TIDMBWO
RNS Number : 5497E
Barloworld Limited
28 February 2020
Barloworld Limited
(Incorporated in the Republic of South Africa)
(Registration number 1918/000095/06)
(Income Tax Registration number 9000/051/71/5)
(Share code: BAW)
(JSE ISIN: ZAE000026639)
(Share code: BAWP)
(Bond issuer code: BIBAW)
(JSE ISIN: ZAE000026647)
(Namibian Stock Exchange share code: BWL)
("Barloworld" or the "Company")
PROPOSED ACQUISITION OF THE TONGAAT HULETT STARCH DIVISION OF
TONGAAT HULETT LIMITED
1. INTRODUCTION
Barloworld shareholders are advised that the Company has today
entered into a Sale and Purchase Agreement ("SPA") with Tongaat
Hulett Limited ("Seller" or "Tongaat Hulett") in terms of which the
Company, through one of its wholly-owned subsidiaries, will acquire
the Tongaat Hulett Starch business of Tongaat Hulett ("THS" or
"Business") as a going concern for an enterprise value of R5.350
billion, on a debt fee/cash free basis ("Proposed Transaction" or
"Acquisition"). The Acquisition will be funded from the Company's
existing cash resources and local debt facilities.
The Acquisition is the result of an auction process conducted by
the Seller and follows a comprehensive financial, legal, tax,
technology, environmental and commercial due diligence performed by
Barloworld and its external advisors. The outcome of the due
diligence and the subsequent commercial negotiation culminated in a
transaction that is acceptable to Barloworld.
2. OVERVIEW OF THS
THS is a fully integrated starch and modified starch producer,
operating separately within the Tongaat Hulett group and has been
in operation for over 100 years. It is the leading starch and
glucose producer in Africa and has significant growth
prospects.
THS is one of the largest producers of unmodified and modified
starch, and liquid and powdered glucose in Sub-Saharan Africa which
uses non-genetically modified, predominantly yellow maize. It
enjoys a strong market position as the sole manufacturer of starch
and glucose in South Africa and supplies a significant proportion
of the local market across a diverse range of industries, including
paper manufacturing, alcoholic beverages, prepared foods and other
food manufacturing and consumer end markets and has a long standing
blue chip client base.
THS products are manufactured across four manufacturing sites,
three of which are in Gauteng, namely in Kliprivier, Meyerton,
Germiston, and one of which is in the Western Cape at Bellville.
The mills have a combined total installed capacity to process more
than 850 000 tons of maize per annum.
THS' starch and glucose products are manufactured to ISO 22000
standards and the Business has an established international market
presence with approximately 50% of its products exported to
regional markets. Its Amyral(R) corn starch, Hydex(R) and
Vaalgold(R) Gluten 60 products are some of the leading starch,
glucose and feed ingredient brands in South Africa.
THS has consistently delivered a strong financial performance
and as set out below will make a positive contribution to
Barloworld post the Acquisition.
Salient financial information for the Business, including the
financial information as required for a JSE category two
announcement, is shown below:
6 months to 30 September 12 months to 31 March
2019 2019
Revenue R2.118 billion R3.921 billion
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EBITDA R303 million R777 million
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EBITDA margin 14% 20%
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Operating profit R245 million R656 million
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Operating margin 12% 17%
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Profit after Tax R206 million R464 million
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Net assets R1.020 billion R1.088 billion
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Source: Audited management accounts for end March 2019 and
unaudited management accounts for end Sept 2019 and the Company
confirms that it is satisfied with the quality of the management
accounts.
3. RATIONALE FOR THE ACQUISITION
Barloworld continues to focus on improving returns in the medium
term, while noting that there are limited value accretive growth
opportunities within its current portfolio of businesses. It is
Barloworld's view that the opportunities to achieve its ambitions
lie in high growth, capital light and defensive industries.
In line with this, Barloworld has undertaken extensive analysis
over the last three years and reviewed multiple opportunities
within its strict guard rails and returns criteria to determine its
next growth opportunity. During this analysis, industries servicing
the consumer foods sector, such as agri-processing, food and
beverage, manufacturing and ingredient-based operations, were
identified as potential verticals to develop and grow Barloworld's
portfolio.
Barloworld's strong balance sheet and cash generative capability
provide a solid base from which long term sustainable growth can be
achieved through disciplined capital allocation.
THS is a highly cash generative, relatively asset light,
defensive investment. It possesses market leading assets and a
strong client base of well-regarded and established multi-national
clients.
The Business has strong financial fundamentals with historical
revenue growth of c. 8% per annum over a 10 year period. Glucose
accounts for c. 60% of total revenue and c. 54% of volumes;
starches and co-products make up the balance of c. 40% in revenue
and c. 46% in volume (of which 21% in revenue and 13% in volumes
come from higher margin modified starches). It has a positive
economic profit and best-in-class return on invested capital of c.
28%.
The Business has a broad and balanced product mix spread across
beverages (38%); coffee and creamers (18%); confectionary (14%);
prepared food (3%); paper manufacturing (15%); and the balance from
canning/ preservatives and general industrial uses (by volume for
the period ended March 2019).
Starch and glucose producers supply stable and diversified
end-product markets and benefit from stable local raw material
supplies. The starch and glucose consumption (volume) is projected
to grow at c. 3.4% per annum in Africa and c. 1.7% per annum in
South Africa, with the South African modified starch market valued
at c. R600 million per annum.
THS further presents an opportunity for Barloworld to leverage
its core capabilities of building lasting B2B businesses and
operating in emerging markets.
The identified growth and product development potential
opportunities identified include:
-- unlocking latent manufacturing capacity through the application
of lean improvement processes;
-- increasing exports into key African countries;
-- increasing the presence of the Business within the high-margin
modified starch sector; and
-- better utilisation of current plant capacity, through capacity
increases and by addressing current production bottlenecks,
all with little incremental investment being required of THS.
Barloworld expects that through product development and
specialisation (into modified starches) it will be able to create
immediate margin uplift and optimise the product mix, whilst the
ability to leverage Barloworld's core competencies in distribution
within its existing businesses will also create additional value.
Currently, THS has a global technical partner who is a leading
global ingredients solutions company and it is intended to retain
the technical partner's services.
Finally, THS has a strong management team that has consistently
delivered strong EBITDA performance and cash conversion despite
tough economic conditions. It is the intention to retain this
management team post the Acquisition.
4. JSE TRANSACTION CATEGORISATION
In terms of the JSE Listings Requirements, the Proposed
Transaction is classified as a Category 2 transaction and
accordingly it will not require Barloworld shareholder
approval.
The Proposed Transaction constitutes a disposal of the greater
part of the assets or undertaking of the Seller and as such it is
subject to Section 112 of the Companies Act 71 of 2008, as amended
(the "Companies Act"). Shareholders are referred to the firm
intention announcement released by the Seller on SENS today for
additional details in this regard.
Barloworld, through Absa Bank Limited, has provided the Takeover
Regulation Panel ("TRP") with a bank guarantee in accordance with
Regulation 111(4) and Regulation 111 (5) of the Companies
Regulations issued under the Companies Act.
5. SALIENT TERMS AND CONDITIONS OF THE PROPOSED TRANSACTION
Purchase Consideration
The agreed enterprise value of THS is R5.350 billion
("Enterprise Value").
The Enterprise Value less net debt and an adjustment for working
capital (both as at the Closing Date (as defined below)) plus an
amount of R96 million, in lieu of THL retaining the obligation to
pay for the post-retirement benefits for retired employees as well
as in-service employees, will be the consideration payable to
Tongaat Hulett for the Business ("Purchase Consideration").
The Purchase Consideration is limited to a maximum amount of
R5.347 billion.
The Purchase Consideration will be paid to Tongaat Hulett in
cash following fulfillment of the suspensive conditions referred to
below. A portion of the Purchase Consideration (being an amount of
R450 million) will be retained in an escrow account for a period of
twelve months as cover for warranty and indemnity claims under the
SPA.
The Purchase Consideration will be funded from Barloworld's
existing cash resources and debt facilities, including a credit
approved twelve month bridge facility from Absa Bank Limited
(acting through its Corporate and Investment Bank), which will be
syndicated into appropriate term facilities.
Suspensive Conditions
The Proposed Transaction is subject to the fulfillment of the
following suspensive conditions ("Suspensive Conditions"):
-- Tongaat Hulett shareholders passing a special resolution approving
the Proposed Transaction as required in terms of sections 112
and 115(2)(a) of the Companies Act;
-- Tongaat Hulett shareholders passing the "category 1" ordinary
resolution required in terms of section 9 of the JSE Listings
Requirements;
-- The independent expert delivering a report to the independent
board of Tongaat Hulett in terms of Section 114 of the Companies
Act and Regulations 90 and 110 of the Takeover Regulations;
-- Tongaat Hulett shareholders holding no more than 5% (five per
cent) of all the Seller's issued shares exercising their appraisal
rights by delivering valid demands, as contemplated in sections
164(5) to 164(8) of the Companies Act, within the maximum time
period specified in the Companies Act;
-- Court approval being obtained, if required pursuant to the
Companies Act;
-- The approval of the Proposed Transaction by the relevant competition
authorities;
-- The receipt of any other regulatory approvals that may be required
for the Proposed Transaction, including the approval of the
JSE, the Financial Surveillance Department of the South African
Reserve Bank and the issue of a compliance certificate by the
TRP (as required by section 115(1)(b) read with section 119(4)(b)
of the Companies Act);
-- Tongaat Hulett publishing a notice of the Proposed Transaction
(" Section 34 Notice ") in terms of section 34 of the Insolvency
Act; 24 of 1936, as amended;
-- Tongaat Hulett's bank lending group agreeing not to exercise
any rights they may have, as a result of the publication of
the Section 34 Notice, to accelerate the payment of any liquidated
claims they may have against Tongaat Hulett;
-- Absa Bank Limited and Nedbank Limited consenting to the assignment
to Barloworld of the commodity finance facilities granted by
them to Tongaat Hulett; and
-- No material adverse change having occurred in relation to the
Business between the signature date of the SPA and the Closing
Date (as defined below).
Closing Date
The Proposed Transaction will be implemented on the last day of
the calendar month during which the latest of the following events
occur:
-- all the Suspensive Conditions to the Proposed Transaction are
fulfilled or waived;
-- the expiry of a period of 30 days following the publication
of the Section 34 Notice; and
-- Tongaat Hulett delivering certain management accounts for the
Business to Barloworld, as required in terms of the SPA, unless
the last of the aforesaid events occur on or after the 25th
day of a calendar month in which case the effective date of
the Proposed Transaction shall be the last day of the following
calendar month.
The closing date of the Proposed Transaction is currently
expected to be quarter 3 2020 ("Closing Date").
Other Significant Terms
Barloworld and Tongaat Hulett will enter into a transitional
services agreement in terms of which Tongaat Hulett will provide
certain services to the Business after the Closing Date in order to
ensure continuity in the conduct of the Business after the Closing
Date.
In terms of section 197 of the Labour Relations Act 66 of 1995,
as amended, all employees of the Business, including the key THS
management, will be transferred to Barloworld as part of the
Proposed Transaction.
Barloworld has undertaken to obtain Warranty and Indemnity
Insurance ("W&I Insurance") cover to the value of USD75 million
by 4 March 2020 (or such extended date agreed to by the Seller).
Barloworld has made significant progress with a syndicate of
underwriters to attain this cover. In the event that Barloworld
does not obtain the required W&I Insurance cover by the
relevant date, the Seller will have the right to terminate the
SPA.
Barloworld will advise shareholders once all the Suspensive
Conditions have been fulfilled (or waived, if applicable) at which
time it will also announce the Closing Date of the Proposed
Transaction.
Johannesburg
28 February 2020
Financial Advisor and Transaction Sponsor
Absa Corporate and Investment Banking, a division of Absa Bank
Limited
Legal Advisor
DLA Piper Advisory Services Proprietary Limited
JSE Equity Sponsor and Debt Sponsor
Nedbank Corporate and Investment Banking, a division of Nedbank
Limited
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END
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