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Voluntary Announcement - Renegotiation Of Agreements And Acquisition Of Insurance Business
PEPKOR HOLDINGS LIMITED
(Previously Steinhoff Africa Retail Limited)
(Incorporated in the Republic of South Africa)
(Registration number: 2017/221869/06)
Share code: PPH
ISIN: ZAE000247995
(“Pepkor” or “the Company”)
VOLUNTARY ANNOUNCEMENT - RENEGOTIATION OF COMMERCIAL AGREEMENTS
PERTAINING TO FINANCIAL SERVICES AND ACQUISITION OF INSURANCE BUSINESS
Pepkor hereby advises that it has agreed to terminate its existing commercial relationship with
Century Capital (Pty) Ltd (“Cencap”), in a phased approach.
1. BACKGROUND
Historically, a commercial relationship was established during 2016 between the
subsidiaries of Pepkor Holdings Limited (“Pepkor”, the “Company” or the “Group”) and
subsidiaries of Wands Investments Proprietary Limited (collectively “Wands”). Wands is
responsible for the funding of credit books that provide financial services to customers of
certain Pepkor retail brands. Wands carries the credit risk related to these financial
services. Wands is a subsidiary of Fulcrum Financial services SA (“Fulcrum”).
The financial services delivered by Wands include:
1. Credit, provided by Cencap, to customers of the JD Group (“JD consumer credit”)
and unsecured personal loans (“Capfin loans”) provided by Cencap by using the Pep
and Ackermans retail footprint.
2. Insurance products, provided by FGI Holdings Proprietary Limited (“FGI”) under the
brands of Abacus Insurance and Abacus Life.
Pepkor, through its internal financial services administration operations (call centre and
debt collection operations), has to date provided origination, collection, accounting,
regulatory and compliance services (“Outsourced services”) to Cencap pertaining to JD
consumer credit, Capfin loans and FGI.
Pepkor has therefore been responsible for managing all operational aspects of services
provided to customers, including the customer experience and interaction, except for the
funding thereof, which has been provided by Cencap.
2. PROPOSED TRANSACTIONS
Pepkor considered its options and decided not to pursue the acquisition of the credit books
owned by Cencap, but instead will build its own credit books. With regard to the existing
credit books, commercial agreements were renegotiated, granting Pepkor the right to
continue collection of the Cencap-owned loan books for the run-down period of the books,
up to a maximum period of 3 years and render the Outsourced services at a market-related
fee (“Commercial Agreements”).
Pepkor further agreed to purchase 100% of the issued shares in FGI from Wands for a
purchase price of circa R150 million (“the FGI Transaction”). FGI contains highly
regulated, liquid assets. The acquisition is subject to a due diligence and other conditions
precedent, normal for transactions of this nature.
The Commercial Agreements and FGI Transaction are herein collectively referred to as
“the Proposed Transactions”.
3. RATIONALE FOR THE PROPOSED TRANSACTIONS
The ability of Cencap to continue funding financial services provided to Pepkor customers
is uncertain. This presents a business risk to Pepkor as financial services enables sales
in especially the JD Group retail businesses.
Pepkor therefore seeks to mitigate any risk to its business operations and aims to:
1. Take control of the funding of financial services provided to Pepkor customers;
2. Maintain profitability insofar as it relates to financial services and Pepkor’s
financial services operations; and
3. Ultimately, end its commercial relationship with Fulcrum, Wands & Cencap in a
responsible manner.
Pepkor further seeks to protect the positive contribution from insurance products provided
to Pepkor customers by FGI, through its subsidiaries Abacus Life and Abacus Insurance.
Pepkor already possess the financial services administration capabilities to manage the
inherent credit risk associated with the internal funding of retail credit and unsecured
lending books. The Group’s capability is further strengthened by successfully funding and
managing the clothing and general merchandise retail credit book through Tenacity
Financial Services since 2007.
The Proposed Transactions will result in Pepkor gaining control over the customer data
and book in addition to controlling the customer experience and interactions.
4. DESCRIPTION OF THE RENEGOTIATED AGREEMENTS AND PARTICULARS OF
THE PROPOSED TRANSACTIONS
The following is a summary of the historic and renegotiated Commercial agreements
between Pepkor and Cencap:
1. JD Group
a. Commercial agreement
This current agreement allows Cencap to provide credit (“JD consumer
credit”) to customers of the JD Group. Pepkor earns a merchant
commission in return. Cencap is responsible for the credit granting criteria
of JD consumer credit and bears the credit risk.
The effective date of termination of the current agreement was 30
September 2018. After this date, JD consumer credit would be originated
and funded by Pepkor and therefore no merchant commission would be
receivable from Cencap in respect of the period after this date.
b. Outsource agreement
Services pertaining to JD consumer credit such as origination,
administration and collection through its store network are outsourced by
Cencap to Pepkor for a fee based on a cost recovery basis.
The effective date of termination of the current outsource agreement was
30 September 2018. It was replaced by a new outsource agreement with
an effective date of 1 October 2018 and termination date of
30 September 2021. In terms of this agreement Pepkor will provide certain
services to Cencap relating to Cencap’s existing consumer credit book.
These services include primarily collection (as exclusive agent),
administration, regulatory and compliance services. The service fee in
terms of this agreement will be on an arms-length basis.
2. Capfin
a. Commercial agreement
The current agreement allows Capfin unsecured personal loan (“Capfin
loans”) applications to be made in certain Pepkor retail stores for which
Pepkor earns a distribution fee in return. Cencap is responsible for the
granting of Capfin loans and bears the credit risk on these Capfin loans.
The current agreement will terminate on 30 June 2019. At the latest from
1 July 2019, Capfin loans will be originated and funded by Pepkor and
therefore no further distribution fees will be receivable from Cencap.
b. Outsource agreement
Services pertaining to Capfin loans are outsourced by Cencap to Pepkor
for a “cost plus”-fee. These services include inter alia: origination,
collection, accounting, regulatory and compliance services.
The current outsource agreement will terminate on 30 June 2019 and will
continue to operate on a “cost plus” recovery basis until then.
A new outsource agreement will become effective from 1 July 2019 to
30 September 2021 whereby Pepkor will exclusively collect Capfin loans
granted before 1 July 2019. Services will include: collection, accounting,
regulatory and compliance services. The service fee in terms of this
agreement will be on an arms-length basis.
3. FGI
a. Insurance services provider commercial agreement
FGI’s right of first refusal as provider of insurance products is determined
in terms of the JD credit provider commercial agreement referred to above
and an undertaking by Pepkor to FGI during 2016 not to cancel this
commercial agreement before December 2020. This agreement allows the
Abacus entities to provide insurance products to Pepkor customers that
are interdependent on JD consumer credit and include credit life insurance
and product insurance. Pepkor earns commission and administration fees
in return. As mentioned above, the FGI Transaction is subject to a due
diligence and other conditions and should the due diligence condition in
the FGI Transaction not be fulfilled, this period will be extended until June
2021.
These renegotiated agreements ultimately results in Pepkor maintaining its income
streams and profitability insofar as it pertains to financial services operations.
5. PURCHASE CONSIDERATION IN TERMS OF THE FGI ACQUISITION
Pepkor will pay a purchase consideration of R150 million to Wands based on an estimated
net asset value of FGI equal to R100 million. Should the net asset value of FGI:
• Exceed R100m, the purchase consideration will be increased with the excess; or
• Be less than R100m, the purchase consideration will be reduced with the shortfall.
6. FGI FINANCIAL INFORMATION
FGI net asset value as on 30 June 2018 was R238 million, after which date a dividend of
R158 million was declared. FGI consolidated profits after tax for the 12 months ended 30
June 2018, was R54 million, based on the audited annual financial statements of FGI for
the year ending 30 June 2018, which were prepared in terms of IFRS.
7. CONDITIONS PRECEDENT
The Proposed Transactions are subject to the fulfilment of the following outstanding
conditions precedent (“Conditions Precedent”):
In respect of the conclusion of the Commercial Agreements:
• Conclusion of all the Commercial Agreements; and,
• Regulatory approval, to the extent applicable.
In respect of the acquisition of the FGI Transaction:
• Resolutions providing the necessary company constitutional consents;
• Conclusion of the Due Diligence on FGI and the delivery by Pepkor of a notice to
Wands that it is satisfied with the outcome thereof;
• Competition Commission Approval (at Pepkor’s cost);
• Any approvals prescribed by the JSE Listing Requirements, to the extent
applicable;
• All the approvals prescribed by the Financial Sector Regulation Act 2017, the
Insurance Act 2018, the Short-term Insurance Act 1998, Long-term Insurance Act
1998, NCA and any other applicable legislation have been obtained;
• Prudential Authority approval;
• A compliance certificate issued by the Takeover Regulation Panel or exemption
granted by the Takeover Regulation Panel, as the case may be, to the extent
required;
• All the other regulatory notifications and consents/approvals to the extent
required.
8. EFFECTIVE DATE OF THE PROPOSED TRANSACTIONS
The effective date of the changes to the Commercial Agreements is 1 October 2018,
except for the new Capfin outsource agreement which will be effective from 1 July 2019.
The effective date of the FGI Transaction is upon fulfilment of the conditions precedent,
expected to be on or about 1 July 2019.
9. FAIRNESS OPINION
As communicated to Pepkor shareholders during its interim results published on the
Stock Exchange News Service of the JSE Limited on 29 May 2018, Pepkor’s controlling
shareholder, Steinhoff International Holdings N.V., is investigating its relationship with
various parties, including Fulcrum, Cencap and Wands (“Fulcrum Relationship”).
Furthermore, entities controlled by the Wiese family (the “Preference Shareholders”)
hold preference shares in Southern View Finance Holdings SA (Pty) Ltd (“Southern
View”), a subsidiary of Wands. The Preference Shareholders entered into agreement/s
with Wands to acquire Southern View and Cencap in an attempt to secure the
recoverability of these preference shares, which agreement/s are currently subject to
conditions precedent. The Preference Shareholders may therefore receive indirectly a
financial benefit in respect of the Commercial Agreements as shareholders of Cencap
and / or the application of the sale proceeds of the FGI Transaction to repay a loan owing
by Wands to Southern View (”Wiese Relationship”)
Based on the Fulcrum Relationship and the Wiese Relationship, the Pepkor board of
directors (“Pepkor Board”) has deemed it prudent to appoint PSG Capital (“Independent
Expert”) as the independent expert to compile a fairness opinion on the Proposed
Transactions. The Independent Expert has considered the terms and conditions of the
Proposed Transactions and is of the opinion that the terms and conditions of the Proposed
Transactions are fair to the shareholders of the Company.
23 November 2018
Sponsor
PSG Capital
Date: 23/11/2018 12:40:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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