DealMakers - 2021 Annual

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Deal of the Year

Vodacom’s acquisition of a 55% stake in Vodafone Egypt Telecommunications

For years, Vodacom has been vying with rival MTN for market share on the continent, as people and businesses, propelled by the COVID-19 pandemic, increase demand for higher speeds and better connectivity to financial services, entertainment and education.

 

In November 2021, Vodacom announced that it had entered into a binding agreement to acquire a controlling stake in high margin business, Vodafone Egypt, in a deal that combined SA’s largest mobile operator with Egypt’s telecom market leader, commanding a 43% market share. The R41bn share and cash deal from two wholly owned subsidiaries of parent, Vodafone, is set to generate clear benefits for all parties involved.

Despite subdued economic demand in a COVID-19 environment, Vodafone Egypt delivered 8% revenue growth for the financial year ended March 2021, and EBITDA and operating free cash flow margins of 42% and 26% respectively. For the six-month period ended September 2021, revenue and EBITDA growth accelerated to 17% and 29% respectively.

 

The deal will see Vodacom expand its reach beyond its key markets, scale its multi-product strategy to a largely unbanked (80%) population of 100 million, with a high smartphone penetration. The deal provides Vodacom with significant opportunities to leverage its lucrative financial services platform with products such as M-Pesa or VodaPay. In addition, attractive synergy potential exists through the combination of Vodafone Egypt’s software factory with Vodacom’s existing big data capabilities, and closer cooperation in scaling pan-African enterprise and IoT solutions, enabling the proliferation of digital services through a platform approach.

Local Advisers

Financial Advisers: UBS, Goldman Sachs

Sponsors: UBS and Vunani Sponsors

Legal Advisers: ENSafrica and Webber Wentzel

Transactional Support Services: PwC, EY and KPMG

The company will issue 242 million new ordinary shares at R135,75 per share to fund 80% of the acquisition, with the outstanding R8,2bn payable in cash raised through traditional bank financing. Telecom Egypt, the fixed-line incumbent, will remain the minority partner in Vodafone Egypt with a 45% stake. The state-owned company agreed to waive a rule that a mandatory offer be made for its shares.

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Shameel Joosub
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The single transaction is expected to diversify and accelerate Vodacom’s medium-term operating profit growth potential into double digits, reducing revenue dependency on South Africa to below 50%. Vodacom will have access to 500 million people across its African footprint which, according to management, is 40% of Africa’s GDP, across the Democratic Republic of Congo,

Egypt, Ethiopia, Kenya, Lesotho, Mozambique, South Africa and Tanzania. The deal expands Vodacom’s reach to 37,000 network sites, making it one of Africa’s largest tower owners. While Vodacom is present in fewer markets than MTN, it has well-capitalised market leadership in these, supporting attractive return on capital employed (ROCE). Vodafone Egypt generated a ROCE in excess of 30% for the financial year ended March 2021.

The transaction will simplify the management of Vodafone’s African holdings and increase its interest in Vodacom to 65.1%. Vodacom’s free float will fall below 20% as a result of Vodafone’s increased ownership, but given the scale of the current liquidity on the JSE, the Exchange has not asked for any remedial steps to be taken. The transaction remains conditional on the approvals from the JSE, the National Telecom Regulatory Authority of Egypt and Egypt’s Financial Regulatory Authority. The transaction is expected to close before March-end.

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Summing up the transaction, CEO Shameel Joosub described the deal as “an exciting and important milestone for Vodacom; [it] will be transformational in our evolution from a teleco to a techco” .

Comment from the Independent Panel: The panel liked this pan-African deal; it combines South Africa’s largest mobile operator with Egypt’s telecom market leader. Successfully navigating the complexities of highly regulated companies in different jurisdictions was well executed. This deal creates scale and brings together complimentary offerings in two of Africa’s key economies, enabling the Vodacom group to diversify and accelerate its growth in a single transaction.

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Pick of the best in alphabetical order

Heineken International’s acquisition of Distell

The complex deal, two years in the making, represents a three-way cross border combination for Distell of Heineken International’s South African assets, 59.37% of Namibian Breweries, and the sale of Distell Namibia to Namibian Breweries. The transaction also combines the majority of the African interests of Heineken and Distell. Heineken and Distell, the world’s top two cider makers, have gone head-to-head for the cider market in South Africa since Heineken launched its Strongbow brand in 2016.

Distell’s cider, ready-to-drink beverages, and spirits and wine business will be combined with Heineken’s mostly beer interests into an unlisted public holding company, Sunside Aquisitions (of which Heineken will own a minimum of 65%). Although takeover punters were disappointed by the offer, the transaction unlocks value for Distell shareholders at an offer price of R180 per share, representing a 53% premium to the 90-day VWAP, before the release of the cautionary in May 2021.

 

A separate business (Capevin) will hold the remaining assets, including the Scotch whisky business for which Heineken will make an offer for a minority shareholding of up to 37%, at an offer price per share of R15 in cash.

Local Advisers

Financial Advisers: Rand Merchant Bank and KPMG

Sponsors: Rand Merchant Bank

Legal Advisers: ENSafrica, Webber Wentzel and Cliffe Dekker Hofmeyr

Transactional Support Services: PwC, BDO and Deloitte

Prosus/Naspers voluntary share exchange offer

 

In 2001, Naspers, under the guidance of then-CEO Koos Bekker, put $32 million into an obscure web company called Tencent. Now worth billions of Rands, Naspers’ stake in the Chinese social media giant has become the tail that wags the dog. The company's valuation has been a hot topic for management in recent years, which has been under pressure to find a sustainable solution to a widening discount to NAV, which sits at around 50%. This is the result of the complex holding structure between Naspers and Prosus, and an obscure ownership structure in which Tencent holds its internet operations, the performance of which has been negatively affected by Chinese regulatory pressure.

Local Advisers

Financial Advisers: Morgan Stanley, Goldman Sachs

Sponsors: Investec Bank

Legal Advisers: Webber Wentzel

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The initial restructure of Distell, the unbundling of the Capevin stake and the subsequent scheme of arrangement which involves both cash and shares in an unlisted entity, provide Distell shareholders with no less than six different election outcomes. Remgro, with a 31.7% economic interest in Distell, intends to take shares in Newco rather than the cash offer. The transaction provides shareholders with the opportunity, alongside Remgro, to share in the future growth of the unlisted combined entity through the reinvestment offer.

Distell’s B-BBEE partner will continue to hold 15% of the assets in 

Sunside, and the empowerment ownership of the enlarged business post completion of the transaction will be enhanced.

COVID-19 challenges added to the complexity of the transaction, with negotiations impacted upon by adverse economic headwinds, putting pressure on transaction timelines and impacting on forecasting and operational activities. The deal, which is expected to conclude in the latter part of 2022, requires the approval of the JSE, Namibian Stock Exchange, Takeover Regulation Panel, South African Reserve Bank and a number of competition authorities across the continent.

 

The combination of the two complementary route-to-market businesses will scale the business, unlocking significant revenue and cost synergies, accelerating growth and strengthening its footprint across Southern Africa, to create a noteworthy regional player.

Comment from the Independent Panel: 

The panel was impressed by this three-way, cross border and multi-jurisdictional transaction that will create a strong player in the alcoholic beverages industry in Southern Africa. We liked the foreign direct investment component of this deal, but disliked the delisting of Distell. As a panel, we were impressed that this was achieved during the COVID-related alcohol restrictions.

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In May 2021, Prosus announced plans to acquire up to 45.33% of the issued Naspers N ordinary shares in a voluntary share swap aimed at reducing the discount gap between Naspers and the value of its underlying investments. The transaction’s objective was to reduce Naspers’ approximate weighting on the JSE from 23% to around 13%, to rebalance the oversized weight of Naspers while preserving its position as the largest South African-domiciled company on the exchange. The swap increased the Prosus holding in Naspers to 49.5%, while Naspers

retained control of Prosus with a 57.2% stake. In addition, the transaction increased the size of the Prosus free float, and more than doubled its ownership of the group’s outstanding global consumer internet portfolio.
The proposal was not without its difficulties, with asset managers airing concerns about its complexity and the ultimate value-add for shareholders. While this may be a genuine concern, Naspers’ ability to add value goes without saying – the listing of Prosus on the Euronext Amsterdam Stock Exchange in 2019 was primarily designed to provide the group with a strong platform to attract capital, while at the same time unlocking $16bn in value for Naspers shareholders.

However, the complicated structure in which Naspers continues to hold its stake in Tencent (unbundling the stake is not an option entertained by management) and the additional layer of shareholding between Prosus and Naspers as a result of the swap, creates uncertainty about whether the full value of the stake will be realised.  
 

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Comment from the Independent Panel: 

This was a deal of significant importance for South Africa, the FTSE/JSE and its various indices, and by extension, every South African who has a pension fund. A good deal, smart structural steps, well executed, but one that sadly seems to have left most investors cold.