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Proposed acquisition of certain Tsogo casino, hotel and office properties by Hospitality and cautionary announcement
HOSPITALITY PROPERTY FUND LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 2005/014211/06)
JSE share code: HPB
ISIN: ZAE000214656
(Approved as a REIT by the JSE)
(“Hospitality” or “the Company”)
PROPOSED ACQUISITION OF CERTAIN TSOGO SUN HOLDINGS LIMITED (“TSOGO”) CASINO,
HOTEL AND OFFICE PROPERTIES BY HOSPITALITY AND CAUTIONARY ANNOUNCEMENT
1. INTRODUCTION
Shareholders are referred to the announcement released by Tsogo on SENS on Friday, 2 March 2018 and are advised
that the board of directors of Tsogo and Hospitality have agreed, in principle, to the acquisition by Hospitality of
seven casino precinct properties (“Properties”), currently owned by the Tsogo group of companies (“Tsogo
Group”), in consideration for the issue of new shares in Hospitality (“Proposed Transaction”).
2. RATIONALE
The Proposed Transaction will provide Hospitality with scale through the acquisition of seven premium casino
precincts (including an additional 1 335 hotel rooms), namely:
- Montecasino Precinct: Montecasino, Palazzo, Southern Sun Montecasino, SunSquare Montecasino,
Palazzo Towers East & West Offices and The Pivot Offices;
- Gold Reef City Casino Precinct: Gold Reef City Casino and Southern Sun Gold Reef City;
- Silverstar Casino Precinct: Silverstar Casino and Southern Sun Silverstar;
- Suncoast Casino Precinct: Suncoast Casino, Suncoast Towers and SunSquare Suncoast;
- Blackrock Casino Precinct: Blackrock Casino and Garden Court Blackrock;
- Emnotweni Casino Precinct: Emnotweni Casino, Southern Sun Emnotweni and StayEasy Emnotweni; and
- The Ridge Casino Precinct: The Ridge Casino, Southern Sun The Ridge and StayEasy Emalahleni.
The increased scale of Hospitality, with a gross asset value of circa R35 billion post implementation of the Proposed
Transaction, should result in the inclusion in the SAPY and All Property Indices. The unbundling referred to in
paragraph 3.4 below should result in a more diverse shareholder base, enhanced liquidity and improved shareholder
spread. The acquisition of the Properties is in line with Hospitality’s growth strategy to acquire value enhancing
properties and the broadening of its earnings base and product offering. The casino precincts will be subject to a
minimum 20 year lease, providing an anticipated stable, escalating and predictable income stream and distribution
for Hospitality shareholders.
3. TERMS OF THE PROPOSED TRANSACTION
3.1 Prior to the implementation of the Proposed Transaction, the Tsogo Group will undertake an internal restructure
that will result in the Properties being housed in a separate wholly-owned subsidiary of Tsogo (“PropCo” or
“Landlord”).
3.2 The Properties will be let to an indirect wholly-owned subsidiary of Tsogo (“LeaseCo” or “Tenant”) in terms
of a head lease.
3.3 Hospitality will acquire the entire issued share capital of PropCo in exchange for the issue of new Hospitality
shares (“Hospitality consideration shares”) to the Tsogo Group in terms of an asset for share transaction in
accordance with Section 42 of the Income Tax Act, 1962, as amended (“Income Tax Act”).
3.4 Based on an equity valuation of PropCo of R15 billion (being the value of the PropCo property portfolio of
R23 billion net of PropCo debt of R8 billion and an agreed forward yield of 8.45%), the number of Hospitality
consideration shares to be issued to the Tsogo Group will be approximately 1.2 billion at an issue price of
R12.50 per share. This will result in Tsogo's total shareholding in Hospitality being approximately 1.5 billion
Hospitality shares (approximately 87% of Hospitality’s total issued share capital, net of treasury shares), which
shareholding Tsogo intends to distribute to its shareholders in terms of an unbundling in accordance with
Section 46 of the Income Tax Act.
3.5 The proposed salient terms of the head lease are as follows:
3.5.1 the head lease will permit the Tenant to sub-let each of the Properties in terms of separate sub-leases
to various Tsogo Group operating companies;
3.5.2 the head lease, which will be a triple net lease, will be concluded for an initial period enduring until
31 March 2023, whereafter the head lease can be terminated by either party on 15 years’ written notice;
3.5.3 the initial aggregate base rental payable by the Tenant for the Properties will be R1.9 billion per
annum, which is approximately 65% of the aggregate casino precinct EBITDAR (earnings before
interest, tax, depreciation amortisation and rent) in the first year of the head lease, post-management
and license fees, in respect of all the Properties, one twelfth of which amount will be payable monthly
in advance on the 1st business day of each month;
3.5.4 the initial aggregate base rental will escalate annually on the 1st day of April of each year by the
Consumer Price Index (“CPI”), subject to the terms of an Anniversary Rental Review referred to in
paragraph 3.5.5 below;
3.5.5 on the 7th anniversary of 1 April 2018 and thereafter on each further 5th anniversary of that date, the
aggregate annual rental payable by the Tenant in respect of the Properties for the year commencing
on such anniversary, will be reviewed (“Anniversary Rental Review”) and be recalculated to reflect
the lesser of:
3.5.5.1 an amount equal to the aggregate annual rental that was paid in respect of the Properties for
the year terminating on the day preceding such anniversary, escalated at the rate of CPI ; and
3.5.5.2 an amount equal to 70% of the EBITDAR earned by the Properties in respect of the year
terminating on the day preceding such anniversary (“Re-set”), escalated at the rate of CPI ,
provided that a downward Re-set will not be applied, and the aggregate annual rental payable by the
Tenant in respect of the Properties for the year commencing on the 7th anniversary or any subsequent
5th anniversary (as the case may be) will be the amount calculated in terms of paragraph 3.5.5.1, in
circumstances where the difference between the amount calculated in terms of paragraph 3.5.5.1 above
and the amount calculated in terms of paragraph 3.5.5.2 above does not exceed an amount of two point
five percent of the amount calculated in terms of paragraph 3.5.5.1.
3.5.6 where there has been a downward Re-set to the aggregate annual rental payable as contemplated in
paragraph 3.5.5.2 above as a result of any Anniversary Rental Review (a “Downward Re-set”), then:
3.5.6.1 in applying the Anniversary Rental Review calculation contained in paragraph 3.5.5 above in
respect of the following Anniversary Rental Review, the amount to be used in respect of
paragraph 3.5.5.1 will be the amount that the CPI escalated annual aggregate rental would
have been had there been no downward Re-set and this will be compared to the amount
calculated in terms of paragraph 3.5.5.2 as provided for in paragraph 3.5.5; and
3.5.6.2 the annual rental payable in each of the respective years commencing on the first and on the
second anniversary dates of that Downward Re-set occurring shall again be reviewed in
accordance with paragraph 3.5.5, with the preceding year’s EBITDAR used for purposes of
paragraph 3.5.5.2 and the Re-set only to be effected if it is an upward Re-set;
3.5.7 subject to paragraph 3.5.8 below, in the event of a Downward Reset occurring in any two consecutive
Anniversary Rental Review cycles of the head lease, the Landlord will be entitled, either:
3.5.7.1 to give 5 years’ written notice of termination of the head lease in its entirety, effective
from the end of the second of such Anniversary Rental Review cycles; or
3.5.7.2 to give 5 years’ written notice of termination of the head lease in respect only of the
casino precinct Properties whose performance was the cause of the second Downward
Reset concerned, effective from the end of the second of such Anniversary Rental
Review cycles;
provided, however, that any such notice must be received by the Tenant within a period of 3 months
of the end of the second of such Anniversary Rental Review cycles in order to constitute a valid notice
of termination,
3.5.8 notwithstanding the provisions of paragraphs 3.5.6 and 3.5.7 above, the Tenant will have the right to
waive any Downward Re-set in respect of any Anniversary Rental Review cycle of the head lease,
thereby preventing an early termination of the head lease as contemplated in paragraph 3.5.7 above
should it elect to make (and make) payment of an aggregate annual rental which is equal to the
aggregate annual rental that was paid in respect of the Properties for the year terminating on the day
preceding the day upon which the Downward Re-set would have been implemented, escalated at the
rate of CPI, instead of making payment of the Downward Re-set amount that would have been
implemented for the year commencing on such anniversary, continuing to escalate thereafter in terms
of paragraph 3.5.4.
3.5.9 the Tenant will be liable for all utility deposits and charges incurred or payable in respect of the
Properties;
3.5.10 the Tenant (or its nominee) may, at its own cost, make any alterations, renovations or additions to any
of the developments on any of the Properties, and may install any fixtures, fittings and equipment
without the Landlord’s consent;
3.5.11 where such alterations or additions to any of the Properties constitutes material improvements of such
casino precinct Property, the Tenant (or its nominee) may elect to offer the sale of that development
opportunity to the Landlord and its lease-back. In the event that the Landlord does not acquire the
development opportunity and the sale and lease-back, then the Tenant (or its nominee) will be free to
erect those improvements at its cost and to restore such casino precinct Property to its original
condition at the end of the head lease;
3.5.12 subject to the aforesaid, all improvements will be forfeited to the Landlord for no consideration on
termination of the head lease. The Tenant (or its nominee) will be entitled to remove all fixtures,
fittings and equipment upon termination of the head lease;
3.5.13 the Tenant will be entitled to sublet the Properties and/or any portion/s thereof, or grant concessions
for such premises (including any improvements, or part thereof) without the consent of the Landlord;
and
3.5.14 the Landlord will grant the Tenant a right of first refusal to acquire each of the Properties of which the
Landlord wishes to dispose.
3.6 CONDITIONS PRECEDENT TO THE PROPOSED TRANSACTION
3.6.1 The Proposed Transaction is subject to, inter alia, a formal written agreement being concluded
between the relevant companies in the Tsogo Group and Hospitality, upon terms acceptable to Tsogo
and Hospitality (“Agreement”). Such Agreement will be subject to the normal terms for transactions
of the nature of the Proposed Transaction and otherwise as may be agreed between Tsogo and
Hospitality.
3.6.2 The Agreement, itself, will be subject to the fulfilment (or waiver) of certain conditions precedent,
including, without limitation:
3.6.2.1 Hospitality undertaking a due diligence investigation of the Properties and being satisfied with
the results of such investigation;
3.6.2.2 obtaining, on terms acceptable to Tsogo and Hospitality, all requisite regulatory and other
consents and shareholder approvals;
3.6.2.3 the sub-committee of independent directors of the Hospitality board of directors (“Hospitality
Board”), as established by the Hospitality Board, approving the terms of the Agreement;
3.6.2.4 the board of directors of Tsogo approving the terms of the Agreement;
3.6.2.5 obtaining of the requisite independent expert opinions in terms of the Companies Act, 2008,
as amended (“Companies Act”) and the Listings Requirements of the JSE Limited (“Listings
Requirements”); and
3.6.2.6 such other conditions precedent as may be agreed between Tsogo and Hospitality.
4. CATEGORISATION OF THE PROPOSED TRANSACTION
The Proposed Transaction will be classified as a Category 1 Related Party Transaction and a Reverse Listing for
Hospitality in terms of the Listings Requirements and will require approval by the requisite majority of
Hospitality’s shareholders (excluding related parties) in accordance with the JSE Listings Requirements and the
Companies Act.
5. FURTHER DETAILS OF THE OF THE PROPOSED TRANSACTION AND CAUTIONARY ANNOUNCEMENT
The full details of the Proposed Transaction will be provided to shareholders once the Agreement has been finalised
and signed. Accordingly, shareholders should exercise caution when dealing in Hospitality shares until a further
announcement is made.
2 March 2018
Corporate advisor and sponsor
Java Capital
Legal advisors
ENS Africa
Date: 02/03/2018 05:01:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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