SABMiller announces a proposed black economic empowerment transaction in South Africa
SABMiller announces that it proposes to enter into a broad-based black economic empowerment transaction in South Africa, which will involve an equity issue of approximately 10% of its South African subsidiary, The South African Breweries Limited ("SAB"), to a broad base of black participants (the "Transaction"), reflecting the group's long-standing commitment to socio-economic progress in South African society.
The Transaction will involve an equity interest of approximately 10% in SAB, valued at approximately US$750 million (R6 billion).
Participants will include SAB's employees; black-owned licensed liquor retailers and liquor licence applicants, as well as black-owned customers of ABI, the soft drinks division of SAB; and the broader South African community through an SAB foundation.
The Transaction will not require any external bank funding, and will require only a small cash investment by licensed liquor retailers, liquor licence applicants and customers of ABI; meaningful cash dividends are expected to be paid to participants from the first year.
At the end of the ten year transaction period, participants will exchange their shareholdings in SAB for shares in SABMiller. The economic cost of the Transaction to SABMiller, based on SABMiller's current assumptions and on market conditions as at Friday, 26 June 2009, is calculated at approximately US$220 million (R1.8 billion).
The Transaction will materially enhance SAB's compliance with the South African Government's Codes of Good Practice on Black Economic Empowerment and, in addition, seeks to support the normalisation of the South African liquor industry by supporting liquor licensing in South Africa.
By seeking to promote sustainable economic growth and social development in South Africa, the Transaction will align the interests of the group's South African stakeholders with SABMiller's shareholders, and will maximise long term shareholder value.
Graham Mackay, Chief Executive of SABMiller plc, commented:
"We have structured this transaction to maximise benefits for all our stakeholders and to deliver genuine broad-based black economic empowerment.
"There are three innovative and distinctive features of this transaction. Firstly, the transaction places no reliance on external bank funding, and requires only a relatively small and hence affordable cash investment from retail participants. Secondly, a meaningful dividend stream is expected to be paid to all participants for the whole of the ten-year transaction period, thereby delivering a significant economic benefit from the first year. Thirdly, the transaction aims to benefit the stakeholders who have made a real contribution to SAB's success as well as the broader South African community through the SAB Foundation."
Norman Adami, Managing Director of SAB, commented:
"We were determined to design a transaction that would deliver truly broad-based and tangible benefits, and we believe this transaction will do that from the beginning. This deal is good for South Africa and good for SAB."
SABMiller believes that broad-based black economic empowerment is a key requirement for the promotion of sustainable economic growth and social development in South Africa. Further, the South African government has promulgated the country's Codes of Good Practice on Black Economic Empowerment (the "Codes") as a means of reducing the effects of entrenched inequalities and improving the participation of previously disadvantaged people in effective economic activity.
In line with SAB's empowerment objectives, the Transaction is therefore designed to increase black participation in SAB by providing long term economic benefits to a broad range of black South Africans. The Transaction will result in the issue, in aggregate, of an estimated 10% equity shareholding in SAB, post issuance, to three groups, comprising employees ("Employees"); licensed liquor retailers, liquor licence applicants and customers of ABI, the soft drinks division of SAB ("Retailers"); and the broader South African community through the creation of an SAB foundation (the "SAB Foundation").
SABMiller believes that the Transaction, through the inclusion of these participant groups as shareholders, will facilitate the closer alignment of SAB's interests with its many stakeholders. Through the Transaction, SAB seeks to support the licensing process in South Africa and believes that there are considerable socio-economic benefits to be derived from a normalised and regulated industry in which liquor retailers, the vast majority of whom are currently unlicensed, are formally incorporated into the economy and liquor industry.
The Transaction will also make a material contribution towards achieving SAB's committed objective of attaining Level Four Contributor status on the basis of the scorecard contained in the Codes. Based on current assumptions, the Transaction will constitute an effective 16% broad-based black economic empowerment ownership transaction in terms of the Codes, after adjusting for mandated investments.
The ultimate size of the Transaction may change, depending on, amongst other things, financial and market conditions at the time of implementation, and the finalisation of beneficiary participation. The precise terms of the Transaction are expected to be finalised after the release, in November 2009, of SABMiller's interim results for the six months ending 30 September 2009 and, subject to SABMiller shareholder approval, the Transaction is expected to be implemented in the first half of 2010.
The Transaction is expected to be implemented through the creation of three separate investment entities (an Employee trust, a Retailer entity and the SAB Foundation), which will each subscribe for new separate classes of ordinary shares in SAB (the "SAB Shares"). The three investment entities will, in aggregate, hold approximately 10% of SAB, post issuance, over the transaction period of ten years. This equates to a value of approximately US$750 million (approximately R6 billion at the exchange rate as at Friday, 26 June 2009). The Transaction will be apportioned in the ratio of approximately 40:40:20 between Employees, Retailers and the SAB Foundation.
The three investment entities will hold the interests of the participants in SAB, and participants will, from inception, have the voting and economic rights associated with the respective investment entities' interests in SAB. Cash dividends are expected to be paid to all participants on their SAB Shares from the first year.
Participating Retailers will be required to make a relatively small cash investment as part of the subscription for their SAB Shares. This cash investment will be based on a sliding scale relative to the value of the allocation subscribed for. Participating Employees and beneficiaries of the SAB Foundation will not be required to make any cash or other investment toward their respective participations.
The Transaction, as currently envisaged, will not require any cash funding, whether from SABMiller or an external bank, apart from the small cash investment required from participating Retailers.
Benefits delivered to participants
Participants will receive economic benefits in two forms: a dividend on their SAB Shares from the first year, and SABMiller plc shares at the end of the Transaction period.
The size of the dividend on the SAB Shares that is likely to be paid to participants annually, although dependent on SAB's operational performance and capital requirements, is expected to be meaningful.
At the end of the ten-year transaction period, the SAB Shares will be re-purchased by SABMiller and, in return, participants will receive shares in SABMiller plc which, broadly, will have a value linked, inter alia, to the operating performance of SAB. The value of the SABMiller plc shares received will be calculated by taking into account the difference between:
the initial value of the SAB Shares (after indexing that value by reference to an interest rate linked, and at a discount, to the South African prime interest rate during the transaction period, and offsetting against that indexed value the difference between the dividends which would have been paid on SAB ordinary shares, had SAB pursued a 100% dividend policy during the transaction period, and the actual dividends paid on the SAB Shares); and
the actual value of the SAB Shares at the end of the ten year period.
The benefits to participants at the end of the transaction period will, therefore, reflect the performance of SAB in South Africa during the next ten years.
To ensure transparency and consistency throughout the transaction period, the value of SAB for the purposes of the Transaction will be calculated using the implied trading EV/EBITA (enterprise value to earnings before interest, tax and amortisation) multiple of SABMiller.
Further details on the structure will be disclosed when the detailed terms announcement is made in due course.
IMPACT ON SABMILLER
The transaction value is estimated to be approximately US$750 million (R6 billion). However, as the value ultimately delivered to participants will depend upon, inter alia, the increase in value of the SAB Shares, the economic cost of the Transaction to the SABMiller group (based on SABMiller's current assumptions and on market conditions as at Friday, 26 June 2009 and applying the option valuation methodology that is common practice for transactions of this nature) is calculated at approximately US$220 million (R1.8 billion).
The Transaction is expected to become effective in the financial year beginning on 1 April 2010, and as such will not impact the group's earnings for the current financial year. Under International Financial Reporting Standard 2 or IFRS 2, the Transaction will result in a share-based payment expense being reflected in the income statement of SABMiller over the transaction period. This non-cash expense would be excluded for the purposes of calculating adjusted earnings.
Full details of the financial effects on SABMiller will be disclosed when the detailed terms announcement is made in due course.
PROPOSED BROAD-BASED BLACK ECONOMIC EMPOWERMENT("BBBEE") PARTICIPANTS
The inclusion of employees in the Transaction is intended to create broad-based ownership in SAB and to spread a significant portion of the benefits of the Transaction among SAB's employees. The sustainability and growth prospects of SAB will be enhanced by improving SAB's ability to attract and retain employees, aligning the interests of employees and shareholders and recognising and rewarding employees who have enabled the success of SAB.
The employee offer will include all black permanent employees of SAB, its subsidiaries and the SABMiller group who are permanently resident in South Africa. It will also include those permanent white employees who are not normally eligible for participation in the SABMiller group share incentive plans.
The Employee trust will hold the interest of participating employees in the issued share capital of SAB over the Transaction period of ten years. The participating employees will, from inception, have voting rights, which will be exercised on their behalf and at their direction by the trustees of the Employee trust, and will have economic rights associated with the Employee trust's interests in the SAB Shares.
An allocation committee will determine the extent of the participation rights to be allocated to participating employees, once the full terms of the Transaction have been finalised.
SAB believes that participation by retailers and liquor licence applicants will create genuine broad-based empowerment, by improving the social well-being and sustainability of retailers, and in supporting the normalisation and regulation of the South African liquor industry.
It is proposed that there will be the following categories of retailer categories eligible to participate in the Transaction:
liquor retailers with a valid form of licence;
applicants or legal entities who can provide evidence that a liquor licence application has been lodged; and
customers of ABI, the soft drinks division of SAB.
Participants will be required to be a qualifying black person or a greater than 51% black-owned entity as defined in terms of the Codes, in order to participate in the offer. Further details of qualifying criteria will be elaborated upon when the detailed terms announcement is made in due course.
The Retailer investment entity will hold the interests of participating liquor retailers, licence applicants and ABI customers in SAB Shares, for the transaction period of ten years. The participating Retailers will, from inception, have voting rights, which will be exercised on their behalf and at their direction, by the directors of the investment entity, and will have economic rights associated with the investment entity's interests in the SAB Shares.
The Retailer offer will be preceded by an extensive communication campaign, aimed at informing prospective participants of what they need to do, in order to become eligible for the Transaction.
The primary focus of the SAB Foundation will be to engage in community initiatives that provide benefits to historically disadvantaged South Africans. Through the board of trustees, and its independent chairman, the SAB Foundation will aim to distribute the benefits of the Transaction to a wider group of beneficiaries, and oversee the creation and maintenance of a visible, sustainable fund of a meaningful size, that is able to start operating within the first year of the Transaction being finalised. The names of the trustees of the SAB Foundation will be announced in due course.
The SAB Foundation will primarily focus on supporting entrepreneurship development as SAB believes this will deliver broader economic benefits for South Africa. It will target historically disadvantaged people with a priority on women and the youth, particularly in rural areas.
The SAB Foundation will continue in existence indefinitely, not just for the period of the Transaction, to become a lasting contributor to community development.
PROCESS AND TIMELINE
It is expected that the final size and structure of the Transaction will be determined following the release, in November 2009, of SABMiller's interim results for the six months ending 30 September 2009. A further announcement will then be made setting out full details of the Transaction.
The detailed terms announcement is expected to be followed by the conclusion of all relevant legal agreements, and the obtaining of all requisite regulatory approvals. A meeting of the shareholders of SABMiller plc is then expected to be held in the first quarter of 2010, to approve the Transaction. Subject to shareholder approval, it is expected that the Retailer offer will be launched, and the allocations in respect of all three categories of participants will be finalised, in the first half of 2010.
SABMiller is being advised in connection with the Transaction by Standard Bank as Investment Bank, by Bowman Gilfillan (South Africa) and Lovells (UK) as legal advisors, and by J.P. Morgan Equities Limited as sponsor.
About SABMiller plc
SABMiller is one of the world's largest brewers with brewing interests and distribution agreements across six continents. The group`s wide portfolio of brands includes premium international beers such as Grolsch, Miller Genuine Draft, Peroni Nastro Azzurro and Pilsner Urquell, as well as market-leading local brands such as Aguila, Castle, Miller Lite, Snow and Tyskie. SABMiller is also one of the largest bottlers of Coca-Cola products in the world.
In the year ended 31 March 2009, the group reported US$3,405 million in adjusted pre-tax profit and group revenue of US$25,302 million. SABMiller is listed on the London and Johannesburg stock exchanges.
This announcement is available on the company website and high resolution images are available for the media to view and download free of charge from the Image Library in the News and media section of www.sabmiller.com.
About The South African Breweries Limited ("SAB")
SAB was established in 1895 and has in the region of 9,000 permanent employees, including its soft drinks division, ABI. It owns seven breweries with a brewing capacity of some 31 million hectolitres. Total beer volumes during the financial year ended 31 March 2009 reached 25.9 million hectolitres. ABI is the largest producer and distributor of Coca-Cola brands in southern Africa. With five manufacturing plants in South Africa, ABI accounts for approximately 60% of Coca-Cola's sales in South Africa, and total sales volumes of soft drinks in the year ended 31 March 2009 (including sparkling soft drinks, fruit juices and water) were 17.3 million hectolitres. SAB is the South African subsidiary of SABMiller plc. For more information, visit the company's website: www.sablimited.co.za
SABMILLER'S HISTORY OF BBBEE IN SOUTH AFRICA
SABMiller has been actively engaged in the advancement of black economic empowerment initiatives in South Africa since the 1970's. The group has progressed a number of initiatives in all spheres of black economic empowerment, including: ownership, through the creation of Tsogo Sun Holdings in a landmark black economic empowerment ownership transaction in the hotel and gaming industry; enterprise development, through the establishment of a number of benchmark programmes such as SAB's Owner-Driver programme, the SAB KickStart Awards (funding and mentoring of aspirant businesses), the Taung barley farmers programme, the establishment of joint ventures with black partners to supply certain key raw materials; SAB's Mahlasedi Taverner Training programme; and human resources development, through the implementation of employment equity practices.
In addition, SAB has placed significant focus on procurement equity throughout its value chain. The company embarked an aggressive black economic empowerment campaign during the 1980s in an effort to place a considerable portion of its business with black suppliers. Today, in its procurement, outsourcing and contract-awarding activities, SAB favours those companies who have demonstrated a tangible and deliverable commitment to black economic empowerment principles.
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HISTORY OF BROAD-BASED BLACK ECONOMIC EMPOWERMENT ("BBBEE")
OVERVIEW OF THE CODES AND SCORECARD PROCESS
Background to the Codes
On 7 January 2004, the South African Government passed into law the Broad-Based Black Economic Empowerment Act, No. 53 of 2003 (the "Act"). The Act provides for the Codes for the practical implementation of the Act and these became operational as of the date of publication in the Government Gazette, No. 29617, on 9 February 2007.
The Act states that every organ of state and public entity must take into account the Codes when: determining qualification criteria for issuing of licences; developing and implementing a preferential procurement policy; determining qualifications for sale of state-owned enterprises; and developing criteria for entering into partnerships with the private sector.
Adjustments for "Mandated Investments"
Mandated Investments may be described as investments made through any third party which is regulated by legislation (for example, a pension fund), on behalf of the actual investor. When determining the level of equity ownership of an enterprise in terms of the Codes, up to 40% of the total ownership rights of that enterprise that is attributable to these Mandated Investments may be excluded. This exclusion is in recognition of the fact that some of the beneficiaries of Mandated Investments may be historically disadvantaged people or groups and this proportion may be administratively burdensome to verify.
The generic scorecard
A key component of the Codes is the balanced scorecard which measures a company's empowerment status in 7 core areas. Each area is allocated a weighting and compliance target, and the overall score determines the rating of the entity being measured. 20 points of the scorecard are attributed to equity ownership of the entity by historically disadvantaged people or groups.
1. Equity ownership
Human Resources Development
2. Management control
4. Skills Development
5. Preferential Procurement
6. Enterprise Development
7. Socio-economic Development
The BBBEE status of an enterprise is based on the score achieved using the generic scorecard (below). Recognition is expressed in terms of 8 levels and Level Four is recognised as to 100%. For example, a company that scores 70 points is classified as a level four contributor. Thus, in measuring Code 500 (Preferential Procurement), any procurement from a level four contributor will be regarded as 100% BBBEE spend.
Qualification (generic scorecard points)
Level 1 contributor
Level 2 contributor
> 85 but < 100
Level 3 contributor
> 75 but < 85
Level 4 contributor
> 65 but < 75
Level 5 contributor
> 55 but < 65
Level 6 contributor
> 45 but < 55
Level 7 contributor
> 40 but < 45
Level 8 contributor
> 30 but < 40
< 30 points
The ratings achieved by businesses are important as Government has set specific targets for Government departments and organs of state in relation to providing business to black empowered organisations. In order to enhance their scores, companies can also benefit by doing business with suppliers with a high BBBEE status, thereby earning points in the preferential procurement area and ultimately providing positive empowerment effects throughout the value chain.
In some industries, a minimum BBBEE score is a requirement for the issue or maintenance of an operating licence from a Government regulator. SAB is currently a level five contributor to BBBEE. SAB has committed to being at least a level four contributor by 2012, as part of its operating licence requirements.
This announcement does not constitute an offer to sell or issue or the solicitation of an offer to buy or acquire securities of SABMiller or any of its affiliates ("SABMiller Group") in any jurisdiction or an inducement to enter into investment activity.
This document includes "forward-looking statements". These statements may contain the words "anticipate", "believe", "intend", "estimate", "expect" and words of similar meaning. All statements other than statements of historical facts included in this announcement, including, without limitation, those regarding the SABMiller Group's financial position, business strategy, plans and objectives of management for future operations (including development plans and objectives relating to the SABMiller Group's products and services) are forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the SABMiller Group to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements are based on numerous assumptions regarding the SABMiller Group's present and future business strategies and the environment in which the SABMiller Group will operate in the future. These forward-looking statements speak only as at the date of this announcement. The SABMiller Group expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained in this announcement to reflect any change in the SABMiller Group's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Any information contained in this announcement on the price at which the SABMiller Group's securities have been bought or sold in the past, or on the yield on such securities, should not be relied upon as a guide to future performance.