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DIPULA INCOME FUND LIMITED - Proposed internalisation of asset management function and withdrawal of cautionary

Release Date: 16/10/2017 17:45
Code(s): DIA DIB     PDF:  
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Proposed internalisation of asset management function and withdrawal of cautionary

DIPULA INCOME FUND LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 2005/013963/06)
JSE share code: DIA ISIN: ZAE000203378
JSE share code: DIB ISIN: ZAE000203394
(Approved as a REIT by the JSE)
(“Dipula” or “the company”)


PROPOSED INTERNALISATION OF ASSET MANAGEMENT FUNCTION AND WITHDRAWAL OF CAUTIONARY



1.     INTRODUCTION AND RATIONALE

       Further to the announcement released on SENS on 4 July 2017, shareholders are advised that Dipula has concluded an
       agreement to effectively internalise its management, through the disposal of 100% of the beneficial interest in the Dipula
       Asset Management Trust (the “asset manager”) by the beneficiaries (the “vendors”) to Dipula. The proposed internalisation
       is consistent with global best practice and will better align the interests of the company’s management and investors.

2.     TERMS OF THE ACQUISITION

      2.1.    The transaction

              Dipula has entered into an agreement with all the beneficiaries of the asset manager whereby the beneficiaries will
              dispose of 100% of the units held by the vendors in the asset manager to Dipula (the “internalisation”), for an
              aggregate purchase consideration of R142 000 000 (the “purchase price”), with practical effect from 1 September
              2017 (the “effective date”).

              As a consequence of the internalisation, all of Dipula’s executive management and key staff will be formally employed
              by Dipula as if from the effective date.

      2.2.    Purchase price

              The purchase price is payable as follows:

               -        R92 300 000 (65% of aggregate consideration) through the allotment and issue of a number of Dipula B
                        ordinary shares (JSE: DIB) (the “consideration shares”) to the vendors to be determined with reference
                        to the 30 day volume weighted average price of Dipula B ordinary shares as at the effective date; and
               -        the balance of R49 700 000 (35% of aggregate consideration), in cash (the “cash consideration”).

              Interest of 9,5% will be payable on the cash consideration between the effective date and the first business day after
              the last of the conditions precedent has been fulfilled or waived (as applicable) (“closing”).

      2.3.    Conditions precedent

              The internalisation is subject to the fulfilment of the following conditions precedent:

              -      Dipula shareholders approving the issue of shares to related party vendors by way of special resolution
                     passed in terms of section 41 of the Companies Act, 71 of 2008, (the “Companies Act’);
              -      execution of formal employment contracts between all management staff identified by Dipula as being
                     required in order to effect the internalisation; and
              -      both Izak Petersen (Chief Executive Office of Dipula) and Ridwaan Asmal (Financial Director of Dipula):
              -      concluding formal employment contracts with Dipula, with a minimum employment period of two years;
                     and
              -      electing the lock-in election described under paragraph 0 below.


      2.4.    Material terms

              The consideration shares received by the vendors upon implementation of the internalisation will be subject, at the
              election of the vendor, to either:
              -    a restriction on trading the consideration shares for a period of two years (“lock-in election”); or
              -    Entering into an arrangement whereby:
              -    all consideration shares not subject to the lock-in election will be placed in a pool administered by a broker
                   or CSDP nominated by the Dipula board (the “pool administrator”);
              -    the pool administrator will sell shares in the pool on the instruction of vendors under a responsible dealing
                   mandate which will include restrictions on the sale of shares to competitors and a maximum discount of 5%
                   to the 30 day volume weighted average price; and
              -    the proceeds of the share sales will be distributed to vendors on settlement of trades.

            As compensation for the contracted minimum employment period and undertaking the lock-in election in respect of
            their respective entitlement to consideration shares, management will be awarded a fully funded, once-off issue of
            Dipula B ordinary shares of R8 000 000 (the “management shares”). The management shares will be subject to a
            restriction on trading for a period of two years

            On closing of the internalisation, Saul Gumede will retire from his position as a director of Dipula.

            The agreement in respect of the internalisation contains warranties and indemnities which are normal for an
            acquisition of this nature.

     2.5.   Source of funding

            The cash consideration will be funded through cash resources and/or debt facilities.


3.   DETERMINATION OF THE PURCHASE PRICE

     In terms of the asset management agreement between Dipula and the asset manager (the “asset management agreement”),
     Dipula is entitled to internalise its asset management function through the exercise of an option to acquire the asset manager
     on 12 months written notice, which notice may not be given within the first 6 years of the commencement date of the asset
     management agreement. The option became exercisable on 11 August 2017. Should the option be exercised, the purchase
     price payable for the asset manager is equivalent to its fair market value as agreed by the parties and, failing agreement, as
     determined by an independent merchant bank.

     In order to effect the internalisation without the delay of a 12 month notice period, it is proposed to be implemented not as
     provided for in terms of the asset management agreement, but in terms of an arms-length transaction, with the purchase price
     payable for the asset manager equivalent to its fair value as agreed by the parties.

     As a basis for the agreement of the purchase price, the parties considered the following:
     -     an initial valuation of the asset manager in terms of the formula contained in the asset management agreement
           applicable in the event of termination of the asset management agreement. The calculation is essentially the present
           value of future management fees with the following key inputs:
           -     a base monthly management fee determined with reference to the fee formula of 0.3% of Dipula’s aggregate market
                 capitalisation and total borrowings;
           -     the base management fee grown over the termination period in line with the annual average growth rate in Dipula’s
                 aggregate market capitalisation and borrowings for the 36 month period preceding the termination date;
           -     the tenor of the forecasted management fees is calculated as a period of 3 years plus the remaining period of the first 7
                 years of the agreement; and
           -     the discount factor as determined with reference to the 10 day volume weighted average price for both the Dipula A
                 and Dipula B shares as well as the budgeted 12 month forward distribution per share.
     -     a comparison to precedent transactions within the sector; and
     -     a calculation of the impact of the internalisation on the forward distribution per share which indicated that the
           internalisation would be marginally accretive.

     It is the view of the Dipula board of directors that implementing the internalisation in terms of an arms-length transaction at
     this stage, rather than through the exercise of the option granted in terms of the asset management agreement, which is subject
     to a 12 month notice period, allows Dipula to benefit from the expected savings detailed under section 5 of this announcement
     and also caters for any potential material increase in share price or conclusion of any material acquisition by Dipula during
     the notice period, which would likely result in a purchase price that is dilutive to shareholders. The board of directors
     accordingly recommends that Dipula shareholders vote in favour of the internationalisation.

4.   SMALL RELATED PARTY TRANSACTION

     The internalisation constitutes a small related party transaction in terms of section 10.7 of the JSE Listings Requirements and
     accordingly does not require approval of shareholders, provided an independent expert has confirmed that the terms of the
     acquisition are fair as far as shareholders are concerned. However, as the proposed internalisation requires an issue of shares
     to a related party as defined in the Companies Act, which issue requires the approval of shareholders of Dipula shareholders.
     A notice of general meeting to be convened in order for and if deemed fit, pass such special resolution, will be issued.
      Mazars South Africa, who have been appointed as independent expert by Dipula, are in the process of finalising their opinion
      on the fairness of the internalisation to Dipula shareholders. A further announcement will be published on the finalisation of
      the independent expert’s fairness opinion in respect of the acquisition.

      The proposed internalisation requires an issue of shares to a related party as defined in the Companies Act, which issue
      requires the approval of Dipula shareholders. A notice of general meeting to be convened in order for and if deemed fit, pass
      such special resolution, will be issued.

      The company will ensure that there are no provisions in the asset manager’s trust deed that may frustrate or relieve the
      company from compliance with the JSE Listings Requirements.

5.    FINANCIAL INFORMATION

      The profits attributable to the net assets of the asset manager for the period 1 January 2016 to 28 February 2017 are Rnil.
      Income received by the asset manager in excess of its operating costs are expensed through service level agreements to
      beneficiaries. For the 14 month period ended 28 February 2017, the income received by the asset manager in excess of its
      operating expenses amounted to R15.1 million.

      The expected annual savings to Dipula as a result of the internalisation are approximately R15 million.

6.    DISTRIBUTION GUIDANCE FOLLOWING THE INTERNALISATION

      As the effective date of the internalisation is the first day of Dipula’s 2018 financial year, the internalisation will have no
      impact on the current distribution guidance provided by Dipula for the year ended 31 August 2017.

7.    WITHDRAWAL OF CAUTIONARY

      Shareholders are referred to the cautionary announcements issued on 4 July 2017, 16 August 2017 and 28 September 2017
      and are advised that, following the release of this announcement, caution is no longer required to be exercised by shareholders
      when dealing in their Dipula shares.


16 October 2017


Corporate advisor and sponsor
Java Capital

Date: 16/10/2017 05:45:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). 
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