BROAD-BASED BLACK ECONOMIC EMPOWERMENT TRANSACTION 18 December 2018

Transcription

1 KHULA SIZWE BROAD-BASED BLACK ECONOMIC EMPOWERMENT TRANSACTION 18 December 2018 The Circular published on 18 December 2018 is the main source of detailed information on the proposed B-BBEE transaction, therefore this presentation serves only to give highlights of the transaction and address possible questions.

2 AGENDA TRANSACTION HIGHLIGHTS FAQs

3 B-BBEE TRANSACTION HIGHLIGHTS 3 Transformation Creation of a long term sustainable B-BBEE transaction Contribute to the transformation and inclusive growth of the South African economy Longevity Foundation shareholding permanent Minimum 15-year empowerment period Broad-based Sustainability Creation of a broad-based Foundation issued with 3% of Barloworld Foundation mandate of poverty alleviation, education and youth development Broad-based participation of circa employees and management Public Offer to the black public The sale of a R2.8bn property portfolio to a black controlled company (Propco) Propco will raise external debt of up to 80% of the acquisition price of the properties The empowerment points from the sale of properties will be locked in after three years time Propco will grow its property portfolio over time Strategic alignment Sale of property portfolio aligned to strategic focus to maximise and unlock value of all assets Protect and grow the market leading positions of the South African operations Reliable, credible partner to public and private sector clients Efficient structure B-BBEE ownership equivalent to 14% Limited dilution to shareholders Barloworld Limited BBBEE TRANSACTION

4 BARLOWORLD FOUNDATION 4 BARLOWORLD FOUNDATION Aligned with the national development imperatives of advancing inclusive economic transformation and growth Focus will be on: 3% BARLOWORLD FOUNDATION Poverty alleviation, Education, Youth development and advocacy Permanent shareholding, not allowed to sell into perpetuity Barloworld Limited BBBEE TRANSACTION

5 BARLOWORLD FOUNDATION 5 In respect of any financial year of the Foundation, the aggregate maximum entitlement of each beneficiary shall be determined in accordance with the allocation principles of the Foundation Trust Deed and apportioned to the qualifying categories set out below: Entrepreneurship 30% 30% 5% 20% 15% Programmes focusing on access to quality education with emphasis on improving science, technology, engineering and mathematics (STEM) subjects at high school Teacher Development Programmes with an emphasis on STEM streams Funding for youth programmes that give the youth: access to tertiary education access to youth skills and leadership development programmes Social Entrepreneurship and Social Innovation Programmes that resolve local community challenges Initiatives that ensure conservation and environmental sustainability Funding support for welfare and charitable organisations Humanitarian and disaster relief support Financial and nonfinancial initiatives that promote entrepreneurship including, but not limited to Training Mentoring Collaboration 80% Youth 60% Black Female 10% Black People disabilities 100% Youth 60% Female 10% Black People with disabilities 100% Black 60% Black Female 30% Black People with Disabilities 60% Black Female 10% Black People with Disabilities 100% Black Barloworld Limited BBBEE TRANSACTION

6 B-BBEE TRANSACTION SALE OF PROPERTIES 6 BLACK PUBLIC SCHEME c participants 30% 100% free contribution towards the Employee Trust s R174m equity requirement EMPLOYEE TRUST c participants 32% Senior Managers: Loan from Barloworld amounting to R147m to fund 95% of the Senior Managers equity requirement Junior Managers: Loan from Barloworld amounting to R52m to fund 100% of the Junior Managers equity requirement MANAGEMENT TRUST c participants 38% PROPCO Propco will be listed after 5 years to enable trading Loan EXTERNAL FUNDER Capital Structure Debt 80% Sale of Properties Market Value (R2.8 billion) less 5% discount Equity 20% Barloworld Limited BBBEE TRANSACTION

7 SALE OF PROPERTIES 7 The purchase price is calculated as follows: Purchase Price Reconciliation Value Current Value (31 Aug 2018) R Developments in progress R Future Market Value (1 Oct 2019) R Discount on future value (5%) (R ) Purchase Price R Barloworld Limited BBBEE TRANSACTION

8 SALE OF PROPERTIES 8 Property type Properties Market Value Yield Base Rental GLA (m2)** Motor Retail R1.676 billion 8.83% R148 million Industrial R940.3 million 9.28% R87.2 million Commercial R95.28 million 9.00% R8.6 million Mixed Commercial and Industrial Residential and Vacant Land Attached Total *Independent Property Valuation ** GLA: Gross Lettable Area Disposal price based on: Future value of properties of R2.865 billion (being the current market value (as above) increased by the value of capex committed on properties under development of R110 million) Discount of 5% to the future value of R2.865 billion Ten year lease between Barloworld (through Barloworld SA and Logistics) and Propco Year 1 rental will be escalated at 8% Propco will not limit Barloworld s ability to sell a division Barloworld Limited BBBEE TRANSACTION R13.8 million 9.00% R1.2 million R29.4 million 9.38% R2.8 million 595 R2.755 billion* 9.00% R247.9 million

9 FAQ s PARTICIPANTS 9 How were the staff allocations done? Whilst Barloworld aimed to ensure inclusivity by allowing participation by all employees, the allocations are based on national economically active population statistics (EAPs). Thus, a large portion of the transaction value accrues to black staff How many employees, that will be involved in the BEE scheme, are in each of grades 2-10, and 15-23? Grades 2 10 : Grades 10 14: Grades 15 23: 150 Why are white staff participating in a BEE Transaction? One of the key pillars in the design of the transaction is inclusivity, thus the inclusion of all staff, black and white A large component of the value of the transaction (in excess 90%) accrues to black people Participation is based on EAPs, therefore the impact on black ownership is minimal What is the level of women participation? At Propco level: Participation within the Employee Trust and the Management Trust is governed by EAPs. Based on the EAPs, women will have 45.2% participation (with black women at 41%) At the Foundation level: Beneficiaries are required to be minimum 60% black female

10 FAQ s PARTICIPANTS cont d Please outline the management participation. Will there be facilitation and what are the governance considerations? Allocations were done by a sub-committee of the board made up of independent non-executive directors. Management was recused from this process The allocation is based on EAPs and grading Senior Management will be required to put skin in the game of 5% (a total of R8 million) of their own equity requirement. The rest of the facilitation will be in the form of an interest-free loan from Barloworld, which will be repaid Non-managerial employees will receive a free contribution from the company in order to participate The transaction is subject to shareholder approval (which is scheduled for February 2019). All the required governance procedures and approvals are detailed in the published circular 10 How have conflicts of interest been resolved given significant management participation? The following safeguards were put in place by the board to ensure that conflicts of interest are appropriately managed: In the interests of transparency, the company approached the transaction as a related party transaction as a principle, and thus resolved to: seek shareholder approval; independently determine the value of the properties; and seek a fairness opinion A sub-committee made up of independent non-executive directors was specifically tasked with dealing with matters relating to the participation of and allocation to management in the transaction and were integral to the structuring of the transaction

11 FAQ s PARTICIPANTS cont d 11 Are non-executive directors participating in the transaction? Those non-executive directors that qualify (being black South African citizens) are eligible to participate in the public offer by Propco, just like ordinary members of the black public, subject to such participation: Not impacting their independence Not exceeding R1 million per director Not exceeding 0.25% of Barloworld s market capitalisation There is no special treatment or set aside allocations for non-executive directors What is the process for the public to participate in the scheme? The public scheme will open in H1 of Propco will issue a prospectus inviting members of the public to subscribe for shares in Propco. Additional information will be provided in H If the public offer does not yield desired participation, how is this to be addressed? The total equity required for the public scheme is R163 million The minimum target for the public scheme is to raise R120 million, i.e. if the minimum of R120 million is not achieved, the scheme will not be implemented Any short-fall on the R163 million total equity required will be reallocated to the Management Trust, for the specific benefit of the circa Junior Managers. None of the Senior Managers (grades 15 and above) will benefit from the re-allocation Should the public scheme fail to raise the total equity of R163 million, the junior managers loan from Barloworld will increase from R52 million to R215 million

12 FAQ s PROPERTIES 12 How is Barloworld s continued use of the properties guaranteed? Barloworld will enter into a 10-year lease with Propco with renewal rights for a further 5 years Will this limit the management of the motor retail dealerships? Management performed an analysis of which dealerships should be included in the transaction This transaction will not limit management s ability to make decisions relating to the viability of each dealership. Barloworld s management will continue to manage the company in the best interests of all stakeholders, including any decisions to open or close dealerships On closure of dealerships, Propco may (i) rent the premises to a third party or (ii) sell the property In cases where dealerships need to be closed, the only impact on Barloworld will be in those cases where Propco is unable to sell the relevant property for an amount higher than the present value of the then remaining lease payments. In such instances Barloworld will be liable for any shortfall What is the impact on Automotive who have owned their properties and therefore not paid any rentals? The Automotive dealerships are managed on the basis of an attributed rental charge to each dealership, although the properties were owned within the Automotive division

13 FAQ s PROPERTIES cont d 13 Given that more than 50% of the properties are dealerships, with management participating in the transaction, does this remove Barloworld s ability to consider the viability of certain dealerships? Propco will be independently managed with no involvement by Barloworld management. Barloworld management will continue to manage Barloworld in the best interests of all stakeholders Furthermore, due to the related party nature of the transaction, any transactions (other than lease payments) may require Barloworld shareholder and other regulatory approvals at the time

14 FAQ s OWNERSHIP 14 What is your current BEE level / BEE shareholding? Barloworld s current BEE shareholding is 54% (comprising 31% permanent BEE shareholding and 23% BEE shareholding from mandated investments). Mandated investments are not permanent and may change should the relevant shareholders sell their shares in Barloworld The proposed BEE transaction provides Barloworld with a higher permanent BEE shareholding The BEE shareholding is secured post the expiry of 3 years after the sale of the assets (Properties) provided Barloworld does not buy-back the properties from Propco Should Barloworld buy-back the properties from Propco within the empowerment period, Propco will be required to buy Barloworld shares with the net proceeds after settling debt and taxes The transaction will result in Barloworld s permanent BEE shareholding increasing to 48% How does the sale of assets into Propco confer BEE points? The ownership points are conferred under Statement 102 of the BEE Codes: Statement 102 provides that: a Seller that has concluded a transaction involving a sale of Asset, Equity Instrument or Business of a separately identifiable related business, may claim the benefits provided for in this statement in its own Ownership scorecard. The future rental from a black owned company will further confer procurement points for Barloworld

15 FAQ s OWNERSHIP 15 Why target such a high BEE shareholding? Barloworld s current and prospective customers prefer suppliers with a 51% black shareholding. Barloworld believes achieving 51% black shareholding will give Barloworld a competitive advantage. This transaction achieves 48% black shareholding without the mandated investments. This gives Barloworld headroom even with any volatility that may emanate from the mandated investments shareholding and/or future growth of the business

16 FAQ s FINANCIAL EFFECTS 16 What is the value created as a result of the proposed transaction? With the enterprise value at risk of R5.5bn identified, the transaction will give Barloworld the ability to be competitive and to protect and grow the market leading positions of its South African operations Barloworld s different business units have customers (both public and private) that require strong BEE credentials from suppliers. Barloworld is entering into the proposed BEE transaction in order to maintain its relevance and competitive advantage Barloworld, with the capital released from the transaction, will continue to carefully assess value enhancing growth opportunities Please explain how the transaction generates 14% increase in black ownership? = Foundation size + Property Transaction Size (Value of Property/Value of BAW) = 3% + (R2.75bn/R24.97bn) = c. 14% What is the difference between the cash costs of the scheme vs the economic costs? The cash outflow from Barloworld includes the payment of CGT and breakage costs amounting to R207 million as well as the transaction execution costs which have been detailed in the circular

17 FAQ s FINANCIAL EFFECTS cont d 17 What are the cash flows on day1? Cash Reconciliation Value External Debt Raised R Public Scheme Equity R Management Equity R Total cash inflow R CGT + Breakage costs (R ) Net cash inflow R How will the cash received by Barloworld be deployed? What is the availability of the cash since Propco is consolidated? Will the cash only be available post 1 October 2019? The transaction is only due to be concluded on 1 October For the purposes of the pro-forma financial effects in the circular, it has been assumed that the proceeds will be applied towards reducing debt Given the current low gearing levels for Barloworld, as part of management s ongoing capital allocation assessment, the proceeds may be used to: Make an acquisition that meets Barloworld s return hurdles; and/or If no appropriate acquisition is made (within a reasonable period), return cash to shareholders

18 FAQ s FINANCIAL EFFECTS cont d 18 What is the impact on EPS and HEPS? The year 1 impact on EPS and HEPS is a reduction of 16.6% and 6.7% respectively on a pro-forma basis This comprises: Income tax and IFRS 2 charge, 3% administration charge, Foundation and transaction costs, net finance costs and breakage costs EPS will include CGT and transaction costs What is the immediate dilution to shareholders and over time in terms of both shares and earnings? The dilution to shareholders results from the issue of shares to the Foundation. However, due to the Foundation being consolidated, these shares are treated as treasury shares and as such have no dilutive impact. Only the actual expenses of the Foundation will have an impact on earnings in perpetuity The impact of the overall transaction on earnings in year 1 is a 16.6% and 6.7% reduction in pro-forma EPS and HEPS respectively Over time: The impact of the Foundation component on Barloworld s Income Statement will be the actual expenditure by the Foundation (which is based on dividends received from Barloworld) The rental charge for the Property component will also be eliminated on consolidation However, there will be an actual net cash cost to Barloworld of the rental (being the after tax rental expense) The net proceeds to Barloworld may (depending on how the proceeds are applied) generate returns that reduce the impact of the rental charge

19 FAQ s GENERAL What happens if shareholders do not vote in favour of the transaction? This transaction will not go ahead. However, BEE is required to trade competitively within the South African environment. There is material enterprise value at risk as South African customers are unwilling to continue doing business with untransformed businesses. Therefore, another BEE transaction may need to be considered in order for Barloworld to remain competitive 19 What happens at the end of 10 years - Will Propco continue to be consolidated? Will Barloworld buy back properties or extend the leases? How will the price of the properties be determined? Accounting Treatment If Propco were to be de-consolidated (due to Barloworld being deemed to have lost control in terms of IFRS 10), there will be a net loss equal to Propco s NAV in Barloworld s financial statements of R2.3 billion Properties At the end of the 10-year lease period, the following alternatives are available: Barloworld may extend the lease period (on some or all the properties) by a further 5 years. The extension will be at the then independently determined market related rental; Propco may, in its sole discretion, sell some or all the properties; If Propco chooses to sell the properties, Barloworld has a right of first refusal to acquire the properties The purchase price will be independently determined, given the related party nature of such a transaction Were Barloworld to acquire (some or all of) the properties from Propco, the transaction may be subject to any regulatory approvals at the time (which may include shareholder approval) The transaction term is 15 years, during which period Propco is required to remain black owned

20 TOTAL ECONOMIC COST TO SHAREHOLDERS 20 ECONOMIC COST TO SHAREHOLDER Percentage of Market Cap Rand Equivalent (1) Foundation (Free issue of shares) 3.00% Property transaction Facilitation costs Employees (Grades 2 10) (100% facilitation of equity portion) 0.70% Junior Management (Grades 10-14) (100% facilitation of equity portion) 0.11% Senior Management (Grades 15 23) (95% facilitation of equity portion) 0.32% Total IFRS 2 Costs 1.13% Discount on Property sale 0.57% Total property transaction facilitation costs 1.70% Total BEE Facilitation Costs (Public Scheme Successful) 4.70% The average BEE transaction s economic cost is around 2.7% for every 10%. This is normally for shorter term transactions (5 8 years). The total economic cost of this 14% transaction is 3.4% per 10%. This is slightly above the average, however, the longer tenure (15 years) compensates shareholders for this extra cost Of the total costs of 4.70%, 3% relate to the Foundation and the costs of the property transaction amount to 1.70% The market related rental escalation of the property portfolio was informally determined as 7% vs the 8% rental escalation as part of this transaction. The cost to the Barloworld shareholder is the present value of the difference in rentals paid over the market rental period, which amounts to R80 million Note 1: The amounts are based on a market cap of circa R24.97 billion Refer to other costs included with the transaction detail on slides 16, 17 and 18 Barloworld Limited BBBEE TRANSACTION

21 KHULA SIZWE BROAD-BASED BLACK ECONOMIC EMPOWERMENT TRANSACTION