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TRANSACTION BETWEEN JOHNNIC HOLDINGS LIMITED, A WHOLLY-OWNED SUBSIDIARY OF HCI, AND TSOGO SUN GAMING (PROPRIETARY) LIMITED PURSUANT TO WHICH THE HCI GROUP DECREASES ITS INDIRECT INTEREST IN TSOGO SUN KWAZULU-NATAL (PROPRIETARY) LIMITED

1.   Introduction

HCI has an aggregate indirect interest of 46.6% in the issued share capital of Tsogo Sun KwaZulu-Natal (Proprietary) Limited “TS-KZN”), the licensee and operator of Suncoast Casino and Entertainment World in Durban.  HCI`s indirect interest in TS-KZN is held as to 30% via HCI`s wholly-owned subsidiary Johnnic Holdings Limited`s (“Johnnic”) shareholding in The Millennium Casino Limited (“Millennium”), and as to 16.6% via HCI`s interests           in Tsogo Investment Holding Company (Proprietary) Limited (“TIH”).

Shareholders of HCI are advised that Johnnic has entered into an agreement with Tsogo Sun Gaming (Proprietary) Limited (“TSG”) in terms of which TSG shall purchase all of the shares in the issued share capital of Millennium from Johnnic (“the transaction”).  TIH has a 51% indirect interest in TSG.  As a result of the transaction, HCI`s aggregate indirect interest in TS-KZN will decrease from 46.6% to 28%.

2.   Rationale

HCI believes it would be optimal to manage its casino interests through a single entry point being TIH. The transaction simplifies the group structure and facilitates this.

3.   Particulars of the transaction

In terms of the transaction, Johnnic will sell all of its shares in Millennium (comprising 100% of the issued share capital of Millennium) (“Sale Shares”) to TSG in exchange for the cash consideration dealt with in 5 below, with effect from the fifth business day after the transaction becomes unconditional (see 4 below) (“Effective Date”).

Upon implementation of the transaction, TSG will own 100% of the issued share capital of Millennium, giving it an additional indirect interest of 30% in the issued share capital of TS-KZN, and an overall interest of 73,5% in TS-KZN.

Upon implementation of the transaction, TSG has agreed to lend and advance the sum of R1 billion to Millennium in order to enable Millennium to discharge its obligation to pay Johnnic R1 billion  in respect of the amount owing by Millennium to Johnnic on loan account as at the Effective Date.

4.   Conditions Precedent

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

4.1  the subscription agreement referred to in 5 below becoming unconditional;

4.2  the unconditional written approval of the Competition Authorities and the KwaZulu-Natal Gambling Board;

Implementation of the transaction is accordingly conditional upon the aforesaid conditions being fulfilled or waived within the agreed time constraints.

5.   Purchase consideration

The purchase consideration for the Sale Shares is the sum of R1.00, which sum will be adjusted depending on whether certain agreed targets in respect of the gaming win achieved by TS-KZN for the financial years ending on 31 March 2010, 2011 and 2012 are met, subject to the aggregate adjustment over the three years being limited to a maximum of R330 million.

If the agreed targets are met, TSG shall pay to Johnnic the increased adjusted purchase price, determined in accordance with an agreed formula, on 30 April 2010, 30 April 2011 and 30 April 2012.  If the agreed targets are not met, an amount, determined in accordance with an agreed formula, will be refunded by Johnnic to TSG.

Any such payments shall be escalated by a factor determined in accordance with an agreed formula so as to take into account interest that would have accrued on such amounts during the period from the Effective Date until the date of actual payment.

The purchase price (as adjusted above) shall be subject to further adjustment in accordance with an agreed formula, such that if the Effective Date occurs after the expiry of 90 days from the signature date of the transaction agreement, the purchase price shall be increased, and if the Effective Date occurs before the expiry of such 90 day period, the purchase price shall be reduced.

6.   Funding of the transaction

In order to fund the transaction, TSG, SABSA Holdings Proprietary) Limited and Johnnic have entered into a written subscription agreement in terms of which TSG shall issue, and each of SABSA and Johnnic shall subscribe for redeemable cumulative preference shares of R0,10 each in the capital of TSG, at the subscription price of R490 million and R510 million, respectively,with each such preference share having the special rights, privileges and conditions as contained in TSG`s articles of association.

Any additional funding that is required for the transaction shall be funded from cash resources of the TSG group existing at the relevant time.

7.   Pro forma financial effects

The preparation of the unaudited pro forma financial effects of the transaction is the responsibility of the directors of HCI.The unaudited pro forma financial effects of the transaction are presented for illustrative purposes only to provide information on how the transaction may impact on an HCI shareholder and, due to the nature thereof, may not give a fair reflection of HCI`s actual financial position after the transaction.

The pro forma financial effects of the transaction are based on the published reviewed abridged consolidated group results of HCI for the year ended 31 March 2009.  The pro forma financial effects of the transaction on HCI`s earnings, headline earnings, net asset value (“NAV”) and net tangible asset value (“NTAV”) are set out below.

 

 

Per HCI share

Earnings (cents)

Headline earnings (cents)

NAV (cents)

NTAV (cents)

 

Before

890

254

3371

1797

After

1179

256

3655

2080

% change

32.47

0.79

8.42

15.75

Notes:

The unaudited pro forma financial effects of the transaction are indicative only and have been based on the assumptions set out below:

1.   The transaction was effected on 1 April 2008 for income statement purposes and on 31 March 2009 for balance sheet purposes.

2.    HCI`s interest in the shareholding of Johnnic  was based on a 90% weighted average holding for the year.

3.   The proceeds from sale are invested with financial institutions at daily call rates. An average rate of 7,5%, after deducting taxation at a rate of 28%,  was used for the year.

4.    The coupon on the preference shares issued was assumed to be an average of  9,76% for the year.

5.   The net profit on disposal is included in the earnings per share in the “after column” and is excluded from the headline earnings per share in the “after column”.

6.   Goodwill and intangible assets have been excluded in the calculation of NTAV per HCI ordinary share.

8.   Categorisation of transaction

In terms of the Listings Requirements of the JSE limited, this transaction is categorised as a Category 2 transaction.

2 July 2009

Cape Town