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CASHBUILD LIMITED - Detailed Terms of Cashbuilds Acquisition of The Building Company

Release Date: 04/08/2020 09:01
Code(s): CSB     PDF:  
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Detailed Terms of Cashbuild’s Acquisition of The Building Company

CASHBUILD LIMITED
(Incorporated in the Republic of South Africa)
(Registration number: 1986/001503/06)
ISIN: ZAE000028320
JSE share code: CSB
("Cashbuild" or "the Company")


DETAILED TERMS OF CASHBUILD’S ACQUISITION OF THE BUILDING COMPANY


1. INTRODUCTION

Cashbuild is pleased to announce that it has entered into a def initive sale and purchase agreement
(“SPA”) on 3 August 2020 with Pepkor Holdings Limited (“Pepkor”), subject to the conditions precedent
outlined in paragraph 4, to acquire 100% of the issued share capital of The Building Company
Proprietary Limited (“TBC”), a wholly owned subsidiary of Pepkor, and the shareholder loan claims of
Pepkor against TBC, for a purchase consideration of R1,074,700,000 (the “Transaction”).


2. DESCRIPTION OF TBC

TBC is a leading Southern African building materials retail and wholesale business, providing a full
spectrum service offering to the construction industry including residential, commercial and industrial
markets, with a core competency in servicing building contractors. In the prior financial year ending 30
September 2019, TBC achieved revenue of c.R8.2 billion across the retail, wholesale and specialised
divisions. In the twelve month period ended 31 March 2020, TBC achieved revenue of c.R8.0 billion.

TBC offers a portfolio of 13 well-known brands across its three divisions, namely: the retail division
which houses notable brands including Buco and Timbercity; the wholesale division which includes
Cachet and MacNeil chains, and the specialised division offering differentiated products across brands
including Bildware and Tiletoria. In addition to the core retail division, the wholesale and specialised
divisions allow for differentiated access to a broader base of specialised products and materials.

TBC has an attractive portfolio of store locations with an established presence across the coastal
regions of South Africa, comprising 160 TBC outlets and 21 franchise stores. The portfolio includes 91
Buco stores, 75% of which are merchant stores with the balance being cash stores, and 20 Timbercity
stores. The remainder of TBC’s store footprint largely covers both the wholesale and specialised
divisions. TBC’s presence, inclusive of franchise stores, is predominantly based in South Africa (171
stores) with a further presence in the rest of Southern Africa including Namibia (7 stores), Botswana (2
stores) and Zambia (1 store).

In the financial year ending 30 September 2019, the retail division contributed 68% of total TBC revenue
across its stores. Over the same year, the wholesale division contributed 21% to total TBC revenue,
and the specialised division contributed the balance of 11% of TBC revenue.
Pepkor is a diversified retailer with key segments including clothing and general merchandise, furniture,
appliances and electronics, building materials and fintech, operating over 5,400 stores across 11 African
countries.


3. RATIONALE FOR THE TRANSACTION

Cashbuild’s management identified geographic expansion and incremental access to additional
segments of the market as key areas for potential growth. An acquisition of TBC allows Cashbuild an
opportunity to drive these growth initiatives while still maintaining its commitment to its customers in the
South African and neighbouring markets.


The Transaction is anticipated to result in the following benefits to the Company and its shareholders:
    -   an increased retail store footprint presence in Cashbuild’s previously underrepresented
        regions, particularly those in the Western Cape, Eastern Cape and Kwa-Zulu Natal;
    -   a broader reach into the middle-to-higher income customer segment, a target market currently
        underserved by Cashbuild’s current offering;
    -   incremental competency in accessing and servicing the building contractors segment of the
        market; and
    -   improved operational efficiencies and improved future trading profitability through access to
        additional suppliers, inventory and the optimisation of delivery routes.


In addition to the above benefits, Cashbuild is delighted to be bringing on a highly experienced senior
management team who are fully supportive of the Transaction.


4. KEY TERMS OF THE TRANSACTION

The purchase consideration payable by Cashbuild is R1,074,700,000 (the “Purchase Consideration”),
payable at the time of Transaction closing, subject to:
    -   an escalation rate of 5.5% per annum from 1 January 2021 until the Transaction closing date;
        and
    -   the sum of the Purchase Consideration and the total escalation not exceeding R1,119,700,000.


The Purchase Consideration represents an implied enterprise value multiple of 5.0x TBC’s earnings
before interest, tax, depreciation and amortisation (excluding the impact of IFRS 16) for the twelve
month period ended 31 March 2020. The Purchase Consideration will be fully funded through committed
acquisition debt financing facilities ("Debt Financing").

The Transaction will be subject to the usual warranties and indemnities consistent with agreements of
this nature and which are more fully described in the SPA. The Transaction will become effective
immediately following the fulfilment of the conditions precedent detailed below.


Conditions Precedent


The Transaction is subject to, inter alia, the following conditions precedent ("Conditions Precedent"):
     -   all regulatory approvals (including but not limited to the required competition authorities and
         Takeover Regulation approvals, as defined in the Companies Act No. 71 of 2008) being
         obtained; and
     -   the Debt Financing agreements being duly executed and becoming unconditional.


Cashbuild and Pepkor are committed to engage with the relevant authorities and affected stakeholders
in order to f ulfil the Conditions Precedent to enable the Transaction to become unconditional as soon
as possible.


5. FINANCIAL INFORMATION


The below financial information is based on TBC’s unaudited, consolidated management accounts.


                                                                        Total net
                                           Profit / (loss)                asset /
                                                after tax               (deficit)
                                             attributable         attributable to
                                            to the equity              the equity                                 Total
                                               holders of              holders of       Shareholder         shareholder
 R’ millions                                     TBC(2,3)                  TBC(2)     loan claims (2,5)     interest(2)
 Year ended 30 September 2018                          94                     62             2,661               2,723

 Year ended 30 September 2019                     (1,094)                (1,173)             2,841               1,668
 Impairment (1)                                     1,247                    N/A               N/A                 N/A
 Related tax adjustment (1)                         (113)                    N/A               N/A                 N/A
 Adjusted to exclude the impact                        40                (1,173)             2,841               1,668
 of impairment for the year ended
 30 September 2019(4)

 Last twelve months ended 31                      (1,126)                (1,274)             2,929               1,655
 March 2020(4)
 Impairment (1)                                     1,247                    N/A               N/A                 N/A
 Related tax adjustment (1)                         (113)                    N/A               N/A                 N/A
 Adjusted to exclude the impact                         8                (1,274)             2,929               1,655
 of impairment for the last twelve
 months ended 31 March 2020(4)


Notes:
(1). TBC recognised an impairment totalling R1,247 million (R557 million in relation to intangible assets, R686
     million in relation to goodwill and R4 million in relation to PPE), mainly due to the poor outlook of the
     construction industry at the time. The related tax impact in relation to deferred tax liabilities reversed amounted
     to R113 million. This financial information is based on the TBC’s unaudited, consolidated management
     accounts for the financial year ended 30 September 2019.
(2). Based on TBC’s unaudited, consolidated management accounts for the financial year en ded 30 September
     2018, the financial year end ed 30 September 2019 and the financial interim period end ed 31 March 2020.
(3). Net profit/(loss) attributable to equity holders of the parent excluding the impact of interest on shareholder loan
     claims.
(4). The adjusted financial information excluding the impact of the impairment constitutes pro -forma financial
     information in terms of the JSE Listings Requirements. The preparation of the pro -forma information is the
     responsibility of the directors of TBC. The directors of Cashbuild are responsible for the presentation of the
     pro-forma financial information in accordance with the JSE Listings Requirements. The purpose of presenting
     the pro forma financial information is to illustrate the impact of the impairment on reported earnings. It has
     been prepared for illustrative purposes only and may not fairly present the financial position, changes in equity,
     and results of operations or cash flows of TBC. This pro -forma financial information has not been reported on
     by a reporting accountant.
(5). Shareholder loan claims due by TBC to the Pepkor related entities amounted to R2,929 million, R2,841 million
     and R2,661 million as at the financial interim period ending 31 March 2020, and the financial years ended 30
     September 2019 and 30 September 2018 respectively.


The financial information was prepared in accordance with International Financial Reporting Standards
(excluding the impact of IFRS 16) and the Companies Act. Cashbuild is satisfied with the quality of
financial information contained in TBC’s unaudited, consolidated management accounts.


Over the course of the COVID-19 related nationwide lockdown, there have been significant disruptions
to TBC trading. Lockdown regulations severely constrained trading during April and May 2020 where
the business was only permitted to trade on a very limited product range. The TBC business was
permitted to trade on its full product range since June 2020 in line with the reopening of the construction
industry and has since seen a positive trajectory in trading momentum.


6. CATEGORISATION OF THE TRANSACTION

In terms of the JSE Listings Requirements, the Transaction is classified as a category 2 transaction and
accordingly does not require approval by the shareholders of Cashbuild.


7. TRANSACTION PRESENTATION AND CALL

Cashbuild shareholders are advised that a presentation in relation to the Transaction will be made
available on the Company’s website later today. There will be a call at 17h00 today (South Africa
Standard Time) for Cashbuild management to present the Transaction.


Call participants are advised to pre-register for the call at https://www.diamondpass.net/7603631.


4 August 2020
Johannesburg


Financial Advisor and Transaction Sponsor: Investec Bank Limited


Legal Advisor: Webber Wentzel

Date: 04-08-2020 09:01:00
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