off ratio for the number of new Vodacom Group shares to be issued, in respect of 87.5% of
the 39.93% Safaricom shares held by Vodafone Kenya, is equivalent to 1.62 new Vodacom Group
shares (cum dividend) for every 100 shares in Safaricom held by Vodafone Kenya.
The agreed share subscription and set-off ratio implies:
- a 5.9% discount compared to the implied share subscription and set-off ratio of 1.72 based
on the closing share prices of Vodacom Group and Safaricom on Friday 12 May 2017;
- a 4.8% discount compared to the implied share subscription and set-off ratio of 1.70 based
on the volume weighted average share prices of Vodacom Group and Safaricom for the 30
days prior to and including Friday 12 May 2017;
- a 0.6% discount compared to the implied share subscription and set-off ratio of 1.63 based
on the volume weighted average share prices of Vodacom Group and Safaricom for the
180 days prior to and including Friday 12 May 2017; and
- a share price of KES19.05 based on the Vodacom Group closing share price on Friday
12 May 2017.
The new Vodacom Group shares to be issued by the company to Vodafone will be adjusted, after
the signature date, if Vodacom Group declares any distribution ("Vodacom Group distribution") to
its shareholders where the record date for such distribution is set to occur prior to the effective
date of the proposed transaction, being the 10 business days after the fulfilment of the last of the
suspensive conditions set out below ("effective date"). Such adjustment will be equal to:
(i) the rand equivalent of the Vodacom Group distribution per Vodacom Group share;
(ii) multiplied by the number of new Vodacom Group shares immediately prior to any adjustment;
and
(iii) divided by the closing price of a Vodacom Group share on the JSE Limited (“JSE”) on Friday
12 May 2017 less the Vodacom Group distribution per Vodacom Group share.
As a result of the issue of the new Vodacom Group shares to Vodafone, the interest held by
Vodafone in Vodacom Group will increase from 65.0% to 69.6% (excluding any potential
adjustment necessary due to a Vodacom Group distribution). Following the proposed transaction
Vodacom Group’s expected free float may be below the minimum free float requirement of 20%
for its listing on the JSE. Should there be a breach in free float as a result of the proposed
transaction, Vodacom Group has secured a two-year exemption from the JSE from the date of
implementation of the proposed transaction. Vodafone has committed to Vodacom Group that, if
required, it will sell down up to 36.3 million of its shares in Vodacom Group before the exemption
expires in order to rectify the position.
5. Suspensive conditions
The proposed transaction is subject to the fulfilment or waiver of the following suspensive
conditions:
5.1 the adoption by the existing shareholders of Vodafone Kenya of new articles of association
in the form prescribed in the agreement (subject only to comment and sign off by Kenyan
counsel for each of Vodacom Group and Vodafone) and the subsequent filing of the
articles of association and the special resolution passed in respect thereof with the Kenyan
Companies Registry;
5.2 to the extent required, Vodacom Group obtaining an unconditional exemption (as
contemplated in section 121(b)(ii) of the Companies Act 71 of 2008 of South Africa ("the
Act")) or an unconditional compliance certificate (as contemplated in section 121(b)(i) of
the Act) from the Takeover Regulation Panel;
5.3 Vodacom Group shareholders, other than Vodafone and its associates, as defined in the
JSE Listings Requirements approving the proposed transaction by means of an ordinary
resolution as a related party transaction as contemplated in section 10 of the JSE Listings
Requirements;
5.4 Vodacom Group shareholders approving:
5.4.1 the issue of the new Vodacom Group shares by means of a special resolution as
contemplated in section 41(1)(b) of the Act; and
5.4.2 the issue of the new Vodacom Group shares by means of an ordinary resolution
as contemplated in clause 5.7.2 of the memorandum of incorporation of Vodacom
Group;
5.5 the receipt of the approval of the proposed transaction in writing from the Financial
Surveillance Department of the South African Reserve Bank;
5.6 the JSE having approved a listing of the new Vodacom Group shares on the JSE with
effect from the effective date;
5.7 Vodafone Kenya, Vodacom Group and Vodafone entering into an agreement ("director
appointment right agreement") which provides for Vodafone’s right to nominate for
appointment one of the Safaricom directors appointed by Vodafone Kenya, and
Vodafone’s right to cede its rights and delegate its obligations under the director
appointment right agreement, and such agreement becoming unconditional in accordance
with its terms, save for any condition requiring the agreement to become unconditional;
and
5.8 the receipt of an exemption, in a form acceptable to Vodacom Group, from the Capital
Markets Authority of Kenya in terms of regulation 5(1) of the Capital Markets (Take-overs
and Mergers) Regulations, 2002 ("regulations") from compliance by Vodacom Group
and/or Vodafone Kenya with any requirement under the regulations to make a mandatory
offer to the remaining shareholders of Safaricom pursuant to the implementation of the
proposed transaction.
6. Warranties and indemnities
As required by JSE Listings Requirements, Vodacom Group confirms that warranties and
indemnities applicable to the proposed transaction are normal for transactions of this nature.
7. Pro forma financial effects of the proposed transaction
The table below sets out the pro forma financial effects of the proposed transaction on the
published reviewed preliminary condensed consolidated financial results of Vodacom Group for
the year ended 31 March 2017. The pro forma financial effects have been prepared for illustrative
purposes only and because of their pro forma nature, they may not fairly present Vodacom
Group’s financial position, changes in equity, results of operations or cash flows, nor the effect
and impact of the proposed transaction going forward.
The pro forma financial effects have been prepared using accounting policies that comply with
IFRS and that are consistent with those applied in the published reviewed preliminary condensed
consolidated financial results of Vodacom Group for the year ended 31 March 2017. The
pro forma financial effects are presented in accordance with the JSE Listings Requirements and
the Guide on Pro Forma Financial Information issued by the South African Institute of Chartered
Accountants.
The directors of Vodacom Group are responsible for the compilation, contents and preparation of
the pro forma financial effects. Their responsibility includes determining that the pro forma
financial effects have been properly compiled on the basis stated, which is consistent with the
accounting policies of Vodacom Group and that the pro forma adjustments are appropriate for
purposes of the pro forma financial information disclosed pursuant to the JSE Listings
Requirements.
The pro forma financial effects of the proposed transaction have been included on a voluntary
basis.
Before the After the Percentage
proposed proposed change
transaction transaction (%)
(cents) (cents)
(A) (B) (B/A)
Basic earnings per share 915 861 (5.9)
Diluted earnings per share 886 836 (5.6)
Headline earnings per share 923 875 (5.2)
Diluted headline earnings per share 894 850 (4.9)
Net asset value per share 1 617 3 420 111.5
Net tangible asset value per share 1 004 1 105 10.1
Weighted average number of Vodacom Group
shares in issue (millions) 1 467 1 694
Weighted average diluted number of Vodacom
Group shares in issue (millions) 1 469 1 696
Number of Vodacom Group shares in issue
(millions) 1 488 1 715
Notes and assumptions:
a) The Vodacom Group information reflected in the "Before the proposed transaction" column
has been extracted from the published reviewed preliminary condensed consolidated
financial statements of Vodacom Group for the year ended 31 March 2017.
b) The effects on basic earnings, diluted earnings, headline earnings and diluted headline
earnings are calculated on the basis that the proposed transaction was effective 1 April 2016,
while the effects on the net asset value and net tangible asset value per share are calculated
on the basis that the proposed transaction was effective 31 March 2017.
c) Vodafone Kenya is an investment holding company, with its only material asset being the
39.93% investment in Safaricom. Management has determined that Vodacom Group will,
through the acquired interest in Vodafone Kenya, be able to exercise significant influence
over Safaricom, but not control Safaricom. The acquisition by Vodacom Group of a controlling
interest of 87.5% in Vodafone Kenya is therefore treated as the acquisition of a subsidiary
that does not meet the definition of a business. The 39.93% equity interest that Vodafone
Kenya holds in Safaricom is treated as an investment in an associate in terms of
IAS 28: Investments in Associates and Joint Ventures.
The equity accounting method has been used to account for Vodafone Kenya's equity interest
in Safaricom. Under the equity method, the 39.93% investment is initially recognised at cost,
including directly attributable transaction costs. A provisional fair value allocation of the
investment in the associate was performed. The resulting notional goodwill, calculated as the
difference between the cost of the investment and Vodafone Kenya’s share of the fair value
of identifiable assets and liabilities of Safaricom is included in the carrying amount of the
investment in associate. The identifiable tangible and intangible assets are assumed to be
amortised over their respective useful lives as determined within the provisional fair value
allocation exercise.
Vodafone will retain a 12.5% non-controlling interest in Vodafone Kenya. On consolidation,
12.5% of the net assets and earnings are therefore allocated to non-controlling interests.
A detailed fair value allocation will be performed on the effective date of the proposed
transaction and may differ from the assumptions underlying these pro forma financial effects.
d) The financial information for Vodafone Kenya has been extracted from unaudited
management accounts for the year ended 31 March 2017, while the financial information for
Safaricom has been extracted from the audited condensed consolidated financial statements
for the year ended 31 March 2017 as published on the NSE on Wednesday 10 May 2017.
e) For accounting purposes the assumed purchase consideration is determined as follows:
New Vodacom Group shares:
226.8 million new Vodacom Group shares at a price of R152.49 per new Vodacom Group
share, being the closing share price of Vodacom Group on Friday 12 May 2017, being the
last practicable date prior to this announcement (the assumed price of the new Vodacom
Group shares will be determined on the effective date of the proposed transaction and may
differ from the assumptions underlying these pro forma financial effects).
The number of new Vodacom Group shares has been fixed at 226.8 million, subject only to
adjustment in respect of distributions to shareholders where the record date for such
distribution is set to occur prior to the effective date. The pro forma financial effects have been
prepared on the assumption that the fixed number of new Vodacom Group shares reflect fair
value of the purchase consideration and equity interest in Safaricom on the assumed effective
dates of the proposed transaction, which is 1 April 2016 for purposes of calculating the effect
on basic earnings, diluted earnings, headline earnings and diluted headline earnings per
share, and 31 March 2017 for purposes of calculating the effect on net asset value and
tangible net asset value per share. The pro forma financial effects do not reflect any
adjustments that may result from movements in the fair value of Vodacom Group, Safaricom,
or the ZAR/KES exchange rate between the date of signing the agreements and the effective
date of the proposed transaction.
Furthermore, the pro forma financial effects do not consider potential adjustments to the
purchase consideration arising pursuant to a Vodacom Group distribution.
Cash consideration:
Assumed cash consideration of R51 million in lieu of actual cash in Vodafone Kenya, being
the Vodacom Group’s share of KES500 million less withholdings tax converted at 7.6867,
being the closing ZAR/KES exchange rate at 31 March 2017.
f) Assumed directly attributable transaction costs (non-recurring) to the value of R417 million
have been added to the purchase consideration which has consequently increased notional
goodwill by the same value. This includes security transfer taxes of 1% of the assumed
purchase consideration amounting to R346 million.
g) All effects are of a recurring nature except where otherwise noted.
h) Net tangible asset value is calculated as net asset value attributable to the owners of the
parent, less the value of goodwill, other intangible assets and deferred tax assets attributable
to the owner of the parent.
8. Value and profits attributable to the net assets of Vodafone Kenya
Vodafone Kenya is a wholly-owned subsidiary of Vodafone and consequently does not prepare
consolidated results. The results of Vodafone Kenya do not therefore include its share of the
profits from its investment in Safaricom. The carrying value of the net assets of Vodafone Kenya
as at 31 March 2017, being Vodafone Kenya’s most recent reporting date, is KES5 202 million,
being an equivalent of R677 million (calculated at the closing ZAR/KES exchange rate at 31 March
2017 of 7.6867) and profits attributable to the net assets for the year ended of KES23 297 million,
being an equivalent of R3 205 million (calculated at an average ZAR/KES exchange rate for the
year ended 31 March 2017 of 7.2699).
9. Articles of association of Vodafone Kenya
Vodacom Group confirms that the provisions of the articles of association of Vodafone Kenya will
neither frustrate nor relieve Vodacom Group’s compliance with the JSE Listings Requirements.
10. Dividend policy
Vodacom Group intends to maintain its dividend policy of paying at least 90% of headline
earnings, excluding the contribution of the attributable net profit or loss from Safaricom and any
associated intangible amortisation. In addition, the company intends to distribute any dividend it
receives from Safaricom, up to a maximum amount of the dividend received, net of withholding
tax.
Dividends will be paid after consideration of the factors below:
Vodacom Group intends to pay as much of its after tax profits as will be available after retaining
such sums and repaying such borrowings owing to third parties as shall be necessary to meet the
requirements reflected in the budget and business plan, taking into account monies required for
investment opportunities. There is no fixed date on which entitlement to dividends arises and the
date of payment will be determined by the Board or shareholders at the time of declaration, subject
to the JSE Listings Requirements.
11. Related party transaction
The proposed transaction is a 'related party transaction' in terms of the JSE Listings Requirements
as Vodacom Group will be transacting with a related party, being Vodafone. Vodafone is a material
shareholder by virtue of being an indirect 65% shareholder in Vodacom Group and is also the
direct 100% shareholder in Vodafone Kenya.
The Vodacom Group Board appointed a committee consisting of independent directors who have
unanimously approved the proposed transaction.
The company appointed an independent expert, Deloitte & Touché, to provide a fairness opinion
on the proposed transaction which will be included in the circular to be distributed to shareholders
as referred to in paragraph 12 below.
12. Categorisation of the proposed transaction
The proposed transaction is further classified as a Category 2 transaction in terms of the JSE
Listings Requirements as the purchase consideration, being the issue of the new Vodacom Group
shares and the cash consideration, is 5% or more, but less than 30% of Vodacom Group’s issued
share capital and market capitalisation, respectively, as at the date of signature of the agreement.
As the proposed transaction is categorised as a ‘related party transaction' and a 'Category 2
transaction' in terms of the JSE Listings Requirements, a circular containing details of the
proposed transaction, together with the fairness opinion referred to in paragraph 11 above, and a
notice of general meeting will be posted to Vodacom Group shareholders in due course. Vodacom
Group shareholders, other than Vodafone and its associates, will be required to approve the
proposed transaction at the general meeting by means of an ordinary resolution.
Midrand
15 May 2017
Transaction sponsor
Nedbank Corporate and Investment Banking
Financial and transaction advisor
Goldman Sachs International
Independent expert
Deloitte & Touché
Legal advisor
Edward Nathan Sonnenbergs Incorporated
Date: 15/05/2017 07:30:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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