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Disposal of interest in Burger King (South Africa) RF Proprietary Limited and Grand Foods Meat Plant
GRAND PARADE INVESTMENTS LIMITED
(Incorporated in the Republic of South Africa)
(Registration Number 1997/003548/06)
Share code: GPL
ISIN: ZAE000119814
(“GPI” or the “Company”)
DISPOSAL OF INTEREST IN BURGER KING (SOUTH AFRICA) RF PROPRIETARY
LIMITED AND GRAND FOODS MEAT PLANT PROPRIETARY LIMITED
1. INTRODUCTION
Shareholders are advised that the Company has, on 18 February 2020, entered into a
binding offer (“Offer”) with ECP Africa Fund IV LLC (“ECP”), in terms of which the
Company will sell (i) all of the shares it holds in Burger King (South Africa) RF Proprietary
Limited (“BKSA”), comprising 95.36% of the issued share capital of BKSA (“BKSA Sale
Shares”), and (ii) all of the shares it holds in Grand Foods Meat Plant Proprietary Limited
(“Grand Foods Meat Plant”), comprising 100% of the issued share capital of Grand
Foods Meat Plant (“Grand Foods Sale Shares”), (together the “Sale Shares”) to ECP
(“Disposal”).
2. RATIONALE
GPI is an investment holding company with minority interests in the gaming industry and
controlling interests in the food and manufacturing industry. GPI has historically traded at
a significant discount to its intrinsic net asset value (“iNAV”), with a large portion of the
discount attributed to its food and manufacturing investments. Over the last 2 years
management has undergone a process of restructuring the business with the main aim of
reducing the discount to iNAV. This process involved discontinuing loss making business
and improving the profitability of its operational food and manufacturing businesses. The
restructure resulted in a vast improvement in profitability which assisted in reducing the
discount.
Despite this improvement the Company still trades at a large discount to iNAV.
Management and the board of directors of the Company (“Board”) have decided that the
best way to unlock value for shareholders is through a controlled sale of assets. This shift
in strategy should result in a significant value unlock for all shareholders. The sale of GPI’s
interest in BKSA and Grand Foods Meat Plant represents the first phase of this value
unlock strategy. In the opinion of the Board the offer received for GPI’s interest in BKSA
is a reasonable offer and is higher than an independent third party valuation of the
business obtained by the Board and based on the current 5-year plan for the business.
The monetization of the Company’s assets should result in a positive outcome for all GPI
shareholders.
3. DESCRIPTION OF BKSA AND GRAND FOODS
GPI and Restaurant Brands International Inc. formed BKSA, which holds the long-term
master franchise the BURGER KING® brand in South Africa, and have exclusive rights
to develop and expand the BURGER KING® brand in the country’s quick service
restaurant market. GPI opened the first BURGER KING® restaurant in Cape Town at 33
on Heerengracht in May 2013 and has established a meaningful presence in the quick-
service restaurant market in South Africa during its first 6 years of operations. As at the
date of this announcement, 92 restaurants have been opened at locations throughout
South Africa.
Grand Foods Meat Plant operates a meat plant that is a state-of-the-art burger production
facility built to EU standards and is a Halaal-certified supplier. Burger King is Grand Foods
Meat Plant’s largest customer with more than 90% of the sales. The plant also supplies
Spur with frozen patties as well as the Grill Father.
4. PARTICULARS OF THE DISPOSAL
As mentioned above, the Disposal entails the Company disposing of its entire
shareholding in BKSA and in Grand Foods Meat Plant to ECP.
All shareholder loans that the Company may have against BKSA and Grand Foods Meat
Plant will be converted to equity before Closing (defined below) and, accordingly, ECP
will not be acquiring any shareholder loan claims.
5. CONDITIONS PRECEDENT
The Disposal is subject to the fulfilment of the following conditions precedent
(“Conditions Precedent”):
- by not later than 30 June 2020, or such later date agreed between the parties, the
conclusion of a share purchase agreement (“SPA”) between GPI and ECP (which shall
include terms which are customary for a transaction of this nature including, inter alia,
standard representations, warranties and specific indemnifications from GPI) and any
other documents deemed relevant, including such provisions that are customary to
transactions that are in the nature of the Disposal;
- the conversion of all shareholder loan claims that GPI may have against BKSA and
Grand Foods Meat Plant into equity;
- the execution by relevant key persons of new employment agreements with BKSA;
- the receipt of a capacity, authority and enforceability opinion from GPI’s legal counsel
addressed to BKSA and to ECP in form and substance satisfactory to ECP;
- the receipt of all requisite corporate, shareholder, third party, franchisor, government
and regulatory approvals as agreed between the parties including any necessary
approvals from the JSE Limited and the South African competition authorities;
- the notification to and receipt of any waivers and/or approvals from any required parties
resulting from the proposed investment;
- the waiver from an affiliate of Burger King Corporation. of the historical breach(es) of
the Burger King master franchise and development agreement (“MFDA”);
- certain agreed changes to the MFDA being effected; and
- the acquisition by ECP of the immovable property on which the Grand Foods Meat
Plant is operated on, or, alternatively, the conclusion of a minimum 5-year lease, on
terms to be agreed that are customary for such transactions.
6. EFFECTIVE DATE OF THE DISPOSAL
It is envisaged that delivery and payment in respect of the Sale Shares will take place
following the completion of all Conditions Precedent (“Closing”).
7. CONSIDERATION
BKSA Consideration
The purchase consideration to be paid by ECP for the BKSA Sale Shares
(“BKSA Consideration”) shall be the equity value of BKSA determined below multiplied
by 95.36%. The equity value of BKSA shall be:
- based on an enterprise value of R670 million (“BKSA Enterprise Value”) being a 8x
multiple of the normalised earnings before interest, tax, depreciation and amortization
(“EBITDA”) of BKSA for the 12-month period ending 30 June 2020 (“BKSA FY20
Normalised EBITDA”) of at least R84 million (“BKSA FY20 Normalised EBITDA
Target”); and
- derived by (i) subtracting any debt or debt-like items from the BKSA Enterprise Value
and (ii) adding back any excess cash and cash equivalents as at Closing and on the
assumption that the current shareholder loan, the amount of which is to be determined
on Closing, will be converted to equity before Closing.
ECP shall settle the BKSA Consideration as follows:
- immediately upon Closing, 75% of the BKSA Consideration shall be paid in cash via
electronic funds transfer to bank account/s designated by GPI;
- on the day which is 14 days after the later of 6 months following Closing or following
completion of a review of the audited financial statements for BKSA for the financial
year ending June 2020 by an independent expert (“FY20 Audit Review”), 15% of the
BKSA Consideration shall be paid in cash by electronic funds transfer to bank
account/s designated by GPI (“BKSA Tranche 2 Payment”), as adjusted downwards
as set out below; and
- on the day which is 24 months after Closing, the remaining 10% of the
BKSA Consideration shall be paid in cash (“BKSA Tranche 3 Payment”), as adjusted
downwards as set out below. The BKSA Tranche 3 Payment may also be reduced by
the amount of any warranty claims.
Should the FY20 Audit Review confirm that the actual BKSA FY20 Normalised EBITDA
is less than the BKSA FY20 Normalised EBITDA Target, then the amount of the BKSA
Tranche 2 Payment and the BKSA Tranche 3 Payment shall be adjusted downwards
based on the percentage by which the actual BKSA FY20 Normalized EBITDA is less
than the BKSA FY20 Normalized EBITDA Target.
Notwithstanding the above, the BKSA Tranche 2 Payment and BKSA Tranche 3
Payments shall further be adjusted downwards on a rand-for-rand basis by:
- debt and debt-like items including any similar liabilities that pre-date the transaction
Closing, but which are not accounted for in the financial statements for BKSA or any
of its constituent entities;
- full settlement of all taxes incurred due and payable up to Closing; and
- survival of all assets, including tax assets, unimpaired through the BKSA Sale Shares;
- any material liabilities arising from claims, suits or other proceedings initiated by public
market shareholders against the Company, its subsidiaries and/or ECP, which shall be
the exclusive responsibility of GPI.
Grand Foods Meat Plant Consideration
The purchase consideration to be paid by ECP for the Grand Foods Sale Shares ("Grand
Foods Consideration”) shall be the equity value of Grand Foods Meat Plant determined
below. The equity value of Grand Foods Meat Plant shall be:
- based on an enterprise value of R27 million (“Grand Foods Enterprise Value”), which
equates to a 3x multiple of the normalised EBITDA of Grand Foods Meat Plant for the
12-month period ending 30 June 2020, (“Grand Foods FY20 Normalised EBITDA”)
of at least R9 million (“Grand Foods FY20 Normalised EBITDA Target”); and
- derived by (i) subtracting any debt or debt-like items from the Grand Foods Enterprise
Value and (ii) adding back any excess cash and cash equivalents as at Closing and
on the assumption that the current shareholder loan, the amount of which is to be
determined on Closing, will be converted to equity before Closing.
ECP shall settle the Grand Foods Consideration as follows:
- immediately upon Closing, 50% of the Grand Foods Consideration shall be paid in
cash by electronic funds transfer to bank account/s designated by GPI;
- on the day which is 14 days after the later of 6 months following Closing or following
completion of a review of the audited financial statements for Grand Foods Meat Plant
for the financial year ending June 2020 by an independent expert (“FY20 Audit
Review”), 40% of the Grand Foods Consideration shall be paid in cash by electronic
funds transfer to bank account/s designated by GPI, as adjusted downwards, as set
out below (“Grand Foods Tranche 2 Payment”); and
- on the day which is 24 months after Closing, the remaining 10% of the Grand
Foods Consideration shall be paid in cash, as adjusted downwards as set out below
(“Grand Foods Tranche 3 Payment”). The Grand Foods Tranche 3 Payment may
also be reduced by the amount of any warranty claims.
Should the FY20 Audit Review confirm that the actual Grand Foods FY20 Normalised
EBITDA is less than the Grand Foods FY20 Normalised EBITDA Target, then the Grand
Foods Tranche 2 Payment and the Grand Foods 3 Payment shall be adjusted downwards
based on the percentage by which the actual Grand Foods FY20 Normalized EBITDA is
less than the Grand Foods FY20 Normalized EBITDA Target.
Notwithstanding the above, the Grand Foods Tranche 2 Payment and the Grand Foods
Tranche 3 Payment shall further be adjusted downwards on a rand-for-rand basis by debt
and debt-like items including any similar liabilities that pre-date the transaction Closing,
but which are not accounted for in the financial statements for Grand Foods Meat Plant
or any of its constituent entities.
8. APPLICATION OF THE CONSIDERATION
The proceeds of the Disposal will be returned to shareholders in the form of a special
dividend. This forms part of GPI’s strategy to unlock value for shareholders through a
controlled sale of its underlying assets.
9. WARRANTIES AND OTHER SIGNIFICANT TERMS OF THE OFFER
As security for ECP’s obligations in respect of BKSA Tranche 2 Payment and the BKSA
Tranche 3 Payment, ECP shall deliver and pledge in securitatem debiti (and not out and
out) to GPI, a first priority, fully executed share pledge in respect of such number of shares
constituting 25% of the BKSA Sales Shares. On payment of the BKSA Tranche 2
Payment, GPI shall release 15% of such pledged shares. Should there be any adjustment
to the BKSA Consideration, then a proportionate number of the pledged shares shall be
released.
As security for ECP’s obligations in respect the Grand Foods Tranche 2 Payment and the
Grand Foods Tranche 3 Payment, ECP shall deliver and pledge in securitatem debiti (and
not out and out) to GPI, a first priority, fully executed share pledge in respect of such
number of shares constituting 50% of the Grand Foods Sale Shares. On payment of the
Grand Foods Tranche 2 Payment, GPI shall release 40% of such pledged shares. Should
there be any adjustment to the Grand Foods Consideration, then a proportionate number
of the pledged shares shall be released.
GPI has provided ECP with an exclusive right to purchase the immovable property on
which the Grand Foods Meat Plant meat plant is situated for a price of not more than
R22 000 000 within 6 months from 7 January 2020. Should ECP not exercise this right,
the Parties will sign a 5-year lease on terms no worse than the current rental terms.
The Offer further contains representations and warranties by the Company in favour of
ECP which are standard for a transaction of this nature.
GPI has provided ECP with exclusivity. Should GPI attempt to enter into a similar
transaction with a third party in breach of their exclusivity undertaking, GPI shall be liable
for a break fee as well as injunctive relief.
10. INDEPENDENT THIRD PARTY VALUATION
Although not required in terms of the JSE Limited Listings Requirements, in order to be
prudent, the Board has obtained an independent third party valuation for BKSA for
purposes of assessing the BKSA disposal. The offer received for GPI’s interest in BKSA
is a reasonable offer and is higher than the independent third party valuation obtained.
11. FINANCIAL INFORMATION
The value of the net assets comprising the Sale Shares as at 30 June 2019, being the
date of the last audited financial statements of GPI, was R509 039 205.
The audited profits after tax attributable to the Sale Shares for the 12-month period ended
30 June 2019, was R2 125 429, based on the audited financial statements of GPI for the
12 months ended 30 June 2019. The audited financial statements of GPI were prepared
in terms of IFRS.
12. CLASSIFICATION OF THE DISPOSAL
In terms of the JSE Limited Listings Requirements, the disposal of the BKSA Sale Shares
and the Grand Foods Sale Shares should be aggregated. As the aggregated value of the
Disposal exceeds 30% of the Company’s market capitalisation as at the date of the
signature of the Offer, it meets the definition of a category 1 transaction as contemplated
in section 9 of the JSE Limited Listings Requirements.
As a result, the Disposal is required to be approved by an ordinary resolution of the
shareholders of the Company and accordingly a general meeting of the shareholders of
the Company will be convened.
13. CIRCULAR
A circular containing the full details of the Disposal, incorporating a notice convening the
required general meeting of the shareholders of the Company, will be distributed to
shareholders in due course, at which time the salient dates and times of the Disposal,
including the date of the general meeting, will be announced on SENS.
Cape Town
19 February 2020
Sponsor and Corporate Adviser
PSG Capital
Legal Advisors
Cliffe Dekker Hofmeyr
Date: 19-02-2020 07:05:00
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