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DIPULA INCOME FUND LIMITED - Non-binding offer by Dipula to acquire 100% of shares in SA Corporate through a merger and cautionary announcement

Release Date: 26/07/2019 10:15
Code(s): DIA DIB     PDF:  
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Non-binding offer by Dipula to acquire 100% of shares in SA Corporate through a merger  and cautionary announcement

DIPULA INCOME FUND LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 2005/013963/06)
JSE share code: DIA   ISIN: ZAE000203378
JSE share code: DIB   ISIN: ZAE000203394
(Approved as a REIT by the JSE)
("Dipula" or the "company")


NON-BINDING OFFER ("NBO") BY DIPULA INCOME FUND LIMITED TO ACQUIRE 100% OF THE SHARES IN SA CORPORATE REAL ESTATE LIMITED 
("SA CORPORATE" OR "SAC") THROUGH A MERGER OF THE TWO ENTITIES AND CAUTIONARY ANNOUNCEMENT

1. INTRODUCTION

Shareholders are advised that, on Friday 19 July 2019, Dipula addressed a NBO to the SA Corporate Board of Directors ("SAC
Board"), setting out a proposal to acquire 100% of the issued share capital of SA Corporate through a friendly merger of the
two entities ("the Proposed Transaction").

The NBO was submitted following a submission of an expression of interest to the SAC Board on 31 May 2019 and a follow up
letter to the SAC Board on 18 June 2019, in which Dipula expressed its desire to implement a merger of the two entities on a
friendly basis that will be value accretive for both sets of shareholders.

In conjunction with previous engagements with representatives of the SAC Board, Dipula has had discussions with key
shareholders of SAC representing a meaningful majority of the SAC shareholders, conveying an indicative offer price and
rationale for the Proposed Transaction.

2. PROPOSED TRANSACTION PARAMETERS

Dipula proposes a 100% share-for-share transaction using a combination of Dipula A and Dipula B shares ("Share
Consideration") as proceeds for the Proposed Transaction ("the Proposed Transaction Proceeds"). The Share Consideration
will be based on a switch ratio to be determined on a relative income for income basis and based on the sustainable 12 months
distributable income per share ("DPS") of Dipula and SAC to be measured with effect from an agreed effective date
("Sustainable Income").

Based on the estimated rolling 12 months DPS of Dipula and SA Corporate from an assumed effective date of 1 December 2019
("Effective Date") and Dipula's current equal weighting of A and B shares in issue, the switch ratio equates to c. 0.185 Dipula
A shares and 0.242 Dipula B shares for every 1 SAC share, equal to a combined switch ratio of 0.427 Dipula shares for every 1
SAC share in issue ("Switch Ratio").

The Share Consideration equates to an indicative offer price of R3.55 per SAC share ("Offer Price") (based on a clean Dipula A
and B share price of R10.80 and R6.43 respectively as at 9 July 2019 being the date prior to the date on which a competing
expression of interest was made for the acquisition of shares in SAC). At the Offer Price, the Proposed Transaction Proceeds
are estimated at c. R9 billion.

The Offer Price is at a 26% premium to the 30 day clean volume weighted average price per SAC share of R2.83 as at 9 July
2019 and a 30% premium to the clean SAC price of R2.73 as at 24 June 2019 (the date prior to SAC releasing a cautionary
announcement in terms of which it indicated that it has received certain expressions of interest).

Based on the Switch Ratio, SA Corporate shareholders will receive a total of c. 469.5 million Dipula A shares and 613.2 million
Dipula B shares, with a resultant ownership of c. 64% of Dipula A shares and 70% of Dipula B shares in issue post the Proposed
Transaction. On a combined basis, SA Corporate shareholders will own c. 67% of the merged entity post the Proposed
Transaction, thereby significantly benefiting from a post-merger implementation value unlock.

3. RATIONALE FOR THE PROPOSED TRANSACTION:

Dipula and SA Corporate are both well regarded Real Estate Investment Trusts ("REITs"). Separately, both companies are
capable of delivering strong income and distribution growth over the medium to long term. The friendly merger will however
effect a step change in the combined business, unlocking immediate shareholder value and positioning the entity for short,
medium and longer term benefits. The merged entity will be firmly positioned as a JSE-listed mid cap REIT of reference with a
predominantly South African focus under strong, experienced management. More particularly:

3.1 Scale and diversification:

    - the merged entity will have a portfolio value of c. R27 billion;
    - the sectoral split of a merged portfolio by value will comprise c. 46% retail, 8% office, 29% industrial and 17% Afhco (a
      residential, retail and commercial property company with assets primarily located in Johannesburg's inner-city);
    - the merged entity will achieve significant improvements in scale and diversity without compromising asset quality or
      overextending operational capacity; and
    - the merged entity will be better positioned to withstand macroeconomic headwinds, be able to better leverage its
      position with suppliers and tenants and position itself as a consolidator rather than a target.

3.2 Improved liquidity:

    -   with a combined market capitalisation of c. R13.6 billion, the merged entity can become one of the more tradable
        entities on the South African Listed Property Index.

3.3 Benefit from a credit profile enhancement:

    -   the increased critical mass and diversity of the merged portfolio can result in a positive credit rerating, leading to a
        significant saving of finance costs.

3.4 Enhanced equity rating:

    -   increased scale, improved liquidity and a reduced cost of debt, increases the ability to access better rated paper in the
        capital markets.

3.5 Platform for growth on both an asset and a shares level: 

    -	the culmination of the factors above will enhance the merged entity’s ability to compete for higher quality assets;
    -	the merged entity will have limited exposure (c. R2 billion) to the struggling office sector;
    -	Dipula's experienced in-house property management team has the ability and capacity to manage properties more effectively 
        and efficiently than third party property managers;
    -	Dipula has a strong track record of “sweating” assets, a strategy that can extract significant value from the SA Corporate 
        property portfolio; and
    -	Dipula's A and B capital structure has become virtually unique in the SA REIT market. Dipula A shares have historically enjoyed 
        strong demand from institutional investors and have a long-term cost of capital with a yield growth of the lower of CPI and 5%. 
        Using Dipula as the vehicle for the proposed merger and utilising largely Dipula B shares as consideration for SA Corporate, means 
        that the combined entity will be able to utilise its A and B capital structure in order to fund acquisitions and grow the merged 
        entity going forward.

3.6	Synergies

    -	Dipula has a well-entrenched and fully aligned executive management team, focused on sustainable value creation;
    -	Dipula internalised its property and asset management teams in 2017, resulting in material cost savings and in-house expertise;
    -	Dipula's team of c.86 personnel is well placed to dedicate significant time to the merged portfolio in order to extract real value; 
    -	Dipula's team has developed expertise especially in peri-urban areas, with entrenched experience to navigate complex community issues. 
        The team includes in-house property, financial, marketing and legal expertise and strong relationships with key national tenants; and 
    -	Synergies further include a reduced cost of debt and savings on fund administration costs which will positively impact distributable 
        income. 


4. CONDITIONS TO SUBMITTING A FIRM INTENTION OFFER

A submission of a firm intention offer will be conditional on inter alia:

    -   as Dipula expects to implement the Proposed Transaction by way of a scheme of arrangement in terms of Section 114
        of the Companies Act ("the Scheme"), it would require that the Scheme be proposed by the SAC Board to SA Corporate
        shareholders following the approval of the Proposed Transaction by the independent board of SAC;
    -   completion of a reciprocal due diligence by both Dipula and SAC and confirming the Sustainable Income, which will
        impact the Switch Ratio;
    -   an indication from independent experts that the proposed Share Consideration and Offer Price would be considered
        fair and reasonable; and
    -   the parties reaching agreement on the following operational matters to take effect upon implementation of the Proposed
        Transaction:

       -    the employment status, position and remuneration of SAC employees; and
       -    the constitution of Dipula's board of directors following the implementation of the Proposed Transaction.

Nothing in this announcement constitutes or is intended to constitute a firm intention to make an offer and accordingly this
announcement is not a firm intention announcement in terms of Regulation 101 of the Companies Regulations, 2011.

Shareholders are advised to exercise caution when dealing in the Company's securities until a further
announcement is made.

Rosebank
26 July 2019

Corporate Adviser
Tenurey BSM Proprietary Limited


Legal Adviser
Werksmans Attorneys


Sponsor
Java Capital

Date: 26/07/2019 10:15:00
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