DealMakers - 2020 Annual
Business Rescue Transaction of the Year
Phumelela Gaming and Leisure
Phumelela Gaming and Leisure (PGL) entered business rescue proceedings in May 2020, in accordance with Chapter 6 of the Companies Act, No 71 of 2008, after deciding against voluntary liquidation.
The group, which operates in seven of the nine provinces in the country, experienced financial difficulties pre-COVID, partly due to the withdrawal in 2019 of the group’s 50% share of the 6% levy on punters’ winnings on fixed-odd bets on horse racing in Gauteng, but it was the devastating financial impact of COVID-19 which led to its decision to enter business rescue proceedings. Claims submitted by creditors suggest that PGL was struggling with debts of up to R1,17bn. The operator suspended race meeting in mid-March due to lockdown restrictions, cutting off revenue.
Phumelela received R100m in post-commencement finance from local company Mary Oppenheimer Daughters (MOD), a company linked to the family of late mining baron Harry Oppenheimer, to ensure the continuation of operations while the company underwent restructuring and the sale of assets. MOD concluded an additional finance facility for R550m, which essentially will underpin certain minimum payments to creditors of PGL.
Multiple bids to acquire all or some of its assets were received, including those from MOD and UK bookmaker, Betfred. Betfred made a binding offer of R875m for PGL’s entire business. The MOD proposal yielded R480m for the racing assets, with the potential for realisation proceeds from other assets, and had provided certain funding, thus offering certainty on timing. Also, MOD was a known quantity in the SA horseracing industry, and a South African bid. On the back of this, in September 2020, creditors voted in favour of MOD (4Racing) to take control of the racing assets, including the local and offshore totes and broadcasting rights – MOD was not interested in the non-racing assets.
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The proposed business rescue plan was published on 18 August 2020, and adopted by creditors on 1 September 2020.
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The deal was complex, in that it not only involved the usual regulators, but that there were extensive conditions around the various gambling boards in all provinces. In addition, the BRP encountered unexpected litigation when PGL was served a notice of motion by Gold Circle, a horse racing and betting company which said it owned 39% of the shares in PGL, intending to interdict its proposed business rescue plan and possible sale. The motion was dismissed.
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The MOD bid was unique in that it was a first guarantee facility of this nature in South Africa to underpin returns to creditors, even if the distressed assets were not sold. In addition, 4Racing currently envisages a restructuring of the business and the implementation of one or more empowerment transactions (25%) post implementation of the initial transaction agreements, adding significantly to the execution complexity of the transaction. PGL itself employs in excess of 2,000 people, none of whom were retrenched during the business rescue proceeding – no retrenchments are envisaged by 4Racing in the short to medium term. In addition, the collapse of horseracing’s main protagonist would have been catastrophic for the industry, in terms of job losses.
Local Advisers
Financial Adviser: RS Advisors
Legal Advisers: Werksmans and Fluxmans
Comment from the Independent Panel:
Business Rescue is often a case of some stakeholders achieving significant value gain at the expense of others. The panel was very pleased with the approach followed by, and ultimate outcome of, our chosen category winner, Phumelela Gaming and Leisure. A lot of credit goes to Mary Oppenheimer Daughters for using industry experts, as well as for their innovative financial structure. A good BR deal should seek to strike a balance between the divergent and competing interests of previous and new shareholders and funders, employees and other stakeholders and, as a panel, we believe that this was achieved in an exemplary way in this deal.
BR Pick of the best in alphabetical order
Comair
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Comair entered voluntary business rescue proceedings in May 2020, in order to safeguard the company and its shareholders by restructuring the airline as quickly as possible so that the business could, once again, be operational. The internal restructuring process began in March, but was interrupted by the grounding of flights, in line with the COVID-19 travel restrictions. Comair became financially distressed and unable to meet its debt obligations, resulting in the company filing for business rescue.
It was imperative that a focused restructuring of the airline was achieved as quickly as possible, so that the business could once again be operational.
The Business Rescue Plan was overwhelmingly adopted by the majority of Comair’s creditors and shareholders in September. The proposal set out in the Plan consisted of two parts, namely the conclusion of the investment or, if that could not be achieved, a structured wind-down of the company’s operations and activities, and the realisation of the assets of the company.
The evaluation of multiple bids, negotiations with lenders, aircraft lessors, creditors and stakeholders resulted in a transaction with the Moritz Consortium, which saw it acquire 99% of the shareholding in the airline. An equity raise was undertaken, which itself was unique, in that it was the largest and only equity raise of this nature for a listed entity in rescue. This, together with new debt funding and debt refinancing, enabled a return to solvency for the benefit of all stakeholders, and avoided a structured wind-down and liquidation. The total deal size was R1,73bn which comprised R500m in equity, R575m in new debt funding and R650m in debt refinancing.
When compared with other airlines in business rescue, both locally and internationally, the implementation of the Comair plan was exceptionally efficient and expeditious, with the airline resuming flights once more in December 2020. By voluntarily entering into business rescue proceedings, litigation against the airline was placed under moratorium, and pre-business rescue creditors were compromised in terms of the plan. The alternative would have been an immediate liquidation of the company, destroying any potential for future value creation. In addition, a significant number of jobs were saved and made for a healthy, competitive local airline industry.
Local Advisers
Financial Advisers: ASOCapital (Business Rescue Practitioners) and PSG Capital
Sponsor: PSG Capital
Legal Advisers: Werksmans, ENSafrica and Webber Wentzel
Transactional Support Services: Letsema Corporate Finance
Edcon
In 2019, Edcon, which had been struggling for a number of years under a growing debt burden, secured R2,7bn from lenders, landlords and the Public Investment Corporation in a restructuring plan that freed the company of interest-bearing debt.
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In May 2020, after losing R2bn in sales as a result of South Africa’s COVID-19 lockdown restrictions, the owner of the Edgars and JET chains filed for administration. Unable to find investors for the business, the administrators opted for a sale plan to transfer ownership of parts of the group in SA and Southern Africa and to save jobs. Durban-based Retailability, backed by Metier Private Equity and DEG of Germany, acquired 120 Edgars stores, and The Foschini Group took over 425 JET stores.
75% of Edcon’s creditors, who were owed R8,1bn, approved the proposed rescue plan that would see the retailer sold in parts or whole. Some 15 parties expressed interest in the sale.
Retailability, backed by Metier, saw the potential of the brand and took the opportunity to acquire a significant portion of the Edgars business in South Africa, Botswana, eSwatini, Lesotho and Namibia at a favourable price. The deal gives Retailability access to more of the middle to upper end of the mass market. The transaction was closed within two months after the announcement.
In a R480m cash deal, The Foschini Group (TFG) acquired 382 select JET stores across SA, Botswana, Lesotho, Namibia and Eswatini and took on 4,800 of its staff. The deal gives TFG a significant entry into an increasingly important value retail sector, at scale and at an attractive price.
Local Advisers
Financial Advisers: Rand Merchant Bank, Investec Bank and Matuson Associates (Business Rescue Practitioners)
Sponsor: UBS
Legal Advisers: ENSafrica and Cliffe Dekker Hofmeyr
Transactional Support Services: EY