SENS: EPE CAPITAL PARTNERS LIMITED – Proposed strategic equity investment by Ethos Capital and Ethos Fund VII into Brait

ANNOUNCEMENT OF A PROPOSED STRATEGIC EQUITY INVESTMENT BY ETHOS CAPITAL AND ETHOS FUND VII INTO BRAIT SE (“BRAIT”) AND A RIGHTS OFFER BY ETHOS CAPITAL 

Shareholders are advised that Ethos Capital and Ethos Fund VII (collectively “Ethos”) have entered into a binding agreement with Brait whereby Ethos has committed to invest ZAR1,350 million in Brait (“Ethos Investment”) as part of an equity capital raise by Brait of at least ZAR5,250 million and up to ZAR5,600 million (“Brait Equity Raise”) as detailed in the announcement released by Brait on the Stock Exchange News Service (“SENS”) of the JSE Limited (“JSE”) today Wednesday, 27 November 2019. Ethos has also entered into binding agreements with Titan Financial Services Proprietary Limited and its affiliates (“Titan Entities”) (“Titan Agreement”), in relation to the Brait Equity Raise.

Pursuant to the Brait Equity Raise, the Brait board will terminate the advisory agreement with its existing corporate advisors and enter into an advisory agreement with Ethos Private Equity whereby Ethos Private Equity will become the advisor to Brait.

The Brait Equity Raise will be implemented in part by way of a fully committed and underwritten, renounceable rights offer of ZAR5,250 million to Brait shareholders (“Brait Rights Offer”) and a potential non-pre-emptive specific issue of new Brait ordinary shares to Ethos of up to ZAR350 million (“Top-Up Subscription”).

The Brait Rights Offer will be priced at a price to be agreed between Brait and its underwriters, and, in the absence of such agreement, at a 27% discount to the theoretical ex-rights price of a Brait ordinary share, subject to a maximum price of ZAR9.40 (“Maximum Brait Rights Offer Price”) and a minimum price of €0.22, being the nominal value of the new Brait ordinary shares (“Brait Rights Offer Price”).

Ethos Capital and Ethos Fund VII will invest ZAR600 million and ZAR750 million respectively, into the Brait Equity Raise achieved through:

• the Titan Agreement, whereby Titan has undertaken in favour of Ethos to irrevocably and unconditionally, renounce part of its entitlements to shares under the Brait Rights Offer with an aggregate subscription price of ZAR1,000 million in favour of Ethos and Ethos has irrevocably undertaken to subscribe for such shares;
• providing an additional ZAR350 million underwrite to the Brait Rights Offer in the event of rights not being taken up by existing Brait shareholders; and / or
• to the extent required, a subscription for new Brait ordinary shares at the Brait Rights Offer Price under the Top-Up Subscription to ensure that Ethos achieves its minimum guaranteed investment of ZAR1,350 million.

For Ethos to meet its commitments in the Brait Equity Raise, Ethos Capital will undertake a renounceable rights offer to raise equity of up to ZAR750 million (“Ethos Capital Rights Offer”). Ethos Capital has received commitments from existing Ethos Capital shareholders and other investors to underwrite ZAR600 million of the Ethos Capital Rights Offer to fund its direct investment into the Brait Equity Raise. 

The Ethos Fund VII ZAR750 million investment is fully committed and available for drawdown for use in the Brait Equity Raise.

The net proceeds of the Brait Equity Raise (after deduction of costs, fees and expenses related to the Brait Equity Raise) are intended to be used by Brait for the repayment of a portion of the remaining Brait 2020 convertible bonds at or before their maturity on 18 September 2020, to partially repay the Brait Mauritius Limited Revolving Credit Facility and thereafter for general corporate and financing purposes.

The Ethos Investment is subject to a number of conditions as more fully described below.

Salient terms of the Ethos Investment

• The Brait Equity Raise

The salient terms of the Brait Equity Raise are set out below:

• Brait will undertake an equity capital raise of at least ZAR5,250 million and up to ZAR5,600 million made up as follows:
  • The Brait Rights Offer of ZAR5,250 million in terms of which existing Brait shareholders will be offered, on a pro rata basis, pre-emptive rights to subscribe for new ordinary shares in Brait; and
  • If applicable, the Top-Up Subscription of ZAR350 million in the event that Ethos does not achieve its minimum guaranteed investment of ZAR1,350 million into the Brait Equity Raise through the subscription rights renounced in favour of Ethos by the Titan Entities and the Ethos underwriting arrangements.

• The Brait Equity Raise is fully committed and underwritten pursuant to the following arrangements:
  • An irrevocable undertaking by Titan Financial Services Proprietary Limited (“Titan”) and the Titan Entities whereby Titan undertakes to take up rights having a value at the Brait Rights Offer Price of ZAR750 million;
  • An underwriting agreement (the “underwriting agreement”) between Brait, Titan, Rand Merchant Bank (“RMB”) and Ethos which provides for (i) the ZAR1,350 million underwriting and subscription commitment from Ethos mentioned above; and (ii) underwriting commitments from Titan and RMB in respect of ZAR1,772 million; and
  • Undertakings from major institutional shareholders (ZAR1,378 million) to follow their rights pursuant to the Brait Rights Offer, subject to certain exceptions for compliance with investment mandates.

• Conditions to the Brait Equity Raise and including the Ethos Investment include, inter alia:
  • The Brait board having validly approved all matters necessary or required for the completion of the Brait Equity Raise;
  • Brait convening and holding a general meeting of Brait shareholders to secure all the necessary approvals and to pass all shareholder resolutions required to implement the Brait Equity Raise;
  • Receipt of any required regulatory approvals, including, but not limited to, the approvals of the Luxembourg Stock Exchange and the JSE;
  • The conclusion of definitive financing arrangements with FirstRand Bank Limited (trading through its Rand Merchant Bank division) and The Standard Bank of South Africa Limited as Revolving Credit Facility funders to Brait on terms consistent with the agreed term sheets; and
  • The underwriting agreement becoming unconditional in accordance with its terms.
• The underwriting agreement is conditional on, inter alia:
• The conclusion of definitive financing arrangements with FirstRand Bank Limited (trading through its Rand Merchant Bank division) and The Standard Bank of South Africa Limited as Revolving Credit Facility funders to Brait, on terms and conditions consistent with the agreed term sheets; and
• Since the date of the underwriting agreement and on or prior to 4.30 p.m. on the day prior to the finalisation date of the Brait Rights Offer, there shall not have occurred or been disclosed any material force majeure or market disruption events that, in the good faith judgement of the underwriters (acting together), and after notification to and, to the extent practicable, consultation with Brait, would make the Brait Rights Offer and/or the underwriting envisaged in terms of the underwriting agreement impracticable or inadvisable, or would materially prejudice trading of the Brait shares in the secondary market.

The conditions in the underwriting agreement may be waived in the absolute discretion of the underwriters.

For full details of the Brait Equity Raise, shareholders are referred to the Brait announcement released on SENS today Wednesday, 27 November 2019.

• Ethos, Titan and underwriting agreements

Ethos will commit up to ZAR1,350 million to the Brait Equity Raise in the following proportions:

• Ethos Capital 44.4% (ZAR600 million); and
• Ethos Fund VII 55.6% (ZAR750 million).

The key terms of the Titan Agreement are as set out below:

• The Titan Entities have undertaken in favour of Ethos to irrevocably and unconditionally, renounce part of their entitlement to shares under the Brait Rights Offer with an aggregate subscription price of ZAR1,000 million in favour of Ethos and Ethos has irrevocably undertaken to subscribe for such shares; and
• As compensation to the Titan Entities for renouncing a portion of their allocation of shares under the Brait Rights Offer, Ethos has agreed to pay the Titan Entities a portion of the value of their nil paid rights.

The key terms of the Ethos Investment are as set out below:

• Ethos has irrevocably undertaken to subscribe for shares in the Brait Rights Offer with an aggregate subscription price of ZAR1,000 million for the Brait ordinary shares that are attached to rights allocated to the Titan Entities under the Brait Rights Offer;
• In addition, Ethos has agreed to underwrite a further ZAR350 million of the Brait Rights Offer; and/or
• If applicable, the Top-Up Subscription of ZAR350 million in the event that Ethos does not achieve its minimum guaranteed investment of ZAR1,350 million into the Brait Equity Raise through the subscription rights renounced in favour of Ethos by the Titan Entities and the Ethos underwriting arrangements; and
• Ethos will earn a commission equal to 2.0% of the aggregate number of Brait ordinary shares taken up multiplied by the Brait Rights Offer Price.

Based on the Maximum Brait Rights Offer Price, Ethos’ effective in-price will be a maximum of ZAR10.81 per Brait ordinary share.

Rationale for the Ethos Investment

Despite an over leveraged balance sheet, Brait has a portfolio of high-quality assets. The Brait board has resolved to adopt a new strategy that will focus on maximising value through the realisation of its existing assets in the portfolio over the next five years and returning capital to Brait shareholders. The Brait Equity Raise will provide Brait with sufficient funding headroom to implement the new strategy and provides Brait with sufficient flexibility to manage its portfolio of investments and to execute on the new strategy in an optimal manner. Ethos Private Equity will assume the role as the advisor for the Brait portfolio on the overall portfolio value optimisation and maximisation strategy.

Ethos Private Equity has a 35-year history of generating realised returns for investors and will bring a different perspective to the Brait portfolio leveraging its value-add expertise, execution capability and exit track record to execute Brait’s new strategy. As part of the transaction, certain senior members of the Brait team will be joining Ethos Private Equity, thereby bringing together two of the most experienced private equity teams in Southern Africa and ensuring both continuity and a smooth transition of the advisory services to the Brait board.

Participating in the Brait Equity Raise will provide Ethos Capital shareholders with access to a high quality asset base that complements the Company’s existing investments, adding sector and geographic diversification. The potential unlock of value through the Brait value realisation strategy could provide strong capital flows to Ethos Capital over the medium term, which will have a positive impact on returns and liquidity. 

Based on the Maximum Brait Rights Offer Price, the pro-forma of Brait’s latest reported net asset value per share of ZAR38.00 (as at 30 September 2019) would equate to ZAR21.60 per share post the Brait Rights Offer.

Based on Ethos’ maximum effective in-price of ZAR10.81 per Brait ordinary share, the effective Ethos entry price per Brait ordinary share represents a discount of c.50% to the proforma net asset value per share of ZAR21.60 post the Brait Rights Offer.

• The Ethos Capital Rights Offer

In order for Ethos Capital to fully fund its commitments in terms of the Ethos Investment, the Company proposes to raise up to ZAR750 million through the Ethos Capital Rights Offer.

The Ethos Capital Rights Offer will be priced at or close to the prevailing Ethos Capital share price immediately prior to the launch of the Ethos Capital Rights Offer.

Ethos Private Equity has agreed not to charge Ethos Capital any management or participation fees on its investment in the Brait Equity Raise.

Ethos Capital has received commitments from existing Ethos Capital shareholders and other investors to underwrite ZAR600 million of the Ethos Capital Rights Offer to fund its direct portion of Ethos’ aggregate investment into the Brait Equity Raise.

• New advisory agreement

Ethos Private Equity will enter into a new advisory agreement with the Brait board, wherein Ethos Private Equity assumes the right to advise the Brait board on the overall portfolio value maximisation strategy. The agreement has an initial three-year tenor (effective from the completion of the Brait Rights Offer), with an annual renewal thereafter. The new agreement with Brait will be at an initial reduced cost of ZAR100 million per annum with annual inflationary linked increases. In addition, the Brait board and Ethos Private Equity have undertaken to, each year, assess the appropriateness of the annual cost in the context of the resources required to implement the strategic business plans for that year. The Brait board and Ethos Private Equity will look to structure an annual incentive-based payment that would be payable to Ethos Private Equity upon the achievement of predetermined annual objectives designed to create shareholder value. In addition, a new share incentive structure will be developed, aligning the interests of Ethos Private Equity and the Brait shareholders.

Conditions precedent to the Ethos Capital Rights Offer

Conditions to the Ethos Capital Rights Offer include, inter alia (which are capable of waiver by Ethos Capital):

• the Brait board having validly approved all matters necessary or required for the completion of the Brait Equity Raise and having resolved to proceed with the Brait Equity Raise;
• Brait convening and holding a general meeting of Brait shareholders to secure all the necessary approvals to pass all shareholder resolutions required to implement the Brait Equity Raise, and the passing of any Brait shareholder resolutions required for the Brait Equity Raise at a general meeting of Brait shareholders;
• the Ethos Capital board having validly approved all matters necessary or required for the completion of the Ethos Capital Rights Offer and having resolved to proceed with the Ethos Capital Rights Offer;
• Receipt of any required regulatory approvals, including, but not limited to, the approval of the JSE; and
• The conclusion of definitive financing arrangements by Brait with FirstRand Bank Limited (trading through its Rand Merchant Bank division) and The Standard Bank of South Africa Limited as Revolving Credit Facility funders to Brait on terms consistent with the agreed term sheets.

Further details of the Ethos Capital Rights Offer

Further details of the Ethos Capital Rights Offer will be provided in due course.  The Ethos Capital Rights Offer is expected to commence in late January 2020 and complete in February 2020.

Peter Hayward-Butt (Ethos Capital CEO) will host a webcast to provide an overview of the transaction for investors today, Wednesday 27 November, 2019 at 12.00pm.   Participants can register for the webcast by clicking on this link: https://www.diamondpass.net/1707852