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ALEXANDER FORBES GROUP HOLDINGS LIMITED - Disposal of short-term insurance business in South Africa

Release Date: 25/07/2019 15:00
Code(s): AFH     PDF:  
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Disposal of short-term insurance business in South Africa

Incorporated in the Republic of South Africa
(Registration number: 2006/025226/06)
JSE Share Code: AFH
ISIN: ZAE000191516
(“Alexander Forbes” or “the Company” or “the Group”)


   Shareholders are referred to the announcement released on the Stock Exchange News Service on 26 March 2019
   in which they were advised of the Company’s revised strategy and the Board’s consequent decision to seek a
   purchaser for Alexander Forbes’ short-term insurance business in South Africa, in line with its advice-led and capital-
   light model.

   The Alexander Forbes short-term insurance business in South Africa (“AFI” or “Business”) is a highly respected,
   niche insurance business which has attracted significant interest from numerous potential purchasers, both locally
   and internationally. The decision to dispose of the Business included an appreciation of the synergistic benefits
   which a large insurer may gain from the acquisition of AFI.

   The Board is pleased to announce that Alexander Forbes has entered into a binding agreement with Momentum
   Metropolitan Strategic Investments Proprietary Limited (“MMSI”) for the sale and purchase of the Business as a
   going concern, subject to certain conditions precedent (“Proposed Transaction”). MMSI is a wholly owned
   subsidiary of Momentum Metropolitan Holdings Limited (“Momentum Metropolitan”).

   The Board is confident that the Proposed Transaction not only benefits Alexander Forbes, through the realisation
   of value for shareholders, but also balances appropriate solutions for clients and protects and values the employees
   of the Business.

   The disposal of AFI delivers on the implementation of the company’s strategy, which reaffirms Alexander Forbes’s
   strength as a trusted adviser to our clients, with a renewed focus on the core businesses of consulting,
   administration and investments.

   2.1 Overview of the Business
   AFI targets the middle to high income market in South Africa, offering personal and commercial short-term insurance
   products. AFI’s business model focuses on personalised sales and superior client service. This has resulted in an
   in-force book that tilts towards high-net worth individuals and experiences better than industry average persistency.

   2.2 Overview of the Proposed Transaction Terms
   Alexander Forbes Limited (the direct holding company of the three legal entities comprising the Business) and/or
   related Alexander Forbes companies, in respect of the information technology software and trademarks, will dispose
         •    100% of the shares in Alexander Forbes Administration Services Proprietary Limited, Alexander Forbes
              Direct Proprietary Limited and Alexander Forbes Insurance Company Limited (“AF Insurance
         •    The information technology software which supports the Business; and
         •    The trademarks specific to the Business
   for a total Proposed Transaction consideration of R1 938 million (“Base Price”).

   The rights, benefits and advantages of the Business will accrue to Momentum Metropolitan from 1 April 2019 in
   terms of a ‘locked box structure’. In the event of any contractually non-permitted distributions post 1 April 2019, the
   base price will be adjusted downwards (“Adjusted Price”). The Adjusted Price will in turn be escalated at a rate of
   6% per annum, nominal annual compounded monthly in arrears, from 1 April 2019 up to the closing of the Proposed
   Transaction (“Final Price”). The maximum Final Price, if closing only occurs on the last date for the conditions
   precedent to be met (31 March 2020), would equate to R2 055 million. The Proposed Transaction is however
   expected to be implemented towards the end of 2019, assuming the necessary approvals are obtained timeously.

   The Proposed Transaction will close once all conditions precedent are fulfilled and the Final Price is determined in
   accordance with the relevant Proposed Transaction agreements. The Final Price will be settled in cash and is
   guaranteed by Momentum Metropolitan on behalf of its subsidiary which will conclude the Proposed Transaction.
   Additional ancillary agreements include a brand licence agreement and transitional services agreement, applicable
   for an interim period to ensure and enable a smooth transition for the Business, its clients and employees. The
   Proposed Transaction agreements include contractual undertakings normal for a transaction of this nature, including
   warranties, interim undertakings, non-compete undertakings and termination rights.

   2.3 Conditions precedent
   The Proposed Transaction is subject to the following outstanding conditions precedent:
       •   Approval from the Competition Authorities;
       •   Approval from the Prudential Authority; and
       •   Obtaining of either a compliance certificate or a written exemption from the Takeover Regulation Panel in
           respect of the Proposed Transaction.

   The Business was classified as a discontinued operation in the Group financial statements for the year ended
   31 March 2019. The net asset value of the Business, including the intangible assets, as well as inter-company
   balances and investment in subsidiaries, held for the Business within the Group structure amounted to R728 million
   as at 31 March 2019. The intangible assets relate to goodwill attributed to the Business that arose from the
   Company’s private equity transaction in 2007.

   The net tangible asset value of the underlying Business sold at that date amounts to R322 million. The reported
   profit after taxation for the Business for the year ended 31 March 2019 amounted to R135 million.

   The historical information for the Business was prepared in accordance with International Financial Reporting
   Standards and the Companies Act 71 of 2008 and has been audited by the Group’s external auditors.

   In relation to the planned utilisation of the cash proceeds, the Board intends to return excess capital to shareholders,
   after taking cognisance of the investment needs of the Group, which is aligned with the Company’s revised strategy
   to remain capital-light.

   The Proposed Transaction is categorised as a category 2 transaction in terms of the JSE Listings Requirements
   and accordingly, no shareholder approval is required.

 Carina Wessels
 Executive: Governance, Legal and Compliance

 25 July 2019

 Corporate Advisor: Deloitte Capital Proprietary Limited

 Legal Advisor: Bowman Gilfillan

 Sponsor: Rand Merchant Bank (A division of FirstRand Bank Limited)

Date: 25/07/2019 03:00:00
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