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EFFICIENT GROUP LIMITED - Acquisition by the company of shares in ARX Investment Partners Proprietary Limited and withdrawal of cautionary

Release Date: 08/04/2015 08:00
Code(s): EFG     PDF:  
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Acquisition by the company of shares in ARX Investment Partners Proprietary Limited and withdrawal of cautionary

EFFICIENT GROUP LIMITED
(Incorporated in the Republic of South Africa)
(Registration Number: 2006/036947/06)
JSE share code: EFG ISIN: ZAE 000151841
(the “company”)

ACQUISITION BY THE COMPANY OF SHARES IN ARX INVESTMENT PARTNERS PROPRIETARY
LIMITED AND WITHDRAWAL OF CAUTIONARY ANNOUNCEMENT

1. Introduction

   Efficient shareholders are referred to the cautionary announcement dated 24 February 2015 and
   are advised that Efficient has entered into a sale of shares agreement between Efficient, ARX
   Investment Partners Proprietary Limited (“ARX”) and Pangaia Holdings Proprietary Limited
   (“Pangaia”), Exceed Group Limited, The Pieteva Trust, The Jomajaro Trust, The Di Thaba Trust
   and Pieter de la Rouviere Stead (collectively, the “sellers”), dated 7 April 2015 (the “sale of
   shares agreement”), in terms of which, inter alia, Efficient purchases from the sellers, in two
   phases over a three year period, 100% of the issued share capital of ARX (the “sale shares”) (the
   “transaction”).

2. Business of ARX

   2.1. ARX is the holding company of Stead Wealth Management Proprietary Limited, Exceed
        Asset Management Proprietary Limited and Exceed Private Client Services Proprietary
        Limited, all of which are wholly-owned subsidiaries of ARX (the “ARX subsidiaries”).

   2.2. ARX is a Category II discretionary financial services provider that manages more than
        R2.35 billion in various unit trust portfolios. ARX markets its products, branded as “Select
        Manager”, through the ARX subsidiaries, all of which are authorised financial services
        providers, as well as through various other independent financial advisors located
        throughout South Africa.

   2.3. Prior to the transaction, the business division of ARX specialising in investment advice for
        ultra-high net worth clients was sold to Pangaia, and this business division is therefore
        excluded from the transaction.
3. Rationale for the transaction

   3.1. The transaction is in line with Efficient’s acquisitive growth strategy. ARX and the ARX
        subsidiaries (the “ARX group”) operate within Efficient’s area of expertise, being financial
        services and investments, and offer multi-management to the clients of both the ARX
        subsidiaries and other independent financial services providers. The transaction is a good
        strategic fit for Efficient, in the sense that the advisory business of ARX, operated through
        the ARX subsidiaries, offers comprehensive quality investment advice to retail and
        corporate clients, which fits within Efficient’s financial services strategy. The transaction
        will also increase Efficient’s national footprint.

   3.2. The positive impact of the transaction on Efficient as a business can best be illustrated as
        follows:

                                            Before transaction       After transaction
          Financial planners                               100                     105
          Assets under advice                          R10.3bn                 R11.9bn
          Assets under management                      R15.3bn                 R17.7bn
          Assets under administration                  R50.9bn                 R53.3bn

4. Share capital conversion

   4.1. The transaction is subject to ARX dividing its current issued share capital into the following
        two classes of shares:

        4.1.1.   A shares, being ordinary no par value shares with full voting rights, carrying rights
                 associated with the business and profit derived by ARX from financial service
                 providers in which ARX has a controlling interest as at 1 March 2015 (“internal
                 FSPs”) (“A shares”); and

        4.1.2.   B shares, being ordinary no par value shares with no voting rights, carrying rights
                 associated with the business and profit derived by ARX from financial service
                 providers other than internal FSPs (“external FSPs”) (“B shares”),

        such classes of share representing two ring-fenced profit centres in respect of the business
        derived from internal FSPs and external FSPs, respectively.

5. Terms and conditions of the transaction

   5.1. The purchase of ARX shares

        5.1.1.   Subject to the fulfilment or waiver, if applicable, of the conditions precedent set
                 out in paragraph 5.2 below, Efficient will purchase the sale shares from the sellers
                 as follows:

                 5.1.1.1.       with effect from the date upon which the new ARX MoI (as defined
                                in paragraph 5.2.1 below) is accepted and placed on file at the
                                Companies and Intellectual Property Commission (the “CIPC”),
                                Efficient will purchase from the sellers 71.127% of the issued
                                A shares (or such other percentage of the issued A shares
                                determined with reference to the audited profit after tax of the ARX
                                group for the year ended 28 February 2015 attributable to internal
                                FSPs, which other percentage is not expected to materially differ
                                from 71.127%), for a purchase price payable in cash in the following
                                tranches:

                                5.1.1.1.1.      R15 000 000 on the date on which all the conditions
                                                precedent set out in paragraph 5.2 have been
                                                fulfilled or waived, as the case may be (which date is
                                                expected to be 30 April 2015);

                                5.1.1.1.2.      R15 000 000 on 1 September 2015;

                                5.1.1.1.3.      R15 000 000, plus 25% of annual profit after tax of
                                                the ARX group attributable to internal FSPs for the
                                                12 month period ending 28 February 2016 less
                                                R14 461 106, on 1 March 2016;

                                5.1.1.1.4.      R15 000 000, plus 25% of annual profit after tax of
                                                the ARX group attributable to internal FSPs for the
                                                12 month period ending 28 February 2017 less
                                                R15 907 217, on 1 March 2017; and

                                5.1.1.1.5.      25% of annual profit after tax of the ARX group
                                                attributable to internal FSPs for the 12 month
                                                period ending 28 February 2018 less R17 497 939,
                                                on 1 March 2018; and

                  5.1.1.2.      with effect from 1 March 2018, Efficient will purchase:

                                5.1.1.2.1.      the remainder of the A shares held by the sellers as
                                                at 1 March 2018 (such that Efficient will then hold
                                                100% of the issued A shares), for a purchase price
                                                equivalent to the market value of such A shares as
                                                at that date (calculated as set out in paragraph 5.1.2
                                                below) (the “A share purchase price”), payable in
                                                cash; and

                                5.1.1.2.2.      all B shares held by the sellers as at 1 March 2018
                                                (such that Efficient will then hold 100% of the issued
                                                B shares), for a purchase price equivalent to the
                                                market value of such B shares as at that date
                                                (calculated as set out in paragraph 5.1.3 below) (the
                                                “B share purchase price”), payable as set out in
                                                paragraph 5.1.4.

        5.1.2.   The market value of the A shares to be purchased, as contemplated in
                 paragraph 5.1.1.2.1 above, will be calculated as 7 x PAT, where PAT is the profit
                 after tax of the ARX group attributed to the A shares (i.e. the profit after tax in
                 respect of the internal FSPs), calculated with reference to the 12 month period
                 ending 28 February 2018.

        5.1.3.   The market value of the B shares to be purchased, as contemplated in
                 paragraph 5.1.1.2.2 above, will be calculated as 4.5 x PAT, where PAT is the profit
                 after tax of the ARX group attributed to the B shares (i.e. the profit after tax in
                 respect of the external FSPs), calculated with reference to the 12 month period
                 ending 28 February 2018. However, insofar as a controlling interest in an external
                 FSP has been acquired by either ARX or the company at any time after
                 1 March 2015 but prior to 1 March 2018 (such external FSP then being referred to
                 as a “converted FSP”), the market value of that portion of the B shares as is
                 equivalent to the portion of profit after tax of the ARX group attributed to the
                 B shares that is generated by converted FSPs (the “converted FSP B shares”) will
                 instead be calculated as 7 x PAT, where PAT is the profit after tax of the ARX group
                 in respect of the converted FSPs only.

        5.1.4.   The B share purchase price (excluding that portion of the B share purchase price
                 payable in respect of converted FSP B shares, if any) (the “unconverted FSP B share
                 purchase price”) shall be settled 90 days following the effective date of the
                 company’s purchase of the B shares, being 1 March 2018 (the “Phase 2 completion
                 date”), by the pro rata allotment and issue of Efficient shares (the “consideration
                 shares”) to each of the sellers. The purchase price payable in respect of converted
                 FSP B shares (the “converted FSP B share purchase price”), if any, shall be settled
                 on the Phase 2 completion date, as to 65% thereof by way of the allotment and
                 issue of consideration shares to each of the sellers, with the remaining 35% thereof
                 payable in cash to the sellers. The total number of consideration shares issued
                 (in respect of the settlement of both the unconverted FSP B share purchase price
                 and the converted FSP B share purchase price) shall be determined by dividing the
                 unconverted FSP B share purchase price or converted FSP B share purchase price,
                 as the case may be, by (i) the 30 day VWAP of Efficient shares as at 1 March 2018
                 or, (ii) if either Efficient or any of the sellers deems such 30 day VWAP not to
                 represent a fair value for the consideration shares, such other value determined by
                 the parties in accordance with the provisions of the sale of shares agreement (the
                 “agreed value of consideration shares”). If the agreed value of consideration
                 shares is more than 10% lower than the 30 day VWAP of Efficient shares as at
                 1 March 2018, any issue of consideration shares in settlement of the B share
                 purchase price beyond those consideration shares that would be issued on the
                 basis of a 30 day VWAP calculation will require the approval of Efficient
                 shareholders (i.e. where the proposed issue of consideration shares will dilute the
                 shareholding of Efficient shareholders by more than 10% of what that dilution
                 would be on the basis of a 30 day VWAP calculation, such dilution will require
                 shareholder approval). Insofar as such approval is not obtained, the excess portion
                 of the B share purchase price will instead be settled in cash.

        5.1.5.   Notwithstanding the aforegoing, the aggregate purchase price payable for all
                 A shares and B shares purchased in terms of the transaction (the “aggregate
                 purchase price”) shall be capped at R122 200 000 (the “capped purchase price”).
                 To the extent that the aggregate purchase price calculated pursuant to
                 paragraphs 5.1.1 to 5.1.3 above exceeds the capped purchase price, the difference
                 between the aggregate purchase price and the capped purchase price shall be set
                 off firstly against that portion of the B share purchase price to be settled by way of
                 the issue of consideration shares and thereafter, if necessary, against that portion
                 of the B share purchase price to be settled in cash.

5.2. Conditions precedent

    The transaction is subject to the fulfilment or waiver, if applicable, of the following
    conditions precedent (the “conditions precedent”) by no later than 30 April 2015, or such
    later date as the parties may agree:
    
    5.2.1.    a new memorandum of incorporation (the “new ARX MoI”) being adopted by ARX
              and lodged at the CIPC;

    5.2.2.    a shareholders agreement between the parties, in relation to their shareholding in
              ARX, being executed and such agreement becoming unconditional (save for any
              condition that requires the sale of shares agreement to become unconditional);

    5.2.3.    non-compete and restraint agreement(s) being executed between each of the
              sellers and Efficient in terms of which each of the sellers is, inter alia, restrained in
              respect of certain activities pursuant to the transaction and such agreement(s)
              becoming unconditional (save for any condition that requires the sale of shares
              agreement to become unconditional);

    5.2.4.    a three year exclusive licence agreement being executed with Exceed Group
              Limited, in respect of the use of the ‘Exceed’ name, and such agreement becoming
              unconditional (save for any condition that requires the sale of shares agreement to
              become unconditional);

    5.2.5.    an executive service level and/or restraint of trade agreement being executed
              between ARX and each of Ina Dugmore, Kobus Human, Pieter Stead, Suzette van
              Niekerk, Tenk Loubser and Johan van Heerden and such agreements becoming
              unconditional (save for any condition that requires the sale of shares agreement to
              become unconditional);

    5.2.6.    signed undertakings by the subsidiaries of ARX, in terms of which such subsidiaries
              agree to be bound by the provisions of the sale of shares agreement, being
              delivered to Efficient;

    5.2.7.    the parties to the sale of shares agreement, other than ARX and Efficient, providing
              Efficient with a written waiver of any rights they have in terms of section 123 of the
              Companies Act, 71 of 2008 (the “Companies Act”), to the extent applicable to the
              transaction;

    5.2.8.    the parties obtaining and/or fulfilling any other regulatory requirements, to the
              extent applicable for the purposes of the transaction, including compliance with
              any applicable requirements under the JSE Listing Requirements as well as in terms
              of section 122 of the Companies Act with regard to any filing requirements with
              the Takeover Regulations Panel;

    5.2.9.    ARX cancelling its co-naming agreement (and any addendums or other ancillary
              agreements thereto) with MET Collective Investments (RF) Proprietary Limited;

    5.2.10.   the parties agreeing on a final dividend to be paid to the sellers, in respect of
              profits earned prior to 1 March 2015, as well as on the statement of financial
              position as at 1 March 2015, which the parties acknowledge can only be attended
              to once the statutory audit in respect of the financial year ended 28 February 2015
              has been concluded;

    5.2.11.   the sellers providing Efficient with their respective banking details;

    5.2.12.   the sellers disclosing any and all matters that they deem necessary for purposes of
              the undertakings made and warranties given in terms of the sale of shares
              agreement;
    
    5.2.13.   the sellers providing Efficient with a comprehensive client list for each of ARX,
              Pangaia and the ARX subsidiaries; and

    5.2.14.   the parties agreeing on the allocation method to be applied to allocate operating
              expenses between A shares and B shares.

6. Financial information

                                                     Total      Attributable to      Attributable to
                                                                non-controlling       equity holders
                                                                       interest           of parents
The value of the net assets that are the        16 328 646            8 773 815            7 554 831
subject of the transaction (as at
28 February 2015)
The profits attributable to the net assets      23 890 414           10 083 729           13 806 685
that are the subject of the transaction
(assuming the transaction was implemented
as at 1 March 2014)

7. Compliance with the JSE Listings Requirements

    7.1. The new ARX MoI will not frustrate the company in any way from compliance with its
         obligations in terms of the JSE Listings Requirements, and Efficient shall ensure that the
         memoranda of incorporation of the subsidiaries of ARX are, to the extent necessary,
         amended in order to ensure that such compliance is not frustrated.

    7.2. Nothing contained in the new ARX MoI shall relieve the company from compliance with the
         JSE Listings Requirements.

8. Categorisation

   The transaction will be categorised as a Category 2 acquisition in terms of the JSE Listings
   Requirements and accordingly will not require the approval of Efficient shareholders.

9. Withdrawal of cautionary

   Shareholders are no longer required to exercise caution when dealing in their Efficient shares.

8 April 2015



Sponsor

Java Capital

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