DETAILED CAUTIONARY IN RESPECT OF AN ACQUISITION AND RENEWAL OF CAUTIONARY ANNOUNCEMENT

Transcription

1 HUGE GROUP LIMITED (Registration number 2006/023587/06) Share code: HUG ISIN: ZAE ( Huge or the Company ) DETAILED CAUTIONARY IN RESPECT OF AN ACQUISITION AND RENEWAL OF CAUTIONARY ANNOUNCEMENT Further to the cautionary announcements dated 28 April 2015, 10 June 2015, 22 July 2015, 30 July 2015, 10 September 2015 and 23 October 2015 respectively regarding discussions relating to strategic acquisitions which would require the approval of the shareholders of Huge, shareholders are advised that Huge has signed a Memorandum of Agreement with Centratel Group Investments Proprietary Limited and the Trustees for the time being of the Centracom Employees Trust (collectively the Relevant Shareholders ). TERMS OF THE MEMORANDUM OF AGREEMENT In terms of the Memorandum of Agreement, Huge and the Relevant Shareholders (collectively the Parties ) are considering a transaction (the Proposed Transaction ), the core commercial terms of which are as follows: - Huge shall purchase 100% of the issued share capital of Centracom Proprietary Limited ( Centracom ) and the total amount owing by Centracom to the Relevant Shareholders on shareholders loan accounts from the Relevant Shareholders for a total purchase consideration of R (the Purchase Consideration ). Based on the Purchase Consideration, the Proposed Transaction will likely be a category 2 transaction for the Company; - 90% (ninety percent) of the Purchase Consideration shall be settled by Huge through the issue of vendor shares ( Vendor Shares ) to the Relevant Shareholders. - The Vendor Shares will be that number of Huge ordinary shares as is equivalent to the Purchase Consideration divided by the issue price ( Issue Price ). - The Issue Price will be determined by Huge in its sole discretion, but will be a price that is no more than (i) a 10% discount to the 30 business day weighted average traded price prior to the date that the placing is authorised by the directors of Huge or (ii) a 10% discount to the 3 business day weighted average traded price prior to the date of the placing of the shares so issued; - the Relevant Shareholders shall be entitled to elect (the Election ) on written notice to Huge delivered on the first business day after the date of fulfilment or waiver

2 of the conditions precedent to the transaction agreements ( Transaction Agreements ) relating to the Proposed Transaction that Huge shall procure that the Vendor Shares shall be placed with third parties ( Placement Parties ) on the basis that the Placement Parties will purchase the Vendor Shares from the Relevant Shareholders at the Issue Price, such that the aggregate cash consideration payable by the Placement Parties to the Relevant Shareholders shall be equal to 90% of the Purchase Consideration; and - 10% (ten percent) of the Purchase Consideration shall be paid by Huge on the closing date of the Transaction Agreements in cash, free of deduction or set off, to the trust account of an escrow agent. In terms of the Memorandum of Agreement, the Relevant Shareholders have granted Huge an exclusivity period of 180 days in which to negotiate the Transaction Agreements and close the Proposed Transaction. CONDITIONS PRECEDENT TO THE MEMORANDUM OF AGREEMENT The Memorandum of Agreement is subject to the following conditions precedent: - Huge delivering a certified copy of a resolution of the board of directors of Huge authorising Huge to conclude the Memorandum of Agreement to the Relevant Shareholders on or before 17h00 on Friday, 30 October 2015; - Huge delivering expressions of interest ( Expressions of Interest ) from third parties interested in participating as Placement Parties in respect of the Vendor Shares on or before 17h00 on Friday, 27 November 2015; and - the Relevant Shareholders (acting reasonably) confirming in writing that the Expressions of Interest are acceptable to them on or before 17h00 on Friday, 27 November CONDITIONS PRECEDENT TO THE TRANSACTION AGREEMENTS The Proposed Transaction and the coming into force and effect of the resultant Transaction Agreements shall be subject to the following conditions precedent: - the delivery by the Relevant Shareholders to Huge of a certified copy of a resolution of its board of directors or trustees (as the case may be) authorising the conclusion of the Transaction Agreements; - the delivery by Huge to the Relevant shareholders of a certified copy of a resolution of its board of directors authorising the conclusion of the Transaction Agreements;

3 - the receipt of all shareholder and regulatory approvals required for the implementation of the Transaction Agreements, either unconditionally or subject to conditions as are reasonably acceptable to all parties including the approval of the following to the extent required: - the JSE; - the TRP; - ICASA; and - the Competition Authorities, as applicable. - in the event that the Relevant Shareholders shall have exercised the Election, the procuring by Huge of unconditional and irrevocable undertakings from Placement Parties in favour of the Relevant Shareholders to purchase the Vendor Shares at no less than the Issue Price supported by such proof of funding as may be required under the Listing Requirements and reasonably acceptable to the Relevant Shareholders; - the procuring by the Relevant Shareholders of access to the books and records of Centracom in order for Huge to complete the Due Diligence; - the completion by Huge of a comprehensive legal, financial and technical due diligence investigation into the business and affairs of Centracom and its subsidiary companies ( Due Diligence ) within 45 days of the signature date of the Transaction Agreements; - the delivery by Huge to the Relevant Shareholders of a written notification that Huge is satisfied with the results of the Due Diligence within 45 days of the signature date of the Transaction Agreements; - on or before the last business day prior to the closing date of the Transaction Agreements, there has not occurred any: - revocation, or amendment of the terms and/or conditions of any licence or agency or distribution agreements in respect of the operations of Centracom or any subsidiary company of Centracom regarded by Huge in its sole discretion as being material to Huge; or - change in legislation or licensing dispensation applicable to the operations of Centracom or any subsidiary company of Centracom regarded by Huge in its sole discretion as being material to Huge; or - other act or event, which, upon occurrence, has or is reasonably likely to have, when measured on the day prior to the closing date of the Transaction Agreements (individually or in aggregate), a material adverse effect (as defined); - the conclusion of restraint of trade agreements with certain key employees of Centracom identified by Huge in its sole

4 discretion and subject to terms customary in South Africa for agreements of this nature; - where such consent is necessary, the consent for the transactions contained in the Transaction Agreements being obtained from the relevant counterparties to certain key contracts identified during the course of the Due Diligence; The transactions contemplated in the Transaction Agreements shall be subject to warranties customary in South Africa for transactions of their nature. In addition, the Transaction Agreements shall contain warranties that in the period between the signature date of the Transaction Agreements and the closing date of the Transaction Agreements: - Centracom has not proposed, declared or paid any distribution (including, without limitation, a dividend) to its shareholders; and - the shareholders of Centracom have not passed any special resolution (other than to approve of and give effect to the Proposed Transaction). DESCRIPTION OF THE BUSINESS OF HUGE TELECOM Huge Telecom Proprietary Limited ( Huge Telecom ), the principal operating subsidiary of Huge, provides communications services to corporate organisations and residential customers in South Africa. It is the only significant provider in the market of connectivity services using GSM and fixed-cellular customer premises equipment, which is a fixed-wireless service that it calls Fixed Cellular Routing or FCR. Huge Telecom s connectivity services integrate seamlessly with private automated branch exchanges ( PABXs ). The advantage of Huge Telecom s service offering lies in its simplicity and ease of installation and accordingly Huge Telecom s network maintenance costs are considered to be the lowest in the market and result in higher operating profit margins. Monthly service fault requests in the last 12 months have averaged less than 0.16% of the total installed telephone line base. Huge Telecom builds and controls a last mile network or local loop between its customers and the mobile network operators. The last mile of any network is the touch point with the end-customer and commentators therefore suggest that this can be considered to be that part of a communications network with the greatest value. The cost of installing a subscriber telephone line is approximately R5 000 and Huge Telecom s last mile network therefore represents a significant infrastructure investment.

5 FCR is a viable, cost-effective substitute for fixed-line public switched telephone ( PST ) networks like those provided by Telkom. Huge Telecom is partnering with Telkom by providing Telkom Mobile s connectivity as a substitute for Telkom s fixed-line or PST connectivity. Huge Telecom s connectivity services are distributed primarily to the SMME market. As it succeeds in demonstrating the mainstream characteristics of its services and as the adoption rate of the solution improves, penetration into the mid and upper segments of the market is increasing. Huge Telecom s dominance at present lies in the SMME segment of the market - this segment is recognised as the last unconquered frontier or the holy grail of customers because of the high level of penetration in the enterprise market. Huge Telecom provides services to over customers. Huge Telecom has no more than a 1.3% exposure to its single largest customer and accordingly, customer concentration risk is very low. Huge Telecom has more than 500 Business Partners, each of which employ a sales force, and this significant distribution capability underpins Huge Telecom s true potential as a distribution business. The value in Huge Telecom lies in its base of annuity revenues and the resultant cash flow generation, as well as in its last mile network which connects to its corporate and residential customers. DESCRIPTION OF THE BUSINESS OF CENTRACOM Centracom aggregates converged voice, connectivity and cloud solutions services utilising multiple leading technology brands and is engaged in the provision of these services within South Africa. Centracom offers connectivity through DSL, Diginet, Fibre, LTE and Wireless and aggregates its connectivity from a number of networks into its MPLS core, allowing it to offer cost-effective pricing through economies of scale. It offers its customers an infrastructure footprint covering 98% of South Africa. Centracom has partnered with leading hardware and network providers to deliver an infrastructure solution that is first-class, resilient, secure, competitive and, most importantly, that promotes business growth. Centracom s cloud solutions are hosted in multiple data centres, ensuring that customers have access anytime and anywhere and are managed and supported at the Centracom national operations centre.

6 RATIONALE FOR THE TRANSACTION Huge is intent on supplementing its high rate of organic growth by growing earnings aggressively through strategic acquisitions. Huge s proposed acquisition of Centracom is expected to result in: 1. An increase of 20% in its customer base to more than customers; 2. An increase of more than 50% in Huge s number of billed minutes; 3. Enhanced annuity revenue cash flows; 4. A substantial increase in the number of connections to corporate and residential customers; 5. An increase of at least 20% in the number of resellers (Business Partners); 6. Improved purchasing power with upstream suppliers; 7. An alternative last mile technology choice and the ability to aggressively compete with voice over Internet protocol (VoIP) competitors; 8. A platform to provision additional products and services such as data and cloud based services to its existing customer base; 9. The ease of integration of the operations of each company in each of the geographical locations in which Huge operates; 10. Enhanced intellectual property and human capital; and 11. Significant economies of scale which are achievable through the elimination of duplicate costs. In summary, an acquisition of Centracom will provide benefits which will result from economies of scale and which are expected to be significant and immediately realisable. The levels of synergy in terms of eliminating duplicated costs within the two businesses are high and the board of directors of Huge therefore believes that the Centracom Purchase Consideration is priced at a historical price-earnings multiple of approximately 6.6 when measured for the year ended 28 February Based on Centracom s revenues for the twelve months to 28 February 2015 and the Company s most recently published results, had the Proposed Transaction taken place at the beginning of that financial year, it would have the had the effect of increasing Huge s revenues by 42%. This statement, which is the responsibility of the directors, is for

7 illustrative purposes only and to provide information about how the Proposed Transaction could have affected the financial results of Huge for twelve months to 28 February However, this may not be a fair reflection of what the effect on Huge s financial results could have been. Shareholders are advised that any forecast financial information that may be contained in this announcement has not been reviewed by the Group s auditors. FINANCIAL INFORMATION As at 28 February 2015, Centracom s net asset value was R2.079m, it generated profit after tax of R4.382m and cash flow from operations of R8.681m. JSE LIMITED: LISTINGS REQUIREMENTS: CONTINUING OBLIGATIONS If Huge Proposed Transaction is implemented, Huge will have an obligation to ensure that the memorandum of incorporation of Centracom is aligned with its own and as such the Proposed Transaction will not be permitted to frustrate or relieve Huge in any way from complying with its obligations in terms of the JSE Limited s Listings Requirements. RENEWAL OF CAUTIONARY Details announced above relate to the Proposed Transaction. However, shareholders are advised to continue to exercise caution when dealing in the Company s securities until the conditions precedent to the Memorandum of Agreement have been fulfilled and the Transaction Agreements are formalised. In addition, the Company is involved in other negotiations with additional parties which may affect the price at which the Company s securities trade. Certain of these discussions are also now at an advanced stage and accordingly, shareholders are again advised to continue to exercise caution when dealing in the Company's securities until a further announcement is made. Johannesburg 30 October 2015 Designated Adviser: Stellar Advisers (Pty) Ltd