JSE - JSE Limited / BESA - Joint Announcement By BESA And The JSE Relating To A
JSE - JSE Limited / BESA - Joint Announcement By BESA And The JSE Relating To A
December 10, 2008 at 5:23 AM EST
JSE JSE - JSE Limited / BESA - Joint Announcement By BESA And The JSE Relating To A Revised And Increased Offer And Withdrawal Of Cautionary Announcements BOND EXCHANGE OF SOUTH AFRICA LIMITED (Incorporated in the Republic of South Africa) (Registration number: 2007/034441/06) ("BESA") JSE LIMITED (Incorporated in the Republic of South Africa) (Registration number: 2005/022939/06) Share Code: JSE ISIN: ZAE000079711 ("JSE") JOINT ANNOUNCEMENT BY BESA AND THE JSE RELATING TO A REVISED AND INCREASED OFFER BY THE JSE TO ACQUIRE THE ENTIRE ISSUED SHARE CAPITAL OF BESA AND WITHDRAWAL OF CAUTIONARY ANNOUNCEMENTS 1. Introduction The JSE announced on SENS on Monday, 27 October 2008, its firm intention to make an offer for all the BESA ordinary shares in issue ("BESA Shares") ("the Firm Intention"). Further announcements by BESA and the JSE were released on SENS in which shareholders were advised that BESA and the JSE had entered into discussions in relation to the Firm Intention. BESA shareholders are now advised that: - the JSE has agreed to increase its original offer consideration from R90 per BESA Share to R125 per BESA Share ("the Offer Consideration"), reflecting a 39% upward adjustment; - after discussions with the BESA Board and the provision of certain information by the BESA Board to the JSE, the JSE has further agreed to amend the terms of such offer by making the Offer Consideration free from any downward price adjustment and subject only to the conditions precedent set out below. BESA and the JSE have in addition agreed to: - the rationale and benefits of the merger; and - the importance of initiating a broad ranging fixed income growth strategy to be led (once the merger is implemented) by the current chief executive officer of BESA ("CEO") to understand and respond to the needs of market participants, including a comprehensive review of the needs of market participants; and BESA has noted: - the JSE's commitment to retain BESA's fee structure without increase for two years; and - the JSE's undertaking to retain all BESA staff. 2. JSE offer to BESA shareholders to acquire all their BESA Shares ("the Offer") In the opinion of the JSE and BESA, the most effective way to implement the Offer is by way of a scheme of arrangement in terms of Section 311 of the Companies Act No 61, 1973, as amended ("the Companies Act") ("the Scheme"). The Scheme will be proposed by the JSE, between BESA and its shareholders ("the BESA Shareholders"), at a meeting ("Scheme Meeting") to be convened in terms of an order of the High Court of South Africa ("the Court") for which order BESA will shortly make application. Should the Scheme be implemented, BESA will become a wholly-owned subsidiary of the JSE and, insofar as required, the BESA articles will be amended to comply with the JSE Listings Requirements. In the event that the Scheme does not become operative, the JSE will be obliged forthwith to make an irrevocable substitute offer to BESA Shareholders to purchase all their BESA Shares for the Offer Consideration ("Substitute Offer"). 3. Rationale and benefits Background to the Offer Both the JSE and BESA have made significant advances in their respective markets, deepening liquidity and product lines and strengthening market structure for the benefit of various market participants. There have been occasions where the JSE and BESA have considered whether there were opportunities for a closer relationship which would extend the offering for market users in South Africa. BESA's recent demutualisation, successful rights issue, the injection of fresh capital and the support for BESA's expansionary strategies have continued to strengthen BESA's established platform in its market. Following discussions with various shareholders to explore their views on a closer relationship between the JSE and BESA, a number of shareholders indicated that the JSE and BESA should explore a merger for the benefit of South African financial markets. In light of the above, the JSE informed the chairperson and the BESA CEO on Friday 24 October 2008 of its firm intention to make an offer to the BESA Shareholders to acquire the entire issued ordinary share capital of BESA. Since the release of the announcement of the Firm Intention, and following extensive discussions between the JSE and BESA, the BESA Board has agreed to support the JSE's proposed merger of the two exchanges on the basis of the envisaged benefits for the market, feedback and support received from shareholders, and the now revised and increased Offer Consideration. Vision and benefits The world of capital markets is fast changing. In response, exchanges need to innovate continually to ensure they remain relevant to issuers and investors alike. In order to have a well-performing modern economy it is a prerequisite to have a sound and strong financial system. Strong capital markets are an essential part of such a financial system, to allow participants to mobilise savings, allocate capital and manage risk. It is therefore extremely important from a national interest and market participant perspective that there are deep markets in debt and equity products and that, as far as possible, the trading, clearing and settlement of South African financial instruments happens in a globally competitive manner. This enables participants and the local economy to derive the benefits of a vibrant financial market. Exchanges such as the JSE and BESA face strong competition for the trade in South African financial instruments from both international exchanges and the over-the-counter ("OTC") market (local and international). Being a global market, a large proportion of trade in spot instruments takes place offshore, and the on-exchange trade in derivative interest rate instruments in South Africa is low in comparison to international exchanges. Certain strategic initiatives of BESA address this and in combination with the JSE, will ensure that a globally competitive offering is created as a result of the formation of the combined JSE/BESA group. As part of continuing to offer leading-edge products, BESA has recently successfully completed a capital raising exercise confirming BESA's strategy and prospects. At that time BESA confirmed its current (and continued) vision to: - improve the profitability of BESA's existing bond business through the upgrading of BESA's BTB matching platform, restructuring BESA's transaction processing fees, and growing data revenue across BESA's markets; - develop an interest rate derivatives market by establishing BondClear Limited as a central counterparty to clear interest rate derivatives; and - develop alternative trading systems to support additional products such as binary options (Justrade.com). Like BESA, the JSE also supports the need to grow South Africa's interest rate market significantly and to promote the development of the interest rate derivatives market. BESA and the JSE are of the view that South Africa's interest rate market will be well served through the merger of the two exchanges, which will enable the merged group to leverage the best of what each has to offer, while at the same time better utilising infrastructure to achieve economies of scale. This will enable the JSE/BESA group to realise the following benefits for issuers, investors and market participants: - variety of products and increased liquidity: the combination of spot and derivative products in a single venue where users can access both types of products is expected to increase the liquidity in both spot and derivative markets and drive increased volumes of on-exchange interest rate derivatives to a level more commensurate with international norms; - improved, common risk-management processes: risk management and transparency are critical to ensuring confidence in any capital market. The merged group will work together to introduce holistic risk management, clearing and settlement mechanisms for all products traded on-exchange in South Africa and therefore enable best of breed mechanisms to be introduced into the South African market. An integrated entity will be able to achieve this more quickly than one acting independently; - enhanced market model funded from existing capital: the merged group will be strongly positioned to fund the development of strategies for the enhancement of the local interest rate market from existing capital using the existing expertise from both BESA and the JSE to develop such strategies in collaboration with market participants; and - reduction in costs through economies of scale: the integration of BESA and the JSE will allow for the consolidation of the JSE's and BESA's infrastructure as well as enabling the more efficient use of the JSE's and BESA's overheads resulting in expected cost savings for users and the market as a whole. 4. Terms of the Offer 4.1 The Offer Consideration under the Scheme If the Scheme becomes unconditional and is implemented, each BESA Shareholder will, within five business days of the fulfilment of the conditions precedent, receive the Offer Consideration in cash for every BESA Share held on the consideration record date of the Scheme. The Offer Consideration: - is a 31% premium to the consolidated net asset value of BESA of R183 675 404 (including the BESA Guarantee Fund) at 31 December 2007 taking into account the recent capital raising of R80.8m, reflecting the fact that the JSE, through the Scheme, will gain control of BESA in its entirety; - reflects an increase of 39% on the initial conditional JSE offer of R90 per BESA Share; and - is not subject to any downward adjustment. 4.2 Conditions precedent under the Scheme The Scheme is subject to the fulfilment of the following conditions precedent (the deadlines for all or any of which may be extended before the relevant fulfilment date by written agreement between the JSE and BESA): - the Scheme being approved at the Scheme Meeting, or any adjournment thereof, by a majority representing not less than three fourths of the votes exercisable by the BESA Shareholders present and voting, either in person or by proxy; - by no later than 30 June 2009, the Court sanctioning the Scheme; - by no later than 30 June 2009, a certified copy of the Order of Court sanctioning the Scheme being lodged with, and registered by, the Registrar of Companies; and - by no later than 30 June 2009, all necessary regulatory approvals or consents to effect the Scheme having been granted, including but not limited to, approvals and consents from the Financial Services Board, the Securities Regulation Panel ("the SRP"), the South African Reserve Bank and the South African competition authorities, provided that if any such approval is materially qualified or subject to material conditions, then the condition in this paragraph would only be deemed to be fulfilled if prior to 30 June 2009 the JSE agrees in writing to such qualification or condition. 4.3 Substitute Offer Should the Court for any reason refuse or fail to convene a Scheme Meeting or should the Scheme not become operative, the JSE will be obliged forthwith to make the Substitute Offer for a cash consideration of R125 per BESA Share. The Substitute Offer will be conditional on it being accepted by BESA Shareholders in respect of at least 50% plus one of all the BESA Shares in issue, and all necessary regulatory approvals or consents as relate to the Scheme will apply mutatis mutandis to the Substitute Offer. If the Substitute Offer is made, shareholders will be advised accordingly on SENS and in the press, to the extent necessary. 5. Support for the Offer by BESA Shareholders BESA Shareholders representing approximately 63% of the voting rights of all BESA Shares have irrevocably undertaken to vote in favour of the Scheme and to accept the Substitute Offer, if made. 6. JSE holdings of shares in BESA The JSE has confirmed that neither the JSE nor any of its directors directly hold or control any BESA Shares. 7. Confirmation of financial resources First National Bank of South Africa Limited has furnished confirmation to the satisfaction of the SRP that the JSE has sufficient cash resources available to satisfy full acceptance of the Offer. 8. Financial effects of the Scheme The unaudited pro forma financial effects of the Scheme set out below are based on the audited annual financial statements for the JSE Limited for the twelve months ended 31 December 2007 and the last published results of BESA for the year ended 31 December 2007, adjusted where necessary for the BESA capital- raising subsequent to its 2007 year end. The latest interim results of the JSE have not been used, as the BESA interim results are not publicly available. If the BESA interim results become available, the pro forma effects will be calculated and released on SENS if materially different from the numbers disclosed below. The unaudited pro forma financial effects of the JSE are the responsibility of the JSE Board, and have been prepared for illustrative purposes only to assist shareholders of the JSE in assessing the effects of the Scheme on earnings, headline earnings, net asset value and tangible net asset value per share. Due to their nature, the unaudited pro forma financial effects may not give a true reflection of the financial effects of the Scheme. 8.1 Financial effects on JSE shareholders Before the After the Change acquisition (1) acquisition (2,5) (%) (cents) (cents) Earnings per share 321.3 293.3(3,4) (8.7%) Headline earnings per 292.1 264.1(4) (9.6%) share Net asset value per 1 302.2 1 296.3 (0.5%) share Tangible net asset 1 102.8 1 029.3 (6.7%) value per share Number of shares in 85 140 050 85 140 050 - issue Weighted average 85 038 891 85 038 891 - number of shares in issue Notes: Extracted from the audited annual financial statements for the JSE Limited for the twelve months ended 31 December 2007. It should be noted that net asset value per share and net tangible asset value per share do not form part of the audited financial statements. Balance sheet adjustments have been determined assuming that the acquisition occurred on 31 December 2007, while income statement adjustments were made assuming that the acquisition occurred on 1 January 2007. Income Statement Adjustments Includes 100% of the audited results of BESA for the twelve months ended 31 December 2007. It should be noted that BESA incurred an attributable loss of -R1,498,849 during this period. Goodwill is computed as the excess between the purchase consideration transferred and the net asset value of BESA. Due to the nature of this transaction, we are unable to quantify at this stage a formal purchase price allocation as required by IFRS 3, Business Combinations. Shareholders must be advised that some of the Goodwill might be allocated to an intangible asset which would be amortised over a five to ten year period which could have a negative income statement effect. Accounting for interest foregone, at a rate of 10%, on the cash utilised to fund the acquisition and the resultant tax impact. Balance Sheet Adjustments The information in BESA's Rights Issue Circular has been used to compute the JSE's pro-forma Balance Sheet as at 31 December 2007. 9. BESA Board and employees Following the implementation of the Offer a member of the BESA Board will be offered a position on the JSE's Board in order to immediately facilitate the process of a closer strategic alignment between BESA and the JSE. The JSE acknowledges that BESA staff are critical to its operations and that they have important and growing roles within the combined JSE/BESA group. The JSE will retain all BESA staff in the integrated entity on terms and conditions no less favourable than they currently enjoy. The JSE has further confirmed that it is critical to retain the BESA operations team, with their unique skill set, so as to ensure that the market operations perform as stakeholders expect and thereby reduce any potential integration risk. The BESA Board has noted the long standing intention of its CEO, Garth Greubel, to emigrate. However, he has confirmed his availability and desire to assist with the integration of BESA into the merged JSE/BESA group until June 2009. BESA and the JSE recognise that he has an important role to play in ensuring that the collective views of market participants are reflected in the interest rate market strategy of the combined JSE/BESA group. As a result, upon the implementation of the transaction, he will be invited to join the JSE's executive committee, as head of the Interest Rate Division, and will chair the Interest Rate Advisory Committee ("Interest Rate Advisory Committee") that will be formed (see paragraph 11 below). The BESA Board thanks him for his leadership and vision in building BESA to its current position, and in so doing, making a valuable contribution to the market. The combined JSE/BESA group looks forward to his continued input. 10. Growing the fixed income market While the Offer is progressing through the various legal and regulatory steps necessary for implementation, BESA and the JSE will continue to operate as separate entities and fully pursue their usual business in the ordinary course. Once the necessary approvals have been obtained and the Offer is being implemented, the JSE will continue to provide the full range of BESA products and services in the merged group while the head of the Interest Rate Division of the combined entity (the current BESA CEO) leads the fixed income growth strategy, including a comprehensive review of the needs of market participants, referred to in paragraph 12 below together with the Head of Derivatives Trading of the JSE. 11. Interest Rate Advisory Committee Once the Offer has been implemented, the JSE will create an Interest Rate Advisory Committee to advise the combined JSE/BESA group on the development of the interest rate market. Advisory committees have well established roles within the JSE and the JSE relies heavily on them for guidance when facing difficult strategic decisions. The Interest Rate Advisory Committee will be broadly representative of the participants and stakeholders in the interest rate market. It will be chaired by the current BESA CEO and will have senior executive representatives from both the JSE and BESA to ensure that, as an integrated group, it finds solutions for growing South Africa's interest rate markets that best leverage the capabilities of both the JSE and BESA. 12. Fixed income growth strategy The JSE and BESA recognise that markets are evolving extremely quickly in the current economic environment. The JSE is therefore committed to continuing to operate the current BESA products and services while developing a fixed income growth strategy with full and proper market consultation. The following key focus areas will, once the Offer has been implemented, drive the development of this fixed income growth strategy: - product and services review: involving a broad-ranging and open-minded review of all the interest rate products and services either currently provided by BESA and Yield-X or which either of them are currently investigating. It is key that the merits of all of these products be discussed with market participants so that the combined entity can determine which products and services clients want; - market model review: BESA and the JSE, through Yield-X, currently deploy different trading and clearing models. The fixed income growth strategy will entail a full assessment of the current market models for trading, clearing and settlement with the identification of pressure points in the current models and with input from all market participants. This will allow an integrated JSE and BESA, to develop a superior, customised market model; and - infrastructure review: on completion of the market model review and the formulation of the overall fixed income strategy, a review of all the technology solutions available in the integrated group will be undertaken to determine the optimal technology infrastructure. As indicated, one of the key objectives of the proposed consolidation of the exchanges is to keep costs to users as low as possible. 13. BESA rules and membership 13.1 Initially, the existing BESA rules will not be affected (apart from possibly minor amendments necessitated by the integration (where applicable)). 13.2 Once the fixed income growth strategy discussed above has been agreed, it may, however, necessitate a complete - and again collaborative - review of all relevant rules relating to interest rate membership, trading, clearing and settlement to ensure that the rules are aligned to that strategy. 13.3 As part of the implementation of the fixed income growth strategy, the JSE/BESA group would start consolidating all interest rate members (BESA and Yield-X members) into one class over time. This would not necessarily mean that such members would automatically be granted rights to execute trades on any of the JSE's other markets because membership requirements of those markets are different due to the different risk management principles applied. Neither does it mean that the same capital adequacy requirements applied in one of the JSE's markets would automatically be applied to the others. Input from BESA and from the JSE's Director: Derivatives Trading would be required as to the best way to proceed with this process, particularly as to the best manner in which to promote greater access to and trade on all the markets. 14. JSE's undertaking as to costs The JSE commits, once the Offer has been implemented, to retain BESA's fee structure without increase for two years. The JSE will also investigate means of lowering those fees wherever possible. 15. Opinions and recommendations 15.1 Independent expert Ernst & Young Transaction Advisory Services Limited ("EY") has been appointed by the BESA Board as the independent expert to provide advice to the BESA Board on how the terms and conditions of the Offer affect all BESA Shareholders. EY has completed its review of the Offer and has advised that the terms and conditions are fair to shareholders of BESA. Their final opinion, after submission to the BESA Board, will be set out in the Scheme circular to BESA shareholders referred to below. 15.2 Board of directors of BESA The BESA Board has considered the terms and conditions of the Offer and the advice of EY and, in addition, has given extensive consideration to the views of BESA Shareholders, market participants and key stakeholders. The BESA Board is of the view that the Offer can be considered as fair consideration to BESA Shareholders for their BESA Shares and notes that it is within the value range indicated by EY. The BESA Board is also of the view that any support for the Offer must be considered in light of the requirements for efficient capital markets in South Africa. The BESA Board has confirmed with the JSE that, as reflected in this announcement, the intention is that key elements of the BESA businesses and structure will remain intact and that the views and considerations of all market participants will be canvassed in order to finalise the fixed income growth strategy for the combined entity. Taking into account, inter alia:- - the increase in the Offer Consideration the EY opinion; - the views of, and the level of support shown by, BESA Shareholders for the Offer; - the BESA Board's firm view on market structures; and - the commitment of the JSE to consider and implement key structural issues as set out above, the BESA Board recommends that BESA Shareholders vote in favour of the Scheme or accept the Substitute Offer, if made. BESA Shareholders should note that the Scheme and the Substitute Offer both require regulatory and competition authority approval prior to the Offer being implemented, which approval may or may not be received in accordance with the relevant legislation. 16. Further announcements, circular and withdrawal of cautionary announcements The Scheme will be proposed at the Scheme Meeting and a circular regarding the Scheme and incorporating the Substitute Offer, will be posted to BESA Shareholders. Upon the request of the JSE and BESA, the SRP has extended the period within which the circular has to be posted to BESA Shareholders to on or about 20 January 2009. This extension was necessitated by practical difficulties caused by the approaching holiday season. A further joint announcement containing the salient dates will be released on SENS and published in the press at the appropriate time, to the extent necessary. Shareholders of the JSE and BESA are advised that their respective cautionary announcements have been withdrawn. Johannesburg 10 December 2008 Advisor to BESA Absa Capital Legal advisor to BESA Edward Nathan Sonnenbergs Inc. Independent advisor to BESA Ernst and Young Communications advisor to BESA Arcay Communications Legal advisor to JSE Webber Wentzel Sponsor to JSE RAND MERCHANT BANK (A division of FirstRand Bank Limited) Communications advisor to JSE FD Beachhead Date: 10/12/2008 07:30:02 Produced by the JSE SENS Department.