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KHULA SIZWE
BROAD-BASED BLACK ECONOMIC EMPOWERMENT TRANSACTION
18 December 2018
The Circular published on 18 December 2018 is the main source of detailed
information on the proposed B-BBEE transaction, therefore this presentation
serves only to give highlights of the transaction and address possible questions.
AGENDA– TRANSACTION HIGHLIGHTS
– FAQs
Barloworld Limited
BBBEE TRANSACTION
B-BBEE TRANSACTION HIGHLIGHTS
Transformation Creation of a long term sustainable B-BBEE transaction
Contribute to the transformation and inclusive growth of the South African economy
Broad-based
Creation of a broad-based Foundation issued with 3% of Barloworld
Foundation mandate of poverty alleviation, education and youth development
Broad-based participation of circa 14 000 employees and management
Public Offer to the black public
Longevity Foundation shareholding permanent
Minimum 15-year empowerment period
Sustainability
The sale of a R2.8bn property portfolio to a black controlled company (Propco)
Propco will raise external debt of up to 80% of the acquisition price of the properties
The empowerment points from the sale of properties will be locked in after three years time
Propco will grow its property portfolio over time
Strategic
alignment
Sale of property portfolio aligned to strategic focus to maximise and unlock value of all assets
Protect and grow the market leading positions of the South African operations
Reliable, credible partner to public and private sector clients
Efficient
structure
B-BBEE ownership equivalent to 14%
Limited dilution to shareholders
3
Barloworld Limited
BBBEE TRANSACTION
BARLOWORLD FOUNDATION
BARLOWORLD FOUNDATION
Aligned with the national development
imperatives of advancing inclusive
economic transformation and growth
Focus will be on:
• Poverty alleviation,
• Education,
• Youth development and advocacy
Permanent shareholding, not allowed
to sell into perpetuity
BARLOWORLD FOUNDATION
3%
4
Barloworld Limited
BBBEE TRANSACTION
In respect of any financial year of the Foundation, the aggregate maximum entitlement of each beneficiary
shall be determined in accordance with the allocation principles of the Foundation Trust Deed and
apportioned to the qualifying categories set out below:
BARLOWORLD FOUNDATION
30%
• Programmes focusing on
access to quality
education with emphasis
on improving science,
technology, engineering
and mathematics (STEM)
subjects at high school
• Teacher Development
Programmes with an
emphasis on STEM
streams
30%
• Funding for youth
programmes that give the
youth:
• access to tertiary education
• access to youth skills and
leadership development
programmes
• Social Entrepreneurship and
Social Innovation
Programmes that resolve
local community challenges
80% Youth
60% Black Female
10% Black People
disabilities
100% Black
100% Youth
60% Female
10% Black People with
disabilities
100% Black
60% Black Female
30% Black People with
Disabilities
15%
• Financial and non-
financial initiatives that
promote
entrepreneurship
including, but not
limited to
• Training
• Mentoring
• Collaboration
60% Black Female
10% Black People with
Disabilities
5%
• Initiatives that ensure
conservation and
environmental
sustainability
20%
• Funding support for
welfare and charitable
organisations
• Humanitarian and
disaster relief support
Entrepreneurship
5
Barloworld Limited
BBBEE TRANSACTION
BLACK PUBLIC
SCHEMEc.20 000 participants
MANAGEMENT
TRUSTc.1 800 participants
B-BBEE TRANSACTION SALE OF PROPERTIES
38%32%30%
Sale of Properties
PROPCOPropco will be listed after 5 years
to enable trading
EMPLOYEE
TRUSTc.12 000 participants
EXTERNAL
FUNDERLoan
100% free contribution
towards the Employee
Trust’s R174m equity
requirement
Senior Managers: Loan from
Barloworld amounting to
R147m to fund 95% of the
Senior Managers’ equity
requirement
Junior Managers: Loan from
Barloworld amounting to R52m
to fund 100% of the Junior
Managers’ equity requirement
Market Value
(R2.8 billion) less
5% discount
Capital
Structure
Debt 80%
Equity 20%
6
Barloworld Limited
BBBEE TRANSACTION
SALE OF PROPERTIES
Purchase Price Reconciliation Value
Current Value (31 Aug 2018) R2 754 617 400
Developments in progress R110 310 000
Future Market Value (1 Oct 2019) R 2 864 927 400
Discount on future value (5%) (R143 246 370)
Purchase Price R2 721 681 030
The purchase price is calculated as follows:
7
Barloworld Limited
BBBEE TRANSACTION
SALE OF PROPERTIES
Disposal price based on:
• Future value of properties of R2.865 billion (being the current market value (as above) increased by
the value of capex committed on properties under development of R110 million)
• Discount of 5% to the future value of R2.865 billion
Ten year lease between Barloworld (through Barloworld SA and Logistics) and Propco
• Year 1 rental will be escalated at 8%
Propco will not limit Barloworld’s ability to sell a division
*Independent Property Valuation
** GLA: Gross Lettable Area
Property typeProperties’ Market
ValueYield Base Rental GLA (m2)**
Motor Retail R1.676 billion 8.83% R148 million 128 913
Industrial R940.3 million 9.28% R87.2 million 149 901
Commercial R95.28 million 9.00% R8.6 million 9 150
Mixed – Commercial and
IndustrialR13.8 million 9.00% R1.2 million 5 264
Residential and Vacant Land
AttachedR29.4 million 9.38% R2.8 million 595
Total R2.755
billion*9.00% R247.9 million 293 823
8
FAQ’s – PARTICIPANTS
How were the staff allocations done?
• Whilst Barloworld aimed to ensure inclusivity by allowing participation by all employees, the
allocations are based on national economically active population statistics (EAPs). Thus, a large
portion of the transaction value accrues to black staff
How many employees, that will be involved in the BEE scheme, are in each of grades 2-10, 10-
14 and 15-23?
• Grades 2 – 10 : 12 000
• Grades 10 – 14: 1 600
• Grades 15 – 23: 150
Why are white staff participating in a BEE Transaction?
• One of the key pillars in the design of the transaction is inclusivity, thus the inclusion of all staff,
black and white
• A large component of the value of the transaction (in excess 90%) accrues to black people
• Participation is based on EAPs, therefore the impact on black ownership is minimal
What is the level of women participation?
• At Propco level: Participation within the Employee Trust and the Management Trust is governed by
EAPs. Based on the EAPs, women will have 45.2% participation (with black women at 41%)
• At the Foundation level: Beneficiaries are required to be minimum 60% black female
9
FAQ’s – PARTICIPANTS cont’d
Please outline the management participation. Will there be facilitation and what are the
governance considerations?
• Allocations were done by a sub-committee of the board made up of independent non-executive
directors. Management was recused from this process
• The allocation is based on EAPs and grading
• Senior Management will be required to put “skin in the game” of 5% (a total of R8 million) of their
own equity requirement. The rest of the facilitation will be in the form of an interest-free loan from
Barloworld, which will be repaid
• Non-managerial employees will receive a free contribution from the company in order to participate
• The transaction is subject to shareholder approval (which is scheduled for February 2019). All the
required governance procedures and approvals are detailed in the published circular
How have conflicts of interest been resolved given significant management participation?
• The following safeguards were put in place by the board to ensure that conflicts of interest are
appropriately managed:
• In the interests of transparency, the company approached the transaction as a related party
transaction as a principle, and thus resolved to:
• seek shareholder approval;
• independently determine the value of the properties; and
• seek a fairness opinion
• A sub-committee made up of independent non-executive directors was specifically tasked with
dealing with matters relating to the participation of and allocation to management in the
transaction and were integral to the structuring of the transaction
10
FAQ’s – PARTICIPANTS cont’d
Are non-executive directors participating in the transaction?
• Those non-executive directors that qualify (being black South African citizens) are eligible to
participate in the public offer by Propco, just like ordinary members of the black public, subject to
such participation:
• Not impacting their independence
• Not exceeding R1 million per director
• Not exceeding 0.25% of Barloworld’s market capitalisation
• There is no special treatment or set aside allocations for non-executive directors
What is the process for the public to participate in the scheme?
• The public scheme will open in H1 of 2019. Propco will issue a prospectus inviting members of the
public to subscribe for shares in Propco. Additional information will be provided in H1 2019
If the public offer does not yield desired participation, how is this to be addressed?
• The total equity required for the public scheme is R163 million
• The minimum target for the public scheme is to raise R120 million, i.e. if the minimum of R120
million is not achieved, the scheme will not be implemented
• Any short-fall on the R163 million total equity required will be reallocated to the Management
Trust, for the specific benefit of the circa 1 600 Junior Managers. None of the Senior Managers
(grades 15 and above) will benefit from the re-allocation
• Should the public scheme fail to raise the total equity of R163 million, the junior managers loan
from Barloworld will increase from R52 million to R215 million
11
FAQ’s – PROPERTIES
How is Barloworld’s continued use of the properties guaranteed?
• Barloworld will enter into a 10-year lease with Propco with renewal rights for a further 5 years
Will this limit the management of the motor retail dealerships?
• Management performed an analysis of which dealerships should be included in the transaction
• This transaction will not limit management’s ability to make decisions relating to the viability of each
dealership. Barloworld’s management will continue to manage the company in the best interests of
all stakeholders, including any decisions to open or close dealerships
• On closure of dealerships, Propco may (i) rent the premises to a third party or (ii) sell the property
• In cases where dealerships need to be closed, the only impact on Barloworld will be in those cases
where Propco is unable to sell the relevant property for an amount higher than the present value of
the then remaining lease payments. In such instances Barloworld will be liable for any shortfall
What is the impact on Automotive who have owned their properties and therefore not paid any
rentals?
• The Automotive dealerships are managed on the basis of an attributed rental charge to each
dealership, although the properties were owned within the Automotive division
12
FAQ’s – PROPERTIES cont’d
Given that more than 50% of the properties are dealerships, with management participating in
the transaction, does this remove Barloworld’s ability to consider the viability of certain
dealerships?
• Propco will be independently managed with no involvement by Barloworld management. Barloworld
management will continue to manage Barloworld in the best interests of all stakeholders
• Furthermore, due to the related party nature of the transaction, any transactions (other than lease
payments) may require Barloworld shareholder and other regulatory approvals at the time
13
FAQ’s – OWNERSHIP
What is your current BEE level / BEE shareholding?
• Barloworld’s current BEE shareholding is 54% (comprising 31% permanent BEE shareholding and
23% BEE shareholding from mandated investments). Mandated investments are not permanent
and may change should the relevant shareholders sell their shares in Barloworld
• The proposed BEE transaction provides Barloworld with a higher permanent BEE shareholding
• The BEE shareholding is secured post the expiry of 3 years after the sale of the assets (Properties)
provided Barloworld does not buy-back the properties from Propco
• Should Barloworld buy-back the properties from Propco within the empowerment period, Propco
will be required to buy Barloworld shares with the net proceeds after settling debt and taxes
• The transaction will result in Barloworld’s permanent BEE shareholding increasing to 48%
How does the sale of assets into Propco confer BEE points?
• The ownership points are conferred under Statement 102 of the BEE Codes:
• Statement 102 provides that: “a Seller that has concluded a transaction involving a sale of
Asset, Equity Instrument or Business of a separately identifiable related business, may claim
the benefits provided for in this statement in its own Ownership scorecard.”
• The future rental from a black owned company will further confer procurement points for
Barloworld
14
FAQ’s – OWNERSHIP
Why target such a high BEE shareholding?
• Barloworld’s current and prospective customers prefer suppliers with a 51% black shareholding.
Barloworld believes achieving 51% black shareholding will give Barloworld a competitive
advantage. This transaction achieves 48% black shareholding without the mandated investments.
This gives Barloworld headroom even with any volatility that may emanate from the mandated
investments shareholding and/or future growth of the business
15
FAQ’s – FINANCIAL EFFECTS
What is the value created as a result of the proposed transaction?
• With the enterprise value at risk of R5.5bn identified, the transaction will give Barloworld the ability
to be competitive and to protect and grow the market leading positions of its South African
operations
• Barloworld’s different business units have customers (both public and private) that require strong
BEE credentials from suppliers. Barloworld is entering into the proposed BEE transaction in order to
maintain its relevance and competitive advantage
• Barloworld, with the capital released from the transaction, will continue to carefully assess value
enhancing growth opportunities
Please explain how the transaction generates 14% increase in black ownership?
= Foundation size + Property Transaction Size (Value of Property/Value of BAW)
= 3% + (R2.75bn/R24.97bn)
= c. 14%
What is the difference between the cash costs of the scheme vs the economic costs?
• The cash outflow from Barloworld includes the payment of CGT and breakage costs amounting to
R207 million as well as the transaction execution costs which have been detailed in the circular
16
FAQ’s – FINANCIAL EFFECTS cont’d
What are the cash flows on day1?
How will the cash received by Barloworld be deployed? What is the availability of the cash since
Propco is consolidated? Will the cash only be available post 1 October 2019?
• The transaction is only due to be concluded on 1 October 2019. For the purposes of the pro-forma
financial effects in the circular, it has been assumed that the proceeds will be applied towards
reducing debt
• Given the current low gearing levels for Barloworld, as part of management’s ongoing capital
allocation assessment, the proceeds may be used to:
• Make an acquisition that meets Barloworld’s return hurdles; and/or
• If no appropriate acquisition is made (within a reasonable period), return cash to
shareholders
Cash Reconciliation Value
External Debt Raised R2 177 344 824
Public Scheme Equity R163 300 862
Management Equity R7 756 791
Total cash inflow R2 348 402 477
CGT + Breakage costs (R207 304 133)
Net cash inflow R2 141 098 344
17
FAQ’s – FINANCIAL EFFECTS cont’d
What is the impact on EPS and HEPS?
• The year 1 impact on EPS and HEPS is a reduction of 16.6% and 6.7% respectively on a pro-forma
basis
• This comprises: Income tax and IFRS 2 charge, 3% administration charge, Foundation and transaction
costs, net finance costs and breakage costs
• EPS will include CGT and transaction costs
What is the immediate dilution to shareholders and over time in terms of both shares and earnings?
• The dilution to shareholders results from the issue of shares to the Foundation. However, due to the
Foundation being consolidated, these shares are treated as treasury shares and as such have no
dilutive impact. Only the actual expenses of the Foundation will have an impact on earnings in
perpetuity
• The impact of the overall transaction on earnings in year 1 is a 16.6% and 6.7% reduction in pro-forma
EPS and HEPS respectively
• Over time:
• The impact of the Foundation component on Barloworld’s Income Statement will be the actual
expenditure by the Foundation (which is based on dividends received from Barloworld)
• The rental charge for the Property component will also be eliminated on consolidation
• However, there will be an actual net cash cost to Barloworld of the rental (being the after tax
rental expense)
• The net proceeds to Barloworld may (depending on how the proceeds are applied) generate
returns that reduce the impact of the rental charge
18
FAQ’s – GENERAL
What happens if shareholders do not vote in favour of the transaction?
• This transaction will not go ahead. However, BEE is required to trade competitively within the South
African environment. There is material enterprise value at risk as South African customers are unwilling to
continue doing business with untransformed businesses. Therefore, another BEE transaction may need to
be considered in order for Barloworld to remain competitive
What happens at the end of 10 years - Will Propco continue to be consolidated? Will Barloworld buy
back properties or extend the leases? How will the price of the properties be determined?
Accounting Treatment
• If Propco were to be de-consolidated (due to Barloworld being deemed to have lost control in terms of
IFRS 10), there will be a net loss equal to Propco’s NAV in Barloworld’s financial statements of R2.3 billion
Properties
• At the end of the 10-year lease period, the following alternatives are available:
• Barloworld may extend the lease period (on some or all the properties) by a further 5 years. The
extension will be at the then independently determined market related rental;
• Propco may, in its sole discretion, sell some or all the properties;
• If Propco chooses to sell the properties, Barloworld has a right of first refusal to acquire the
properties
• The purchase price will be independently determined, given the related party nature of such a
transaction
• Were Barloworld to acquire (some or all of) the properties from Propco, the transaction may be
subject to any regulatory approvals at the time (which may include shareholder approval)
• The transaction term is 15 years, during which period Propco is required to remain black
owned
19
Barloworld Limited
BBBEE TRANSACTION
Note 1: The amounts are based on a market cap of circa R24.97 billion
Refer to other costs included with the transaction detail on slides 16, 17 and 18
The average BEE transaction’s economic cost is around 2.7% for every 10%. This is normally for shorter term
transactions (5 – 8 years). The total economic cost of this 14% transaction is 3.4% per 10%. This is slightly above the
average, however, the longer tenure (15 years) compensates shareholders for this extra cost
Of the total costs of 4.70%, 3% relate to the Foundation and the costs of the property transaction amount to 1.70%
The market related rental escalation of the property portfolio was informally determined as 7% vs the 8% rental
escalation as part of this transaction. The cost to the Barloworld shareholder is the present value of the difference in
rentals paid over the market rental period, which amounts to R80 million
TOTAL ECONOMIC COST TO SHAREHOLDERS
ECONOMIC COST TO SHAREHOLDERPercentage of
Market Cap
Rand
Equivalent (1)
Foundation (Free issue of shares) 3.00% 749 167 085
Property transaction Facilitation costs
Employees (Grades 2 – 10) (100% facilitation of equity portion) 0.70% 174 187 586
Junior Management (Grades 10 -14) (100% facilitation of equity portion) 0.11% 26 422 682
Senior Management (Grades 15 – 23) (95% facilitation of equity portion) 0.32% 81 126 815
Total IFRS 2 Costs 1.13% 281 737 083
Discount on Property sale 0.57% 143 246 370
Total property transaction facilitation costs 1.70% 424 983 453
Total BEE Facilitation Costs (Public Scheme Successful) 4.70% 1 174 150 538
20
KHULA SIZWE
BROAD-BASED BLACK ECONOMIC EMPOWERMENT TRANSACTION