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ESORFRANKI LIMITED - Disposal by Esorfranki of the business carried on by Esorfranki Construction - under Esorfranki Geotechnical

Release Date: 09/10/2013 08:51:00      Code(s): ESR       PDF(s):  
Disposal by Esorfranki of the business carried on by Esorfranki Construction - under Esorfranki Geotechnical

ESORFRANKI LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 1994/000732/06)
JSE code: ESR
ISIN: ZAE000133369
(“Esorfranki” or “the Company”)

DISPOSAL BY ESORFRANKI OF THE BUSINESS CARRIED ON BY ITS WHOLLY-OWNED
SUBSIDIARY, ESORFRANKI CONSTRUCTION PROPRIETARY LIMITED AND CERTAIN OF ITS
SUBSIDIARIES, UNDER THE NAME AND STYLE OF ESORFRANKI GEOTECHNICAL, TO
KELLER HOLDINGS LIMITED, PROPOSED CHANGE OF NAME AND WITHDRAWAL OF THE
CAUTIONARY ANNOUNCEMENT

THE TRANSACTION:

1.      INTRODUCTION
        Further to the cautionary announcements, dated 6 August 2013 and 20 September 2013,
        shareholders are advised that Esorfranki has entered into a Sale Agreement, dated 8 October
        2013, between Keller Holdings Limited (“Keller”), Esorfranki Construction Proprietary Limited
        (“Esorfranki Construction”), Esor Africa Proprietary Limited and Business Venture
        Investments No 1592 (“Sale Agreement”) in terms of which Keller Holdings (“the Purchaser”)
        will acquire the business carried on by Esorfranki Geotechnical for a cash consideration of
        R500 million (“the Transaction”).

2.      BACKGROUND INFORMATION

2.1     Information relating to Keller
        Keller is a limited liability company registered in England and Wales and a wholly-owned
        subsidiary of Keller Group plc whose securities are listed on the London Stock Exchange.
        The Keller Group is the world’s largest independent ground engineering specialist, renowned
        for providing technically advanced and cost-effective foundation solutions. Its services are
        used across the construction sector in infrastructure, industrial, commercial, residential and
        environmental projects.

2.2     Information relating to Esorfranki Geotechnical
        The sale of Esorfranki Geotechnical encompasses the sale of the business conducted by
        Esorfranki Construction (“the SA Business”) as well as the sale of the shares of 10 of its
        subsidiaries (“the Sale Subsidiaries”) and the sale of the business conducted by Esorfranki
        Construction in Angola and Frankipile Mauritius International Limited in the Indian Ocean
        Islands.

        Esorfranki Geotechnical is the largest geotechnical contractor in South Africa and well-
        established in the Southern African region.

2.3     Features of the Sale Agreement
        The Sale Agreement does not contain any warranties that are unusual in respect of a
        transaction of this nature.

        In terms of the Sale Agreement, Esorfranki and Esorfranki Construction have agreed to
        change their respective names so as not to include the word “Franki” and have undertaken to
        rename and rebrand their remaining businesses to exclude this word in combination with any
        other name.

        Both Esorfranki and Esorfranki Construction are subject to a 60 month restraint of trade in
        respect of any business services currently rendered by Esorfranki Construction –
        Geotechnical division and/or the Sale Subsidiaries as well as the supply of any goods or
        products by those entities which are similar to or sold in competition to the goods and
        products sold by the Purchaser excluding pipe, culvert and bridge jacking. These restraints
        apply to various territories as set out in the Sale Agreement.

3.   EFFECTIVE DATE
     The effective date of the Transaction will be the date which is 3 business days after the day
     on which the last of the conditions precedent (refer paragraph 6 below) are fulfilled or waived.

4.   RATIONALE FOR THE TRANSACTION
     The Geotechnical market in South Africa, and Esorfranki’s share of that market, has been
     relatively flat over the last number of years. Esorfranki has been exploring ways to increase
     the market share as well as the geographical footprint and an association with the Keller
     Group, the world's largest independent ground engineering specialist, renowned for providing
     technically advanced and cost-effective foundation solutions, positions the Geotechnical
     business to grow and realise its true potential.

     Given the opportunity and the purchase consideration, the board considered it to be in the
     best interest of shareholders to enter into the Sale Agreement.

     Esorfranki’s strategy is to maintain growth in the existing construction area of Pipelines, with
     further expansion into selective African countries where it will have a competitive advantage
     as well as the Developments division where it anticipates further growth in the social housing
     market in particular. The Civils division is being right-sized to take advantage of the
     anticipated Government Growth initiatives and is currently well-placed for work at Kusile
     Power Station and Integrated Housing projects.

5.   PURCHASE CONSIDERATION
     The purchase consideration is R500 million, payable in cash on the Effective Date.

     The purchase consideration is subject to adjustments in terms of formulae contained in the
     Sale Agreement but which in aggregate will not exceed an additional payment of R150 million,
     payable based on the results of the 3-year period on which this contingent consideration
     payment is based.

6.   CONDITIONS PRECEDENT
     The Transaction is subject, inter alia, to:
     .    the approval thereof by Esorfranki shareholders; and
     .    the necessary approval being obtained from the Financial Services Commission of
          Mauritius.

7.   FINANCIAL EFFECTS OF THE TRANSACTION
     The pro forma financial effects of the Transaction, for which the directors are responsible, are
     provided for illustrative purposes only to show the effect of the Transaction on earnings,
     headline earnings, diluted earnings and diluted headline earnings as if the Transaction had
     taken effect on 1 March 2012 and on net asset value and net tangible asset value per share
     as if the Transaction had taken effect on 28 February 2013. Because of their nature, the pro
     forma financial effects may not give a fair presentation of Esorfranki’s financial position and
     performance subsequent to the Transaction. The pro forma financial effects of the
     Transaction are presented in a manner consistent with the format and accounting policies
     adopted by Esorfranki and and have been adjusted as described in the notes below:

                                                             Audited        Pro forma
                                                          Before the         After the         %
                                                         Transaction      Transaction      Change
      Basic and diluted earnings per share (cents)
                                                                  23.5            30.7       30.7%
      Headline and diluted headline earnings per
      share (cents)                                               20.5            11.8      (42.4%)
      Net asset value per share (cents)                          280.3           298.0         6.3%
      Tangible net asset value per share (cents)                 205.2           246.3        20.0%
      Weighted average and diluted average
      number of shares in issue (000’s)                       375 289         375 289
      Actual number of shares in issue (000’s)                395 185         395 185
      Proposed special dividend per share (cents)
                                                                    -            38.0        100%
      Net asset value per share (cents) after                   280.3           260.0       (7.2%)
      proposed special dividend
      Tangible net asset value per share (cents)
      after proposed special dividend                           205.2           208.3         1.5%

     Notes:
     1. The financial information set out in the “Before the Transaction” column has been
         extracted, without adjustment from the published, audited results of Esorfranki for the
         year ended 28 February 2013.

     2.   The “Pro forma After the Transaction” column incorporates the effects of the Transaction
          as follows:

           2.1        The profit on disposal has been calculated as the difference between the
                      sale proceeds of R500 million and the carrying value of net assets sold.
                      Proceeds have been adjusted for management’s best estimate of the
                      discounted contingent consideration of R59 million and further adjusted for
                      debt and net working capital.
           2.2        Goodwill attributable to the acquisition of Franki will be impaired immediately
                      following the Transaction.
           2.3        Cash proceeds of R500 million will be used for payment of transaction costs
                      of R875 000, taxation of R60 million, settlement of debt, including the
                      Domestic Medium Term Note Program Asset finance and overdrafts totalling
                      R285 million and the proposed special dividend of R150 million.
           2.4        Finance costs have been reduced due to applying a portion of the proceeds
                      of the sale consideration to the settlement of the Domestic Medium Term
                      Note Program. This has been calculated based on the rates applicable to the
                      different pricing supplements.
           2.5        The Taxation expense comprises the recoupment on disposal of South
                      African, Angolan and Mauritian assets, interest saving and interest income
                      and is taxed at tax rates in the jurisdiction where the gain is made. There is
                      no taxation effect on the disposal of shares in foreign subsidiaries.

     3.   The basic earnings per share and basic headline earnings per share figures are
          calculated based on a weighted average number of 375 288 905 shares in issue at 28
          February 2013.

     4.   The diluted earnings per share and diluted headline earnings per share figures are
          calculated based on a weighted average number of 375 288 905 shares in issue at 28
          February 2013.
     5.   Net Asset Value per share and Tangible Net Asset Value per share are calculated based
          on 375 703 084 shares in issue at 28 February 2013.

8.   APPLICATION OF THE SALE PROCEEDS
     The net proceeds of the purchase consideration will be applied towards:

     Repayment of the Domestic Medium Term Note Programme                               R210 million
     Repayment of secured borrowings relating to the Geotechnical business               R40 million
     unit
     Taxation payable on the proceeds from the Transaction                               R60 million
     Proposed special dividend to shareholders                                          R150 million
     Expansion of working capital for the remaining business units                       R40 million

9.   CLASSIFICATION OF THE TRANSACTION AND CIRCULAR TO SHAREHOLDERS
     The Transaction is classified as a Category 1 disposal in terms of the Listing Requirements of
     the JSE Limited (“JSE”). Accordingly a circular prepared in terms of the Listings Requirements
     of the JSE, containing a notice of general meeting of shareholders, will be dispatched to
     shareholders on or about 22 October 2013.
THE CHANGE OF NAME:
In terms of the Sale Agreement, Esorfranki will in future not be able to use the name “Franki” and
accordingly the directors propose that the company revert to its original listed name of Esor Limited.
The salient dates relating to this change of name will be announced in due course.

WITHDRAWAL OF THE CAUTIONARY ANNOUNCEMENT:
Having regard to the information set out above, the cautionary announcement is hereby withdrawn.


Germiston
9 October 2013

Sponsor
Vunani Corporate Finance

Corporate Adviser
Reign Capital

Independent reporting accountants
KPMG Inc

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