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Acquisition of Australian speciality menswear apparel retailer, the Retail Apparel Group
THE FOSCHINI GROUP LIMITED
Incorporated in the Republic of South Africa
Registration number: 1937/009504/06
Ordinary share code: TFG
Preference Share code: TFGP
Ordinary Share ISIN: ZAE000148466
Preference Share ISIN: ZAE000148516
(“TFG” or “the Company”)
ACQUISITION OF AUSTRALIAN SPECIALITY MENSWEAR APPAREL RETAILER,
THE RETAIL APPAREL GROUP
1. Introduction
Shareholders are advised that TFG Retailers Pty Ltd, a wholly-owned subsidiary of the Company
and a private company incorporated in accordance with the laws of the Commonwealth of
Australia, with company number ACN 612 634 312 (“TFG Australia”) has entered into an
agreement with the current shareholders (“Vendors”) of RAG Holdco Limited trading as Retail
Apparel Group (“RAG”) in terms of which, amongst other things, TFG Australia will acquire the
entire issued ordinary and preference share capital of RAG from the Vendors (“Acquisition”). The
Vendors are private equity group Navis Capital, Stephen Leibowitz (the founder of RAG) and
certain members of management, who have entered into new employment agreements with TFG
Australia and will remain as the management of RAG following implementation of the Acquisition.
2. Overview of RAG
RAG was established in 1987 and has since grown to become a leading speciality menswear
apparel retailer in Australia. RAG houses a balanced portfolio of core and emerging retail apparel
brands, and has established itself as a menswear player in the mid to value, fashion conscious
speciality store segment in its local market. In addition, RAG has a small but growing women’s
athleisurewear retail offering (Rockwear).
RAG’s retail portfolio spans five speciality apparel brands:
Brand name Fashion focus Price point Store footprint
Tarocash Leading, on-trend menswear brand Mid-market 114
Leading, fashionable, younger
yd. menswear brand Mid-market 98
Fast growing, on-trend menswear
Connor brand Value 137
On-trend big and tall menswear
Johnny Bigg brand Mid-market 26
Differentiated, on-trend women’s
Rockwear athleisurewear Value 25
Total 400
RAG’s core menswear brands, Tarocash and yd., are long established and leading brands in the
Australian menswear market, while Connor is one of the fastest growing menswear brands in
Australia. Johnny Bigg has been proven as a unique offering in the market, and is in the process
of a focused store roll-out. Rockwear’s on-trend women’s athletic apparel appeals to a broad
range of consumers and is well positioned for further store roll-out. RAG’s brands are uniquely
positioned across diversified product categories, generating a resilient and growing earnings
stream.
Through its customer centred approach, RAG has grown its national footprint to a network of 400
stores, strategically positioned throughout Australasia to capture its target market. 80% of RAG’s
stores are located in shopping centres, with the remainder in city centres, neighbourhood centres
and factory outlets.
Further detail regarding RAG and its brands can be found on its website, http://rag.net.au.
3. Rationale for the Acquisition
RAG has achieved consistent growth in sales and profitability within the Australian market,
through:
- an experienced and proven management team;
- a differentiated low risk product strategy;
- excellent sourcing and distribution, whereby RAG ensures that products are manufactured
in a cost-optimal location through its strong supplier network;
- centralised stock and IT infrastructure; and
- digital marketing and online channels.
TFG believes that the product and value offerings of RAG are well aligned with the current brand
and value offering of TFG. In conjunction with TFG’s recent value enhancing acquisitions of
Phase Eight and Whistles, the Acquisition will further diversify its international expansion into its
chosen geographies. RAG’s strong store and online platform is expected to catalyse the
expansion of TFG’s brands into Australia.
The Acquisition satisfies the four specific requirements of TFG’s stated expansion strategy:
- A strong financial track record – strong historical revenue and earnings before interest, tax,
depreciation and amortisation (“EBITDA”) growth;
- Established footprint in the target market and well positioned to take advantage of future
opportunities;
- An experienced, motivated and self-sufficient management team; and
- Exciting growth prospects in the target market and the opportunity to further expand in
strategic international markets.
In addition, RAG has the following attractive attributes for the Company:
- Impressive track record of growing sales at a faster rate than the retail sector as a whole
(14.3% compound average revenue growth over the past 3 years and 10.7% compound
average EBITDA growth over the past 3 years) while successfully increasing its market
share;
- Scalable business model with scope for further market share growth;
- Strong earnings enhancement is anticipated from continued roll-outs and optimisation of its
operating brands;
- Enhances the geographic diversification of the Company outside of South Africa, providing
a further earnings and currency hedge, and entrenches its position in Australia;
- Expands the Company’s outlet footprint from 3 328 to 3 728 (as at March 2017); and
- Alignment with the Company’s multi-brand business model with a focus on menswear and
athleisure.
4. Acquisition consideration
All figures in this announcement are calculated using an illustrative ZAR:AUD exchange rate of
R10.00.
The Acquisition consideration (“Consideration”) is capped at the lower of 7 (seven) times RAG’s
audited normalised EBITDA for the year ending June 2017 and AUD302,5 million
(ZAR3 025 million) and is calculated on a “debt free cash free” basis and with reference to an
agreed level of working capital (“Target Working Capital”).
The Consideration will be settled in cash and is payable on the later of:
- 26 June 2017; and
- the date which is the latest to occur of:
- the first day of the month following the month in which all conditions precedent have
been fulfilled or waived; and
- the date which is the seventh Business Day after all conditions precedent have been
fulfilled or waived,
(“Consideration Payment Date”).
On the Consideration Payment Date 95% of the Consideration shall be payable to the Vendors,
adjusted for estimated net debt and for the difference between the estimated actual working
capital, and the Target Working Capital, as at the effective date (“Adjustment Amounts”). The
remaining c.5% of the Consideration shall be transferred on the Consideration Payment Date
into an escrow account (“the Escrow Funds”).
Following the finalisation of RAG’s audited financial statements for the year ending June 2017
and the actual Adjustment Amounts, the proportions in which each of TFG Australia and the
Vendors become entitled to the Escrow Funds will be determined.
TFG will utilise a combination of its own funds as well as a short-term bridge facility (“Bridge
Facility”) provided by Rand Merchant Bank, a division of FirstRand Bank Ltd (“RMB”), which will
be refinanced with longer term funding at an appropriate time, to provide TFG Australia with the
required funding to enable it to pay the Consideration due in terms of the Acquisition. The
Company intends to retain the flexibility to potentially issue new ordinary shares to refinance all
or part of the Bridge Facility, whether by way of a vendor consideration placing or otherwise. The
expected purchase price has been hedged.
5. Net assets acquired and profits attributable to those assets
The net assets of RAG as at 31 December 2016 (being the date of the most recent reviewed
interim financial statements) were AUD146.2 million (ZAR1 462 million). RAG anticipates
reporting EBITDA of AUD43.2 million (ZAR432 million) for the year ending June 2017.
Additional financial information relating to the historic performance of RAG is included in the
presentation referred to in paragraph 10 below.
TFG is expected to consolidate approximately 8 months of RAG’s trading performance in its
31 March 2018 results, assuming an effective date of 1 August 2017. The inclusion of RAG’s
trading results (excluding acquisition costs) is expected to have a positive impact on TFG’s
earnings for the 2018 financial year and the Acquisition is expected to be earnings accretive in
the first year of inclusion. This statement is based on management forecasts which have not
been audited by TFG’s auditors and is provided for information only. Similarly, any forecast
financial information contained in this announcement has not been reviewed or reported on by
the Company’s auditors.
6. Conditions precedent
The Acquisition is subject to the fulfilment or waiver where capable of waiver, of the following
conditions precedent, by no later than 29 September 2017:
- South African Reserve Bank approval;
- Australian Foreign Investment Review Board approval; and
- Certain of RAG’s lessors providing consent to the change in ownership of RAG.
7. Retention of RAG key management
Key RAG management have entered into new employment contracts with TFG Australia, which
will provide for operational continuity post-closing.
8. Effective date
The effective date of the Acquisition will be the end date of the retail month in which the last
condition precedent is satisfied or waived.
9. RAG memorandum of incorporation
On implementation of the Acquisition, RAG will become a wholly owned subsidiary of TFG
Australia, which is a wholly owned subsidiary of TFG, and the Company confirms that:
- the provisions of RAG’s incorporation documents do not frustrate TFG in any way from
compliance with its obligations in terms of the Listings Requirements of the JSE Limited
(“Listings Requirements”); and
- nothing in RAG’s incorporation documents shall relieve TFG from compliance with the
Listings Requirements.
10. Acquisition presentation
Shareholders are referred to the Acquisition presentation, which forms part of the March 2017
results presentation, on the TFG website (www.tfglimited.co.za) which will be available later
today.
11. JSE categorisation
The Acquisition constitutes a Category 2 transaction in terms of paragraph 9.5(a) of the Listings
Requirements and accordingly no shareholder approval is required.
Cape Town
25 May 2017
Sole financial advisor and transaction sponsor to TFG
Rand Merchant Bank (A division of FirstRand Bank Limited)
Legal advisors to TFG
Herbert Smith Freehills
ENS Africa
Sponsor to TFG
UBS South Africa (Proprietary) Limited
Date: 25/05/2017 08:00:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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