Investment by an Empowerment Entity in RACEC and Group Restructure
•1. INTRODUCTION
The board of directors of RACEC is pleased to announce that Solethu Investments (Proprietary) Limited (”Solethu Investments”) will acquire a 25% stake in RACEC.
Solethu Investments is an empowerment investment group with specific expertise that complements RACEC’s own skill set and which will significantly strengthen RACEC’s black economic empowerment (”BEE”) credentials. This relationship will allow for the creation of numerous synergies between RACEC and Solethu Investments and will result in additional business opportunities for the entities within the group.
Furthermore, RACEC will restructure two of its operating subsidiaries by acquiring the minority interest for a combination of cash and shares.
•2. THE TRANSACTIONS
RACEC has entered into an agreement with Solethu Investments whereby Solethu Investments, through its recently established wholly-owned subsidiary and special purpose vehicle, Solethu Civils (Proprietary) Limited (”Solethu Civils”), will acquire a 25% interest in the increased share capital of the company by way of subscription for 34 615 384 ordinary shares (”specific issue shares”) in the issued share capital of the company at an issue price of R1.30 per share for an aggregate subscription price of R45 million (”specific issue”). In terms of the agreement, shareholders will be required in the general meeting to:
- - approve the specific issue;
- - authorise the company to provide any financial assistance to Solethu Civils for the purpose of and in connection with the specific issue (”provision of financial assistance”); and
- - approve the potential exercise of a put option for the specific repurchase of up to 26 923 077 specific issue shares for cash from Solethu Civils at R1.30 per share for an aggregate repurchase price of up to R35 million (”specific repurchase”).
Hereinafter, the specific issue, the provision of financial assistance and the specific repurchase are referred to as the “Solethu transaction”.
Furthermore, the board of directors of RACEC (”the board”) has entered into agreements with the minority shareholders of its subsidiaries, Greenbro (Proprietary) Limited (”Greenbro”) and Northern Electric (Cape) (Proprietary) Limited (”Northern Electric”), to acquire the remaining 20% shareholding in Greenbro and the remaining 5% shareholding in Northern Electric, that it does not already own (”acquisition of the minority interests”).
Hereinafter, the Solethu transaction and the acquisition of the minority interests are referred to as the “transactions”.
•3. THE SOLETHU TRANSACTION
•3.1. The nature of Solethu Investments
Solethu Investments is a BEE investment company which is strategically placed in the rail logistics industry. Established in 2001 by Ted Zulu as RRL Holdings (Proprietary) Limited, Solethu Investments is a 95% black controlled and 80% black owned and managed investment group whose core investments are focused on road, rail, sea and related industries, with operations that range from manufacturing, repairs and maintenance to logistics services. This focus ensures that Solethu Investments is able to meaningfully add value to its investments and enables the Solethu group to leverage off its knowledge and reputation within these industries.
Solethu Investments’ shareholding structure ensures that it is a black controlled empowerment entity with a sustainable black shareholding base.
Solethu Civils is a newly established special purpose vehicle designed to house Solethu Investments’ shareholding in RACEC and to facilitate the funding of the Solethu transaction.
•3.2. The rationale for the Solethu transaction
It has been the intention of the board that RACEC creates a platform for strong growth through the cross-selling of products and services currently offered by the group into a broader range of infrastructure related solutions. In addition, an increase in BEE shareholding within the group has been a key objective of the board. The proposed Solethu transaction will ensure that the BEE shareholding objective is addressed as subsequent to the Solethu transaction, 25% of the issued share capital of the company will be held by Solethu Civils.
The improved BEE shareholding will significantly strengthen the group’s BEE credentials, reinforcing the group’s commitment to a multi-faceted approach to BEE, which aims to increase the number of previously disadvantaged individuals that manage and own the company. The Solethu transaction will also provide a cash injection to the company.
The benefits that will accrue to the company as a result of the Solethu transaction and the company’s ongoing relationship with Solethu Investments include:
- - the creation of numerous synergies between RACEC and Solethu Investments;
- - additional business opportunities for the company’s subsidiaries;
- - an enlarged customer base and geographical spread; and
- - increased exposure to expertise, resources and other business relationships.
•3.3. Terms
Subject to the fulfilment or waiver of the conditions precedent set out in paragraph 3.5 below, Solethu Civils will subscribe for 34 615 384 new ordinary shares in RACEC at R1.30 per share for an aggregate subscription price of R45 million. Such shares shall rank pari passu with all other issued ordinary shares in the share capital of the company and shall constitute 25% of all shares in the increased issued share capital of RACEC.
In the event however, that the product of the normalised earnings per share (headline earnings per share adjusted for the consolidation entries pertaining to Solethu Civils and any IFRS/fair value adjustments pertaining to the put option and any other IFRS adjustments relating to the Solethu transaction) of RACEC for the financial year ended 30 September 2010, multiplied by a factor of five (”the relevant product”) is less than R1.30, then the subscription price of the specific issue shares shall be adjusted downwards. This is achieved by way of the subscription by RACEC of a single “B” class ordinary share in the issued share capital of Solethu Civils with a par value of R1.00 at a compulsory subscription price equal to:
the product of 34 615 385 shares multiplied by the difference between R1.30 and the product of normalised earnings per share multiplied by five.
The “B” class ordinary share in Solethu Civils shall:
- - carry no right to dividends or other distributions of whatsoever nature;
- - not be entitled to any return of share premium under any circumstances;
- - on a winding-up of Solethu Civils, be solely entitled to a return of the par value thereof;
- - in relation to any resolution proposed to the holders of the ordinary shares in the share capital of Solethu Civils (whether on a show of hands or on a poll), be entitled to one thousandth of the votes attaching to an ordinary share in the issued share capital of Solethu Civils.
•3.4. Funding of the specific issue
In order to fund the specific issue, Solethu Civils will obtain funding for an aggregate amount of R45 million as follows:
- - R35 million from a 3rd party funder (”the funder”), the terms of which are set out in the written agreement entered into between Solethu Civils, Solethu Investments and the funder (”first tranche funding agreement”), to be utilised by Solethu Civils in respect of the subscription for 26923077 specific issue shares; and
- - R10 million from the company, the terms of which are set out in the written agreement entered into between Solethu Civils, Solethu Investments and RACEC (”second tranche funding agreement”), to be utilised by Solethu Civils in respect of the subscription for 7692307 specific issue shares.
•3.5. Conditions precedent and effective date
In terms of the agreement, the Solethu transaction is subject to the fulfillment or waiver of the following on or before 30 September 2009:
- - the first tranche funding agreement becoming unconditional;
- - the requisite majority of RACEC shareholders in general meeting approving the specific issue, the provision of financial assistance and the specific repurchase; and
- - the procurement of approval from all regulatory authorities, including but not limited to JSE Limited (”JSE”).
The effective date of the Solethu transaction will be the first business day succeeding the date on which all the conditions precedent have been fulfilled or waived.
•3.6. Put option
•3.6.1. Terms of the put option
RACEC has irrevocably granted Solethu Civils the right, on written notice to the company, to require RACEC to purchase from Solethu Civils, 26 923 077 of the specific issue shares (”the put shares”), for an aggregate purchase consideration of R35 million.
The put option shall only be capable of being exercised on a single occasion in full and then only:
- - if there is a breach by Solethu Civils of any of its obligations under the first tranche funding agreement which results in the funder demanding that amounts owing under the first tranche funding agreement be paid or repaid in advance of their originally stipulated payment or repayment dates; or
- - at any time during the period commencing on the fifth anniversary of the effective date and ending on the ninetieth business day thereafter; or
- - the suspension or termination of RACEC’s listing on the JSE.
The aggregate purchase consideration of R35 million set out in paragraph 3.6.1 above shall be paid by RACEC to Solethu Civils in one lump sum and without any deductions, set-off or exchange.
All securities transfer tax arising from or relating to the repurchase of the put shares by RACEC shall be borne by the company.
Solethu Civils has the right on written notice to RACEC to cede and delegate its rights and obligations in terms of the put option to the funder, as security under the first tranche funding agreement and furthermore, on written notice to RACEC, to re-acquire such rights and obligations from the funder at any time.
•3.6.2. Deemed subscription
In the event that the put option is exercised by Solethu Civils, then simultaneously with such exercise, Solethu Civils, in the event that actual 12 month rolling profit before tax is less than the forecast profit before tax for the same period, shall be deemed to have subscribed for RACEC ordinary shares at a deemed consideration =
- - the actual 12 month rolling profit before tax prior to exercise of the option
- - ÷ the forecast 12 month rolling profit before tax prior to exercise of the option as agreed between RACEC and Solethu Civils
- - x R18038462.
However, in the event that actual 12 month rolling profit before tax exceeds forecast profit before tax for the same period, then deemed consideration equals R18 038 462.
The number of shares to be issued to Solethu Civils will be determined by dividing the consideration by the 30 day Volume Weighted Average Price preceding the date of the exercise of the put option.
•3.7. Funding of the specific repurchase
The capital raised through the specific issue will be used to eliminate the group’s bank overdraft, which currently forms part of the group’s permanent working capital structure and to inject surplus cash into the business. Should the possible future exercise of the put option occur, the specific repurchase will be funded through cash and the partial utilisation of the group’s facilities.
Should the put option be exercised by Solethu Civils, the simultaneous exercise by RACEC of the deemed subscription clause would result in RACEC having to return (from the R35 million received by way of the specific issue) R17 million possibly increased by the deemed subscription formula detailed above if profit forecasts are not met. This potential outflow is considered to be an acceptable risk.
•4. THE ACQUISITION OF THE MINORITY INTERESTS
•4.1. Terms
RACEC has concluded agreements in respect of the acquisition by the company of the remaining 20% shareholding in Greenbro and the remaining 5% shareholding in Northern Electric that it does not own. The remaining shares in Greenbro will be acquired from Mr J Greenlees, a director of Greenbro, for a purchase consideration of R4.77 million payable in cash.
The remaining shares in Northern Electric will be acquired from Mr R Savill, a director of Northern Electric, for a purchase consideration of R466 112 of which R233 056 is payable in cash and the remainder being paid by way of an issue of 179 273 RACEC ordinary shares at an issue price of R1.30 per share.
Mr J Greenlees and Mr R Savill are directors of Greenbro and Northern Electric respectively, and are therefore deemed to be “related parties” in accordance with paragraph 10.1(b) of the Listings Requirements of the JSE. “Related party transactions” normally require a fairness opinion from an independent professional expert. However, the categorisation of the acquisition of the minority interests in accordance with paragraph 9.6 of the Listings Requirements of the JSE results in a percentage ratio of less than 10%. Such percentage is less than the categorisation threshold of a “related party transaction” for an AltX listed company and therefore the acquisition of the minority interests is not regarded as a related party transaction. Consequently no fairness opinion is required.
•4.2. Rationale
The board believes that Greenbro and Northern Electric will provide strong revenue streams to the group in the short to medium term. The acquisition of the remaining minority shareholdings will result in increased earnings attributable to the group.
•4.3. Conditions precedent
The acquisition of the minority interests in Greenbro and Northern Electric is subject to the implementation of the Solethu transaction as RACEC will utilise a portion of the cash raised by way of the specific issue to fund the cash portions of the acquisition of the minority interests.
•5. FURTHER DOCUMENTATION
A circular containing full details of the transactions and incorporating a notice to convene a general meeting of RACEC shareholders in order to consider and, if deemed fit to pass, the resolutions necessary to approve the specific issue, the provision of financial assistance and the specific repurchase, will be sent to RACEC shareholders in due course.
•6. PRO FORMA FINANCIAL EFFECTS OF THE ACQUISITION
The pro forma financial effects of the transactions will be disclosed in due course.
•7. CAUTIONARY ANNOUNCEMENT
Shareholders are referred to the announcements released on SENS on 20 April 2009 and 5 June 2009 and are advised to continue to exercise caution when dealing in the company’s securities until a final announcement detailing the pro forma financial effects of the transactions is made.
17 June 2009
Corporate and Designated Adviser
Merchantec (Proprietary) Limited
Auditors and reporting accountants
BDO Spencer Steward (Cape) Inc.
Legal adviser
C&A Friedlander Inc.