Wrap Text
Acquisition of Casino Precincts and withdrawal of cautionary announcement
HOSPITALITY PROPERTY FUND LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 2005/014211/06)
JSE share code: HPB ISIN: ZAE000214656
Bond company code: HPAI
(Approved as a REIT by the JSE)
(“Hospitality” or “the company”)
ACQUISITION OF CASINO PRECINCTS AND WITHDRAWAL OF CAUTIONARY ANNOUNCEMENT
1. INTRODUCTION
Further to the cautionary announcements released by Hospitality on SENS, the last of which was published on 31 May 2018,
the board of directors of Hospitality are pleased to announce that Hospitality and its wholly-owned subsidiary Merway Fifth
Investments Proprietary Limited (“Merway”) have entered into a sale of shares and subscription agreement (the
“subscription agreement”) with Tsogo Sun Holdings Limited (“Tsogo”), Listed Investments Proprietary Limited
(“Listed Investments”), Cassava Investments Proprietary Limited (“Cassava”), 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) for the acquisition of a portfolio of seven mixed-use casino precincts (the “casino
precincts”) for an agreed 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 will provide Hospitality with scale through the acquisition of seven premium casino precincts (including an
additional 1 335 hotel rooms), namely:
- Montecasino Precinct: Montecasino, The Palazzo Hotel, Southern Sun Montecasino Hotel, SunSquare Montecasino
Hotel, Montecasino Theatre, Palazzo Towers East & West Offices and The Pivot Offices;
- Gold Reef City Casino Precinct: Gold Reef City Casino and Southern Sun Gold Reef City Hotel;
- Silverstar Casino Precinct: Silverstar Casino and Southern Sun Silverstar Hotel;
- Suncoast Casino Precinct: Suncoast Casino, SunSquare Suncoast and Suncoast Towers Hotel;
- Blackrock Casino Precinct: Blackrock Casino and Garden Court Blackrock Hotel;
- Emnotweni Casino Precinct: Emnotweni Casino, Southern Sun Emnotweni Hotel and StayEasy Emnotweni Hotel;
and
- The Ridge Casino Precinct: The Ridge Casino, Southern Sun The Ridge Hotel and StayEasy Emalahleni Hotel.
The transaction is in line with Hospitality’s strategy to acquire value enhancing properties and to broaden its earnings base.
The casino precincts will be subject to an effective 20-year triple net lease, which management believes will provide a stable,
escalating and predictable income stream and distribution for Hospitality shareholders. The more stable income base from
the casino precincts, will reduce the impact of the volatility of existing hotel rental income on a combined basis. The
increased scale of Hospitality, with a gross asset value of c. R36 billion post implementation of the transaction, should result
in a reduction in Hospitality’s cost of funding.
Hospitality’s loan-to-value of 28% post the transaction, will still allow capacity for it to make further acquisitions.
3. TERMS OF THE TRANSACTION
3.1. Cassava and Listed Investments own the casino precincts described in paragraph 2 above. In terms of the
subscription agreement, Merway will acquire the entire issued share capital of Cassava and Listed Investments, in
terms of an “intra group transaction” as per section 45 of the Income Tax Act, 1962, as amended. The transaction
will be effective from 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 having regard to an equity valuation of Listed Investments and Cassava
of R15 billion (being the agreed value of the casino precincts of R23 billion net of Cassava’s and Listed
Investments’ debt of R8 billion and 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 settled in cash to Silverstar, TSNEW and TSC pro rata to their
holdings in Cassava; and
3.3.2. an amount of R19 837 261 538 will be settled in cash to Akani-Egoli, TSKZN and TSC pro rata to
their holdings in Listed Investments.
3.4. On the effective date, each of Akani-Egoli, Silverstar, TSKZN, TSNEW and TSC (collectively, the “vendors”) will
use the proceeds of the purchase consideration:
3.4.1. to subscribe for 1 196 362 000 Hospitality ordinary shares at a subscription price of R12.50 per share
(the “subscription shares”), which shares, when issued, will constitute not less than 67.4% of the
entire issued share capital of Hospitality at the time; and
3.4.2. to settle the debt of each of the vendors using the balance of the purchase consideration (being an
amount of R8 052 436 538).
3.5. Upon completion of the transaction, Tsogo will hold approximately 87% of the shares in Hospitality. Hospitality
notes that it is Tsogo’s ultimate intention to unbundle its shareholding in Hospitality to its shareholders as soon as
practically possible. Tsogo has warranted to Hospitality that any unbundling will only be effected to the extent that
it has no adverse consequences for Hospitality.
3.6. Each of the casino precincts will be let by Listed Investments and Cassava as landlord (“landord”) to an indirect
wholly-owned subsidiary of Tsogo, being Grabblebrook Proprietary Limited (“LeaseCo” or the “tenant”) in terms
of a head lease agreement (“head lease agreement”). The vendors, the tenant, Cassava and Listed Investments
have also entered into a rental aggregation agreement which governs the rentals, escalations, reviews and resets in
respect of each of the casino precincts (the “rental aggregation agreement”).
3.7. The salient terms of each head lease agreement and the rental aggregation agreement are set out below:
3.7.1. the head lease agreement will permit the tenant to sub-let each of the casino precincts with the
consent of the landlord;
3.7.2. the head lease agreement, which will be a triple net lease, will be concluded for an initial period
enduring until 31 March 2023, whereafter each head lease agreement can be terminated by either
party on 15 years’ written notice;
3.7.3. the initial aggregate base rental payable by the tenant for the casino precincts 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;
3.7.4. the initial aggregate base rental will escalate annually on the 1 st 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 3.7.5 below;
3.7.5. on the 7th anniversary of 1 April 2018 (i.e. on 1 April 2025), and thereafter on each successive 5 th
anniversary of that date (“rental review date”), the aggregate annual rental payable by the tenant in
respect of the casino precincts for the year commencing on such anniversary, will be reviewed by
the parties (“head lease anniversary rental review”) and will be recalculated to be the lesser of:
3.7.5.1. 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 (downwards or upwards, as described in paragraphs 3.7.6 and 3.7.7 below) has
occurred during the period of the head lease agreement (“aggregate escalated base
rental”); and
3.7.5.2. 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 after deducting management fees and licence fees charged by the
companies within the Tsogo group in respect of the casino precincts) of the casino
precincts in respect of the year terminating on the day preceding the anniversary
concerned, escalated at the escalation rate on the anniversary date concerned,
(“aggregate EBITDAR rental”), and further provided that:
3.7.5.2.1. the EBITDAR as published by Tsogo in respect of each of the casino
precincts will be prepared on the same basis and applying the same
criteria as applied in the years prior to the effective date; and
3.7.5.2.2. the proportion that the aggregate management fees and licence fees
charged by companies within the Tsogo group bears to the aggregate
EBITDAR of all casino precincts will not be increased after the
effective date without the prior written consent of the landlord,
3.7.6. if the difference between the amount of the aggregate escalated base rental and the amount of the
aggregate EBITDAR rental is:
3.7.6.1. less than 2,5% (two and a half percent), then the rental will not be adjusted or 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;
3.7.6.2. equal to or greater than 2,5% (two and a half percent), then the rental will be adjusted
and reset downwards in accordance with the resulting calculation and the rental
payable by the tenant for the ensuing relevant 5 year period will be adjusted and reset
downwards (“downwards rental reset”)
3.7.7. if on:
3.7.7.1. a rental review date; or
3.7.7.2. the first anniversary of any rental review date; or
3.7.7.3. 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 3.7.10 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:
3.7.7.4. 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;
3.7.7.5. the extraordinary rental review will only be used to implement an upwards rental reset
and cannot be used to implement a downwards rental reset;
3.7.7.6. 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;
3.7.8. subject to paragraph 3.7.10 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:
3.7.8.1. all of the head leases in respect of all of the casino precincts; or
3.7.8.2. 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;
3.7.9. if a head lease agreement relating to a particular casino precinct/s is terminated in accordance with
paragraph 3.7.8 above, then:
3.7.9.1. no further rental will be due by the tenant in respect of such head lease agreement/s
from the date of such termination;
3.7.9.2. all calculations made in terms of paragraphs 3.7.5.1 and 3.7.5.2 and 3.7.7 will be
adjusted to exclude that particular casino precinct/s and the particular head lease
agreement as well as the rentals relating thereto, either future or retrospectively;
3.7.10. notwithstanding the provisions of paragraph 3.7.8, the tenant shall have the right to waive any
downwards rental reset in respect of any head lease anniversary rental review cycle of any head
lease, thereby preventing an early termination as contemplated in paragraph 3.7.8 should it elect to
make, (and in fact makes), within a period of 3 weeks from date of the second of the relevant
downwards rental resets, payment for the ensuing year, of an aggregate annual rental which is equal
to the aggregate annual rental that was paid in respect of the casino precincts for the year terminating
on the day preceding the day upon which the downwards rental reset would have been implemented,
escalated at the escalation rate, instead of making payment of the downwards rental reset amount
that would have been implemented for the ensuing year, continuing to escalate annually thereafter
in terms of paragraph 3.7.4 until the occurrence of the next head lease anniversary rental review;
3.7.11. the tenant will be liable for all utility deposits and charges incurred or payable in respect of the casino
precincts;
3.7.12. 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 precincts, and may install any fixtures, fittings and
equipment without the landlord’s consent;
3.7.13. where such alterations or additions to any of the casino precincts constitute material improvements,
the tenant (or its nominee) shall be obliged to offer the landlord the opportunity to pay for that
material improvement, 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 improvement 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 tenant. Any earnings from the
improvement 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;
3.7.14. subject to the aforesaid, prior to the expiration or termination of a head lease agreement, 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, or 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 agreement;
3.7.15. the tenant will be entitled to sublet the casino precincts and/or any portion/s thereof, or grant
concessions for such premises (including any improvements, or part thereof) without the consent of
the landlord, provided that the material improvement threshold (an amount equal to half of the rental
in any particular year ending 31 March, attributable to the relevant casino precinct) is not exceeded;
3.7.16. 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 precincts other than
for the purposes of repairing it or replacing it. On termination of each head lease agreement for any
reason whatsoever, Tsogo will transfer ownership of the operating plant by way of constructive or
physical delivery to the landlord for no consideration. Tsogo warrants that it is the owner of the
operating plant and that it will remain the owner of the operating plant throughout each lease and
that the operating plant is and will at all times during the term of the lease remain unencumbered in
any way and that Tsogo will be able to give free and unencumbered ownership of the operating plant
to the landlord on termination of the lease. On termination of a head lease agreement 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 operating plant;
and
3.7.17. the landlord will grant the tenant a right of first refusal to acquire each of the casino precincts of
which the landlord wishes to dispose.
3.8. Clean-out distribution
3.8.1. Hospitality will declare a clean-out distribution on the later of the date after the general meeting
called for purposes of passing the resolutions required to fulfil the condition referred to in paragraph
4.8 below (provided that Hospitality shareholders will have approved the transaction) and the date
of fulfilment of all the conditions precedent;
3.8.2. the clean-out dividend will be paid to Hospitality shareholders on or before the effective date and
prior to the issue of the subscription shares; and
3.8.3. for the avoidance of any doubt, the subscription shares will not be entitled to participate in the clean-
out distribution and will, to the extent possible, be issued and allotted ex any right or entitlement to
any portion of the clean-out distribution, pursuant to which, Hospitality will procure that no portion
of the clean-out distribution will be paid to holders of the subscription shares.
3.9. The subscription agreement contains terms and warranties which are common for transactions of this nature.
4. CONDITIONS PRECEDENT
The subscription agreement is subject to the fulfilment or waiver, as the case may be, of the following conditions precedent:
4.1. Tsogo concluding an internal group restructure on substantially the same terms as those contained in the draft
restructure agreements initialled by TSH and Hospitality;
4.2. the registration and transfer of those casino precincts which are not already owned by Cassava and Listed
Investments, into the name of Cassava or Listed Investments (as the case may be) being effected in the Deeds
Registry;
4.3. Tsogo confirming in writing that both Cassava and Listed Investments have been unconditionally released from all
obligations furnished by them under the Tsogo group security pool and that the casino precincts have been released
from any guarantees, pledges and/or mortgage bonds furnished as security under the Tsogo group security pool by
no later than 30 days after the effective date;
4.4. the requisite majorities of Tsogo shareholders passing all the resolutions (including those required by the JSE
Listings Requirements and the Companies Act (Act 71 of 2008) (the “Companies Act”)) required to authorise and
approve the transaction and its implementation;
4.5. 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 the obligations of Grabblebrook in terms
of all the head leases;
4.6. to the extent necessary, Tsogo obtaining the requisite approvals of the JSE, The Takeover Regulations Panel
(“TRP”) and the South African Reserve Bank (“SARB”) for the implementation of the transaction;
4.7. Hospitality confirming in writing to Tsogo that it has concluded the necessary funding agreements with its bankers
for the advance to Merway of the funds required to settle the purchase consideration by no later than 30 days after
the effective date;
4.8. the requisite majorities of Hospitality shareholders passing all the resolutions (including those required by the JSE
Listings Requirements and the Companies Act) required to authorise and approve the transaction and its
implementation;
4.9. to the extent necessary, Hospitality obtaining the requisite approvals of the JSE, TRP and SARB for the
implementation of the transaction; and
4.10. the TRP issuing a compliance certificate in relation to the transaction in terms of section 121 (b) of the Companies
Act.
5. PROPERTY SPECIFIC INFORMATION
Gross Casino
built Casino slot Retail Office Independent
area Hotel tables machi GLA GLA valuation
Location Sector sqm rooms nes sqm sqm Rm
Notes 1 2 2 3
Montecasino Gauteng Casino 109 053 619 82 1 700 31 519 25 700 8 330
precinct
Gold Reef Gauteng Casino 43 216 38 51 1 600 10 505 - 3 526
City precinct
Silverstar Gauteng Casino 31 873 34 30 900 12 644 - 1 592
precinct
Suncoast KwaZulu- Casino 40 967 165 57 1 622 11 350 - 6 511
Natal precinct
Blackrock KwaZulu- Casino 9 649 80 10 300 733 - 276
Natal precinct
Emnotweni Mpumalang Casino 17 545 224 19 425 40 - 877
a precinct
The Ridge Mpumalang Casino 18 764 175 19 436 3 310 - 856
a precinct
Total 271 067 1 335 268 6 983 70 101 25 700 21 968
1. Gross built area as determined by the site architects.
2. As at 31 March 2018.
3. The independent valuer, JLL, has arrived at a market value for the portfolio of R22.5 billion which represents a 2.4%
premium to the sum of each of the individual valuations.
4. The weighted average rental per square metre of gross built-area per month is R598.
5. The independent valuations, which were undertaken by Ashton Candrick Eckler of JLL, have an effective date of
31 March 2018. Ashton Candrick Eckler of JLL is an independent external valuer registered in terms of the Property
Valuers Association Act, (Act 47 of 2000).
6. FORECAST FINANCIAL INFORMATION
Set out below are extracts from the profit forecast of the casino precincts (the “forecasts”) for the three months ending
31 March 2019 and year ending 31 March 2020 (the “forecast period”). The forecasts, including the assumptions on which
they are based and the financial information from which they are prepared, are the responsibility of the Hospitality board.
The forecasts have been prepared on the assumption that the transaction will be effective from 1 January 2019 and on the
basis that the forecasts include forecast results for the duration of the forecast period. The forecasts have not been reviewed
or reported on by independent reporting accountants. The forecasts have been prepared in accordance with Hospitality’s
accounting policies, which are in compliance with International Financial Reporting Standards.
Forecast for the Forecast for the
3 months ending year ending
Notes 31 March 2019 31 March 2020
Revenue 1 486 022 2 029 272
Operating costs (16 916) -
Operating profit 469 106 2 029 272
Finance costs 4 (177 112) (722 368)
Net profit before tax 291 994 1 306 904
Taxation - -
Net profit after tax 291 994 1 306 904
Reconciliation of profit and earnings available for distribution
Profit after tax 291 994 1 306 904
Transaction costs 16 916 -
Earnings available for distribution 308 910 1 306 904
1. All rental income is contracted. Rental income has been forecast based on the agreed initial rental per the rental
aggregation agreement and escalated on 1 April 2019 at 4.4%, which is an assumption of the annual inflation rate for
March 2019.
2. There will be no unforeseen economic factors that will affect the lessee’s ability to meet its commitments in terms of
the lease agreement.
3. No fair value adjustments are assumed.
4. Finance costs comprises interest incurred on the R8.0 billion of new debt facilities, and the amortisation of upfront debt
fees. The weighted average interest rate on the new facilities is expected to be c. 8.96%.
7. RECOMMENDATION AND FAIRNESS OPINION
As Southern Sun Hotels Proprietary Limited (“SSH”), a wholly-owned subsidiary of Tsogo, holds 59.15% of the total share
capital of Hospitality, it is regarded as a material shareholder of Hospitality in terms of the JSE Listings Requirements.
Consequently, the transaction between Hospitality and Tsogo, an associate of SSH constitutes a transaction with a related
party in terms of paragraph 10.1(b)(vii) of the JSE Listings Requirements.
As such, Hospitality has appointed Mazars Corporate Finance Proprietary Limited as the independent expert
(the “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 contents of the Independent Expert’s advice and opinion and the final views of the Hospitality Board will be detailed in
the circular referred to in paragraph below.
8. CATEGORISATION OF THE TRANSACTION
In terms of the JSE Listings Requirements, the transaction constitutes a Category 1 related party transaction and reverse take-
over and is subject to approval by way of an ordinary resolution of the Hospitality shareholders (excluding the votes cast by
SSH and its associates). 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 and revised listings particulars)
will be sent to Hospitality shareholders in due course.
9. WITHDRAWAL OF CAUTIONARY ANNOUNCEMENT
Shareholders are referred to the cautionary announcements issued by Hospitality in relation to the transaction, the last of
which was released 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 the company’s shares.
9 July 2018
Corporate advisor and sponsor to Hospitality
Java Capital
Legal advisors to Hospitality
enSAfrica
Independent Expert
MAZARS
Independent reporting accountant
PWC
Date: 09/07/2018 05:40:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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