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SANDOWN CAPITAL LIMITED - Termination of existing investment advisory agreement, change to the investment policy and proposed change of name

Release Date: 19/09/2018 12:07
Code(s): SDC     PDF:  
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Termination of existing investment advisory agreement, change to the investment policy and proposed change of name

SANDOWN CAPITAL LIMITED
(Incorporated in South Africa)
(Registration number 2000/013674/06)
Share code: SDC  ISIN: ZAE000249645
("Sandown Capital" or "the Company")



TERMINATION OF EXISTING INVESTMENT ADVISORY AGREEMENT, CHANGE TO THE INVESTMENT POLICY AND PROPOSED CHANGE OF NAME 
OF THE COMPANY


1.   INTRODUCTION

     Shareholders are referred to previous SENS announcements, the last of which was published on 23 August 2018, 
     advising shareholders of, inter alia, the Company's intention to terminate the existing Investment Advisory 
     Agreement concluded by Sandown Capital, Sandown International Limited ("Sandown International") and Sandown 
     Management Limited ("Investment Advisor") on 23 October 2017 ("Existing Management Agreement").

     Shareholders are advised that Sandown Capital, Sandown International and the Investment advisor (collectively the
     "parties") have, on 17 September 2018, entered into an agreement in terms of which the parties agreed, subject to
     obtaining the requisite shareholder approval, to amend the termination fee payable in terms of the Existing Management
     Agreement to an agreed reduced amount of R63 million and to the consensual termination of the Existing Management
     Agreement, with effect from the second business day following the fulfilment of the condition precedent set out in
     paragraph 2.2.4 below, which date is anticipated to be Monday, 19 November 2018 (the "Effective Date"), in
     consideration for payment by Sandown International of a termination fee of R63 million to the Investment Advisor (the
     "Termination Agreement") (the "Transaction"). The salient terms of the Existing Management Agreement and the
     Termination Agreement are set out in paragraph two below.

     Shareholders are further referred to the announcement released on SENS on 2 August 2018 wherein shareholders were
     advised that, following an engagement process, the current investment policy (as detailed in its pre-listing statement 
     issued on 14 November 2017) was to be amended. The Company now seeks to adopt a revised investment policy ("revised
     investment policy"), details of which are set out in paragraph three below.

2.   TERMINATION OF THE EXISTING MANAGEMENT AGREEMENT

     2.1.     The Existing Management Agreement

              2.1.1.         Under the Existing Management Agreement, the Investment Advisor was appointed to, inter alia,
                             investigate and identify investments for acquisition or divestment, advise on and assist with the
                             implementation of transactions and to advise on and assist with negotiations regarding the terms of
                             any purchase, forward funding and joint venture agreements for the group.

              2.1.2.         The Investment Advisor is entitled to an annual fee ("Investment Advisory Fee") equal to the
                             greater of R16 000 000 or 0.95% of Sandown Capital's annual average net asset value, which fee is
                             payable in four monthly instalments in advance. Taking into consideration that the Investment
                             Advisor performs these services to the group, Sandown International is, in terms of the Existing
                             Management Agreement, jointly liable with the Company to make payment to the Investment
                             Advisor of the Investment Advisory Fee.

              2.1.3.         In the event of its termination, the Existing Management Agreement provides that the Company
                             and/or Sandown International is liable to pay the Investment Advisor an amount equal to five times
                             the Investment Advisory Fee which accrued to the Investment Advisor over the six months
                             immediately preceding the date of termination annualized. As at the last practicable date, this fee
                             was calculated to be approximately R80 million.

     2.2.     The Termination Agreement

              2.2.1.         The parties have agreed, subject to obtaining the requisite shareholder approval, to amend the
                             termination fee as provided for in the Existing Management Agreement to an agreed amount of
                             R63 million and to the consensual termination of the Existing Management Agreement, with effect
                             from the Effective Date, in consideration for payment by Sandown International of a termination
                             fee of R63 million to the Investment Advisor.

              2.2.2.         The termination of the Existing Management Agreement will not affect any fees which were
                             payable by Sandown Capital to the Investment Advisor up to and including the Effective Date,
                             which amounts if unpaid, will be paid by Sandown Capital to the Investment Advisor on the
                             Effective Date.

              2.2.3.         Save as disclosed in paragraphs 2.2.1 and 2.2.2 above, the Investment Advisor will not be entitled
                             to payment of any further amounts from Sandown Capital in terms of or arising from the Existing
                             Management Agreement or its termination.

              2.2.4.         The Termination Agreement is subject to the fulfilment of the condition precedent that a resolution
                             be passed by Sandown Capital shareholders (other than Sean Melnick and Sean Jelley together
                             with their associates) at a general meeting approving the reduction of the termination fee as
                             provided for in the Existing Management Agreement to R63 million and the termination of the
                             Existing Management Agreement in consideration for payment by Sandown International of a
                             termination fee of R63 million to the Investment Advisor.

3.   REVISED INVESTMENT POLICY

     3.1.     Sandown Capital will seek to capitalise on its status as a permanent capital vehicle by investing in a portfolio of
              high-quality investment opportunities that offer exceptional investment returns with a focus on financial market
              infrastructure companies that would benefit from listed governance structures, access to liquid and flexible
              capital, a broad shareholder base, sector expertise and networks that the Company's management and board of
              director of Sandown Capital (the "Board") offer. Investments are likely to be in regulated exchanges, trade
              repositories, clearing houses, securities depositories and investment and technology platforms within the financial
              markets sector in general and South Africa in particular.

     3.2.     The intention is for the financial market infrastructure investments to be complimented and supported by portfolio
              investments of liquid investments that could be used as regulatory capital, that are conducive to transparent
              valuation by Sandown Capital's shareholders and that may be readily monetised should the Company elect to exit
              the investment.

     3.3.     There will be a preference for investing in few, high conviction opportunities in which the Company is positioned
              to actively engage with management and add strategic value rather than passive investment stakes.

     3.4.     The bulk of Sandown Capital's portfolio investments will comprise liquid and transparent investments. Should the
              Company’s share price continue to trade at a substantial discount to NAV, the Company will proactively
              implement strategies to reduce the discount including the return of capital to shareholders via share buybacks or
              otherwise.

     3.5.     In line with the revised investment policy, the Company will be making application for a trade repository licence
              under section 54 of the Financial Markets Act, 2012 ("FMA") and the FMA Regulations, and as prescribed by the
              Financial Sector Conduct Authority and the Prudential Authority in the FMA Joint Standard 1 of 2018.

4.   RATIONALE

     The termination of the Existing Management Agreement is to effect the internalisation of the management of the
     Company's business and the substitution of the current externalised management arrangements with internalised
     arrangements that better align the new management team with the shareholder interests and reduce the cost structure of the
     Company with a view to maximising shareholder returns. The Board and the new management team aim to keep the cost
     base of the Company over the next five years to less than or comparable to the cost base that the Company would have
     been subject to in terms of the Existing Management Agreement had the Existing Management Agreement not being
     cancelled, inclusive of the R63 million cost to the Company of terminating the Existing Management Agreement.

     The investment policy is to be revised to recognise the migration away from an externalised management structure and
     allow the Company to avail itself of investment opportunities that may include portfolio investments within the financial
     market infrastructure sectors that would benefit from the listed governance structures, access to liquid and flexible capital,
     a broad shareholder base, sector expertise and networks the Company’s management and Board offer.

5.   EXECUTIVE DIRECTORS' REMUNERATION

     The termination of the Existing Management Agreement has necessitated the appointment of a Chief Executive Officer
     ("CEO") and Chief Financial Officer ("CFO"). As announced on SENS on 6 September 2018, Warren Chapman has been
     appointed as CEO and Andrew Hannington has been appointed as CFO. The fees payable to Warren and Andrew for their
     services as CEO and CFO, respectively, for the year-ending 31 March 2019 are as follows:

     CEO – R525,000 (R900,000 annual equivalent)

     CFO – R875,000 (R1,500,000 annual equivalent).
     Warren's and Andrew's appointments will be put to shareholders for approval at the Company's annual general meeting
     ("AGM") to be held on 15 November 2018. Further details of the AGM will be announced on SENS in due course.

6.   CHANGE OF NAME OF THE COMPANY

     6.1.     In line with the Company's revised investment policy, the Board proposes that the name of the Company be
              changed from "Sandown Capital Limited" to "Zarclear Holdings Limited", which name has been reserved with
              the Companies and Intellectual Properties Commission.

     6.2.     The change of name of the Company is subject to the passing and the registration of a special resolution. Further
              details relating to the name change will be announced on SENS in due course.

7.   PRO FORMA FINANCIAL EFFECTS

     The consolidated pro forma financial effects of the Transaction on Sandown Capital's basic earnings per share, headline
     earnings per share, diluted basic earnings per share, diluted headline earnings per share and dividend per share
     (collectively, "earnings and dividend per share") and net asset value per share and tangible net asset value per share as at
     31 March 2018 are set out below.

     Due to its nature, the consolidated pro forma financial effects, the consolidated pro forma statement of comprehensive
     income and the consolidated pro forma statement of financial position, (collectively, the "consolidated pro forma
     financial information"), may not give a fair reflection of Sandown Capital’s financial position, changes in equity, results
     of operations and cash flows subsequent to the Transaction.

     The consolidated pro forma financial information is the responsibility of the directors and has been prepared for illustrative
     purposes only, to provide information on how the Transaction may have impacted on the historical financial results of
     Sandown Capital for the year ended 31 March 2018. The consolidated pro forma financial information have not been
     reviewed or reported on by independent reporting accountants.

     The pro forma financial information has been prepared using accounting policies that comply with IFRS and that are
     consistent with those applied in the audited financial statements of Sandown Capital for the year ended 31 March 2018.

                                                                             Before the       Pro forma after          Percentage
                                                                            Transaction      the Transaction               change
                                                                                                                              (%)
      Basic earnings per share (cents)                                           (26.56)               (41.22)                 55
      Headline earnings per share (cents)                                        (26.56)               (41.22)                 55
      Diluted basic earnings per share (cents)                                   (26.56)               (41.22)                 55
      Diluted headline earnings per share (cents)                                (26.56)               (41.22)                 55
      Dividend per share (cents)                                                    1.11                  1.11                  -
      Net asset value per share (Rand)                                              4.87                  4.67                 (4)
      Net tangible asset value per share (Rand)                                     4.87                  4.67                 (4)
      Actual number of shares in issue                                       226 065 969           226 065 969                   -
      Weighted average number of shares in issue                             193 625 269           193 625 269                   -

     Notes and assumptions:

     1.     The amounts set out in the "Before the Transaction" column have been extracted, without adjustment, from the statement
            of comprehensive income for the year ended 31 March 2018 and the statement of financial position as at 31 March 2018 of 
            Sandown Capital.

     2.    The earnings and dividend per share information, as set out in the "Pro forma after the Transaction" column, reflect the
           financial effects on the assumption the Transaction was implemented on 1 April 2017 and after incorporating the
           following adjustments:

            2.1. The quarterly investment advisory fees of R8 million in total for the financial year (and tax thereon of R2.2 million) 
                 are reversed, which adjustment is of a continuing nature.

            2.2. Incremental saving on interest expense, due to a reduction in the group’s net debt outstanding as a result of the
                 non-payment of the quarterly investment advisory fees, is obtained, which adjustment is of a continuing nature.

            2.3. Accrual of the termination fee of R63 million (and tax thereon of R17.6 million), payable under the Termination
                 Agreement, which adjustment is once-off in nature.

            2.4. An additional interest expense of R0.7 million has also been recognised, as the payment of the termination fee
                 will be funded through an increase in borrowings, which adjustment is of a continuing nature.

            2.5. Incremental group expenses of R1.2 million, and related tax thereon, have been recognised. These expenses are
                 expected to be incurred as a consequence of the cancellation of the Existing Management Agreement, which
                 adjustment is of a continuing nature.

            2.6. Once-off transaction expenses of R1.1 million have been accounted for.

      3.    The net asset value per share and net tangible asset value per share information, as set out in the "Pro forma after the
            Transaction" column, reflect the financial effects on the assumption that the Transaction was implemented on 31 March 2018 
            and after incorporating the following adjustments:

            3.1. Recognition of an accrued liability of R63 million (and related tax credit of R17.6 million) relating to the
                 termination fee payable to the Investment Advisor under the terms of the Termination Agreement.

            3.2. Recognition of an accrued liability of R1.1 million, and related tax adjustment, for the once-off transaction
                 expenses.

      4.    There are no other subsequent events which require adjustment to the pro forma financial information.


8.    RECOMMENDATION AND FAIRNESS OPINION

      Sean Jelley and Sean Melnick are directors and shareholders of the Investment Advisor and were directors of the Company
      in the 12 months preceding the conclusion of the Termination Agreement (both Sean Jelley and Sean Melnick having
      resigned as directors of the Company with effect from 5 September 2018). Accordingly, the Transaction is classified as a
      related party transaction in terms of section 10 of the JSE Listings Requirements and is subject to the approval of Sandown
      Capital shareholders (excluding the votes of the related parties and their associates). Although Sean Jelley and Sean
      Melnick, together with their associates, will be taken into account in determining a quorum at the general meeting, the JSE
      requires that the resolution relating to the amendment of the Existing Management Agreement and the conclusion of the
      Termination Agreement must be approved by a majority of Sandown Capital shareholders, excluding the votes cast by
      Sean Jelley and Sean Melnick, together with their associates.

      In compliance with section 10.4 of the JSE Listings Requirements, Sandown Capital has appointed BDO Corporate
      Finance Proprietary Limited as the independent expert ("Independent Expert") to make the appropriate recommendations
      in the form of a fairness opinion.

      Whilst the contents of the Independent Expert’s advice and opinion and the final views of the Board will be detailed in the
      circular referred to in paragraph 8, the Independent Expert’s preliminary view is that the Transaction is fair to Sandown
      Capital shareholders.

      Based on the above, the Board is supportive of the Transaction and anticipates making a recommendation to shareholders
      to vote in favour of the resolutions to be proposed at the general meeting of shareholders to be convened to consider the
      Transaction.

9.    RELATED PARTY TRANSACTION

      In terms of the JSE Listings Requirements, the Transaction constitutes related party transaction for Sandown Capital
      requiring shareholder approval. 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 the
      consolidated pro forma financial information will be sent to shareholders in due course.


19 September 2018


Sponsor and Corporate Advisor
Java Capital

Date: 19/09/2018 12:07:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). 
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
 the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct, 
indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on,
 information disseminated through SENS.

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