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Disposal of Casino Precinct Properties to Hospitality Property Fund and Withdrawal of Cautionary
TSOGO SUN HOLDINGS LIMITED
(Incorporated in the Republic of South Africa)
(Registration No. 1989/002108/06)
JSE Share Code: TSH
ISIN: ZAE000156238
("Tsogo" or the “Company”)
DISPOSAL OF CASINO PRECINCT PROPERTIES TO HOSPITALITY PROPERTY FUND
AND WITHDRAWAL OF CAUTIONARY
1. INTRODUCTION
Further to the cautionary announcements issued by Tsogo, the last of which was issued on
SENS on 31 May 2018, the board of directors of Tsogo (the “Board”) is pleased to announce
that Akani Egoli Proprietary Limited (“Akani-Egoli”), Silverstar Casino Proprietary Limited
(“Silverstar”), Tsogo Sun Casinos Proprietary Limited (“TSC”), Tsogo Sun KwaZulu Natal
Proprietary Limited (“TSKZN”) and Tsogo Sun Newcastle Proprietary Limited (“TSNEW”), all
of which are wholly-owned subsidiaries of Tsogo (the “sellers”) and Tsogo, Listed Investments
Proprietary Limited (“Listed”) and Cassava Investments Proprietary Limited (“Cassava”),
have entered into a sale of shares and subscription agreement (the “subscription
agreement”) with Hospitality Property Fund Limited (“Hospitality”) and its wholly-owned
subsidiary Merway Fifth Investments Proprietary Limited (“Merway”) for the disposal by the
sellers to Hospitality of a portfolio of seven mixed-use casino precinct properties (the “casino
precinct properties”) for an aggregate purchase consideration of R23 billion (the “purchase
consideration”) (the “transaction”).
The salient terms of the subscription agreement are set out in paragraph 3 below.
2. RATIONALE
The transaction is in line with the Board’s strategy to restructure Tsogo into three separate and
distinct operating divisions, being a Property Division, a Gaming Division and a Hotel
Management Division.
The Board anticipates that the separation of Tsogo into these three focused divisions (and
separate listed entities) will unlock value and provide greater investment choice for Tsogo
shareholders. On conclusion of the transaction, Hospitality is expected to own investment
properties with a total fair market value of approximately R36 billion.
Upon completion of the transaction, Tsogo will hold approximately 87% of the shares in
Hospitality. It is Tsogo’s ultimate intention to unbundle their shareholding in Hospitality to its
shareholders and has warranted to Hospitality to do so at a time and in a manner that does not
have any adverse consequences to Hospitality.
3. TERMS OF THE TRANSACTION
3.1 Cassava and Listed will own the casino precinct properties. In terms of the subscription
agreement, Merway will acquire the entire issued share capital of each of Cassava and
Listed in terms of an “intra group transaction” as provided for in section 45 of the Income
Tax Act, 1962, as amended. The transaction will be effective from the date of the
fulfilment or waiver, as the case may be, of the conditions precedent set out in
paragraph 4 below (the “effective date”).
3.2 The purchase consideration was determined using the fair value of the casino precinct
properties being R23 billion, based on an agreed forward yield of 8.45%.
3.3 The purchase consideration will be settled by Merway on the effective date as follows:
3.3.1 an amount of R3 169 700 000 will be paid in cash to Silverstar, TSNEW
and TSC pro rata to their holdings in Cassava; and
3.3.2 an amount R19 837 261 538 will be paid in cash to Akani-Egoli, TSKZN
and TSC pro rata to their holdings in Listed.
3.4 On the effective date, each of Akani-Egoli, Silverstar, TSKZN, TSNEW and TSC will use
its share of the purchase consideration (amounting in the aggregate to
R23 006 961 538):
3.4.1 to subscribe for 1 196 362 000 Hospitality ordinary shares at a subscription
price of R12.50 per share, which shares when issued, shall constitute not
less than 67.4% of the entire issued share capital of Hospitality at such time
(the “subscription”); and
3.4.2 to settle its debt with the balance of R8 052 436 538.
3.5 Following implementation of the internal group restructure referred to in paragraph 4.1
below, each of the casino precinct properties will be let by Listed and Cassava as
landlord (“landlord”) to an indirect wholly-owned subsidiary of Tsogo, being
Grabblebrook Proprietary Limited (“LeaseCo” or “tenant”) in terms of a head lease
agreement (the “head lease”). The tenant, Cassava and Listed will also enter into a
head lease rental aggregation agreement governing the rentals, escalations, reviews
and resets in respect of each of the casino precinct properties (the ”rental aggregation
agreement”).
3.6 The salient terms of the head lease and rental aggregation agreement are set out below:
3.6.1 the head lease will permit the tenant to sub-let each of the casino precinct
properties with the consent of the landlord;
3.6.2 the head lease, which will be a triple net lease, will be concluded for an
initial period enduring until 31 March 2023, whereafter the head lease can
be terminated by either the landlord or the tenant on 15 years’ written
notice;
3.6.3 the initial aggregate base rental payable by the tenant for the casino
precinct properties will be R1.9 billion per annum (the “initial aggregate
base rental”), one twelfth of which amount will be payable monthly in
advance on the 1st business day of each month;
3.6.4 the initial aggregate base rental will escalate annually on the 1st day of April
of each year by the percentage change in the consumer price index which
is applicable for the preceding 12 months (the “escalation rate”) subject to
the terms of a rental review referred to in paragraph 3.6.5 below;
3.6.5 on the 7th anniversary of 1 April 2018 (i.e. on 1 April 2025), and thereafter
on each successive 5th anniversary of that date (“rental review date”), the
aggregate annual rental payable by the tenant in terms of the head lease
for the year commencing on such anniversary, will be reviewed by the
landlord and the tenant (“head lease anniversary rental review”) and will
be recalculated to be the lesser of:
3.6.5.1 an amount equal to the initial aggregate base rental
escalated annually at the escalation rate on the 1st day of
April of each year, irrespective of and disregarding any
rental reset (upwards or downwards, as described in
paragraphs 3.6.6 and 3.6.7 below) which has occurred
during the period of the head lease (“aggregate escalated
base rental”); and
3.6.5.2 an amount equal to 70% of the aggregate EBITDAR
(earnings before interest, income tax, depreciation,
amortisation, property rentals paid, long term incentives and
exceptional items and after deducting management fees
and licence fees charged by companies within the Tsogo
group of companies (“Tsogo Group”) in respect of the
casino precincts properties) earned by the Tsogo Group in
respect of the casino precinct properties in respect of the
year terminating on the day preceding the anniversary date
concerned, escalated at the escalation rate on the
anniversary date concerned, (“head lease re-set”);
provided that:
3.6.5.2.1 the EBITDAR as published by Tsogo in
respect of the casino precinct properties will
be prepared on the same basis and applying
the same criteria as applied in years prior to
the effective date; and
3.6.5.2.2 the proportion that the aggregate
management fees charged by companies
within the Tsogo Group bears to the
aggregate EBITDAR of all casino precinct
properties will not be increased after the
effective date without the consent of the
landlord,
3.6.6 if the difference between the amount of the aggregate escalated base rental
and the amount of the aggregate EBITDAR rental is:
3.6.6.1 less than 2,5%, then the rental will not be adjusted nor reset
downwards and instead the rental and the rental payable by
the tenant for the ensuing relevant 5 year period shall be
equal to the rental payable in the previous year escalated at
the escalation rate; or
3.6.6.2 equal to or greater than 2,5%, then the rental will be
adjusted and reset downwards in accordance with the
resulting calculation and the rental payable by the tenant for
the ensuring relevant 5 year period will be adjusted and
reset downwards (“downwards rental reset”)
3.6.7 if:
3.6.7.1 on a rental review date; or
3.6.7.2 on the first anniversary of any rental review date; or
3.6.7.3 on the second anniversary of any rental review date,
(irrespective of whether or not the review on any rental review date resulted
in a downwards rental reset, a head lease upwards rental reset or a cure
rental as contemplated in paragraph 3.6.10 below) and, if the then rental is
less than the aggregate escalated base rental at such time, then the
relevant parties will again review and recalculate the rental payable despite
such review and recalculation procedure not coinciding with a review date
(“extraordinary rental review”). The rental calculation amount resulting
from the extraordinary rental review will only be implemented if it has the
effect of increasing the rental upwards when compared with the rental
payable in the last month immediately preceding the date of the
extraordinary rental review (“upwards rental review”), provided that:
3.6.7.4 the upwards rental review will not have the effect of resulting
in a rental greater than the aggregate escalated base rental
for the same period;
3.6.7.5 the extraordinary rental review will only be used to
implement an upwards rental reset and cannot be used to
implement a downwards rental reset; and
3.6.7.6 an extraordinary rental review and resulting upwards rental
reset can be used and implemented consecutively in each
of the two years in order to achieve an upwards rental reset,
provided that the maximum aggregate rental payable for
those two years may not be greater than an amount equal
to the aggregate escalated base rental for the same two
year period;
3.6.8 subject to paragraph 3.6.10 below, in the event of a downwards rental reset
occurring on any two consecutive rental review dates, the landlord will be
entitled, by giving five years written notice to the tenant, either to terminate:
3.6.8.1 all of the head leases and the head lease rental aggregation
agreement in respect of all of the casino precincts; or
3.6.8.2 the particular head lease/s in respect of the particular casino
precinct/s whose performance was the cause of the second
relevant downwards rental reset;
in which case such notice of termination must be received by the tenant
within a period of three months of the second of such rental review dates in
order to constitute a valid notice of termination. For the sake of clarity, the
earliest that the landlord will be entitled to give any such five years notice
of termination will be on 1 April 2030;
3.6.9 if a head lease relating to a particular casino precinct/s is terminated in
accordance with paragraph 3.6.8 above, then:
3.6.9.1 no further rental will be due by the tenant in respect of such
head lease from the date of such termination;
3.6.9.2 all calculations made in terms of paragraphs 3.6.5.2.1 and
3.6.5.2.2 and 3.6.7 will be adjusted to exclude that particular
casino precinct/s and the particular head lease as well as
the rentals relating thereto, either future or retrospectively;
3.6.10 notwithstanding the provisions of paragraph 3.6.8 above, the tenant will
have the right to waive any head lease downward re-set in respect of any
head lease anniversary rental review cycle, thereby preventing an early
termination as contemplated in paragraph 3.6.8 above should it elect to
make (and in fact makes), within a period of 3 weeks from date of the
second of the relevant head lease downward re-set, payment for the
ensuing year, of an aggregate annual rental which is equal to the aggregate
annual rental that was paid in terms of the head lease for the year
terminating on the day preceding the day upon which the head lease
downward re-set would have been implemented, escalated at the
escalation rate, instead of making payment of the head lease downward re-
set amount that would have been implemented for the ensuing year,
continuing to escalate annually thereafter in terms of paragraph 3.6.4 above
until the occurrence of the next head lease anniversary rental review;
3.6.11 the tenant will be liable for all utility deposits and charges incurred or
payable in respect of the casino precinct properties;
3.6.12 the tenant (or its nominee) may, at its own cost, make any alterations,
renovations or additions to any of the developments on any of the casino
precinct properties (“improvements”) and may install any fixtures, fittings
and equipment without the landlord’s consent;
3.6.13 where such alterations, renovations or additions to any of the developments
on the casino precinct properties are of a material nature (“material
improvements”), the tenant (or its nominee) shall be obliged to offer the
landlord the opportunity to pay for such material improvements, together
with an appropriate rental increase payable by the tenant to the landlord
(“material improvement offer”). In the event that the landlord fails to
accept or decline or elects not to accept the material improvement offer,
then the tenant (or its nominee) shall be entitled to effect the material
improvements at its own cost or to make such material improvement offer
to a third party on terms no more favourable to those offered to the landlord.
Any earnings from the improvements shall be included for the purpose of
calculating the EBITDAR, whether or not such improvements were paid for
by the tenant, the landlord or by a third party;
3.6.14 subject to the aforesaid, prior to the expiration or termination of a head
lease, the tenant shall have the election to either remove all material
improvements and reinstate the relevant casino precinct to substantially the
same condition in which it was before the material improvement was
effected, failing which all improvements will be forfeited to the landlord for
no consideration. The tenant (or its nominee) will be entitled to remove all
fixtures, fittings and equipment upon termination of a head lease;
3.6.15 neither the tenant nor any other Tsogo Group company, will:
3.6.15.1 establish a casino within 25 kilometres of a particular casino
precinct property while continuing to operate a casino at that
casino precinct property; or
3.6.15.2 procure that the casino operated by it at a casino precinct
property in a particular province, ceases to operate and is
substantially relocated to premises other than at that casino
precinct property.
3.6.16 ownership in and to the operating plant and the fixtures, fittings and
equipment will at all times remain with Tsogo. Tsogo will not remove the
operating plant from the casino precinct properties other than for the
purposes of repairing it or replacing it. On termination of any head lease for
any reason whatsoever, Tsogo will transfer ownership of the operating plant
relating to the casino precinct property, forming the subject of such head
lease (“relevant operating plant”), by way of constructive or physical
delivery to the landlord for no consideration. Tsogo warrants that it is the
owner of the relevant operating plant and that it will remain the owner of the
operating plant throughout the term of the head lease and that the relevant
operating plant is and will at all times during the term of the head lease
remain unencumbered in any way and that Tsogo will be able to give free
and unencumbered ownership of the relevant operating plant to the
landlord on termination of the head lease. In addition on termination of a
head lease for any reason whatsoever, Tsogo will cede to the landlord all
guarantees, warranties and/or undertakings which Tsogo may hold from
time to time from any supplier or contractor in respect of the relevant
operating plant;
3.6.17 the landlord will grant the tenant a right of first refusal to acquire each of the
casino precinct properties of which the landlord wishes to dispose; and
3.6.18 Tsogo undertakes to and in favour of Hospitality, not to dispose, either
directly or indirectly, of any or all of (i) the casino precinct properties’
businesses and/or (ii) its interest in Grabblebrook, without the consent of
Hospitality, which will not unreasonably be withheld.
3.7 Tsogo and Hospitality have agreed to warranties and indemnities that are standard for
a transaction of this nature.
4. CONDITIONS PRECEDENT
The subscription agreement is subject to the fulfilment or waiver (where possible), as the case
may be, of the following conditions precedent:
4.1 Tsogo concluding its internal group restructure on substantially the same terms as those
contained in the draft restructure agreements initialled by Tsogo and Hospitality;
4.2 the registration and transfer of those casino precinct properties which are not already
owned by Cassava and Listed, into the name of Cassava and Listed (as the case may
be) being effected in the relevant Deeds Registry;
4.3 the requisite majorities of Tsogo shareholders shall have passed all resolutions
(including those required by the JSE Listings Requirements and the Companies Act)
required to authorise and approve the transaction and its implementation;
4.4 the requisite majorities of Tsogo shareholders and directors shall have passed the
necessary resolution/s referred to in section 45(3)(a)(ii) and 45(3)(b) of the Companies
Act, authorising Tsogo to provide financial assistance to Grabblebrook and the Vendors
in the form of the guarantee by Tsogo for its obligations of Grabblebrook in terms of the
head lease;
4.5 to the extent necessary, the requisite approvals of the JSE and the SARB for
implementation of the transaction shall have been obtained by Tsogo;
4.6 the requisite majorities of Hospitality shareholders shall have passed all resolutions
(including those required by the JSE Listings Requirements and the Companies Act)
required to authorise and approve the transaction and its implementation;
4.7 to the extent necessary, the requisite approvals of the JSE and the SARB for
implementation of the transaction shall have been obtained by Hospitality;
4.8 Hospitality shall have confirmed in writing to Tsogo that Hospitality will have concluded
all the necessary funding agreements with their bankers to enable the advance to
Merway of the funds required to cover the purchase consideration payable by Merway
in terms of the transaction;
4.9 following receipt of written confirmation, Tsogo shall have confirmed in writing to
Hospitality that both Cassava and Listed will be unconditionally released from all
obligations furnished by them under the Tsogo Group security pool, and that the casino
precinct properties shall be released from any guarantees, pledges and/or mortgage
bonds furnished as security thereunder against payment of the purchase consideration;
and
4.10 The Takeover Regulations Panel issuing a compliance certificate in relation to the
transaction in terms of section 121(b) of the Companies Act.
5. PRO FORMA FINANCIAL EFFECTS
The pro forma financial effects of the transaction on a Tsogo shareholder are the responsibility
of the Board and have been prepared for illustrative purposes only to provide Tsogo
shareholders with information on the pro forma effects of the transaction had the transaction
been effective on 1 April 2017 for the earnings effects and on 31 March 2018 for the net asset
value effects. Due to their nature, the pro forma financial effects may not fairly present Tsogo’s
financial position, changes in equity, financial performance or cash flows after implementation
of the transaction.
The pro forma financial effects have been prepared in accordance with the JSE Listings
Requirements, the Guide on Pro Forma Financial Information issued by the South African
Institute of Chartered Accountants and the measurement and recognition requirements of
International Financial Reporting Standards that are consistent with those applied in the
audited results of Tsogo for the year ended 31 March 2018.
The table below reflects the pro forma financial effects of the transaction:
Before the Pro Forma after the %
transaction transaction change
(“Before”) (“After”)
Basic and diluted earnings per 198.3 179.4 (9.5)%
share (cents)
Basic and diluted headline 197.8 191.2 (3.3)%
earnings per share (cents)
Weighted average number of 994 994 -
shares in issue (million)
Net asset value per share 10.3 11.3 9.7%
(Rand)
Net tangible asset value per 4.1 5.1 24.1%
share (Rand)
Number of shares in issue 1 059 1 059 -
(million)
Notes and assumptions:
1. The Tsogo financial information reflected in the “Before” column has been extracted from
the published reviewed condensed consolidated financial results of Tsogo for the year
ended 31 March 2018.
2. The Tsogo financial information reflected in the “After” column has been calculated on the
basis that the transaction and any other conditions to implement these have been
completed.
3. The effects on earnings, diluted earnings, headline earnings, diluted headline earnings and
distributable earnings per share are based on the following assumptions:
3.1 Before, Tsogo has a 59.15% effective holding in Hospitality and consequently,
Hospitality’s non-controlling interest (“Hospitality NCI”) has a 40.85% effective
holding in Hospitality. After, Tsogo will hold a 86.69% effective holding in Hospitality
and as a result Hospitality NCI is entitled to:
3.1.1 13.3% of the rental income of the Casino Precinct Properties acquired through
the acquisition of Cassava and Listed by Hospitality amounting to R259 million;
and
3.1.2 27.54% less of the existing Hospitality property portfolio profit amounting to
R107 million with the drop in Hospitality NCI effective holding from 40.85% to
13.3%.
3.2 Tsogo will utilise R8 billion of the purchase consideration to settle debt with a weighted
average cost of 9.4% per annum.
3.3 Hospitality will raise R23 billion in respect of the purchase consideration through the
subscription amounting to R15 billion and third party financing of R8 billion at a
weighted average cost of 8.96% per annum. Due to the rate differential there is a
finance cost saving of R48 million pre-tax. Hospitality NCI is allocated their 13.3%
share of the R8 billion finance costs for the financial year amounting to R69 million.
3.4 Tax allowances on the casino precinct properties sold to Hospitality are no longer
deductible for Tsogo with ownership of the properties transferring to Merway. This
results in the reversal of the current deferred tax liability temporary differences on the
casino precinct properties of R55 million and the reversal of certain S13 quin/bis
allowances as per the Income Tax Act amounting to R41 million in additional current
tax on the allowances that will no longer be deductible with the casino precinct
properties transfer to Merway.
3.5 Once off transaction costs assumed of R28 million pre-tax with R2 million attributable
to Hospitality NCI.
4. The effects on net asset value per share and tangible net asset value per share are based
on the following assumptions:
4.1 The casino precinct properties are recognised in Hospitality at the fair value of the
purchase consideration, being R23 billion (which are currently recognised by Tsogo at
a net asset value of R5.0 billion) .
4.2 Subsequent to the transaction, Hospitality NCI is attributed 13.3% of the net asset
value of Hospitality (post the acquisition of the casino precinct properties), resulting in
a R1.062 billion decrease in equity attributed to Hospitality NCI.
4.3 Once off transaction costs, assumed of R28 million pre-tax are recognised in retained
earnings with R2 million attributable to Hospitality NCI.
6. RECOMMENDATION AND FAIRNESS OPINION
Hospitality is a subsidiary of Tsogo, and Hosken Consolidated Investments Limited (“HCI”) is
a material Tsogo shareholder. As such, Hospitality is an associate of HCI and the transaction
constitutes a transaction with a related party for Tsogo in terms of paragraph 10.1(b)(vii) of the
JSE Listings Requirements.
Accordingly, Tsogo has appointed PSG Capital Proprietary Limited as the independent expert
(“Independent Expert”) to make the appropriate recommendations in the form of a fairness
opinion as required in terms of paragraph 10.4 of the JSE Listings Requirements.
The Independent Expert is in the process of finalising its opinion on the transaction, which
opinion, together with the views of the Board on the transaction will be detailed in the circular
to be sent to Tsogo shareholders. Based on the initial assessment of the transaction, subject
to the Independent Expert opinion, the Board is supportive of the transaction.
7. CATEGORISATION OF THE TRANSACTION
In terms of the JSE Listings Requirements, the transaction constitutes a Category 1 related
party transaction and therefore Tsogo shareholder approval is required. A circular convening
a general meeting and providing further information on the transaction (including a report
prepared by the Independent Expert as to the fairness of the transaction) will be sent to Tsogo
shareholders in due course.
8. WITHDRAWAL OF CAUTIONARY ANNOUNCEMENT
Shareholders are referred to the various cautionary announcements issued by Tsogo in
relation to the transaction, the last of which was issued on SENS on 31 May 2018 and are
advised that, on the basis of the above, caution is no longer required to be exercised when
dealing in Tsogo’s shares.
9 July 2018
Corporate advisor and sponsor to Tsogo
Investec Bank Limited
Corporate Law Advisors to Tsogo
Taback and Associates Proprietary Limited
Werksmans Attorneys
Independent Expert
PSG Capital
Independent reporting accountant
PWC
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