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REPURCHASE OF HCI ORDINARY SHARES FROM SACTWU FOR CASH AND AN INDIRECT STAKE IN SABIDO AND CAUTIONARY ANNOUNCEMENT

1.Introduction

As previously announced to the market, HCI has undertaken a strategic review of its investments, and has taken the decision to restructure its investments where value can be created for shareholders. In addition, HCI is committed to furthering the interests of empowerment across the various industries in which it invests. In furtherance of this strategy, several strategic initiatives were undertaken with a view to creating separately focused and empowered entities which can apply an investment strategy which is focused on a specific investment mandate, backed by strong empowerment credentials. The most recently completed example of HCI’s strategy was the successful listing of Niveus Investments Limited, which resulted in a separately listed and empowered investment holding company, principally focused on the gaming, entertainment and alcoholic beverages sectors.

The Southern African Clothing and Textile Workers Union (“Sactwu”), which currently holds 40.2% of the issued share capital of HCI, has expressed an interest in acquiring a stake in Sabido Investments Proprietary Limited (“Sabido”), which is the investment vehicle that currently houses HCI’s media investments, including inter alia, South Africa’s first and only private commercial free-to-air television channel, e-tv, South Africa’s first 24-hour television news channel, the eNews Channel as well as yfm and Sasani Studios. This is consistent with Sactwu’s mandate to secure investments which provide consistent dividend flows in order for Sactwu to provide enhanced benefits to its members.

In light of Sactwu’s preference for a specific investment in Sabido and in line with HCI’s strategic objectives referred to above, HCI and Sactwu have concluded transaction agreements for the repurchase by HCI from Sactwu of up to 15 824 300 HCI ordinary shares for cash and an indirect interest in Sabido.

2. The Repurchase Transactions

The Repurchase Transactions involve the following:

– HCI will internally restructure its stake in Sabido, which restructuring will result in HCI Invest 3 Holdco Proprietary Limited (“SPV”), a wholly owned subsidiary of HCI, acquiring HCI’s 63.9% interest in Sabido. This restructuring will facilitate Sactwu acquiring an indirect holding in Sabido through SPV;

– HCI and Sactwu have entered into an option agreement (“Option Agreement”) which entitles HCI or a company in the HCI Group to repurchase from Sactwu up to 14 024 300 HCI ordinary shares for a period of 90 days following the fulfilment of the conditions precedent as set out in paragraph 6 below, for an agreed amount of R112.00 per HCI ordinary share. The repurchase of the HCI ordinary shares from Sactwu, will result in HCI selling to Sactwu such number of ordinary shares in SPV which will constitute up to 30% of the issued equity share capital of SPV for a cash consideration of R240 million and Sactwu having a claim on loan account against SPV; and

– HCI and Sactwu have entered into an agreement (“Sactwu Sale of Shares Agreement”) whereby HCI will acquire from Sactwu a further 1 800 000 HCI ordinary shares for a cash consideration of R112.00 per HCI ordinary share.

Collectively the Option Agreement and the Sactwu Sale of Shares Agreement (the “Transaction Agreements”), to the extent HCI or a company in the HCI Group, exercises its right and option in terms of
the Option Agreement:

– will result in the restructure of HCI in line with its investment strategy to create an empowered media focused platform; and
– will facilitate the repurchase of up to 15 824 300 HCI ordinary shares from Sactwu.

HCI views these outcomes to be in line with its investment strategy and anticipates that they will be value enhancing for its shareholders.

3. Terms of the Repurchase Transactions

The current structure of Sactwu’s investment in HCI, and HCI’s investment in Sabido is as follows:
[Please refer to the pdf attached below for the image]

The Repurchase Transactions will be implemented in terms of the following transaction steps:

3.1 HCI will implement an internal restructuring on the basis set out in the Subscription and Sale of Shares Agreement entered into by HCI and SPV (“Restructuring Agreement”) in terms of which HCI will subscribe for shares in SPV for an amount of R800 million. SPV will then acquire HCI’s 63.9% interest in Sabido for R5 236 485 560 to be settled by the payment of R800 million in cash, SPV assuming the liability of Squirewood Investments 64 Proprietary Limited (“Squirewood”), a wholly owned subsidiary of HCI, to Sactwu on loan account referred to in paragraph 3.2 below, and the balance of the consideration constituting an interest free loan by HCI to SPV.

3.2 Sactwu currently holds a 40.2% interest in HCI and has indicated that it wishes to exchange a portion of its shareholding in HCI for an indirect equity interest in Sabido, to be held through the SPV. In terms of the Option Agreement, Squirewood has the right and option to acquire up to 14 024 300 HCI ordinary shares from Sactwu at a price of R112.00 per HCI ordinary share for a maximum total consideration of R1 570 721 600 (the “Option Repurchase”).

3.3 In terms of the Option Repurchase, HCI will sell to Sactwu such number of ordinary shares in SPV (“SPV Shares”) up to a maximum of 30% of its equity interest in SPV, the value of which has been agreed as R240 million. As a result, HCI’s shareholding in SPV will reduce from 100% to 70%, should Squirewood exercise the option to repurchase all of the HCI ordinary shares over which it has the option, in terms of the Option Repurchase.

3.4 The balance of the consideration owing by Squirewood to Sactwu in terms of the Option Repurchase will constitute an interest free loan by Sactwu to Squirewood.

3.5 In terms of the Option Agreement, the loan owing by Squirewood to Sactwu referred to in paragraph 3.4 above will be assumed by SPV, with the effect that SPV will owe Sactwu the balance of the consideration in terms of the Option Repurchase. Such assumption of liability by SPV will constitute a part settlement of the purchase consideration owing by SPV to HCI under the
Restructuring Agreement referred to in 3.1 above.

3.6 SPV will issue and allot preference shares to HCI and Sactwu to the value of the outstanding loan balances owing by SPV to HCI and Sactwu referred to above. The preference shares will:
– entitle HCI and Sactwu to receive a dividend of 72% of the prime rate on the issue price of the preference shares, to be paid from time to time out of the free cash of SPV, as and when determined by SPV’s directors;
– in the case of HCI’s preference shares, be redeemable by not later than 3 years and 1 day after their issue and will be convertible into ordinary shares in SPV should they not be redeemed for any reason; and
– in the case of Sactwu’s preference shares, will be convertible into ordinary shares in SPV if HCI’s preference shares are redeemed in full or SPV’s interest in Sabido is disposed of, on the basis that Sactwu will retain an equity interest in SPV of not less than 30%.

3.7 In addition to the Option Repurchase, HCI will repurchase a further 1 800 000 HCI ordinary shares from Sactwu in cash, at a price of R112.00 per HCI ordinary share.

3.8 In compliance with the Companies Act, 2008, as amended (“Companies Act”) such number of HCI ordinary shares held as treasury shares, will be cancelled to ensure that no more than 10%, in aggregate, of the issued share capital of HCI is held as treasury shares.

The implementation of the Repurchase Transactions will result in the following structure:
[Please refer to the pdf attached below for the image]

4. An overview of Sabido

Sabido is a media group that is jointly owned by HCI and Remgro Limited. The media group grew out of the success of e.tv, South Africa’s first and only private commercial free-to-air television channel, which launched in 1998 and which is wholly owned by Sabido.

In 2008, Sabido launched South Africa’s first 24-hour television news channel, the eNews Channel. It also operates a pan-African entertainment channel, e.tv Africa, which broadcasts in 49 countries across the continent and has direct investments in broadcasting businesses in Botswana and Ghana.

Sabido continues to expand its media business with investments in content, production and distribution as well as the launch of services across multiple platforms and territories.

5. Rationale for the Repurchase Transactions

The Repurchase Transactions are intended to achieve several strategic objectives for HCI, including, inter alia, the following:

– as an investment holding company, HCI is committed to furthering the interests of empowerment across the various industries in which it invests. It is in this light that several strategic initiatives were undertaken with a view to creating separately focused and empowered entities. The Repurchase Transactions will create an empowered media platform with an attractive portfolio of cash generative media assets;
– the Repurchase Transactions are anticipated to unlock value for HCI shareholders; and
– HCI will be able to repurchase a significant portion of its shares from Sactwu, which is anticipated to be both earnings and value enhancing for HCI shareholders.

From a Sactwu perspective, the Repurchase Transactions provide Sactwu with an indirect interest in a cash generative media asset which will significantly increase Sactwu’s current dividend flow so as to enable Sactwu to further enhance the benefits to its members.

6. Conditions precedent to the Repurchase Transactions

The Transaction Agreements are subject, inter alia, to the fulfilment or waiver of the following conditions precedent:

– the Restructuring Agreement becoming unconditional;

– HCI obtaining a fairness opinion from an independent expert acceptable to the JSE Limited (“JSE”) in compliance with the JSE Listings Requirements and a report from an independent expert in terms of section 114 of the Companies Act;

– the passing by the shareholders of HCI of the shareholders’ resolutions required to authorise, approve and implement the Repurchase Transactions in terms of the Companies Act, the JSE Listings Requirements and HCI’s Memorandum of Incorporation;

– HCI and SPV satisfying the solvency and liquidity test contemplated in section 4 of the Companies Act;

– the obtaining of the consents of the bankers of HCI to the Repurchase Transactions; and

– the obtaining of such regulatory approvals as may be necessary, including, but not limited to, the approval of the JSE and the Competition Authorities in terms of the Competition Act, 1998, as amended.

7. Financial effects and salient dates

The financial effects and the salient dates relating to the Repurchase Transactions will be released in due course.

8. Documentation

A circular will be issued to HCI shareholders in accordance with the JSE Listings Requirements and the Companies Act, which will incorporate a notice convening a general meeting to approve the Repurchase Transactions.

9. Cautionary announcement

HCI shareholders are advised that the Repurchase Transactions, if successfully concluded, may have a material impact on the price of the HCI’s securities. Accordingly, HCI shareholders are advised to exercise caution when dealing in HCI securities until a further announcement incorporating the financial effects of the Repurchase Transactions is made.

Click here to download the SENS announcement