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Proposed restructure and withdrawal of 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 AND WITHDRAWAL OF CAUTIONARY ANNOUNCEMENT
1. INTRODUCTION
Shareholders are referred to the: -
- cautionary announcement released on the Stock Exchange News Service (“SENS”) on
5 December 2016;
- renewal of cautionary announcement released on the SENS on 20 January 2017;
- renewal of cautionary announcement released on the SENS on 30 January 2017;
- renewal of cautionary announcement released on the SENS on 13 March 2017; and
- renewal of cautionary announcement released on the SENS on 28 April 2017.
In the abovementioned announcements, shareholders were advised that Clover is in the process
of an organisational restructuring of its business to give effect to its stated objective of
developing higher margin, value added products in dairy and other related food categories and
to substantially reduce its exposure to the cyclicality of its low margin business in future (“the
Restructure" or "the Transaction").
The board of directors of Clover is pleased to announce that the Transaction Agreements (as
defined below) have been concluded and that the Restructure will be effective on 1 July 2017
("Effective Date").1
2. THE RESTRUCTURE
2.1 Rationale2
Clover's business presently comprises two main elements. Firstly, it has a low margin business
("Low Margin Business") where profitability is primarily driven by volumes and which, relates,
inter alia, to the procurement of raw milk, the selling, marketing and distribution of non-value
added fresh milk, ultra-high temperature milk, ultra pasteurised milk, skim milk powder, whole
milk and bulk cream ("Non-Value Added Dairy Products") 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, inter alia, custards, yoghurts, certain
cheeses, infant products, non-alcoholic beverages 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.
1
LR9.15(a)(iv).
2
LR9.15(g).
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2.2 The key objectives for the Restructure are as follows:
- To improve access to new volume based growth markets
The attention of Clover's management is currently split between (i) driving the High
Margin Business, and, (ii) driving volumes of raw milk to improve profitability in the Low
Margin Business. It is anticipated that a separate entity, Dairy Farmers of South Africa
Proprietary Limited (“DFSA”), focused exclusively on driving volumes in the Low Margin
Business will enable Clover to focus on the High Margin Business. The focus on the High
Margin Business is in keeping with Clover's stated objectives of promoting and
developing value added products in dairy and other related food categories, expanding
its non-alcoholic beverages portfolio and developing and enhancing 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.
- 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.
- To give producers of raw milk ("Producers") a stake in Non-Value Added Dairy
Products
The Restructure will give Producers that apply for B Shares in DFSA a stake in the Non-
Valued Added Dairy Products business where the highest volumes of raw milk are used
and thus enable them to profit from the entire value chain.
2.3 Terms of the Restructure3
Clover transferred the Low Margin Business4 to, its wholly owned subsidiary, DFSA,5 under a
written transfer of business agreement ("Transfer of Business Agreement") with effect from
1 April 2017. In exchange for the transfer of the Low Margin Business as aforementioned, DFSA
will allot and issue to Clover, shares in DFSA.
Clover will, in addition to the transfer of the business as described above, transfer the following
to DFSA in terms of the Transfer of Business Agreement:
- all employees in the existing milk procurement and milk collection department;
and
- all agreements with Clover's customers relating only to the Low Margin Business.
3
LR9.15(a)(vi).
4
LR9.15(a)(i).
5
LR9.15(a)(iii).
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Clover will then, in terms of a written cession and delegation agreement ("Cession and
Delegation Agreement"), cede, assign, delegate, transfer and make over to DFSA, all and any of
its rights and obligations to receive and purchase milk from Producers under and in terms of all
delivery agreements (being the delivery agreements that Clover has with Producers in terms of
which Clover procures milk) ("Delivery Agreements"), including all of Clover's rights and
obligations from or in respect of, or constituting a part of, the aforegoing rights and obligations.
In addition to the Transfer of Business Agreement and the Cession and Delegation Agreement,
Clover and DFSA will enter into the following suite of agreements:
- a manufacturing and packaging agreement in terms of which DFSA appoints Clover
to manufacture and/or package the Non-Value Added Dairy Products for sale by
DFSA;
- a supply of raw milk and other dairy raw materials agreement ("Milk Supply
Agreement") for the provision of raw milk, skim milk powder and whole milk
powder by DFSA to Clover;
- a sales and distribution agreement in terms of which DFSA appoints Clover to
provide the sales, primary distribution and secondary distribution services as more
fully set out in the agreement;
- a management, administration and overheads agreement in terms of which Clover
agrees to provide management, administration, and overheads services (which
include, inter alia, information technology, human resources, office facilities,
advertising, marketing and product innovation and technology, insurance, tax
services and financial services) to DFSA;
- a licence agreement in terms of which DFSA is granted a licence to use certain
Clover trademarks and copyright to manufacture, market, distribute and sell the
Non-Value Added Dairy Products;
- three separate lease agreements in terms of which:
i. Clover leases the premises described as the Clover Depot, R612 Donny
Brook Road, Ixopo 3276, Kwa-Zulu Natal together with the assets listed
in annexure B to such lease, to DFSA;
ii. Clover leases the following premises to DFSA:
a) Lot 4539, Estcourt;
b) Cons Title, Erf 1347, Heilbron;
c) Erf 951, Lichtenburg;
d) Erf 4316 Clayville Ext 11 Township, JR Transvaal Formerly Erf
1266;
e) Erf 23396, Parow Industria; and
f) Erf 824, Redhouse; and
iii. Clover leases the moveable assets listed in annexure A to such lease to
DFSA; and
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- a revolving credit facility agreement in terms of which Clover makes a facility in an
aggregate minimum amount of R450,000,000 available to DFSA to finance its
general working capital and operational requirements. The interest rate to apply
in terms of the revolving credit facility agreement will be at arms-length and
market related,
the above suite of agreements, together with the Transfer of Business Agreement and the
Cession and Delegation Agreement, collectively, hereinafter referred to as the
"Transaction Agreements".
Pursuant to the Transfer of Business Agreement, Clover will hold all of the ordinary shares
of DFSA. On or about 1 July 2017, Clover's holding of ordinary shares will be converted to
a holding of A shares in DFSA and DFSA will, upon application by individual Producers, issue
and allot B shares to such individual Producers.6 The A shares will constitute 26% of the
issued shares of DFSA and the B shares will constitute 74% of the issued shares of DFSA.
The A shares and the B shares will, for a period of five years, enjoy the same economic and
voting rights and will accordingly rank pari passu. After expiry of such five year period, the
A shares will cease to participate in distributions made by DFSA, other than any distribution
on a dissolution of DFSA in respect of which the A shares will participate equally with the B
shares up to a maximum amount of R0.05 per A share. The holders of B shares must be
Producers who supply milk to DFSA and accordingly they will be restricted from transferring
or disposing of their B shares, save for transfers or disposals to Clover or DFSA in
accordance with the provisions of the Memorandum of Incorporation ("MOI") of DFSA.
In addition, the MOI of DFSA contains a call option ("Call Option") in terms of which DFSA
and each B shareholder grants to Clover an option to require: (a) the sale of all B shares
held by the B shareholders and any corresponding loan account to Clover, (b) the sale of all
the assets and liabilities of DFSA to Clover, or (c) the redemption by DFSA of all the B shares,
if any one or more of the following events occur:
i. the average DFSA farm gate milk price is 20% higher than the national
farm gate milk price (based on a standard litre of milk) as published from
time to time by the Milk Producers' Organisation for longer than six
months;
ii. DFSA's total annual volume of Non- Value Added Dairy Products sold
decreases by 20% or more when compared to the annual volume in any
rolling 12-month period;
iii. DFSA commits a breach of any of the Transaction Agreements and fails to
rectify the breach within the requisite period set out in such agreement to
do so;
iv. relations between DFSA and its milk Producers weaken to such an extent
that it has become irretrievably broken down; or
v. where the B shareholders pass a vote of no confidence in management.
No consideration is payable by Clover to DFSA or any B shareholder for the grant of the Call
Option.
6
LR9.15(i).
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The Call Option is irrevocable and exercisable by Clover for a period of five years from the
date that the MOI is adopted by way of a special resolution.
The board of DFSA will comprise a maximum of ten directors. The holder of A shares, being
Clover is entitled to appoint two directors to the board and the holders of the B shares are
entitled to appoint three directors, provided that:
i. one director is required to be from the Highveld region of South Africa;
ii. one director is required to be from the Kwa-Zulu Natal region of South
Africa; and
iii. one director is required to be from either the Eastern Cape or the Western
Cape region of South Africa.
2.4 Key protections for Clover shareholders
Shareholders of Clover can take comfort in the following:
(i) as stated above, the Restructure will enable Clover to focus on the High Margin
Business, which is in keeping with Clover's stated objectives of promoting and
developing value added products in dairy and other related food categories, expanding
its non-alcoholic beverages portfolio and developing and enhancing its key
competencies in brand development, production, distribution and merchandising;
(ii) the Restructure will not affect Clover's profitability due to the services fees Clover will
earn in rendering services to DFSA under the applicable Transaction Agreements;
(iii) Clover believes that the Restructure will not threaten its ability to source raw milk
since it will merely be doing so through DFSA as opposed to engaging directly with
Producers;
(iv) Clover can exercise the Call Option, which will enable Clover to reacquire the Low
Margin Business from DFSA in the event that any of the circumstances listed above, in
relation to the Call Option, occur.
2.5 The business of DFSA
The business to be conducted by DFSA is the Low Margin Business.7
2.6 The Transaction consideration8
The consideration payable for:
(i) the transfer of the business from Clover to DFSA will, as mentioned above, be settled
by way of an exchange of shares in DFSA, to Clover;
(ii) the stock in trade of Clover will be an amount in respect of the stock as determined in
accordance with the provisions of the Transfer of Business Agreement, which
envisages a physical stock taking of the stock; and
(iii) the cession and delegation and transfer of the Delivery Agreements from Clover to
DFSA in terms of the Cession and Delegation Agreement, DFSA will pay to Clover a milk
7
LR9.15(b).
8
LR9.15(c).
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cession rights fee in the amount of R1.00 plus VAT on the Effective Date, and annually
thereafter on each anniversary of the Effective Date.
The profits attributable to the net assets that are the subject of the Restructure are as referred
to in clause 2.7 below.
2.7 Net assets acquired and profits attributable to those assets
The value of the net assets that are subject to the Restructure9 is RNil since: (i) in terms of the
Transfer of Business Agreement, the inventory related to the Low Margin Business will be
transferred to DFSA at cost i.e having no effect on the net assets in Clover's books, (ii) the other
assets of the Low Margin Business (other than inventory) are no longer reflected in Clover's
books as a result of the Low Margin Business being treated as a discontinued operation with
effect from 1 April 2017.
No profits are attributable to the assets that are subject of the Restructure10 in light of the fact
that the Low Margin Business has been treated as a discontinued operation with effect from 1
April 2017.
3. CONDITIONS PRECEDENT
The implementation of the Restructure is subject to the fulfillment, or waiver, as the case may
be, of the outstanding conditions precedent that the Transaction Agreements are signed by
the parties thereto and each Transaction Agreement becomes unconditional in accordance
with its respective terms.11
4. CATEGORISATION
The Restructure is a Category 2 transaction as contemplated in the Listing Requirements of the
JSE Limited.
5. WITHDRAWAL OF CAUTIONARY
Given that all the Restructure terms are contained in this announcement, caution is no longer
required to be exercised by shareholders when dealing in their Company shares.
Johannesburg
31 May 2017
Sponsor
RAND MERCHANT BANK (A division of FirstRand Bank Limited)
NSX Sponsor
IJG SECURITIES
Attorneys
Werksmans
9
LR9.15(d).
10
LR9.15(e).
11
LR9.15(a)(v).
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Date: 31/05/2017 02:00:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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