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ESR - Esor Limited - Acquisition And Withdrawal Of Cautionary Announcement

Release Date: 29/09/2008 12:35:24      Code(s): ESR
ESR - Esor Limited - Acquisition And Withdrawal Of Cautionary Announcement      
ESOR LIMITED                                                                    
(Incorporated in the Republic of South Africa)                                  
(Registration number: 1994/000732/06)                                           
JSE code: ESR & ISIN: ZAE000078408                                              
("Esor")                                                                        
ACQUISITION OF SHEARWATER PLANT HIRE (PROPRIETARY) LIMITED ("SHEARWATER"),      
FINANCIAL EFFECTS OF THE SHEARWATER AND PATULA CONSTRUCTION (PROPRIETARY)       
LIMITED ("PATULA") ACQUISITIONS AND WITHDRAWAL OF CAUTIONARY ANNOUNCEMENT       
1.   INTRODUCTION                                                               
    Shareholders are referred to the cautionary announcements dated 9 July      
2008, 20 August 2008 and the announcement dated 22 September 2008           
    relating to the Patula transaction and are advised that, subject to         
    certain conditions precedent, Esor entered into agreements on 26            
    September 2008 to acquire the entire issued share capital of and all        
shareholders` claims in Shearwater from Shearwater Group Holdings           
    (Proprietary) Limited ("the Shearwater vendor"), as well as the claim of    
    Shearwater Construction (Proprietary) Limited ("Shearwater Construction")   
    against Shearwater for payment of the purchase price payable by             
Shearwater for the business of Shearwater Construction pursuant to the      
    acquisition by Shearwater of such business (either "the Shearwater          
    acquisition" or "the Shearwater transaction").                              
2.   BACKGROUND INFORMATION TO SHEARWATER GROUP                                 
Shearwater and Shearwater Construction (collectively, "the Shearwater       
    Group") was founded early in 2002 by Andrew Toy and Patrick Delamere who    
    have a combined experience of 38 years in the pipeline construction         
    industry. Shearwater focuses on the construction and rehabilitation of      
onshore pipelines and associated works and operates mainly in the gas and   
    petrochemical, water, stormwater and sewerage sectors.                      
    Shearwater provides the following general services:                         
    -    pipeline earthworks;                                                   
-    installation of piping, valves and specials;                           
    -    wrapping and coating of completed pipeline sections;                   
    -    construction of pump stations, chambers and other pipeline             
         associated works;                                                      
-    testing and pigging of completed pipeline sections;                    
    -    in situ and stack-yard lining of pipelines or pipe lengths; and        
    -    control over environmental and safety aspects.                         
    Shearwater has specialist skills in the laying and welding of steel         
pipelines and particularly pipeline welding techniques applicable mainly    
    in the gas, petrochemical and water sectors.                                
3.   RATIONALE FOR THE TRANSACTION                                              
3.1. Esor is the largest specialist geotechnical and civil engineering          
contractor in South Africa and the only one-stop geotechnical provider.     
    Esor provides the mining, civil engineering and construction industries     
    with pipe-jacking, piling, soil improvements, dynamic compaction, marine    
    services and lateral support services needed to construct the sub-surface   
foundations for all major non-residential buildings, mines,                 
    infrastructure and marine construction projects.  Esor also offers field    
    investigation, design and testing capabilities.                             
3.2. Shearwater is a civil engineering company that focuses on the              
construction and rehabilitation of onshore pipelines and associated works   
    mainly for the gas and petrochemical, mining and Government sectors.  The   
    Shearwater acquisition will contribute towards Esor increasing its          
    participation in the overall large infrastructural spend anticipated by     
Government and the private sector.  Furthermore:                            
    -    the Shearwater acquisition will expand Esor`s product and service      
         offerings, diversify revenue streams and add critical mass to Esor;    
    -    Shearwater is an established profitable operation with a presence      
and track record and can operate as a stand-alone and self-            
         sufficient business unit; and                                          
    -    Shearwater has experienced management with a track record, who will    
         bring further depth and diversity of management to the Esor group      
and who will also become Esor shareholders.                            
4.   PURCHASE CONSIDERATION                                                     
Subject to the provisions set out below, the purchase consideration payable by  
Esor for the Shearwater transaction is the aggregate of:                        
4.1. an initial amount ("initial payment") of R200 million, which amount        
    includes the consideration payable in respect of the claim of Shearwater    
    Construction for payment for the business conducted by Shearwater           
    Construction ("acquisition claim"); and                                     
4.2. a maximum final payment ("final payment") of R20 million determined as     
    follows:                                                                    
    -    If the 2009 headline earnings shall exceed R40 million, the final      
         payment will be an amount equal to R2.00 for every R1.00 by which      
the 2009 headline earnings shall exceed the sum of R40 million,        
         provided that such final payment shall not exceed the sum of R20       
         million.                                                               
5.   PAYMENT OF PURCHASE CONSIDERATION                                          
5.1  The purchase consideration as set out above will be discharged in the      
    following manner:                                                           
    5.1.1.    50% of the initial payment will be discharged on the closing      
              date (as described in 6 below) by the issue and allotment by      
Esor to the Shearwater vendor and Shearwater Construction of      
              Esor ordinary shares at an issue price of R6.00 per ordinary      
              share;                                                            
    5.1.2.    the balance of the initial payment will be payable in cash,       
which cash payment will be financed through borrowings, on the    
              closing date;                                                     
    5.1.3.    50% of the final payment will be discharged on the later of 1     
              September 2009 or the date upon which the 2009 headline           
earnings are finally determined, by the issue and allotment by    
              Esor to the Shearwater vendor of Esor ordinary shares at an       
              issue price of R6.00 per ordinary share;                          
    5.1.4.    the balance of the final payment will be payable in cash at the   
same time as the issue of the ordinary shares in terms of         
              5.1.3.                                                            
5.2. Restrictions on the disposal of the Esor ordinary shares to be issued to   
    the Shearwater vendor and Shearwater Construction                           
Neither the Shearwater vendor nor Shearwater Construction shall be          
    entitled to sell:                                                           
                                                                                
    -    any of the Esor ordinary shares issued to them in terms of 5.1.1.      
prior to the first anniversary of the effective date;                  
    -    more than 50% of the Esor ordinary shares issued to them in terms of   
         5.1.1. prior to the second anniversary of the effective date;          
    -    more than 75% of the Esor ordinary shares issued to them in terms of   
5.1.1. prior to the third anniversary of the effective date,           
    Similar restrictions will apply to the shares to be issued to the           
    Shearwater vendor in terms of 5.1.3.                                        
6.   EFFECTIVE DATE AND CLOSING DATE                                            
The Shearwater transaction will become effective on the first day of the    
    month following the month in which all the conditions precedent (as set     
    out in 7 below) have been fulfilled or waived.  The closing date of the     
    transaction will be the later of 21 business days after the effective       
date or the 5th business day after the date upon which the effective date   
    net tangible asset value ("NTAV") and effective date headline earnings      
    have been finally determined.                                               
7.   CONDITIONS PRECEDENT                                                       
The Shearwater acquisition is conditional, inter alia, upon:-                   
7.1. all necessary regulatory approvals being obtained, including approval in   
    terms of the Competition Act 89 of 1998;                                    
7.2. the implementation of the acquisition by Shearwater of the Shearwater      
Construction business;                                                      
7.3. the effective date NTAV of the Shearwater Group being not less than        
    R50 million plus the amount of the effective date headline earnings of      
    the Shearwater Group;                                                       
7.4. the shareholders of the Shearwater vendor passing a special resolution in  
    terms of section 228 of the Act approving the sale by the Shearwater        
    vendor of the shares and claims in Shearwater to Esor, and the              
    registration by CIPRO of such special resolution; and                       
7.5. the Shearwater vendor, being the sole shareholder of Shearwater            
    Construction, passing a special resolution in terms of section 228 of the   
    Companies Act approving the sale by Shearwater Construction of the          
    acquisition claim to Esor, and the registration by CIPRO of such special    
resolution.                                                                 
8.   OTHER MATTERS                                                              
8.1. Warranties and indemnities as are normal in transactions of this nature    
    have been provided for in the agreements recording the Shearwater           
transaction.                                                                
8.2. Andrew Toy and Patrick Delamere have entered into standard service         
    agreements, which incorporate restraint of trade clauses.                   
8.3. The Shearwater vendor and Shearwater Construction have provided restraint  
of trade undertakings for a period of five years from the effective date.   
8.4. The Shearwater vendor has provided further undertakings regarding          
    Shearwater KwaZulu-Natal (Proprietary) Limited and Shegowane Construction   
    (Proprietary) Limited.                                                      
8.5. To ensure the retention of second tier management, Esor will make 1 750    
    000 Esor share options available to certain Shearwater employees in terms   
    of the Esor Share Incentive Scheme.                                         
8.6. Esor has completed a satisfactory due diligence review of the Shearwater   
Group.                                                                      
9.   FINANCIAL EFFECTS OF SHEARWATER TRANSACTION                                
    The unaudited pro forma financial effects of the Shearwater transaction     
    set out below are provided for illustrative purposes only in order to       
assist Esor shareholders to assess the impact of the Shearwater             
    transaction on the earnings, diluted earnings, headline earnings, diluted   
    headline earnings, NAV and NTAV per share of Esor. These unaudited pro      
    forma financial effects have been disclosed in terms of the Listings        
Requirements and because of their nature may not give a fair presentation   
    of Esor`s results and financial position after the Shearwater               
    transaction.  The unaudited pro forma financial effects are the             
    responsibility of the directors of Esor and are presented in a manner       
consistent with the accounting policies adopted by Esor.                    
                            Notes     Audited       Unaudited     % change      
                                      Before the    pro forma                   
                                      Shearwater    After the                   
transaction   Shearwater                  
                                                    transaction                 
  Earnings per share        1 and 2   51.7          70.3          36.0          
  (cents)                                                                       
Headline earnings per     1 and 2   51.3          70.0          36.5          
  share (cents)                                                                 
  Diluted earnings per      1 and 2   50.7          68.7          35.5          
  share (cents)                                                                 
Diluted headline          1 and 2   50.4          68.4          35.7          
  earnings per share                                                            
  (cents)                                                                       
  NAV per share (cents)     3         160.3         188.9         17.8          
NTAV per share (cents)    3         121.4         100.9         (16.9)        
  Weighted average number   2         224 560       241 455       -             
  of shares in issue (000)                                                      
  Diluted weighted average  2         228 677       247 239       -             
number of shares in                                                           
  issue (000)                                                                   
  Shares in issue at        2         243 019       259 914       -             
  period end (000) *                                                            
* Net of 4 884 908 treasury shares held by the Esor Share Incentive Trust.      
Notes:                                                                          
1.   The earnings, diluted earnings, headline earnings, diluted headline        
    earnings, NAV and NTAV per share, as set out in the "Before the             
Shearwater transaction" column, are extracted from Esor`s audited results   
    for the year ended 29 February 2008.                                        
2.   Earnings, headline earnings, diluted earnings and diluted headline         
    earnings per share effects, as set out in the "Unaudited pro forma after    
the Shearwater transaction" column are based on the following assumptions   
    and information:                                                            
    -    the Shearwater transaction was effective 1 March 2007;                 
    -    the initial payment was settled on 1 March 2007 by way of the issue    
of 16 666 667 Esor ordinary shares at R6.00 per share and a cash       
         payment of R100 million, which cash payment was financed through       
         borrowings of R53.6 million and the balance from existing cash on      
         hand.  The interest rates assumed on interest foregone is 9% per       
annum (pre tax) and on borrowings 12.5% per annum (pre tax);           
    -    a notional interest charge of R0.2 million (pre tax) assuming an       
         interest rate of 12.5% per annum (pre tax) was included relating to    
         the cash portion of R2 million of the total deferred contingent        
purchase consideration of R4 million which is based on expected        
         headline earnings for the Shearwater group for the year ending         
         February 2009;                                                         
    -    pre tax amortisation charges of R0.7 million, R0.8 million and R6.3    
million relating to the revaluation of property, plant and equipment   
         ("PPE"), Shearwater trade name and open contracts acquired are         
         included. The revaluations and allocations that may arise from the     
         application of IFRS 3: Business Combinations ("IFRS 3") have been      
made on an indicative basis and the indicative values of the PPE,      
         Shearwater trade name and open contracts acquired were determined to   
         be R3.5 million, R16.8 million and R12.6 million, respectively. The    
         PPE, Shearwater trade name and open contracts acquired recognised in   
terms of IFRS 3 is amortised over their estimated useful lives,        
         being five, twenty and two years, respectively. Taxation has been      
         adjusted to reflect the deferred tax charge on the amortisation of     
         the PPE and intangible assets at a rate of 29%;                        
-    the adjustment for share based payments that may arise from the        
         application of IFRS 2: Share Based Payments ("IFRS 2") has been made   
         on an indicative basis and was determined to be R1.1 million per       
         annum;                                                                 
-    the estimated transaction costs of R5.0 million have been              
         capitalised and included in the effective cost of the acquisition      
         and were paid on 1 March 2007 in cash and by the issue of 228 462      
         Esor ordinary shares at R6.00 per share, financed through existing     
cash on hand on which interest was assumed foregone at 9% per annum    
         (pre tax); and                                                         
    -    the total after tax profit attributable to the Shearwater group is     
         R65.7 million for the year ended 29 February 2008 as per the audited   
financial statements.                                                  
3.   NAV and NTAV effects, as set out in the "Unaudited pro forma after the     
    Shearwater transaction" column are based on the following assumptions and   
    information:                                                                
-    the Shearwater transaction was effective 29 February 2008;             
    -    the purchase price was settled on 29 February 2008 in the manner       
         described in note 2 above; and                                         
    -    the revaluations and allocations that may arise from the application   
of IFRS 3 have been made on an indicative basis. The financial         
         effects have been prepared on the basis that the excess of the         
         effective purchase price over the NAV of the Shearwater group of       
         R83.7 million and the indicative value of the Shearwater trade name    
of R16.8 million (gross of the related deferred taxation of R4.9       
         million) and open contracts acquired of R12.6 million (gross of the    
         related deferred taxation of R3.7 million) will comprise goodwill of   
         R104.8 million, which is not amortised.                                
10.  FINANCIAL EFFECTS OF PATULA TRANSACTION                                    
    The unaudited pro forma financial effects of the Patula transaction set     
    out below are provided for illustrative purposes only in order to assist    
    Esor shareholders to assess the impact of the Patula transaction on the     
earnings, diluted earnings, headline earnings, diluted headline earnings,   
    NAV and NTAV per share of Esor. These unaudited pro forma financial         
    effects have been disclosed in terms of the Listings Requirements and       
    because of their nature may not give a fair presentation of Esor`s          
results and financial position after the Patula transaction.  The           
    unaudited pro forma financial effects are the responsibility of the         
    directors of Esor and are presented in a manner consistent with the         
    accounting policies adopted by Esor.                                        
Notes   Audited       Unaudited pro  % change    
                                       Before the    forma                      
                                       Patula        After the                  
                                       transaction   Patula                     
transaction                
  Earnings per share (cents)   1 and 2 51.7          56.3           8.9         
  Headline earnings per        1 and 2 51.3          55.7           8.6         
  share (cents)                                                                 
Diluted earnings per share   1 and 2 50.7          55.4           9.3         
  (cents)                                                                       
  Diluted headline earnings    1 and 2 50.4          54.7           8.5         
  per share (cents)                                                             
NAV per share (cents)        3       160.3         188.2          17.4        
  NTAV per share (cents)       3       121.4         85.3           (29.7)      
  Weighted average number of   2       224 560       241 007        -           
  shares in issue (000)                                                         
Diluted weighted average     2       228 677       245 124        -           
  number of shares in issue                                                     
  (000)                                                                         
  Shares in issue at period    2       243 019       259 466        -           
end (000) *                                                                   
* Net of 4 884 908 treasury shares held by the Esor Share Incentive Trust.      
Notes:                                                                          
1.   The earnings, diluted earnings, headline earnings, diluted headline        
earnings, NAV and NTAV per share, as set out in the "Before the Patula      
    transaction" column, are extracted from Esor`s audited results for the      
    year ended 29 February 2008.                                                
2.   Earnings, headline earnings, diluted earnings and diluted headline         
earnings per share effects, as set out in the "Unaudited pro forma after    
    the Patula transaction" column are based on the following assumptions and   
    information:                                                                
    -    the Patula transaction was effective 1 March 2007;                     
-    the initial payment was settled on 1 March 2007 by way of the issue    
         of 16 000 000 Esor ordinary shares at R6.00 per share and a cash       
         payment of R144.0 million, which cash payment was financed through     
         borrowings of R99.4 million and the balance from existing cash on      
hand.  The interest rates assumed on interest foregone is 9% per       
         annum (pre tax) and on borrowings 12.5% per annum (pre tax);           
    -    pre tax amortisation charges of R11.1 million, R1.4 million and R7.2   
         million relating to the revaluation of the PPE, Patula trade name      
and open contracts acquired are included. The revaluations and         
         allocations that may arise from the application of IFRS 3 have been    
         made on an indicative basis and the indicative values of the PPE,      
         Patula trade name and open contracts acquired were determined to be    
R55.5 million, R28.6 million and R14.3 million, respectively. The      
         PPE, Patula trade name and open contracts acquired recognised in       
         terms of IFRS 3 is amortised over their estimated useful lives,        
         being five, twenty and two years, respectively. Taxation has been      
adjusted to reflect the deferred tax charge on the amortisation of     
         the intangible assets at a rate of 29%;                                
    -    the adjustment for share based payments that may arise from the        
         application of IFRS 2 has been made on an indicative basis and was     
determined to be R2.2 million per annum;                               
    -    the estimated transaction costs of R8.0 million have been              
         capitalised and included in the effective cost of the acquisition      
         and were paid on 1 March 2007 in cash and by the issue of 446 538      
Esor ordinary shares at R6.00 per share financed through existing      
         cash on hand on which interest was assumed foregone at 9% per annum    
         (pre tax); and                                                         
    -    the total after tax profit attributable to the Patula group is R47.6   
million the year ended 29 February 2008 as per the audited financial   
         statements.                                                            
3.   NAV and NTAV effects, as set out in the "Unaudited pro forma after the     
    Patula transaction" column are based on the following assumptions and       
information:                                                                
    -    the Patula transaction was effective 29 February 2008;                 
    -    the purchase price was settled on 29 February 2008 in the manner       
         described in note 2 above; and                                         
-    the revaluations and allocations that may arise from the application   
         of IFRS 3 have been made on an indicative basis. The financial         
         effects have been prepared on the basis that the excess of the         
         effective purchase price over the NAV of the Patula group of           
R113.1 million and the indicative value of the Patula trade name of    
         R28.6 million (gross of the related deferred taxation of R8.3          
         million) and open contracts acquired of R14.3 million (gross of the    
         related deferred taxation of R4.2 million) will comprise goodwill of   
R120.4 million, which is not amortised.                                
11.  FINANCIAL EFFECTS OF THE SHEARWATER AND PATULA TRANSACTIONS                
    The unaudited pro forma financial effects of both the Shearwater            
    transaction and the Patula transaction set out below are provided for       
illustrative purposes only in order to assist Esor shareholders to assess   
    the combined impact of the Patula and Shearwater transactions on the        
    earnings, diluted earnings, headline earnings, diluted headline earnings,   
    NAV and NTAV per share of Esor. These unaudited pro forma financial         
effects have been disclosed in terms of the Listings Requirements and       
    because of their nature may not give a fair presentation of Esor`s          
    results and financial position after the Patula and Shearwaters             
    transactions. The unaudited pro forma financial effects are the             
responsibility of the directors of Esor and are presented in a manner       
    consistent with the accounting policies adopted by Esor.                    
                             Audited      Unaudited     %                       
                             Before the   pro forma     change                  
Patula and   After the                             
                             Shearwater   Patula and                            
                             transactions Shearwater                            
                                          transactions                          
Earnings per share         51.7         72.9          41.0                    
  (cents)                                                                       
  Headline earnings per      51.3         72.4          41.1                    
  share (cents)                                                                 
Diluted earnings per       50.7         71.3          40.6                    
  share (cents)                                                                 
  Diluted headline earnings  50.4         70.8          40.5                    
  per share (cents)                                                             
NAV per share (cents)      160.3        213.4         33.1                    
  NTAV per share (cents)     121.4        68.1          (43.9)                  
  Weighted average number    224 560      257 902       -                       
  of shares in issue (000)                                                      
Diluted weighted average   228 677      263 685       -                       
  number of shares in issue                                                     
  (000)                                                                         
  Shares in issue at period  243 019      276 361       -                       
end (000) *                                                                   
* Net of 4 884 908 treasury shares held by the Esor Share Incentive Trust.      
Notes:                                                                          
1.   The earnings, diluted earnings, headline earnings, diluted headline        
earnings, NAV and NTAV per share, as set out in the "Before the Patula      
    and Shearwater transactions" column, are extracted from Esor`s audited      
    results for the year ended 29 February 2008.                                
2.   Earnings, headline earnings, diluted earnings, diluted headline earnings,  
NAV and NTAV per share effects, as set out in the "Unaudited pro forma      
    after the Patula and Shearwater transactions" column are based on the       
    assumptions as detailed in paragraphs 9 and 10 above.  On a combined        
    basis the cash portion of the initial payments equal R244.0 million,        
which cash payments were financed through borrowings of R202.9 million      
    and the balance from existing cash on hand.  The interest rates assumed     
    on interest foregone is 9% per annum (pre tax) and on borrowings 12.5%      
    per annum (pre tax).                                                        
12.  CLASSIFICATION OF THE TRANSACTION                                          
    The Shearwater transaction is classified as a Category 2 transaction in     
    terms of the JSE Listings Requirements.                                     
13.  WITHDRAWAL OF CAUTIONARY ANNOUNCEMENT                                      
The further cautionary announcement of 22 September 2008 is hereby          
    withdrawn.                                                                  
14.  FURTHER ANNOUNCEMENT                                                       
    Shareholders will be notified once the Shearwater and Patula transactions   
become unconditional.                                                       
Johannesburg                                                                    
29 September 2008                                                               
Designated Adviser                                                              
Exchange Sponsors                                                               
Transaction Adviser                                                             
Vunani Corporate Finance                                                        
Legal Advisers to Esor                                                          
Fluxmans Inc.                                                                   
Competition Law Advisers                                                        
Brink Cohen Le Roux Inc.                                                        
Independent Valuation Adviser                                                   
Moore Stephens Corporate Finance                                                
Date: 29/09/2008 12:35:23 Supplied by www.sharenet.co.za                     
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