SPAR South Africa Subscription of Stake

Published on: 2014-08-13
SPAR South Africa Subscription of Stake in BWG Group
SPAR shareholders are advised that the company has entered into an agreement with the BWG group of companies which comprises the following operating companies, BWG Foods Ltd. ("BWG Foods"), Triode Newhill Finance Ltd. ("Triode Newhill") and Appelby Westward Group Ltd. ("Appelby Westward") (collectively the "BWG Group"), and its founders and shareholders, namely, Leo Crawford, John O"Donnell, John Clohisey ("Founding Partners") and senior management of the BWG Group (collectively the "Minority Shareholders"). 

The activities of the three operating companies that make up the BWG Group are as follows: 
* BWG Foods is a wholesaler and distributor of grocery products to the retailing and catering sectors in Ireland 
* Triode Newhill is a property management company; and 
* Appelby Westward is the trading entity in South West England that trades under the SPAR brand in that region. 

In terms of the agreement, SPAR will subscribe for 80% of TIL JV Ltd."s ("TIL JV") issued share capital, the holding company of the BWG Group, for a Purchase Consideration of EUR55 million (R799 million at a R:EUR exchange rate of R14.5) (the "Transaction"). 

The shareholders" agreement, entered into between SPAR and the Minority Shareholders, provides that upon issue of a compulsory delivery notice, the Minority Shareholders are required to sell to SPAR their 20% shareholding in TIL JV"s issued share capital over a three year period, five years from the effective date of the Transaction ("Acquisition of Minority Interests"). 

Nature of Business 

The BWG Group, whose turnover amounted to EUR1.2 billion in 2013, has a presence throughout Ireland and South West England, operating through its three wholly-owned operating companies, namely BWG Foods, Triode Newhill and Appleby Westward. The BWG Group owns the SPAR brand in Ireland as well as several other retail brands. It has consistently been a leading player in the Irish grocery trade / convenience retail sector for the last 50 years and has built a substantial geographic presence throughout Ireland and South West England, with over 1 100 stores of which c.850 are located in Ireland. These stores trade under the SPAR, Eurospar, Mace and XL brands, ranging from large format supermarkets to forecourt and neighbourhood convenience stores. The BWG Group also owns and operates a central distribution centre, a cash and carry operation with 23 Value Centre Cash & Carry outlets and through BWG Foodservice also supplies fresh and ambient products to the hospitality and catering sectors. 

Rationale for The Transaction 

The Transaction represents a unique opportunity for SPAR to acquire a synergistic business that furthers various strategic objectives and will add value to the company as a whole. These synergies will stem from a similar skill and market focus as both companies operate in the food retail, voluntary trading model and wholesale market segments, and the opportunity to share knowledge, technology, and product and industry best practice. 

The BWG Group will continue to be managed by the Founding Partners who have signed service contracts (ranging from five to eight years), ensuring continuity within the businesses. As the BWG Group has a strong operational management team, SPAR does not anticipate relocating any of its South African executives. SPAR will have a controlling interest on the board of directors of TIL JV and will collaborate with the operational team in Ireland, providing strategic input to unlock the key strategic benefits of the Transaction including: 

* SPAR and the BWG Group have a long standing professional association, having both been members of SPAR International for more than 50 years. As a result, SPAR has a solid understanding of the BWG Group"s business model, operating culture with SPAR International, as well as the SPAR retail model and SPAR brands being at the foundation of both businesses. 

* SPAR has made significant investments in its warehousing, logistics and distribution systems which are core to its operating structure and have enhanced internal efficiencies. SPAR will evaluate the feasibility of rolling out similar initiatives within the BWG Group to broaden its supply chain base internally. Underpinned by SPAR"s success in migrating a number of its independent retailers in South Africa to larger store formats, including SUPERSPAR, the company foresees opportunities in the longer term to provide strategic guidance to the BWG Group to migrate its offering from the convenience retail segment into larger store formats. 

* The BWG Group plans to roll out a five-year internally funded capital investment programme to expand its wholesale and retail operations in Ireland and in South West England. 

* SPAR and the BWG Group should both benefit from sharing consumer insights in South Africa, Ireland and England, with the goal of identifying innovations to service their customers" changing needs and sustain their market leading position. 

* Lastly, the Transaction will enable SPAR to establish an attractive, well-positioned retail sector platform for future expansion opportunities. 

Furthermore, the BWG Group"s complementary operations in Ireland and South West England will ensure a more geographically diversified revenue stream, bolstering SPAR"s offering in the food retail and wholesale sector, and allowing SPAR to enhance its scale and critical mass, whilst also providing foreign currency diversification benefits. In the short term, the economy of Ireland is showing strong signs of recovery with positive longer term growth fundamentals. 

Consideration 
The purchase consideration for the Transaction is a cash payment of EUR55 million (R799 million at a R:EUR exchange rate of R14.5) ("Purchase Consideration") paid by SPAR to TIL JV. TIL JV will use the cash proceeds to, inter alia, settle some of the existing BWG Group bank debt, cancel the outstanding share warrants held by certain BWG Group"s banks and provide funds for investment in the business. On the strength of its ungeared balance sheet, SPAR entered into a Rand- denominated short-term loan to fund the Purchase Consideration. 

After the Transaction, SPAR will consolidate EUR130.6 million of debt attributable to the BWG Group, in addition to the Purchase Consideration. 

The value of the Acquisition of Minority Interests will be based on the normalised profit after tax achieved by the BWG Group in the financial years ending 31 December 2019, 2020 and 2022 attributable to the Minority Shareholders" 20% equity interest in TIL JV, multiplied by a price earnings ratio of 11.7x. The Acquisition of Minority Interests will be effected over a three year period. 

Financial Effects 
Before and After the Transaction and Acquisition of Minority Interests 
*Basic EPS (cents) -- 372.1; 2,041.9 
*Diluted basic EPS (cents) 348.9; 1 914.4 
*HEPS (cents) -- 372.0; 405.4 
*Diluted HEPS (cents) -- 348.8; 380.1 
*Normalised HEPS (cents) -- 372.0; 397.2 
*NAVPS (cents) -- 1 876.9; 2 071.8 
*NTAVPS (cents) -- 1 647.2; 241.9 
*Weighted average number of shares in issue (net of treasury shares) (million) 172.8; 172.8 
*Fully diluted weighted average number of shares in issue (net of treasury shares) (million) 184.3; 184.3 

Categorisation of the Transaction and Acquisition of Minority Interests
The Transaction and Acquisition of Minority Interests has been categorised as a Category 2 transaction in terms of section 9.5(a) of the Listings Requirements. 

Withdrawal of Cautionary Announcement 
With reference to the cautionary announcement issued on Friday, 1 August 2014, shareholders are hereby advised that caution is no longer required when dealing in the company"s securities.

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