Tuesday 08 April 2014

The acquisition of black economic empowerment (“BEE”) interests in Grindrod subsidiaries and new BEE transaction

1. Introduction

Grindrod shareholders are referred to the announcement released on SENS on 28 March 2014 and to the circular issued to Grindrod shareholders on 28 March 2014 (“Circular”), relating, inter alia, the proposed equity capital raising that will lead to the total issue of Grindrod shares of up to R4.0 billion, with nett cash proceeds to Grindrod of up to R3.0 billion (the “Equity Capital Raising”), the acquisition of BEE interests in Grindrod subsidiaries and a new BEE transaction at listed Company level (“New BEE Transaction”).

The Equity Capital Raising is intended to be implemented through a combination of an accelerated bookbuild offering to qualifying investors (“Bookbuild Placement”) and a specific issue of shares to a consortium of black strategic investors (“Consortium Placement”).

2. Terms of the Acquisition

Grindrod has agreed with its BEE partners, Calulo Investments Proprietary Limited (“Calulo”), and Solethu Investments Proprietary Limited (“Solethu”), to acquire their interests in certain operating subsidiaries of Grindrod for a total cash consideration of R560 million (“Acquisition”).

Grindrod has agreed with Calulo to acquire its direct and/or indirect interests in the following operating subsidiaries of Grindrod for a total consideration of R360 million:

• Unicorn Calulo Bunker Services Proprietary Limited operating three high specification bunkering barges;
• Unicorn Calulo Shipping Services Proprietary Limited providing the South African oil industry with tanker shipping solutions;
• Sturrock Grindrod Maritime Holdings Proprietary Limited, previously known as JFM Sturrock Holdings Proprietary Limited, providing ships agency, customs clearing, international freight forwarding, and logistics services in South Africa and internationally; and
• Grindrod (South Africa) Proprietary Limited operating in the South African freight industry.

Grindrod has agreed with Solethu and associated parties to acquire their direct and/or indirect interests in the following operating subsidiaries of Grindrod for a total consideration of R200 million:

• RRL Grindrod Proprietary Limited providing rail and logistics solutions;
• RRL Grindrod Locomotives Proprietary Limited specialising in the design, customising and building of new locomotives in South Africa;
• RACEC Group Limited, in the process of being renamed to Grindrod Rail Construction Proprietary Limited, specialising in the manufacturing and refurbishing of locomotives and wagons, locomotive leasing and maintenance, rail operations, track maintenance and signalling contracts; and
• Grindrod Corridor Management Proprietary Limited specialising in value added interface services for stakeholders of rail supply chains by facilitating efficiencies from pit to port.

Calulo and Solethu will reinvest a material portion of the Acquisition consideration proceeds in the New BEE Transaction. The effective date of the Acquisition is expected to be not later than 30 June 2014.

2.1 Rationale for the Acquisition

There are attractive inherent growth prospects for the businesses and the Acquisition represents an opportunity for Grindrod to acquire 100% of the earnings at fair value. The Acquisition will create greater alignment between Grindrod’s subsidiary companies and the larger Group, eliminate any conflicts of interests which might exist and enable more efficient management of the businesses while ensuring that they are appropriately capitalised through leverage of the Group’s balance sheet.

2.2 Small related party transaction

In terms of the JSE Limited Listings Requirements, the Acquisition is a small related party transaction for Grindrod. As such, BDO Corporate Finance (“BDO”) has been appointed to provide the Board of Grindrod with written confirmation, in its capacity as independent professional expert, confirming that the Acquisition is fair to Grindrod shareholders.

BDO’s opinion, the content of which is still subject to JSE approval, will be available for inspection at the registered office of Grindrod.

2.3 Conditions precedent to the Acquisition

The Acquisition is subject to the fulfilment of the following conditions precedent:

• signature of all share repurchase, share subscription and sale agreements by the required parties; and
• the fairness opinion as detailed in paragraph 2.2 above confirming that the Acquisition is fair to Grindrod shareholders.

3. New BEE Transaction

Grindrod has entered into a binding memorandum of understanding with Brimstone Investment Corporation Limited (“Brimstone”), Calulo, Calulo Newco Proprietary Limited (“Calulo Newco”) and Solethu, relating to the establishment of a consortium special purpose vehicle (the “Consortium SPV”) for the purpose of concluding an aggregate R1.6 billion equity investment into Grindrod. Grindrod shares will be issued to the Consortium SPV at the same price as the Bookbuild Placement (“Bookbuild Price”).

The effective date of the New BEE Transaction is expected to be not later than 30 June 2014.

3.1 Shareholding in the Consortium SPV

The Consortium SPV will be established on the basis that:

• Brimstone (or such direct or indirect wholly-owned subsidiary of Brimstone as Brimstone may nominate (“Brimstone SPV”) will acquire a shareholding of between 59.2% and 65.1% in the Consortium SPV at an aggregate subscription price of between R450 million and R495 million, depending on the quantum of equity invested by Calulo Newco;
• Calulo Newco will acquire a shareholding of between 21.7% and 27.6% in the Consortium SPV at an aggregate subscription price of between R165 million and R210 million; and
• Solethu will acquire a shareholding of 13.2% in the Consortium SPV at an aggregate subscription price of R100 million.

3.2 Funding of the Consortium SPV

Grindrod will provide vendor funding to the Consortium SPV, by way of a preference share investment (“Vendor Preference Shares”). The Consortium SPV will issue the Vendor Preference Shares to Grindrod (or one of its direct or indirect subsidiaries) for an aggregate subscription price of R400 million with a term of 6 years. A portion of the proposed Consortium Placement proceeds will be used by Grindrod to fund the Vendor Preference Shares.

The Consortium SPV will raise additional funds through the issue of senior preference shares to third party financiers for an aggregate subscription price of up to R450 million, allowing for costs and other disbursements.

3.3 Lock-in agreements

The shareholders of the Consortium SPV shall not be entitled to dispose of their shares in the Consortium SPV during the period ending 60 months after the issue of the Vendor Preference Shares, subject to certain conditions.

3.4 Rationale for the New BEE Transaction

Grindrod remains committed to driving transformation in ways that are sustainable, credible and of benefit to all its stakeholders. The New BEE Transaction is in keeping with the spirit of transformation and aligns the Group to the ownership elements of the recently released new BEE codes.

Calulo and Solethu remain committed to the partnership with Grindrod and will reinvest a material portion of the Acquisition consideration proceeds into the New BEE Transaction.

3.5 Conditions precedent to the New BEE Transaction

The New BEE Transaction is subject to the fulfilment (or waiver, where applicable) of the following conditions precedent:

• Grindrod shareholders passing all requisite resolutions proposed at the general meeting on 30 April  2014;
• the Consortium SPV being established, with all of the written agreements necessary to give effect to the New BEE Transaction being concluded and becoming unconditional in accordance with their respective terms;
• the Consortium SPV and Grindrod concluding a written subscription agreement, in terms of which the Consortium SPV will subscribe for R1.6 billion worth of Grindrod shares and such agreement becoming unconditional in accordance with its terms; and
• all necessary regulatory approvals being obtained which are required to give effect to the New BEE Transaction.

4. Unaudited pro forma financial effects of the Acquisition and New BEE Transaction

The pro forma financial effects of the Acquisition and the New BEE Transaction will be announced once the Bookbuild Price has been determined and the relevant agreements have been signed.

Merchant bank and transaction sponsor

RAND MERCHANT BANK (A division of FirstRand Bank Limited)

Sponsor
Grindrod Bank Limited

Legal adviser
Edward Nathan Sonnenbergs Inc