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Update on Vodacom Group's proposed new Broad-Based BEE ownership transaction and final BEE transaction price
Vodacom Group Limited
(Incorporated in the Republic of South Africa)
(Registration number 1993/005461/06)
ISIN: ZAE000132577 Share code: VOD
ISIN: US92858D2009 ADR code: VDMCY
("Vodacom Group")
4 July 2018
UPDATE ON VODACOM GROUP'S PROPOSED NEW BROAD-BASED BLACK ECONOMIC EMPOWERMENT OWNERSHIP TRANSACTION AND FINAL BEE TRANSACTION SHARE PRICE
1. Introduction
Shareholders are referred to the announcement released on SENS on Monday 11 June 2018 and published in the South African press on Tuesday 12 June 2018 detailing the
BEE transaction between Vodacom Group and YeboYethu (RF) Limited ("YeboYethu") (the "BEE transaction") a copy of which can be found on the Vodacom Group website at
www.vodacom.com (the "terms announcement").
Unless otherwise indicated by the context, terms defined in the above terms announcement will have the same meanings herein.
The BEE transaction was priced on, Tuesday 3 July 2018, being the last practicable date prior to formal approval by the JSE Limited ("JSE") of the Vodacom Group and YeboYethu
circulars ("pricing date"). The final BEE transaction share price of R143.35 is the 60-day volume weighted average price ("VWAP") of a Vodacom Group share on the JSE, up to and
including Monday, 2 July 2018, which has been used for calculating the BEE transaction size.
All the value parameters are now final except the final split of the YeboYethu gearing amount between third party financing (class A preference shares) and vendor funding from
Vodacom Group (class B preference shares), which will be determined on the fourth implementation day based on the 5-day VWAP of a Vodacom Group share at that time and the
IFRS 2 cost (which will be determined on the shareholder meeting date).
The final BEE transaction parameters are as follows:
60-day VWAP of a Vodacom Group share on pricing date R143.35
Transaction value R16.41 billion
Number of Vodacom Group shares to be issued to YeboYethu 114.45 million
Transaction size 6.23%
Equity swap ratio of Vodacom SA to Vodacom Group 73.0%
Subscription price discount from Vodacom Group R1.95 billion
Equity reinvested by the Vodacom SA BEE shareholders R3.86 billion
Maximum special dividend to be paid to YeboYethu shareholders R3.26 billion (R73.00 per YeboYethu share)
Vodacom ESOP subscription for new YeboYethu ordinary shares R750 million*
5-day VWAP of a Vodacom Group share at pricing date R121.19
Gearing of YeboYethu (third party financing and vendor funding from Vodacom Group) R9.91 billion (60%)
* This amount is rounded up. The exact amount, given the YeboYethu price per share, is R749 999 984.55.
2. BEE transaction steps
The BEE transaction will be implemented through a series of interlinked and inter-conditional steps as outlined below. The values based on the final BEE transaction share price of
R143.35 are as follows:
2.1 Step 1: first implementation day: unwind of the existing Vodacom SA BEE transaction
Step 1 A: Implementation of the NVF structure
Vodacom SA will repurchase 114 744 844 (31 813 785 from RBH, 13 634 479 from Thebe, and 69 296 580 from YeboYethu (30 298 842 of the "public A shares", and 38 997 738
of the "ESOP A shares" (as such terms are defined in Vodacom SA's memorandum of incorporation)) Vodacom SA A shares from the Vodacom SA BEE shareholders for a nominal
consideration (R0.00001 per Vodacom SA A share, and R1 147.45 in aggregate) pursuant to the Vodacom SA NVF transaction terms ("Vodacom SA repurchase"), upon which the
remaining Vodacom SA A shares will rank pari passu with the Vodacom SA ordinary shares in all respects and will be unencumbered consistent with the terms of issue thereof. It is
anticipated that post the Vodacom SA repurchase, the Vodacom SA BEE shareholders will collectively hold 185 255 156 Vodacom SA shares, or approximately 3.95% of Vodacom
SA.
Step 1 B: Conversion and partial repurchase of YeboYethu N shares
Following implementation of the Vodacom SA repurchase, the 12 000 000 YeboYethu N shares in issue will automatically convert according to their terms of issue and at the same
time 3 318 908 of those shares shall be repurchased by YeboYethu for a nominal amount (R0.00001 per share, and R33.19 in aggregate) based on the existing YeboYethu NVF
transaction terms.
Of the 8 681 092 YeboYethu ordinary shares held by the YeboYethu ESOP, which remain after the conversion and repurchase described above, up to a maximum of 3 298 516 will,
as set out in step 4 (paragraph 2.4), be sold to the Vodacom ESOP, and the remaining 5 382 576 YeboYethu ordinary shares will be transferred, together with the proceeds received
by the YeboYethu ESOP from its sale to the Vodacom ESOP, to the existing vested beneficiaries of the YeboYethu ESOP in accordance with the terms of the YeboYethu ESOP trust
deed and scheme rules, whereafter the YeboYethu ESOP will be wound-up.
2.2 Step 2: first implementation day: consolidation of Vodacom SA BEE shareholders' interests in Vodacom SA in a single vehicle
Each of RBH and Thebe will exchange their Vodacom SA shares for new YeboYethu ordinary shares in terms of asset-for-share transactions, thereby consolidating all of the
Vodacom SA BEE shareholders' interests into a single vehicle, being YeboYethu.
RBH will sell its 55 126 215 Vodacom SA A shares and 7.56 million Vodacom SA ordinary shares (valued at R2 410 284 967) to YeboYethu, and in return YeboYethu will issue
15 115 295 new YeboYethu ordinary shares to RBH in consideration.
Thebe will sell its 23 625 521 Vodacom SA A shares and 3.24 million Vodacom SA ordinary shares (valued at R1 032 979 282) to YeboYethu, and in return YeboYethu will issue
6 477 984 new YeboYethu ordinary shares to Thebe in consideration.
The sales by each of RBH and Thebe, and the issue of new ordinary shares in YeboYethu, will be done simultaneously and at fair market value.
2.3 Step 3: second implementation day: YeboYethu declares a special dividend (distribution)
YeboYethu will declare a special dividend of up to a maximum of R3 261 189 876 or, in all cases, R73.00 per YeboYethu ordinary share, on the second implementation day, subject
to YeboYethu meeting a solvency and liquidity test as contemplated by section 45 of the Companies Act, 2008, as amended. The special dividend represents a significant liquidity
event and equates to 2.9 times the YeboYethu shareholders' original equity contribution. Vodacom Group currently has no intention to settle the BEE transaction in cash.
Despite declaration, the payment of the special dividend will only occur in (and payment will be contingent upon) step 6 (in paragraph 2.6) (and each of the preceding steps) being
implemented.
2.4 Step 4: second implementation day: Vodacom Group employer companies make a contribution to the Vodacom ESOP to enable it to acquire YeboYethu ordinary shares
Vodacom Group, on behalf of itself and the employer companies, will make a capital contribution of an aggregate amount of R1.05 billion to the Vodacom ESOP. The Vodacom
ESOP will, on the second implementation day or as soon thereafter as it may be implemented, use the proceeds to purchase up to a maximum of 3 298 516 YeboYethu ordinary
shares valued at R300 million from the YeboYethu ESOP (and the YeboYethu ESOP beneficiaries insofar as the rights therein have vested), and will use the balance of R750 million
to subscribe for 8 246 289 new YeboYethu ordinary shares for the benefit of vested beneficiaries.
Should any balance of the contribution remain after the sale and subscription above, the Vodacom ESOP will use those funds to acquire YeboYethu ordinary shares in the market
after the implementation of the BEE transaction.
2.5 Step 5: YeboYethu exchanges Vodacom SA shares for new Vodacom Group shares
A new special purpose vehicle, YeboYethu Investment Company (RF) (Proprietary) Limited ("YeboYethu Investment"), has been created for the purpose of holding YeboYethu's
Vodacom Group shares. YeboYethu Investment is a wholly-owned subsidiary of YeboYethu.
second implementation day
After the implementation of the aforementioned steps and the consolidation of YeboYethu's shareholding in Vodacom SA, YeboYethu will on the next day exchange its Vodacom SA
shares for ordinary shares in the share capital of YeboYethu Investment ("YeboYethu Investment shares"). YeboYethu will sell its 167 255 156 Vodacom SA A shares, valued at
R6 430 960 748, and 18 million Vodacom SA ordinary shares, valued at R692 100 000, to YeboYethu Investment, and in return YeboYethu Investment will issue 7 123 061 new
YeboYethu Investment ordinary shares to YeboYethu in consideration.
third implementation day
After implementation of YeboYethu's exchange of Vodacom SA shares for YeboYethu Investment shares, and on the subsequent day, YeboYethu Investment will exchange its
Vodacom SA shares for new Vodacom Group shares on a fair market value basis of R7 123 060 748. YeboYethu Investment will sell its 167 255 156 Vodacom SA A shares and 18
million Vodacom SA ordinary shares to Vodacom Group and in return Vodacom Group will issue 49 689 995 new Vodacom Group shares in consideration.
2.6 Step 6: fourth implementation day: YeboYethu raises vendor funding and third party financing and subscribes for additional Vodacom Group shares
In aggregate, YeboYethu will raise R9 908 154 034 in subscription proceeds from the issue of the class A preference shares and class B preference shares. The number of class A
preference shares to be issued by YeboYethu, however, will be, with reference to their aggregate subscription price, equal to the lesser of R5 833 333 333 and an aggregate
subscription price which is equal to a 3x share cover ratio as measured against the 5-day VWAP of a Vodacom Group share on the fourth implementation day. The number of class B
preference shares will be equal to that number of class B preference shares which need to be issued, based on their aggregate subscription price, such that the total preference
share funding received by YeboYethu (including the subscription funds received pursuant to the issue of the class A preference shares) is equal to R9 908 154 034.
Accordingly, although the aggregate funding received by YeboYethu from preference share subscription proceeds will remain constant, the split between the class A preference
shares and class B preference shares will be determined with reference to the 5-day VWAP of a Vodacom Group share on the fourth implementation day. For illustrative purposes,
below and later in the announcement, the split of the class A preference shares and class B preference shares is based on an assumed 5-day VWAP of a Vodacom Group share on
the fourth implementation day of R121.19.
YeboYethu will issue class B preference shares to Vodacom Group and raise R5 284 707 866. The class B preference shares will be unsecured. YeboYethu will use the subscription
proceeds received pursuant to (i) the subscription by Vodacom ESOP (as set out in step 4 at paragraph 2.4 above) and (ii) the issue of the class B preference shares, to (a) fund the
payment of the special dividend (as set out in step 3 at paragraph 2.3 above) and transaction costs amounting to R64 million and (b) subscribe for 2 709 310 (at an issue price of
R1 000 per share) additional YeboYethu Investment shares.
YeboYethu Investment will use the subscription proceeds received from YeboYethu above to subscribe for 23 927 991 new Vodacom Group shares (representing 1.30% of
Vodacom Group shares, post the BEE transaction), valued at R3 430 077 652, at a discount of R720 767 619.
In addition, YeboYethu will issue class A preference shares to third party funders and raise R4 623 446 168. The class A share cover preference shares will be secured through
YeboYethu Investment issuing a guarantee and a pledge of the Vodacom Group shares held by it to the third party funders. YeboYethu will use the entire subscription proceeds
received pursuant to the issue of the class A share cover preference shares, to subscribe for 4 623 446 (at an issue price of R1 000 per share) additional YeboYethu Investment
shares.
YeboYethu Investment will use the entire subscription proceeds received from YeboYethu above to subscribe for 40 833 194 new Vodacom Group shares (representing 2.22% of
Vodacom Group shares, post the BEE transaction), valued at R5 853 438 396, at a discount of R1 229 992 228.
The Vodacom Group share price is a material input in calculating the financial effects of the transaction. Since the terms announcement, dated 11 June 2018, markets across the
globe have been impacted by significant share price volatility. This has been driven by global factors including increased international trade uncertainty from tariff interventions
mainly by the USA and China. Emerging markets have been particularly affected. International funds withdrew from riskier assets, creating negative pressure on emerging market
economies and currencies. The impact of this can be clearly seen in the resultant volatile share prices across the South African market.
The table below illustrates what the split of the YeboYethu gearing amounts will be between the class A preference shares and class B preference shares based on various assumed
5-day VWAP's of a Vodacom Group share on the fourth implementation day and is provided for illustrative purposes only.
Class A share Class B
5-day VWAP of a cover preference preference shares
Vodacom Group shares from from Vodacom Total YeboYethu
share on the fourth third party funders Group gearing
implementation day (Rand) (R'm) (R'm) (R'm)
150 5 723 4 185 9 908
140 5 341 4 567 9 908
130 4 959 4 949 9 908
121.19 4 623 5 285 9 908
120 4 578 5 330 9 908
110 4 196 5 712 9 908
100 3 815 6 093 9 908
2.7 Comparison of transaction parameters to terms announcement
The table below shows a comparison of the key pricing parameters of the BEE transaction between the terms announcement and this pricing announcement. The overall gearing
of the BEE transaction structure does not increase (remains at 60%) but the BEE equity reinvestment and Vodacom discount ratios change. The discount from Vodacom increases
from R1.75 billion to R1.95 billion (R200 million increase). As a result of the smaller deal size (R16.4 billion vs. R17.5 billion) and the proportional increase in the facilitation from
Vodacom, the equity reinvestment from BEE investors decreases from R4.50 billion to R3.86 billion (R638 million decrease) and the overall funding required reduces from
R10.50 billion to R9.91 billion (R592 million decrease).
Pricing announcement Terms announcement
Step Description @R143.35 (assuming R152.50)
1A Aggregate Vodacom SA A shares repurchased from 114 744 844 110 902 035
YeboYethu, RBH and Thebe
Aggregate Vodacom SA shares held between YeboYethu, RBH 185 255 156 189 097 965
and Thebe after the repurchase
Aggregate % shareholding in Vodacom SA held between 3.95% 4.03%
YeboYethu, RBH and Thebe after the repurchase
1B YeboYethu N shares automatically converted and 3 318 908 3 154 468
simultaneously repurchased
Aggregate remaining YeboYethu ordinary shares after the 8 681 092 8 845 532
repurchase and conversion of YeboYethu N shares
2 Number of Vodacom SA shares to be exchanged by RBH for 55 126 215 56 191 660
new YeboYethu ordinary shares Vodacom SA A shares and 7.56 million Vodacom SA A shares and 7.56 million
Vodacom SA ordinary shares in return for Vodacom SA ordinary shares in return for
15 115 295 YeboYethu ordinary shares 15 115 065 YeboYethu ordinary shares
Number of Vodacom SA shares to be exchanged by Thebe for 23 625 521 24 082 140
new YeboYethu ordinary shares Vodacom SA A shares and 3.24 million Vodacom SA A shares and 3.24 million
Vodacom SA ordinary shares in return for Vodacom SA ordinary shares in return for
6 477 984 YeboYethu ordinary shares 6 477 885 YeboYethu ordinary shares
3 YeboYethu special dividend Up to a maximum of R3 261 189 876, in Up to a maximum of R3 016 419 627, in
all cases or R73.00 per YeboYethu all cases or R67.28 per YeboYethu
ordinary share ordinary share
4 Vodacom Group capital contribution to the Vodacom ESOP R1.05 billion R1.05 billion
Acquisition amount in respect of YeboYethu shares acquired Up to a maximum of R300 million Up to a maximum of R300 million
by the Vodacom ESOP from the YeboYethu ESOP
Number of YeboYethu shares acquired by the Vodacom ESOP Up to a maximum of 3 298 516 Up to a maximum of 2 988 919
from the YeboYethu ESOP
Subscription amount for YeboYethu shares by the Vodacom R750 million R750 million
ESOP
Number of YeboYethu shares subscribed for by the Vodacom 8 246 289 7 472 297
ESOP
5 Number of Vodacom SA shares held by YeboYethu post RBH 167 255 156 Vodacom SA A shares 171 097 965 Vodacom SA A shares
and Thebe's sale of their shares in Vodacom SA to YeboYethu and 18 million Vodacom SA ordinary shares and 18 million Vodacom SA ordinary shares
Number of YeboYethu Investment shares to be issued to 7 123 061 7 516 420
YeboYethu in exchange for the Vodacom SA shares
Number of Vodacom SA shares held by YeboYethu Investment 167 255 156 Vodacom SA A shares 171 097 965 Vodacom SA A shares
and 18 million Vodacom SA ordinary shares and 18 million Vodacom SA ordinary shares
Number of Vodacom Group shares to be issued to YeboYethu 49 689 995 49 287 998
Investment in exchange for Vodacom SA shares
6A class B preference shares R5 284 707 866 R4 732 666 667
Number of Vodacom Group shares subscribed for utilising a 23 927 991 19 084 628
portion of the proceeds of the class B preference shares
Vodacom Group discount R720 767 619 R510 158 659
6B class A preference shares R4 623 446 168 R5 833 333 333
Number of Vodacom Group shares subscribed for utilising the 40 833 194 46 381 473
proceeds of class A preference shares
Vodacom Group discount R1 229 992 228 R1 239 841 341
Step 1-6B Total number of Vodacom Group shares issued to YeboYethu 114 451 180 114 754 099
Step 1-6B Percentage of Vodacom Group shares owned by YeboYethu 6.23% 6.25%
3. YeboYethu sources of funding
The table below sets out the sources of funding to discharge the payment obligations in terms of the BEE transaction. The values reflected below are based on the final BEE
transaction share price of R143.35.
Sources of funding Rm %
Economic value of Vodacom Group discount of subscription price 1 951 11.8
Equity contribution - Vodacom SA BEE shareholders (including YeboYethu shareholders) 3 862 23.4
Equity contribution by Vodacom Group and employer companies - Vodacom ESOP* 750 4.6
Class A share cover preference shares from third party funders 4 623 28.1
Class B preference shares from Vodacom Group 5 285 32.1
Total 16 471 100
Uses of funding Rm %
Acquisition of Vodacom Group shares 16 407 99.6
Transaction costs 64 0.4
Total 16 471 100
* Total Vodacom ESOP contribution of R1 050 million, where up to a maximum of R300 million is utilised to acquire shares from the YeboYethu ESOP and R749 999 million is
utilised to subscribe for new YeboYethu shares. The balance of the contribution to the Vodacom ESOP will be used by the Vodacom ESOP following the final implementation
date to acquire YeboYethu ordinary shares in the market.
4. Financial effects
Pro forma financial effects of the BEE transaction
The table below sets out the pro forma financial effects of the BEE transaction on, inter alia, Vodacom Group's net asset value per share, net tangible asset value per share, basic
earnings per share, diluted earnings per share, headline earnings per share and diluted headline earnings per share based on the most recently published audited consolidated
annual financial statements of Vodacom Group for the year ended 31 March 2018.
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 audited
consolidated annual financial statements of Vodacom Group for the year ended 31 March 2018.
The pro forma financial effects are the responsibility of the directors of Vodacom Group and were prepared for illustrative purposes only and may not, because of its nature, fairly
present Vodacom Group's financial position, changes in equity and results of its operations or cash flows nor the effect and impact of the BEE transaction going forward. It does not
purport to be indicative of what the financial results would have been, had the BEE transaction been implemented on a different date.
Accounting treatment
Unwind of existing Vodacom SA BEE transaction
The existing Vodacom SA BEE transaction was predominantly accounted for as an equity-settled share based payment scheme, and YeboYethu and the special purpose vehicles
created by RBH and Thebe to acquire the Vodacom SA shares were consolidated in terms of IFRS 10: Consolidated Financial Statements ("IFRS 10"). Consequently, the unwind of
the existing Vodacom SA BEE transaction will result in the special purpose vehicles created by RBH and Thebe being de-consolidated. The unwind will be accounted for within
equity as it is a transaction with shareholders. Vodacom Group will continue to consolidate YeboYethu while YeboYethu ESOP will be wound up.
The BEE transaction
The BEE transaction will be implemented through a series of inter-conditional steps resulting in Vodacom Group issuing 114 451 180 new Vodacom Group shares to YeboYethu
Investment, of which 49 689 995 are issued at the BEE transaction share price and 64 761 185 are issued at BEE transaction discounted subscription price.
The BEE transaction meets the requirements of an IFRS 2: Share-based Payment arrangement and will predominantly be accounted for as equity-settled, and will result in a once
off share-based payment charge, as well as a recurring share-based payment charge for Vodacom ESOP, which will be expensed over the vesting period. Vodacom Group currently
has no intention to settle the BEE transaction in cash. The Innovator Trust and a portion of the Vodacom ESOP will however be accounted for as cash-settled due to the accounting
substance thereof, of which the charge relating to the Vodacom ESOP will be expensed over the vesting period. As this part of the share based payment is cash-settled, the share
based payment liability will be re-measured at each reporting period.
Based on management's judgement and application of the control principles contained in IFRS 10, management concluded that Vodacom Group will consolidate YeboYethu,
YeboYethu Investment and Vodacom ESOP. As a result, the 114 451 180 new Vodacom Group shares held by YeboYethu Investment in Vodacom Group will be treated as treasury
shares (i.e. it will be excluded from shares in issue and weighted average number of shares in issue for accounting purposes). When the control principles in IFRS 10 are no longer
met, YeboYethu and YeboYethu Investment will be de-consolidated and the new Vodacom Group shares held by YeboYethu Investment will no longer be classified as treasury
shares.
Pro forma after
Before the BEE the BEE Percentage
transaction1 transaction2 change
(cents) (cents) (%)
Based on 31 March 2018 (A) (B) (B/A)
Basic earnings per share 947 834 (11.9)
Diluted earnings per share 919 810 (11.9)
Headline earnings per share 923 810 (12.2)
Diluted headline earnings per share 895 786 (12.2)
Net asset value per share 3 792 3 607 (4.9)
Net tangible asset value per share # 3 255 3 070 (5.7)
Weighted average number of Vodacom Group shares in issue (millions) 1 620 1 620
Weighted average diluted number of Vodacom Group shares in issue (millions) 1 622 1 668
Number of Vodacom Group shares in issue (millions) 1 700 1 700
- Total number of Vodacom Group shares in issue (millions) 1 721 1 836
- Treasury shares (millions) (21) (136)
# 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.
Notes and assumptions:
1. The Vodacom Group information reflected in the "Before the BEE transaction" column has been extracted from the audited consolidated annual financial statements of
Vodacom Group for the year ended 31 March 2018.
2. The Vodacom Group information reflected in the "Pro forma after the BEE transaction" has been calculated on the basis that all of the steps to unwind the existing Vodacom SA
BEE transaction and all of the steps to implement the BEE transaction have been completed.
3. The effects on basic earnings, diluted earnings, headline earnings, and diluted headline earnings per share are calculated on the basis that the BEE transaction was effective on
1 April 2017, while the effects on net asset value and net tangible asset value per share are calculated on the basis that the BEE transaction was effective on 31 March 2018 for
purposes of presenting the pro forma financial effects thereof on Vodacom Group.
The pro forma adjustments are based on the following principal assumptions:
- Step 1: The unwind of the existing Vodacom SA BEE transaction
It has been assumed that the unwind of the existing Vodacom SA BEE transaction and the implementation of the NVF structure by way of a repurchase will take place in accordance
with the memorandum of incorporation of Vodacom SA, resulting in Vodacom SA BEE shareholders collectively owning a shareholding of 3.95% in Vodacom SA.
Step 1 results in the de-consolidation of the special purpose vehicles through which RBH and Thebe own their Vodacom SA shares as well as the reversal of the non-controlling
interest and the YeboYethu ESOP IFRS 2 liability which arose upon the offer to employees to take up interest-free loans with the underlying YeboYethu shares as security, and which
will be extinguished upon unwinding the existing Vodacom SA BEE transaction. Vodacom Group will continue to consolidate YeboYethu.
- Step 2: Consolidation of Vodacom SA BEE Shareholders' interests in Vodacom SA in a single vehicle
This step does not give rise to any pro forma financial effects for Vodacom Group.
- Step 3: YeboYethu declares a special dividend
Other reserves are reduced for the impact of the declaration of the special dividend. The pro forma financial effects arising as a result of the settlement of the special dividend are
described below.
- Step 4: Vodacom Group (on behalf of itself and other employer companies) make a contribution to the Vodacom ESOP to enable it to acquire YeboYethu ordinary shares
Other reserves and cash are each reduced for the impact of the R300 million acquisition of YeboYethu shares by Vodacom ESOP from YeboYethu ESOP, while there is no impact for
the R750 million subscription for YeboYethu shares by Vodacom ESOP as it eliminates on consolidation.
- Step 5: YeboYethu exchanges Vodacom SA shares for new Vodacom Group shares
The 49 689 995 new Vodacom Group shares issued in exchange for the 3.95% shareholding that YeboYethu holds in Vodacom SA are treated as treasury shares on a consolidated
level. This step results in an assumed IFRS 2 charge as described below and an increase in the total number of Vodacom Group shares in issue used for calculating dividend per
share.
- Step 6: YeboYethu raises vendor funding and third party financing and subscribes for additional Vodacom Group shares
Class A preference shares
Borrowings are increased for YeboYethu's issue of class A preference shares to third party funders of R4 623 446 168. YeboYethu will use the entire subscription proceeds received
to subscribe for 40 833 194 new Vodacom Group shares through its wholly owned subsidiary YeboYethu Investment at a discount of R1 229 992 228, based on the BEE transaction
share price.
These shares are treated as treasury shares on a consolidated level. In addition, this step results in an IFRS 2 charge as described below and an increase in the total number of
Vodacom Group shares in issue used for calculating dividend per share.
Finance cost at a rate of 68% of prime overdraft lending rate (non tax deductible) on the outstanding balance of the A preference shares has been assumed.
Class B preference shares
The issue of class B preference shares by YeboYethu to Vodacom Group of R5 284 707 866 does not give rise to any pro forma financial effects as it eliminates on consolidation.
YeboYethu will use the subscription proceeds as well as the subscription proceeds to:
- Fund the payment of the special dividend of R3 261 189 876 to YeboYethu shareholders (detailed in Step 3); and
- Settle assumed transaction costs of R64 million.
The remaining balance of the class B subscription proceeds as well as the subscription proceeds received from Vodacom ESOP through the subscription of YeboYethu shares to the
value of R750 million will be used to subscribe for 23 927 991 new Vodacom Group shares through its wholly owned subsidiary YeboYethu Investment at a discount of R720 767
619 based on the BEE transaction share price.
These shares are treated as treasury shares on a consolidated level. In addition, this step results in an IFRS 2 charge as described below and an increase in the total number of
Vodacom Group shares in issue used for calculating dividend per share.
3.1. The BEE transaction gives rise to the following assumed IFRS 2 charges:
- A non-recurring share-based payment charge of R1 275 million, relating to YeboYethu shareholders, excluding the Vodacom ESOP; and
- A total share-based payment charge of R1 119 million, relating to Vodacom ESOP, which will be recognised on a recurring basis in tranches over the vesting period of five years.
Accordingly, the pro forma financial effects assumes a charge of R1 491 million, consisting of the non-recurring charge, and one year's vesting charge of R216 million (net of tax), in
relation to the Vodacom ESOP component.
Of the total assumed IFRS 2 charge of R2 394 million, R732 million relates to a cash-settled share-based payment arrangement. On initial recognition, the liability relating to the
Vodacom ESOP and the Innovator Trust will be measured at fair value using the Monte Carlo Simulation based option pricing model. The value of the liability will be re-measured at
each reporting period based on changes to the various valuation inputs.
The abovementioned share-based payment charges have been calculated using a Monte Carlo Simulation based option pricing model. The economic substance of the BEE
transaction mimics that of a call option, with the value of the outstanding debt at the maturity date of the transaction as the strike price of the option.
A total assumed IFRS 2 charge of R2 394 million has been determined for this transaction at inception. The assumptions used in this model for purposes of the pro forma financial
effects include:
- 114 451 180 new Vodacom Group shares;
- Vodacom Group share price of R123.09, being the Vodacom Group share price on the last practicable date prior to finalising the pricing announcement;
- Volatility of 22.25% in the Vodacom Group share price, calculated using historical share price information since Vodacom Group's listing on the JSE;
- Expected costs to escalate by 6% per annum;
- Expected dividend yields of between 6.9% and 8.03%; and
- The risk free rate used was based on an independently constructed zero coupon South African Rand interest rate swap curve ranging from 6.3% to 8.4%.
These assumptions will be updated when the final IFRS 2 charge is determined upon approval of the BEE transaction.
The Vodacom Group share price is a material input in calculating the financial effects of the transaction. Since the terms announcement dated 11 June 2018, markets across the
globe have been impacted by significant share price volatility. This has been driven by global factors including increased international trade uncertainty from tariff interventions
mainly by the USA and China. Emerging markets have been particularly affected. International funds withdrew from riskier assets, creating negative pressure on emerging market
economies and currencies. The impact of this can be clearly seen in the resultant volatile share prices across the South African market.
The IFRS 2 charge is most sensitive to changes in the share price of the Vodacom Group share. The table below illustrates what the IFRS 2 charge would be based on various
Vodacom Group share prices, with all other assumptions remaining static. The table below is provided for illustrative purposes only.
Total assumed
IFRS 2 charge IFRS 2 charge IFRS 2 charge Decrease
relating to relating to arising as a result in earnings and
recurring non-recurring of the assumed headline
Vodacom Group Limited share-based share-based Vodacom Group earnings
share price payment charge payment charge share price per share
(Rand) after tax (Rm) (Rm) (Rm) (cents)*
150.00 365 3 269 3 634 (224)
140.00 308 2 505 2 813 (174)
130.00 253 1 767 2 019 (125)
123.09** 216 1 275 1 491 (92)
120.00 200 1 059 1 259 (78)
110.00 155 389 544 (34)
100.00 103 284 387 (24)
* This column represents the decrease in earnings per share and headline earnings per share arising as a result of the total assumed IFRS 2 charge, after tax.
** Reflected in the pro forma financial effects of the BEE transaction
The IFRS 2 charge is also sensitive to the dividend yield that is input into the Monte Carlo valuation model. This will also change based on the Vodacom Group share price.
For the purpose of performing the valuation, an annual effective dividend yield of 8.01% was used. This effective dividend yield was based on a term structure of simple dividend
yields that was calculated using Bloomberg analyst forecasts, as at the last practicable date, in conjunction with a projected future share price. The projected future share price was
determined under a risk-neutral framework as dictated under option pricing theory. Typically, this results in a dividend yield higher than the historical average. In order to assess the
sensitivity of this input, we performed a valuation using an assumed 5.92% average historical dividend yield. This assumed average historical dividend yield was determined based
on historical dividend information over the period commencing from 16 May 2012, the date at which Vodacom Group revised its dividend policy, up to and including 29 June 2018.
The IFRS 2 charge that would result using the assumed average historical dividend yield would have been as follows:
IFRS 2 charge Total assumed
relating to IFRS 2 charge IFRS 2 charge Decrease
recurring relating to arising as a result in earnings and
share-based non-recurring of the assumed headline
payment charge share-based Vodacom Group earnings
after tax payment charge share price per share
Vodacom Group Limited share price (Rand) (Rm) (Rm) (Rm) (cents)*
123.09 224 1 403 1 627 (100)
3.2. The calculation of diluted earnings and diluted headline earnings per share is based on the weighted average number of shares in issue, increased by the number of shares to
be issued for no consideration under the BEE transaction. The assumed number of dilutive shares of 46 095 623 is based on issuing 114 451 180 Vodacom Group shares, assumed
proceeds based on the outstanding preference share funding and the value of services to be provided by employees in the future and an average market price of the Vodacom
Group share over the reporting period of R159.03.
3.3. The net assumed cash proceeds of R992 million is assumed to earn interest at an average rate of 6.44% percent, before taxation, which interest saving thereon is of a
continuing nature.
3.4. Once-off transaction costs of R152 million including VAT (non tax deductible) (inclusive of the transaction costs in Step 6) are assumed to be settled in cash and have been
expensed in profit or loss. YeboYethu will incur operating expenses in the ordinary course of business. The pro forma effects exclude any incremental increase in excess of historical
levels in such expenses as this cannot be quantified as at the last practicable date prior of finalising this pricing announcement.
The pro forma financial effects presented in this pricing announcement differ from those effects presented in the announcement to Vodacom Group shareholders dated 11 June
2018, due to updating the pro forma financial effects for the BEE transaction share price and due to the non-recurring impact arising from the IFRS 2 charge incorrectly being
presented separately.
5. Vodacom Group 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, Vodacom Group intends to distribute any dividend it receives from Safaricom, up to a maximum amount of the dividend
received, net of withholding tax.
Vodacom Group intends to add back the day one non-recurring share-based payment charge relating to YeboYethu shareholders, excluding the Vodacom ESOP, in relation to the
proposed BEE transaction to headline earnings, for the purpose of dividend calculation, for the 2019 financial year.
6. Salient dates and times
2018
Record date for shareholders to be recorded on the register to receive a copy of the circular Friday 6 July
Circular incorporating notice of general meeting posted to shareholders Monday 16 July
Last day to trade in order to be eligible to attend and vote at the general meeting Monday 6 August
Record date for attending and voting at the general meeting Friday 10 August
Recommended day to lodge forms of proxy in respect of the general meeting by 09:00 Wednesday 15 August
General meeting of shareholders to be held at 09:00 at Vodacom World, 082 Vodacom Boulevard, Midrand for the purpose of considering and, if
deemed fit, approving, with or without modification, the resolutions proposed thereat Thursday 16 August
Results of general meeting released on SENS Thursday 16 August
Estimated date of fulfilment of the general transaction conditions (on or about) Friday 7 September
First implementation day (on or about) (if there are no appraisal rights exercised by YeboYethu shareholders) Monday 10 September
First implementation day (on or about) (if any YeboYethu shareholders exercise their appraisal rights) Tuesday 25 September
Notes:
1. The dates and times indicated in the table above are subject to change. Any such changes will be released on SENS and published in the South African press.
2. All times referred to above are references to South African standard time.
3. Forms of proxy should be forwarded to be received for the orderly arrangement of matters on the date of the general meeting (but not required) by the company's transfer
secretaries, by 09:00 on Wednesday 15 August 2018 for administrative purposes (or alternatively to handed to the chairman of the general meeting prior to its commencement).
7. Further documentation
A circular containing full details of the BEE transaction (including pro forma financial effects based on the final BEE transaction share price) and a notice of general meeting will be
posted to shareholders on or about Monday 16 July 2018.
Midrand
4 July 2018
Financial adviser to Vodacom Group, debt arranger and co-funder to YeboYethu and transaction sponsor to Vodacom Group
Rand Merchant Bank (a division of FirstRand Bank Limited)
Financial adviser, co-funder and transaction sponsor to YeboYethu
Absa Corporate and Investment Bank, a division of Absa Bank Limited
Legal and tax adviser to Vodacom Group and YeboYethu
Cliffe Dekker Hofmeyr Inc.
Legal adviser to the debt arranger and co-funders
Allen & Overy (South Africa) LLP
Independent expert to Vodacom SA
Ernst & Young
Independent expert to YeboYethu
BDO Corporate Finance (Pty) Ltd
Reporting accountants
PricewaterhouseCoopers Inc.
Co-funder
Nedbank Corporate (a division of Nedbank Limited)
Date: 04/07/2018 05:20:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct,
indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on,
information disseminated through SENS.
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