Reference no: EM13489238

Plastix Ltd ('Plastix') is the holding company of a group of companies that manufactures and sells a wide range of speciality and general usage plastic containers. The ordinary shares in issue of Plastix are listed on the JSE Ltd.
Served markets
Plastix supplies a number of South African market segments with a specific focus on the beverage industry. In this segment of the market Plastix has a 45% market share and is the recognised market leader. The beverage industry has grown consistently in recent years, particularly with regard to products such as mineral water and energy drinks. Plastix anticipates continued revenue growth from its South African customers of at least 15% per annum for the next four years.
Plastix started to export products to a number of European countries in July 2005 and in the 2007 financial year export revenue increased to R240 million. Plastix expects that its revenue from these markets will double in the 2008 financial year and that export revenue will increase by 20% per annum for the three years thereafter.
Manufacturing base
The capital intensive production processes are carried out at eight sites in South Africa. Plastix embarked on a major reinvestment programme in 2004/2005, and therefore most of the Plastix production facilities are relatively new.
Extracts from the audited accounts of Plastix
PLASTIX LTD
CONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED 30 JUNE
2007
Rmillion
2006
Rmillion
2005
Rmillion
Revenue
1 359,3
1 097,5
925,0
South Africa
1 119,3
1 017,5
925,0
Europe
240,0
80,0
0
Cost of sales
(1 007,5)
(830,9)
(721,5)
South Africa
(839,5)
(773,3)
(721,5)
Europe
(168,0)
(57,6)
0
Gross profit
351,8
266,6
203,5
Operating costs
(66,6)
(60,5)
(55,0)
Depreciation
(75,0)
(70,0)
(70,0)
EBIT
210,2
136,1
78,5
Net finance charges
(7,4)
(25,0)
(30,0)
Profit before tax
202,8
111,1
48,5
Tax
(58,8)
(32,2)
(14,1)
Profit after tax
144,0
78,9
34,4
1
Additional information relating to the consolidated income statements
• The consensus amongst the stock broking fraternity is that Plastix will report earnings before interest and tax (EBIT) of R317,6 million and profit after tax of R230 million for the year ending 30 June 2008.
• Plastix expects to maintain the gross profit margins achieved in the 2007 financial year for the foreseeable future.
• Operating costs have increased by 10% per annum during the past two years and this trend is expected to continue for the foreseeable future.
• Plastix does not intend to invest significant amounts in capital expenditure within the next five years and annual depreciation will approximate capital expenditure. Management expects annual depreciation to be R75 million per annum for the next three years.
• Plastix has historically not declared or paid any dividends.
PLASTIX LTD
CONSOLIDATED BALANCE SHEETS AS AT 30 JUNE
2007
Rmillion
2006
Rmillion
Non-current assets
505,9
505,9
Property, plant and equipment
475,3
475,3
Loans to Executive share option trust
30,6
30,6
Current assets
472,7
370,4
Inventories
252,4
215,0
Trade receivables
186,2
149,0
Cash and cash equivalents
34,1
6,4
TOTAL ASSETS
978,6
876,3
Total equity
738,7
594,7
Share capital and premium
300,0
300,0
Retained earnings
438,7
294,7
Non-current liabilities
Long-term liabilities
0
45,0
Current liabilities
239,9
236,6
Trade and other payables
165,6
145,0
Tax payable
29,3
16,6
Short-term borrowings
45,0
75,0
TOTAL EQUITY AND LIABILITIES
978,6
876,3
2
Additional information relating to the consolidated balance sheets
In the opinion of the executive directors, the working capital ratios for the 2007 financial year are sustainable into the future. Plastix calculates its trade receivables days based on year-end balances divided by revenue for the financial year (in other words, no averaging of trade receivables balances takes place). Inventory days and trade payables days are calculated on the same basis, except that cost of sales is used as the denominator.
Listing of Plastix
Plastix listed on the JSE Ltd by means of an initial public offering on 20 January 2005 at a share price of R7,50 per ordinary share. Plastix currently has 150 million ordinary shares in issue. On 30 September 2007 the company's shares traded at R13,60 per share and the 30-day volume-weighted average price (VWAP) for September 2007 was R12,50. The selected share price information of Plastix over time is set out below:
Prior years
VWAP
2007 year
VWAP
30 June 2005
R7,70
30 April
R9,25
31 December 2005
R5,60
31 May
R9,75
30 June 2006
R7,00
30 June
R10,50
31 December 2006
R6,30
31 July
R11,50
31 August
R12,00
Plastix Executive share option scheme
The executive directors of Plastix have the right to acquire 3,6 million ordinary shares at an average strike price of R8,50 per share in terms of the Executive share option scheme. Plastix loaned money to the Trust set up for the purposes of the scheme. The Trust has acquired the 3,6 million shares in the market over the past three years. The loan from Plastix is non-interest bearing and is repayable when executive directors exercise their options and settle monies owing to the Trust. In terms of the scheme, options must be exercised within 24 months of vesting. The options vest in equal tranches on 30 June 2009, 30 June 2010 and 30 June 2011. However, in the event that Plastix undergoes a change of control, all share options vest immediately.
Proposed buyout of Plastix
IceAge Ltd ('IceAge'), a private equity company, has recently written a letter to the chairman of the board of Plastix in which it proposed a leveraged buyout of the business. The key details of the buyout proposal are as follows:
• A shelf company, 'Newco', will acquire 100% ownership and control of the underlying business, assets and liabilities of Plastix for a consideration of R2,475 billion.
• Once the business of Plastix has been sold as a going concern, the listing of the Plastix shares will be terminated. It is expected that the company will be liquidated after receipt of the purchase price. The liquidation dividend before consideration of any tax or liquidation costs is expected to be R16,50 per share.
• Existing shareholders will be offered a reinvestment option in terms of which they will be entitled to receive 5,5 ordinary shares in Newco at R1 per share and loan accounts ('Newco shareholder loan accounts') totalling R11 for every Plastix share held.
3
• The Newco shareholder loan accounts will not bear interest and will be repayable on or before 31 December 2018.
• IceAge has canvassed a number of Plastix shareholders and is of the opinion that 15% of the existing Plastix shareholders will elect to take up the reinvestment option in Newco.
Newco funding arrangements
• Newco will have an authorised and issued share capital of 225 million ordinary shares with a par value of 1c each.
• To fund the acquisition, IceAge will initially subscribe for 100% of the ordinary shares in Newco at R1 per share and advance a shareholders' loan of R450 million to Newco.
• IceAge will reserve the right to sell shares and the Newco shareholder loan accounts to other parties at any time, provided that the shareholding of IceAge does not drop below 26% at any stage during the next seven years.
• ABZ Bank Ltd ('ABZ') has agreed to fund the balance of the purchase consideration arising of R1,8 billion. ABZ has indicated that the R1,8 billion facility will be split into senior debt, junior debt and mezzanine loan components. The loans will bear interest at predetermined rates in relation to the three-month JIBAR (Johannesburg Interbank Agreed Rate). JIBAR is the daily quoted rate at which South African banks lend wholesale money to each other. The quoted three-month JIBAR rate at 30 September 2007 was 10,2%.
• The key terms of the senior debt, junior debt and mezzanine loan are summarised below:
Senior debt
Junior debt
Mezzanine loan
Amount
R410 million
R410 million
R980 million
Interest rate
JIBAR + 2,0%
JIBAR + 3,3%
JIBAR + 5,5%
Term
Seven years
Seven years
Seven years
Capital repayments
Annually in arrears
No repayments of capital for first two years, thereafter annually in arrears
A single repayment at the end of seven years
Interest payments
Calculated on a nominal annual compounded monthly basis, payable annually in arrears
Calculated on a nominal annual compounded monthly basis, payable annually in arrears
Calculated on a nominal annual compounded monthly basis, payable annually in arrears
• Security for the long-term loans:
o Mortgage bonds over all land and buildings;
o Notarial general bonds over all movable assets;
o Cession and pledge of all shares and all loan accounts in Newco subsidiaries;
o Cession of the Newco shares by its shareholders; and
o Cession of accounts receivable.
• In the event that the senior debt, junior debt or mezzanine loan components are repaid before the agreed dates, ABZ will charge Newco an early settlement fee of 1% of the total loan amount.
4
• ABZ has forwarded the following preliminary calculations of the senior debt, junior debt and mezzanine loan capital and interest payment schedules, based on the current JIBAR rate:
Senior debt
Amounts in Rmillion
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Opening balance
0
370,5
325,9
275,5
218,6
154,4
81,9
Advances
410,0
0
0
0
0
0
0
Interest charges
52,9
47,8
42,0
35,5
28,2
19,9
10,5
Repayments
(92,4)
(92,4)
(92,4)
(92,4)
(92,4)
(92,4)
(92,4)
Closing balance
370,5
325,9
275,5
218,6
154,4
81,9
0
Junior debt
Amounts in Rmillion
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Opening balance
0
410,0
410,0
348,4
278,0
197,4
105,3
Advances
410,0
0
0
0
0
0
0
Interest charges
58,9
58,9
58,9
50,1
39,9
28,4
15,2
Repayments
(58,9)
(58,9)
(120,5)
(120,5)
(120,5)
(120,5)
(120,5)
Closing balance
410,0
410,0
348,4
278,0
197,4
105,3
0
Mezzanine loan
Amounts in Rmillion
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Opening balance
0
980,0
980,0
980,0
980,0
980,0
980,0
Advances
980,0
0
0
0
0
0
0
Interest charges
165,4
165,4
165,4
165,4
165,4
165,4
165,4
Repayments
(165,4)
(165,4)
(165,4)
(165,4)
(165,4)
(165,4)
(1 145,4)
Closing balance
980,0
980,0
980,0
980,0
980,0
980,0
0
5
Covenants: ABZ long-term loans
• All Newco shareholder loan accounts, loans from subsidiaries and from other external parties are to be subordinated in favour of ABZ.
• No disposal or acquisition of assets with an aggregate value of more than R20 million may occur in any year, without the prior written consent of ABZ.
• No payments of any kind may be made to Newco shareholders until such time as the debt-equity ratio falls below 50%.
• Newco must maintain the following minimum interest cover ratios (calculated as EBIT divided by net interest charges):
o 1,2 times in year 1 following advance of the loans,
o 1,5 times in year 2,
o 1,8 times in year 3, and
o 2,0 times in all periods thereafter.
• The debt-equity ratio of Newco may not exceed 200% during the first four years after the advance of the loans and 150% thereafter. The Newco shareholder loan accounts may be regarded as 'equity' for purposes of these calculations.
• All assets of Newco must be comprehensively insured and policies must be ceded in favour of ABZ.
Foreign loan
IceAge is investigating the possibility that Newco raises a loan of €180 million. The current Rand:Euro exchange rate is 10:1. From initial discussions between IceAge and certain European banks it appears that the likely terms of a €180 million loan will be as follows:
• A seven-year term with capital repayment occurring through a single payment at the end of the term;
• A fixed interest rate of 8,5%;
• Interest payable semi-annually in arrears;
• Foreign exchange risks attached to Newco's payment obligations in terms of the loan will have to be fully hedged;
• All fixed and movable assets of Newco will have to be used as security for the loan. In addition, Newco shareholders will be required to cede their shares in Newco and their Newco shareholder loan accounts to the lender for duration of the loan term; and
• While detailed covenants will have to be negotiated, these covenants will contain no minimum prescribed interest cover or debt-equity ratios.
Proposed shareholding of the executive directors of Newco
In terms of the proposed transaction, the executive directors of Plastix will be entitled to acquire up to 13,5 million ordinary shares in Newco for a consideration of R1 per share. Executive directors who exercise their rights shall not be obliged to subscribe for Newco shareholder loan accounts as these will be taken up by IceAge. IceAge will also provide interest-free loans to those executive directors who choose to exercise their rights to purchase shares in Newco.
6
REQUIRED
Marks
(a)
Discuss the nature and role of private equity transactions in South African financial markets. In your answer you should highlight both positive and negative aspects as well as the consequences of private equity transactions for the South African economy and companies in general.
12
(b)
Calculate and estimate whether Newco will be able to meet its loan repayment obligations and comply with the terms of the financial covenants to ABZ Bank Ltd in each of the first three years after the buyout. For the purposes of your calculations -
• you may assume that the buyout occurs effective from 1 July 2007;
• you may assume that the JIBAR interest rate remains at 10,2% for the next three years; and
• you should prepare pro forma income statements, balance sheets and cash flow statements for these three years in support of your answer.
34
(c)
Calculate the effective annual interest rates implicit in the senior debt, junior debt and mezzanine loan components, and on the total facility, based on a prevailing JIBAR rate of 10,2%.
4
(d)
Compare the terms of the foreign €180 million loan with the ABZ Bank Ltd loan terms and highlight key differences. Highlight any other issues or information that Newco would require to enable it to evaluate more fully the foreign loan option.
12
(e)
Evaluate and discuss whether the offer price by IceAge Ltd represents a fair and reasonable value for the business of Plastix Ltd from the perspective of the current shareholders of Plastix Ltd. Show all workings and list any assumptions you have made.
16
(f)
Identify and describe the potential merits, disadvantages and risks attached to the reinvestment option offered to shareholders of Plastix Ltd from a shareholder's perspective.
10
(g)
Identify and explain any conflicts or potential conflicts of interest that the executive directors may have as a result of the proposed buyout offer by IceAge Ltd for the business of Plastix Ltd.