Insimbi announcement

nodus_insimbi

Insimbi Refractory and Alloy Supplies Limited
(Incorporated in the Republic of South Africa)
(Registration number: 2002/029821/06)
Share code: ISB ISIN: ZAE000116828
(“Insimbi” or “the Company” or “the Group”)

Specific Repurchase, EmployeeCo Transaction and ManCo Transaction

1. Introduction and rationale

Shareholders are advised that Insimbi has entered into a repurchase agreement with Insimbi Alloy Supplies Proprietary Limited, a wholly owned subsidiary of Insimbi (“Insimbi Alloy”) for the repurchase of up to 13 000 000 shares from Insimbi Alloy (“Specific Repurchase”) on the terms of such agreement (“the Repurchase Agreement”).

Furthermore, shareholders are also advised that Insimbi has entered into agreements for the implementation of an employee share participation transaction and a management share participation transaction in terms of which eligible employees of Insimbi (other than directors and prescribed officers of the Group as contemplated in the Companies Act, 2008 (Act 71 of 2008), as amended, (“Companies Act”) (“Eligible Employees”) will, collectively, obtain an approximate 8.78% indirect shareholding interest in Insimbi (“the Transactions”).

Eligible Employees forming part of Insimbi’s management structure (“ManCo Participants”) will by way of individual shareholding interests to be held in Piece For All Trading Proprietary Limited (“ManCo”) obtain a collective 3.78% indirect shareholding interest in Insimbi (“ManCo Transaction”). The balance of the Eligible Employees not participating in the ManCo transaction (“EmployeeCo Participants”) will by way of individual shareholding interests in Starblitz Trading Proprietary Limited (“EmployeeCo”) obtain a collective 5.00% indirect shareholding interest in Insimbi (“EmployeeCo Transaction”). The board of directors of Insimbi (“the Board”) has recognised the need to foster a culture of ownership within the Company.

The indicative impact of the EmployeeCo Transaction and the ManCo Transaction on the BEE ownership points of Insimbi will, collectively, result in an increase to 11.07 ownership points, based on an 8.78% ownership in Insimbi.

 

2. The Transactions

2.1. The Specific Repurchase

2.1.1. Introduction and rationale
The Specific Repurchase will facilitate the implementation and intended empowerment objectives of the Transactions set out below. The Specific Repurchase constitutes a specific repurchase ofshares in terms of the JSE Listings Requirements, requiring approval by way of a special resolution of shareholders and otherwise requiring compliance with the provisions of sections 46 and 48 of the Companies Act.

2.1.2 Terms of the Repurchase Agreement
In terms of the Repurchase Agreement, Insimbi Alloy will sell to Insimbi, who will repurchase up to 13 000 000 shares in Insimbi. The repurchase consideration shall be calculated at an amount of R0.63 per repurchase share (“Repurchase Price”), which consideration shall be payable on the first business day following fulfilment of the suspensive conditions to which the Repurchase Agreement is subject or such other date as Insimbi and Insimbi Alloy may agree in writing ("Repurchase Date"). The Specific Repurchase represents not more than 5% of the Insimbi shares currently in issue.

2.1.3 Suspensive conditions to the Repurchase Agreement
The Repurchase Agreement is subject to the fulfilment or waiver on or before 30 June 2016 of the following suspensive conditions:
– the passing of any resolutions required to approve the transaction contemplated in the Repurchase Agreement by the shareholders and boards of directors of Insimbi and the approval of the Specific Repurchase in terms of the JSE Listings Requirements; and
– the conclusion of the EmployeeCo Agreement (as defined below) and the fulfilment or waiver of any suspensive conditions to which such agreement may be subject, apart from those which refer to the conclusion of the Repurchase Agreement and its becoming unconditional in all respects.


2.2. The EmployeeCo Transaction

2.2.1. Introduction and rationale
The Board has recognised the importance of employee ownership within the Company. EmployeeCo has been incorporated to enable EmployeeCo Participants to collectively participate in the EmployeeCo Transaction.

2.2.2. Terms of the EmployeeCo Transaction
Insimbi and EmployeeCo have entered into a reciprocal subscription agreement (“the EmployeeCo Agreement”), in terms of which EmployeeCo will subscribe for 13 000 000 shares in Insimbi (“EmployeeCo Subscription Insimbi Shares”) for an aggregate amount of R10 790 000 (“EmployeeCo Insimbi Shares Subscription Price”). To enable EmployeeCo to fund its acquisition of the EmployeeCo Subscription Insimbi Shares, Insimbi will subscribe for 1 non-convertible cumulative redeemable preference share in EmployeeCo (“EmployeeCo Subscription Preference
Share”) for an aggregate amount of R10 789 000 (“EmployeeCo Preference Share Subscription Price”) and Insimbi will subscribe for 1 000 “B” ordinary shares (“EmployeeCo Subscription "B" Ordinary Shares”) for an aggregate amount of R1 000 (“EmployeeCo "B" Ordinary Share Subscription Price”) subject to the further terms and conditions of the EmployeeCo Agreement. The EmployeeCo Subscription Insimbi Shares will, following the implementation of the EmployeeCo Transaction, constitute 5% of all the issued shares in Insimbi.
EmployeeCo Participants will subscribe for approximately 100 000 "A" ordinary shares in EmployeeCo for a subscription price of R0.01 per share in terms of individual subscription agreements ("EmployeeCo Participants Subscription Agreements").
The EmployeeCo Subscription Preference Share will have certain preferential rights, including the right to a cumulative preference dividend in an amount equal to 80% of EmployeeCo's net income, calculated as the sum of the distributions received by EmployeeCo from Insimbi during each dividend period less any operating costs of EmployeeCo during the relevant dividend period.

2.2.3. Suspensive conditions to the EmployeeCo Agreement
The EmployeeCo Agreement is subject to the fulfilment or waiver on or before 31 May 2016 of the following suspensive conditions:
– the adoption by way of special resolution by the shareholders of EmployeeCo and filing at the Companies and Intellectual Property Commission of the EmployeeCo MOI;
– the implementation of the Specific Repurchase, following the passing of any resolutions required to approve such repurchase by the shareholders and the Board, as well as the subsequent delisting of such repurchased shares;
– the passing of any resolutions required to approve the EmployeeCo Transaction by the shareholders and the board of directors of Insimbi, including, without limitation, the approval of the specific issue of shares for cash in terms of the JSE Listings Requirements and any resolutions required in terms of section 44 of the Companies Act to approve any financial assistance which may be provided by Insimbi to EmployeeCo in connection with the EmployeeCo Transaction; and
– the conclusion and implementation of the EmployeeCo Participants Subscription Agreements to the satisfaction of EmployeeCo and Insimbi.

2.2.4 Financing of the EmployeeCo Subscription Insimbi Shares
In terms of the EmployeeCo Agreement, Insimbi has agreed, on the later of 31 May 2016 and the first business day following fulfilment or waiver of the suspensive conditions set out in paragraph

2.2.3 (“EmployeeCo Subscription Date”), to provide financial assistance to EmployeeCo to fund the EmployeeCo Insimbi Shares Subscription Price, as follows:
– Insimbi has undertaken to subscribe for the EmployeeCo Subscription Preference Share on the EmployeeCo Subscription Date, for a consideration equal to the EmployeeCo Preference Share Subscription Price;
– Insimbi has undertaken to subscribe for the EmployeeCo Subscription “B” Ordinary Shares on the EmployeeCo Subscription Date, for a consideration equal to the EmployeeCo “B” Ordinary Share Subscription Price;
– On the EmployeeCo Subscription Date, the obligation of EmployeeCo in respect of the payment of the EmployeeCo Insimbi Shares Subscription Price shall be settled by setting it off in the books of account of Insimbi against Insimbi's obligation in respect of the EmployeeCo Preference Share Subscription Price and the EmployeeCo “B” Ordinary Share Subscription Price;
– On the EmployeeCo Subscription Date, the obligation of Insimbi in respect of payment of the EmployeeCo Preference Share Subscription Price and EmployeeCo “B” Ordinary Share Subscription Price shall be settled by setting it off in the books of account of EmployeeCo against EmployeeCo's obligation in respect of the EmployeeCo Insimbi Shares Subscription Price;
– EmployeeCo shall be entitled, but not obliged, to redeem the EmployeeCo Subscription Preference Share at any time after payment in full of any accrued but unpaid preference share dividends, subject to compliance with the Companies Act and provided that it passes the solvency and liquidity test; and
– After a period of five years from the EmployeeCo Subscription Date, Insimbi shall be entitled to require EmployeeCo to redeem the EmployeeCo Subscription Preference Share.


2.3. The ManCo Transaction

2.3.1 Introduction and rationale
The Board has identified a need to incentivise and reward management within the Company. ManCo has been incorporated to enable ManCo Participants to collectively participate in the ManCo Specific Issue.

2.3.2 Terms of the ManCo Transaction
Accordingly, Insimbi and ManCo have concluded a sale of shares and subscription agreement with Insimbi subsidiaries, TP Hentiq 6064 Proprietary Limited (“TP Hentiq”) and Insimbi Alloy ("ManCo Agreement") pursuant to which ManCo will acquire 5 000 000 Insimbi shares and 4 835 887 Insimbi shares from TP Hentiq and Insimbi Alloy, respectively (collectively “the ManCo
Insimbi Acquisition Shares”) for an aggregate amount of R7 046 609 (“ManCo Insimbi Share Acquisition Price”).
To enable ManCo to fund its acquisition of the ManCo Insimbi Acquisition Shares, Insimbi will in terms of the ManCo Agreement subscribe for one non-convertible cumulative redeemable participating preference share with no par value (“ManCo Subscription Preference Share”) for an aggregate amount of R7 045 609 (“ManCo Preference Share Subscription Price”) and Insimbi will subscribe for 1 000 “B” ordinary shares (“ManCo Ordinary Shares”) for R1.00 per subscription “B” ordinary share for an aggregate amount of R1 000 (“ManCo Ordinary Share Subscription Price”). The ManCo Insimbi Acquisition Shares will, following the implementation of the ManCo Transaction, constitute a proposed 3.78% of all the issued shares in Insimbi.
ManCo Participants will subscribe for approximately 100 000 “A” ordinary shares in ManCo for a subscription price of R0.01 per share in terms of individual subscription agreements ("ManCo Participants Subscription Agreements").
The ManCo Subscription Preference Share will have certain preferential rights, including the right to a cumulative preference dividend in an amount equal to 80% of ManCo's net income, calculated as the sum of the distributions received by ManCo from Insimbi during each dividend period less any operating costs of ManCo during the relevant dividend period.

2.3.3 Suspensive conditions to the ManCo Agreement:
The ManCo Agreement is subject to the fulfilment or waiver on or before 31 May 2016 of the following suspensive conditions:
– the adoption by way of special resolution by the shareholders of ManCo, and filing at the Companies and Intellectual Property Commission, of the ManCo MOI;
– the passing of any resolutions required to approve the ManCo Transaction as contemplated in the ManCo Agreement by the shareholders and the board of directors of Insimbi and TP Hentiq and Insimbi Alloy, including, without limitation, the approval of the specific issue of shares for cash in terms of the JSE Listings Requirements and any resolutions required in terms of section 44 of the Companies Act to approve any financial assistance which may be provided by Insimbi to ManCo; and
– the conclusion and implementation of the ManCo Participants Subscription Agreement to the satisfaction of ManCo and Insimbi.

2.3.4 Financing of the ManCo Acquisition
In terms of the ManCo Agreement, Insimbi has agreed, on the later of 31 May 2016 and the first business day following the fulfilment or waiver of the suspensive conditions set out in paragraph

2.3.3 above ("ManCo Subscription Date"), to provide financial assistance to ManCo to fund the acquisition of the ManCo Insimbi Acquisition Shares, as follows:
– Insimbi will subscribe for the ManCo Preference Share on the ManCo Subscription Date, for a consideration equal to the ManCo Preference Share Subscription Price and Insimbi will subscribe for the ManCo Ordinary Shares on the ManCo Subscription Date, for a consideration equal to the ManCo Ordinary Share Subscription Price;
– The total purchase price for the ManCo Insimbi Acquisition Shares shall be an amount equal to the ManCo Insimbi Share Acquisition Price which shall be payable in cash by ManCo, utilising the proceeds from the ManCo Preference Share Subscription Price and the ManCo Ordinary Share Subscription Price;
– ManCo shall be entitled, but not obliged, to redeem the ManCo Preference Share at any time after payment in full of any accrued dividends, subject to compliance with the Companies Act and provided that it passes the solvency and liquidity test; and
– After a period of five years from the ManCo Subscription Date, Insimbi shall be entitled to require ManCo to redeem the ManCo Preference Share.

3. Effective date

The effective date of the Specific Repurchase, the EmployeeCo Transaction and the ManCo Transaction shall be the Repurchase Date, the EmployeeCo Subscription Date and the ManCo Subscription Date, respectively.

4. Pro forma effects

The table below sets out the pro forma financial effects of the Transactions on Insimbi’s basic earnings per share, diluted earnings per share, headline earnings per share, diluted headline earnings per share, net asset value per share and tangible net asset value per share. The pro forma financial effects have been prepared to illustrate the impact of the Transactions on the published unaudited financial information of Insimbi for the interim period ended 31 August 2015, had the Transactions occurred on 1 March 2015 for statement of comprehensive income purposes and on 31 August 2015 for statement of financial position purposes.

The pro forma financial effects have been prepared using accounting policies that comply with IFRS and that are consistent with those applied in the unaudited results of Insimbi for the interim period ended 31 August 2015. The pro forma financial effects, which are the responsibility of the directors, are provided for illustrative purposes only and, because of their pro forma nature may not fairly present Insimbi’s financial position, changes in equity, results of operations or cash flow nor the effect and impact of the Transactions going forward.

Before 1 Pro forma after
EmployeeCo
Transaction
Pro forma after
ManCo
Transaction
Pro forma
after the
Transactions
Headlines and diluted headline earnings per share (cents) 5.89 5.43 5.54 5.07
Headlines and diluted headline earnings (cents) 5.87 5.40 5.51 5.05
Weighted and diluted average number of shares ('000) 236,245 236,245 236,245 236,245
Net asset value per share (cents) 59.44 59.13 59.21 58.90
Net tangible asset value per share (cents) 36.55 36.24 36.31 36.01
Numbers of shares in issue ('000) 260,000 260,000 260,000 260,000

Notes:
1. The “Before” column is based on the published unaudited consolidated condensed financial results of Insimbi for the six months ended 31 August 2015, as released on SENS on 29 September 2015.

EmployeeCo Transaction
2. The Specific Repurchase will have no financial effect on the statement of comprehensive income following the delisting and cancellation of the Repurchase Shares, since the Repurchase Shares owned by Insimbi Alloy were treated as treasury shares for accounting purposes prior to the Specific Repurchase.
3. The “EmployeeCo pro forma adjustments” column reflects the pro forma adjustments for the EmployeeCo Transaction based on the following assumptions:

  R'000
Relates to the estimated transaction costs. These costs are once-off and have been assumed to be non-tax deductible (723)
The EmployeeCo Transaction will be treated as an equity settled share based payment scheme in terms of IFRS 2: Share based payments, measured at the fair value of the equity instruments granted on the grant date. On an annual basis, an IFRS 2 expense will be recognised over the remaining vesting period (assumed to be eight years for purpose of calculating the pro forma financial effects) with a corresponding increase in the share based payment reserve to be recognised in ordinary shareholders’ equity.
The scheme has been valued using option pricing methodologies with the following key inputs:
• Strike price: R 0.83
• Market price: R 1
• Volatility: 67.9%
• Risk free rate: 8.36%
• Dividend yield: 12.04%
(366)
Net effect on cash and cash equivalents (1,089)

 

3.2 Finance income is reduced by R18 623 due to the reduction in cash balances as a result of settling the assumed transaction costs of R723 235, calculated at an assumed interest rate of 5.15%, being the yearly average money market rate. Tax is adjusted accordingly.

3.3 The calculation of diluted earnings and diluted headline earnings per share at reporting dates is based on the number of shares to be issued for no consideration. This is calculated as the difference between the average market price of the Company shares for the period, less the value of the consideration receivable at the reporting date and the remainder of un-expensed share-based payment charges. Based on the aforementioned principles, there is currently no diluting effect.

3.4 In terms of IFRS, Insimbi controls EmployeeCo and therefore EmployeeCo is consolidated into the Insimbi Group, thereby eliminating any preference dividends. The EmployeeCo Insimbi Subscription Shares held by EmployeeCo are treated as treasury shares for accounting purposes.


ManCo Transaction

4. The “ManCo pro forma adjustments” column reflects the pro forma adjustments for the ManCo Transaction based on the following assumptions:

4.1 Operating expenses are adjusted as follows:

  R'000
Relates to the estimated transaction costs. These costs are once-off and have been assumed to be non-tax deductible. (547)
The ManCo Transaction will be treated as an equity settled share based payment in terms of IFRS 2: Share based payments, measured at the fair value of the equity instruments granted on the grant date. On an annual basis, an IFRS 2 expense will be recognised over the remaining vesting period (assumed to be eight years for purpose of calculating the pro forma financial effects) with a corresponding increase in the share based payment reserve to be recognised in ordinary shareholders’ equity.
The scheme has been valued using option pricing methodologies with the following key inputs:
• Strike price: R0.63 & R0.80
• Market price: R1
• Volatility: 67.9%
• Risk free rate: 8.36%
• Dividend yield: 12.04%
(289)
Net effect on cash and cash equivalents (836)

4.2 Finance income is reduced by R14 079 due to the reduction in cash balances as a result of settling the assumed transaction costs of R546 765, calculated at an assumed interest rate of 5.15%, being the yearly average money market rate. Tax is adjusted accordingly.

4.3 The calculation of diluted earnings and diluted headline earnings per share at reporting dates is based on the number of shares to be issued for no consideration. This is calculated as the difference between the average market price of the Company shares for the period, less the value of the consideration receivable at the reporting date and the remainder of un-expensed share-based payment charges. Based on the aforementioned principles, there is currently no diluting effect.

4.4 In terms of IFRS, Insimbi controls ManCo and therefore ManCo is consolidated into the Insimbi Group, thereby eliminating any preference dividends. The ManCo Insimbi Subscription Shares held by ManCo are treated as treasury shares for accounting purposes.

4.5 All effects are of a recurring nature except where otherwise noted.

5. JSE Listings Requirements

In terms of paragraph 5.69(b) of the JSE Listings Requirements, the Specific Repurchase constitutes a specific repurchase of shares and requires the approval by special resolution of the shareholders of Insimbi and consequently a 75% majority of the votes cast in favour thereof by all shareholders present or represented by proxy at the general meeting.
Furthermore, in terms of the JSE Listings Requirements, the EmployeeCo Transaction and the ManCo Transaction constitute a specific issue of shares for cash. The EmployeeCo Insimbi Shares Subscription Price represents a 15% discount to the 30 day VWAP prior to 9 February 2016 and the EmployeeCo Insimbi Subscription Shares and the ManCo Insimbi Acquisition Shares are deemed to be issued to ‘non-public’ shareholders.
The EmployeeCo Transaction and the ManCo Transaction require the approval of ordinary resolutions achieving a 75% majority of the votes cast in favour thereof by all shareholders present or represented by proxy at the general meeting, excluding EmployeeCo Participants, ManCo Participants and their associates, if any. Furthermore, in terms of paragraph 10.1(b)(vii) of the JSE Listings Requirements, EmployeeCo and ManCo are not considered to be related parties and fairness opinions are not required.

6. Circular and General Meeting

A circular containing, inter alia, full details of the Specific Repurchase, EmployeeCo Transaction and ManCo Transaction will be posted to shareholders in due course. The circular will contain a notice of general meeting of shareholders to vote on the Transactions.

1 March 2016
Johannesburg

Sponsor: Bridge Capital Advisors Proprietary Limited
Transaction Advisor: Nodus Capital Proprietary Limited
Legal Advisor: Webber Wentzel Attorneys
Independent Reporting Accountants: PricewaterhouseCoopers