PROPOSED ACQUISITION OF TONGAAT HULETT STARCH
Source: RNSBarloworld 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® corn starch, Hydex® and Vaalgold® 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:
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|
6 months to 30 September 2019 |
12 months to 31 March 2019 |
|
Revenue |
R2.118 billion |
R3.921 billion |
|
EBITDA |
R303 million |
R777 million |
|
EBITDA margin |
14% |
20% |
|
Operating profit |
R245 million |
R656 million |
|
Operating margin |
12% |
17% |
|
Profit after Tax |
R206 million |
R464 million |
|
Net assets |
R1.020 billion |
R1.088 billion |
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:
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unlocking latent manufacturing capacity through the application of lean improvement processes; |
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increasing exports into key African countries; |
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increasing the presence of the Business within the high-margin modified starch sector; and |
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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"):
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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; |
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Tongaat Hulett shareholders passing the "category 1" ordinary resolution required in terms of section 9 of the JSE Listings Requirements; |
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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; |
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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; |
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Court approval being obtained, if required pursuant to the Companies Act; |
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The approval of the Proposed Transaction by the relevant competition authorities; |
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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); |
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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; |
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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; |
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Absa Bank Limited and Nedbank Limited consenting to the assignment to Barloworld of the commodity finance facilities granted by them to Tongaat Hulett; and |
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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:
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all the Suspensive Conditions to the Proposed Transaction are fulfilled or waived; |
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the expiry of a period of 30 days following the publication of the Section 34 Notice; and |
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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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