TSOGO SUN HOLDINGS LIMITED - Disposal of Casino Precinct Properties to Hospitality Property Fund and Withdrawal of Cautionary

Release Date: 09/07/2018 17:15
Code(s): TSH
 
Wrap Text
Disposal of Casino Precinct Properties to Hospitality Property Fund and Withdrawal of Cautionary

TSOGO SUN HOLDINGS LIMITED
(Incorporated in the Republic of South Africa)
(Registration No. 1989/002108/06)
JSE Share Code: TSH
ISIN: ZAE000156238
("Tsogo" or the “Company”)



DISPOSAL OF CASINO PRECINCT PROPERTIES TO HOSPITALITY PROPERTY FUND
AND WITHDRAWAL OF CAUTIONARY



1. INTRODUCTION

  Further to the cautionary announcements issued by Tsogo, the last of which was issued on
  SENS on 31 May 2018, the board of directors of Tsogo (the “Board”) is pleased to announce
  that Akani Egoli Proprietary Limited (“Akani-Egoli”), Silverstar Casino Proprietary Limited
  (“Silverstar”), Tsogo Sun Casinos Proprietary Limited (“TSC”), Tsogo Sun KwaZulu Natal
  Proprietary Limited (“TSKZN”) and Tsogo Sun Newcastle Proprietary Limited (“TSNEW”), all
  of which are wholly-owned subsidiaries of Tsogo (the “sellers”) and Tsogo, Listed Investments
  Proprietary Limited (“Listed”) and Cassava Investments Proprietary Limited (“Cassava”),
  have entered into a sale of shares and subscription agreement (the “subscription
  agreement”) with Hospitality Property Fund Limited (“Hospitality”) and its wholly-owned
  subsidiary Merway Fifth Investments Proprietary Limited (“Merway”) for the disposal by the
  sellers to Hospitality of a portfolio of seven mixed-use casino precinct properties (the “casino
  precinct properties”) for an aggregate purchase consideration of R23 billion (the “purchase
  consideration”) (the “transaction”).

  The salient terms of the subscription agreement are set out in paragraph 3 below.

2. RATIONALE

  The transaction is in line with the Board’s strategy to restructure Tsogo into three separate and
  distinct operating divisions, being a Property Division, a Gaming Division and a Hotel
  Management Division.

  The Board anticipates that the separation of Tsogo into these three focused divisions (and
  separate listed entities) will unlock value and provide greater investment choice for Tsogo
  shareholders. On conclusion of the transaction, Hospitality is expected to own investment
  properties with a total fair market value of approximately R36 billion.
  Upon completion of the transaction, Tsogo will hold approximately 87% of the shares in
  Hospitality. It is Tsogo’s ultimate intention to unbundle their shareholding in Hospitality to its
  shareholders and has warranted to Hospitality to do so at a time and in a manner that does not
  have any adverse consequences to Hospitality.

3. TERMS OF THE TRANSACTION

   3.1   Cassava and Listed will own the casino precinct properties. In terms of the subscription
         agreement, Merway will acquire the entire issued share capital of each of Cassava and
         Listed in terms of an “intra group transaction” as provided for in section 45 of the Income
         Tax Act, 1962, as amended. The transaction will be effective from the date of the
         fulfilment or waiver, as the case may be, of the conditions precedent set out in
         paragraph 4 below (the “effective date”).

   3.2   The purchase consideration was determined using the fair value of the casino precinct
         properties being R23 billion, based on an agreed forward yield of 8.45%.

   3.3   The purchase consideration will be settled by Merway on the effective date as follows:

         3.3.1       an amount of R3 169 700 000 will be paid in cash to Silverstar, TSNEW
                     and TSC pro rata to their holdings in Cassava; and

         3.3.2       an amount R19 837 261 538 will be paid in cash to Akani-Egoli, TSKZN
                     and TSC pro rata to their holdings in Listed.

   3.4   On the effective date, each of Akani-Egoli, Silverstar, TSKZN, TSNEW and TSC will use
         its share of     the purchase consideration (amounting in the aggregate to
         R23 006 961 538):

         3.4.1       to subscribe for 1 196 362 000 Hospitality ordinary shares at a subscription
                     price of R12.50 per share, which shares when issued, shall constitute not
                     less than 67.4% of the entire issued share capital of Hospitality at such time
                     (the “subscription”); and

         3.4.2       to settle its debt with the balance of R8 052 436 538.

   3.5   Following implementation of the internal group restructure referred to in paragraph 4.1
         below, each of the casino precinct properties will be let by Listed and Cassava as
         landlord (“landlord”) to an indirect wholly-owned subsidiary of Tsogo, being
         Grabblebrook Proprietary Limited (“LeaseCo” or “tenant”) in terms of a head lease
         agreement (the “head lease”). The tenant, Cassava and Listed will also enter into a
         head lease rental aggregation agreement governing the rentals, escalations, reviews
         and resets in respect of each of the casino precinct properties (the ”rental aggregation
         agreement”).

3.6   The salient terms of the head lease and rental aggregation agreement are set out below:

      3.6.1       the head lease will permit the tenant to sub-let each of the casino precinct
                  properties with the consent of the landlord;

      3.6.2       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 the landlord or the tenant on 15 years’ written
                  notice;

      3.6.3       the initial aggregate base rental payable by the tenant for the casino
                  precinct properties will be R1.9 billion per annum (the “initial aggregate
                  base rental”), one twelfth of which amount will be payable monthly in
                  advance on the 1st business day of each month;

      3.6.4       the initial aggregate base rental will escalate annually on the 1st day of April
                  of each year by the percentage change in the consumer price index which
                  is applicable for the preceding 12 months (the “escalation rate”) subject to
                  the terms of a rental review referred to in paragraph 3.6.5 below;

      3.6.5       on the 7th anniversary of 1 April 2018 (i.e. on 1 April 2025), and thereafter
                  on each successive 5th anniversary of that date (“rental review date”), the
                  aggregate annual rental payable by the tenant in terms of the head lease
                  for the year commencing on such anniversary, will be reviewed by the
                  landlord and the tenant (“head lease anniversary rental review”) and will
                  be recalculated to be the lesser of:

                  3.6.5.1         an amount equal to the initial aggregate base rental
                                  escalated annually at the escalation rate on the 1st day of
                                  April of each year, irrespective of and disregarding any
                                  rental reset (upwards or downwards, as described in
                                  paragraphs 3.6.6 and 3.6.7 below) which has occurred
                                  during the period of the head lease (“aggregate escalated
                                  base rental”); and

                  3.6.5.2         an amount equal to 70% of the aggregate EBITDAR
                                  (earnings before interest, income tax, depreciation,
                                  amortisation, property rentals paid, long term incentives and
                                  exceptional items and after deducting management fees
                                  and licence fees charged by companies within the Tsogo
                                  group of companies (“Tsogo Group”) in respect of the
                                  casino precincts properties) earned by the Tsogo Group in
                                  respect of the casino precinct properties in respect of the
                                  year terminating on the day preceding the anniversary date
                                  concerned, escalated at the escalation rate on the
                                  anniversary date concerned, (“head lease re-set”);
                                  provided that:

                       3.6.5.2.1        the EBITDAR as published by Tsogo in
                                        respect of the casino precinct properties will
                                        be prepared on the same basis and applying
                                        the same criteria as applied in years prior to
                                        the effective date; and

                       3.6.5.2.2        the   proportion     that   the    aggregate
                                        management fees charged by companies
                                        within the Tsogo Group bears to the
                                        aggregate EBITDAR of all casino precinct
                                        properties will not be increased after the
                                        effective date without the consent of the
                                        landlord,

3.6.6   if the difference between the amount of the aggregate escalated base rental
        and the amount of the aggregate EBITDAR rental is:

        3.6.6.1        less than 2,5%, then the rental will not be adjusted nor reset
                       downwards and instead the rental and the rental payable by
                       the tenant for the ensuing relevant 5 year period shall be
                       equal to the rental payable in the previous year escalated at
                       the escalation rate; or

        3.6.6.2        equal to or greater than 2,5%, then the rental will be
                       adjusted and reset downwards in accordance with the
                       resulting calculation and the rental payable by the tenant for
                       the ensuring relevant 5 year period will be adjusted and
                       reset downwards (“downwards rental reset”)

3.6.7   if:

        3.6.7.1        on a rental review date; or

        3.6.7.2        on the first anniversary of any rental review date; or

        3.6.7.3        on the second anniversary of any rental review date,
        (irrespective of whether or not the review on any rental review date resulted
        in a downwards rental reset, a head lease upwards rental reset or a cure
        rental as contemplated in paragraph 3.6.10 below) and, if the then rental is
        less than the aggregate escalated base rental at such time, then the
        relevant parties will again review and recalculate the rental payable despite
        such review and recalculation procedure not coinciding with a review date
        (“extraordinary rental review”). The rental calculation amount resulting
        from the extraordinary rental review will only be implemented if it has the
        effect of increasing the rental upwards when compared with the rental
        payable in the last month immediately preceding the date of the
        extraordinary rental review (“upwards rental review”), provided that:

        3.6.7.4         the upwards rental review will not have the effect of resulting
                        in a rental greater than the aggregate escalated base rental
                        for the same period;

        3.6.7.5         the extraordinary rental review will only be used to
                        implement an upwards rental reset and cannot be used to
                        implement a downwards rental reset; and

        3.6.7.6         an extraordinary rental review and resulting upwards rental
                        reset can be used and implemented consecutively in each
                        of the two years in order to achieve an upwards rental reset,
                        provided that the maximum aggregate rental payable for
                        those two years may not be greater than an amount equal
                        to the aggregate escalated base rental for the same two
                        year period;

3.6.8   subject to paragraph 3.6.10 below, in the event of a downwards rental reset
        occurring on any two consecutive rental review dates, the landlord will be
        entitled, by giving five years written notice to the tenant, either to terminate:

        3.6.8.1         all of the head leases and the head lease rental aggregation
                        agreement in respect of all of the casino precincts; or

        3.6.8.2         the particular head lease/s in respect of the particular casino
                        precinct/s whose performance was the cause of the second
                        relevant downwards rental reset;

        in which case such notice of termination must be received by the tenant
        within a period of three months of the second of such rental review dates in
        order to constitute a valid notice of termination. For the sake of clarity, the
         earliest that the landlord will be entitled to give any such five years notice
         of termination will be on 1 April 2030;

3.6.9    if a head lease relating to a particular casino precinct/s is terminated in
         accordance with paragraph 3.6.8 above, then:

         3.6.9.1         no further rental will be due by the tenant in respect of such
                         head lease from the date of such termination;

         3.6.9.2         all calculations made in terms of paragraphs 3.6.5.2.1 and
                         3.6.5.2.2 and 3.6.7 will be adjusted to exclude that particular
                         casino precinct/s and the particular head lease as well as
                         the rentals relating thereto, either future or retrospectively;

3.6.10   notwithstanding the provisions of paragraph 3.6.8 above, the tenant will
         have the right to waive any head lease downward re-set in respect of any
         head lease anniversary rental review cycle, thereby preventing an early
         termination as contemplated in paragraph 3.6.8 above should it elect to
         make (and in fact makes), within a period of 3 weeks from date of the
         second of the relevant head lease downward re-set, payment for the
         ensuing year, of an aggregate annual rental which is equal to the aggregate
         annual rental that was paid in terms of the head lease for the year
         terminating on the day preceding the day upon which the head lease
         downward re-set would have been implemented, escalated at the
         escalation rate, instead of making payment of the head lease downward re-
         set amount that would have been implemented for the ensuing year,
         continuing to escalate annually thereafter in terms of paragraph 3.6.4 above
         until the occurrence of the next head lease anniversary rental review;

3.6.11   the tenant will be liable for all utility deposits and charges incurred or
         payable in respect of the casino precinct properties;

3.6.12   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 casino
         precinct properties (“improvements”) and may install any fixtures, fittings
         and equipment without the landlord’s consent;

3.6.13   where such alterations, renovations or additions to any of the developments
         on the casino precinct properties are of a material nature (“material
         improvements”), the tenant (or its nominee) shall be obliged to offer the
         landlord the opportunity to pay for such material improvements, together
         with an appropriate rental increase payable by the tenant to the landlord
         (“material improvement offer”). In the event that the landlord fails to
         accept or decline or elects not to accept the material improvement offer,
         then the tenant (or its nominee) shall be entitled to effect the material
         improvements at its own cost or to make such material improvement offer
         to a third party on terms no more favourable to those offered to the landlord.
         Any earnings from the improvements shall be included for the purpose of
         calculating the EBITDAR, whether or not such improvements were paid for
         by the tenant, the landlord or by a third party;

3.6.14   subject to the aforesaid, prior to the expiration or termination of a head
         lease, the tenant shall have the election to either remove all material
         improvements and reinstate the relevant casino precinct to substantially the
         same condition in which it was before the material improvement was
         effected, failing which all improvements will be forfeited to the landlord for
         no consideration. The tenant (or its nominee) will be entitled to remove all
         fixtures, fittings and equipment upon termination of a head lease;

3.6.15   neither the tenant nor any other Tsogo Group company, will:

         3.6.15.1        establish a casino within 25 kilometres of a particular casino
                         precinct property while continuing to operate a casino at that
                         casino precinct property; or

         3.6.15.2        procure that the casino operated by it at a casino precinct
                         property in a particular province, ceases to operate and is
                         substantially relocated to premises other than at that casino
                         precinct property.

3.6.16   ownership in and to the operating plant and the fixtures, fittings and
         equipment will at all times remain with Tsogo. Tsogo will not remove the
         operating plant from the casino precinct properties other than for the
         purposes of repairing it or replacing it. On termination of any head lease for
         any reason whatsoever, Tsogo will transfer ownership of the operating plant
         relating to the casino precinct property, forming the subject of such head
         lease (“relevant operating plant”), by way of constructive or physical
         delivery to the landlord for no consideration. Tsogo warrants that it is the
         owner of the relevant operating plant and that it will remain the owner of the
         operating plant throughout the term of the head lease and that the relevant
         operating plant is and will at all times during the term of the head lease
         remain unencumbered in any way and that Tsogo will be able to give free
         and unencumbered ownership of the relevant operating plant to the
                       landlord on termination of the head lease. In addition on termination of a
                       head lease for any reason whatsoever, Tsogo will cede to the landlord all
                       guarantees, warranties and/or undertakings which Tsogo may hold from
                       time to time from any supplier or contractor in respect of the relevant
                       operating plant;

         3.6.17        the landlord will grant the tenant a right of first refusal to acquire each of the
                       casino precinct properties of which the landlord wishes to dispose; and

         3.6.18        Tsogo undertakes to and in favour of Hospitality, not to dispose, either
                       directly or indirectly, of any or all of (i) the casino precinct properties’
                       businesses and/or (ii) its interest in Grabblebrook, without the consent of
                       Hospitality, which will not unreasonably be withheld.

   3.7   Tsogo and Hospitality have agreed to warranties and indemnities that are standard for
         a transaction of this nature.

4. CONDITIONS PRECEDENT

  The subscription agreement is subject to the fulfilment or waiver (where possible), as the case
  may be, of the following conditions precedent:

   4.1   Tsogo concluding its internal group restructure on substantially the same terms as those
         contained in the draft restructure agreements initialled by Tsogo and Hospitality;

   4.2   the registration and transfer of those casino precinct properties which are not already
         owned by Cassava and Listed, into the name of Cassava and Listed (as the case may
         be) being effected in the relevant Deeds Registry;

   4.3   the requisite majorities of Tsogo shareholders shall have passed all resolutions
         (including those required by the JSE Listings Requirements and the Companies Act)
         required to authorise and approve the transaction and its implementation;

   4.4   the requisite majorities of Tsogo shareholders and directors shall have passed the
         necessary resolution/s referred to in section 45(3)(a)(ii) and 45(3)(b) of the Companies
         Act, authorising Tsogo to provide financial assistance to Grabblebrook and the Vendors
         in the form of the guarantee by Tsogo for its obligations of Grabblebrook in terms of the
         head lease;

   4.5   to the extent necessary, the requisite approvals of the JSE and the SARB for
         implementation of the transaction shall have been obtained by Tsogo;
   4.6   the requisite majorities of Hospitality shareholders shall have passed all resolutions
         (including those required by the JSE Listings Requirements and the Companies Act)
         required to authorise and approve the transaction and its implementation;

   4.7   to the extent necessary, the requisite approvals of the JSE and the SARB for
         implementation of the transaction shall have been obtained by Hospitality;

   4.8   Hospitality shall have confirmed in writing to Tsogo that Hospitality will have concluded
         all the necessary funding agreements with their bankers to enable the advance to
         Merway of the funds required to cover the purchase consideration payable by Merway
         in terms of the transaction;

   4.9   following receipt of written confirmation, Tsogo shall have confirmed in writing to
         Hospitality that both Cassava and Listed will be unconditionally released from all
         obligations furnished by them under the Tsogo Group security pool, and that the casino
         precinct properties shall be released from any guarantees, pledges and/or mortgage
         bonds furnished as security thereunder against payment of the purchase consideration;
         and

   4.10 The Takeover Regulations Panel issuing a compliance certificate in relation to the
         transaction in terms of section 121(b) of the Companies Act.

5. PRO FORMA FINANCIAL EFFECTS

  The pro forma financial effects of the transaction on a Tsogo shareholder are the responsibility
  of the Board and have been prepared for illustrative purposes only to provide Tsogo
  shareholders with information on the pro forma effects of the transaction had the transaction
  been effective on 1 April 2017 for the earnings effects and on 31 March 2018 for the net asset
  value effects. Due to their nature, the pro forma financial effects may not fairly present Tsogo’s
  financial position, changes in equity, financial performance or cash flows after implementation
  of the transaction.

  The pro forma financial effects have been prepared in accordance with the JSE Listings
  Requirements, the Guide on Pro Forma Financial Information issued by the South African
  Institute of Chartered Accountants and the measurement and recognition requirements of
  International Financial Reporting Standards that are consistent with those applied in the
  audited results of Tsogo for the year ended 31 March 2018.
The table below reflects the pro forma financial effects of the transaction:



                                               Before the        Pro Forma after the       %
                                              transaction               transaction    change
                                                (“Before”)                 (“After”)
 Basic and diluted earnings per                      198.3                     179.4   (9.5)%
 share (cents)
 Basic and diluted headline                          197.8                     191.2   (3.3)%
 earnings per share (cents)
 Weighted average number of                               994                   994         -
 shares in issue (million)


 Net asset value per share                                10.3                  11.3     9.7%
 (Rand)
 Net tangible asset value per                              4.1                   5.1    24.1%
 share (Rand)
 Number of shares in issue                               1 059                 1 059        -
 (million)

Notes and assumptions:

1. The Tsogo financial information reflected in the “Before” column has been extracted from
   the published reviewed condensed consolidated financial results of Tsogo for the year
   ended 31 March 2018.

2. The Tsogo financial information reflected in the “After” column has been calculated on the
   basis that the transaction and any other conditions to implement these have been
   completed.

3. The effects on earnings, diluted earnings, headline earnings, diluted headline earnings and
   distributable earnings per share are based on the following assumptions:

   3.1 Before, Tsogo has a 59.15% effective holding in Hospitality and consequently,
        Hospitality’s non-controlling interest (“Hospitality NCI”) has a 40.85% effective
        holding in Hospitality. After, Tsogo will hold a 86.69% effective holding in Hospitality
        and as a result Hospitality NCI is entitled to:

        3.1.1 13.3% of the rental income of the Casino Precinct Properties acquired through
               the acquisition of Cassava and Listed by Hospitality amounting to R259 million;
               and

        3.1.2 27.54% less of the existing Hospitality property portfolio profit amounting to
               R107 million with the drop in Hospitality NCI effective holding from 40.85% to
               13.3%.
      3.2 Tsogo will utilise R8 billion of the purchase consideration to settle debt with a weighted
          average cost of 9.4% per annum.

      3.3 Hospitality will raise R23 billion in respect of the purchase consideration through the
          subscription amounting to R15 billion and third party financing of R8 billion at a
          weighted average cost of 8.96% per annum. Due to the rate differential there is a
          finance cost saving of R48 million pre-tax. Hospitality NCI is allocated their 13.3%
          share of the R8 billion finance costs for the financial year amounting to R69 million.

      3.4 Tax allowances on the casino precinct properties sold to Hospitality are no longer
          deductible for Tsogo with ownership of the properties transferring to Merway. This
          results in the reversal of the current deferred tax liability temporary differences on the
          casino precinct properties of R55 million and the reversal of certain S13 quin/bis
          allowances as per the Income Tax Act amounting to R41 million in additional current
          tax on the allowances that will no longer be deductible with the casino precinct
          properties transfer to Merway.

      3.5 Once off transaction costs assumed of R28 million pre-tax with R2 million attributable
          to Hospitality NCI.

   4. The effects on net asset value per share and tangible net asset value per share are based
      on the following assumptions:

      4.1 The casino precinct properties are recognised in Hospitality at the fair value of the
          purchase consideration, being R23 billion (which are currently recognised by Tsogo at
          a net asset value of R5.0 billion) .

      4.2 Subsequent to the transaction, Hospitality NCI is attributed 13.3% of the net asset
          value of Hospitality (post the acquisition of the casino precinct properties), resulting in
          a R1.062 billion decrease in equity attributed to Hospitality NCI.

      4.3 Once off transaction costs, assumed of R28 million pre-tax are recognised in retained
          earnings with R2 million attributable to Hospitality NCI.

6. RECOMMENDATION AND FAIRNESS OPINION

  Hospitality is a subsidiary of Tsogo, and Hosken Consolidated Investments Limited (“HCI”) is
  a material Tsogo shareholder. As such, Hospitality is an associate of HCI and the transaction
  constitutes a transaction with a related party for Tsogo in terms of paragraph 10.1(b)(vii) of the
  JSE Listings Requirements.

  Accordingly, Tsogo has appointed PSG Capital Proprietary Limited as the independent expert
  (“Independent Expert”) to make the appropriate recommendations in the form of a fairness
  opinion as required in terms of paragraph 10.4 of the JSE Listings Requirements.
   The Independent Expert is in the process of finalising its opinion on the transaction, which
   opinion, together with the views of the Board on the transaction will be detailed in the circular
   to be sent to Tsogo shareholders. Based on the initial assessment of the transaction, subject
   to the Independent Expert opinion, the Board is supportive of the transaction.

7. CATEGORISATION OF THE TRANSACTION

   In terms of the JSE Listings Requirements, the transaction constitutes a Category 1 related
   party transaction and therefore Tsogo shareholder approval is required. A circular convening
   a general meeting and providing further information on the transaction (including a report
   prepared by the Independent Expert as to the fairness of the transaction) will be sent to Tsogo
   shareholders in due course.

8. WITHDRAWAL OF CAUTIONARY ANNOUNCEMENT

   Shareholders are referred to the various cautionary announcements issued by Tsogo in
   relation to the transaction, the last of which was issued on SENS on 31 May 2018 and are
   advised that, on the basis of the above, caution is no longer required to be exercised when
   dealing in Tsogo’s shares.


9 July 2018


 Corporate advisor and sponsor to Tsogo
 Investec Bank Limited

 Corporate Law Advisors to Tsogo
 Taback and Associates Proprietary Limited
 Werksmans Attorneys

 Independent Expert
 PSG Capital

 Independent reporting accountant
 PWC

Date: 09/07/2018 05:15:00 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.

Email this JSE Sens Item to a Friend.

Share This Story