IN THE COMPETITION TRIBUNAL OF SOUTH AFRICA

In the mergers between: IN THE COMPETITION TRIBUNAL OF SOUTH AFRICA CC CASE NOs: 2011Dec0429 and 2011Dec0427 KENILWORTH RACING (PROPRIETARY) LIMITED First Acquiring Firm AND GOLD CIRCLE (PROPRIETARY) LIMITED First Target Firm and THE THOROUGHBRED HORSERACING TRUST Second Acquiring Firm AND KENILWORTH RACING (PROPRIETARY) LIMITED Second Target Firm FACTUAL WITNESS STATEMENT OF WILLEM ADRIAAN DU PLESSIS

Introduction 1 I am currently employed as the Group Chief Executive Officer of Phumelela Gaming and Leisure Limited ( Phumelela ). 2 I qualified as a Chartered Accountant (South Africa) in 1985 and obtained a Higher Diploma in Tax Law from the University of the Witwatersrand in 1988. I spent six years in investment banking, initially with FirstCorp Merchant Bank and thereafter with Rand Merchant Bank ( RMB ) where I became joint CEO of RMB s Corporate Finance Division. 3 Thereafter, I joined the Comparex Group in 1997 as international finance director and later held the position of Group CEO in 2000. During my tenure as CEO, Comparex was adjudicated the top performing company of all companies listed on the Johannesburg stock exchange by Financial Mail. 4 At the invitation of the Comparex board, I led a team of European managers in a management buy-out of the European businesses in 2002. My team and I successfully returned Comparex Europe to profitability within 19 months and we sold the business in 2007. Highlights of the MBO were that we reduced our annual cost base from Euro 119 million to Euro 70 million and repositioned the business such that by May 2004, Comparex Europe was adjudicated the fastest growing IBM business partner in the world, one of the top 5 business partners of EMC in the world, and pan-european business partnerships with Hewlett Packard and Sun Microsystems. 5 I was appointed Group CEO of Phumelela with effect from 1 August 2008. Specific targets set for me by the board include the repositioning of Phumelela s South African business and growing the PGE partnership s international business 2

6 I first set out below the general historical background and the process of corporatisation of horseracing in South Africa, before addressing the cooperation required from totalisator operators in administering the sport. I then turn to consider the proposed transaction. Historical background and the process of corporatisation 7 Prior to 1994, all forms of gambling other than horseracing were prohibited in South Africa. 8 In October 1994, the Lotteries and Gambling Board published an interim report (the Wiehahn Report ), which expressed a view that the Gambling Act, 51 of 1965 no longer reflects the true moral viewpoint of the majority of South Africans and that the Government should legalise lotteries and gambling in the Republic of South Africa. The full report was issued in 1995. The final report contained draft legislation for the regulation of gambling and lotteries. 9 Pursuant to the report, the policy and regulatory framework was put in place, closely following the recommendations and objectives of the Wiehahn Commission report. The National Gambling Act, 33 of 1996 and the National Lotteries Act, 57 of 1997 were promulgated, and the National Gambling Board and the National Lotteries Board were established. The National Lotteries Board was responsible for the regulation of a state-owned but independently operated national lottery, as well as for the administration of the National Lotteries Distribution Trust Fund (NLDTF). The National Gambling Board was not a regulatory body, but rather a body established to provide policy advice and to promote uniformity among provincial gambling regulators, which had responsibility for the licensing and regulation of gambling activities in their respective provinces. Each province also formulated and promulgated its own gambling legislation. 3

Within this regulatory context, the roll-out of gambling activities began, starting with the licensing of casinos within the maximum number of licences that had been set in national legislation. Bingo was also licensed initially, but its rollout was limited to the Gauteng Province. The roll-out of Limited Payout Machines (LPM's) occurred next. 10 The National Gambling Act, 33 of 1996 made provision for the granting of a maximum of forty (40) casino licences, and divided this up between the provinces. 11 The National Lotteries Board ( NLB ) was established in 1998. The first licensed operator for the National Lottery, Uthingo, was appointed in 1999, and the first draw of the National Lottery took place in March 2000. 12 By this time, the South African horseracing industry was in dire straits and interest in horseracing was waning as gamblers flocked to casinos situated in the erstwhile "homelands" and later to illegal casinos. In particular, illegal gambling in the metropolitan areas was rife and other forms of legal gambling were about to be introduced. As a direct result, racing clubs throughout the country faced severe financial difficulties. 13 In 1997 the three Gauteng racing clubs (Turffontein, Newmarket and Gosforth Park) approached the Gauteng Provincial Government for relief. Relief was granted on the basis of two primary conditions: 13.1 horseracing in Gauteng was to be corporatised and listed on the Johannesburg Stock Exchange to ensure proper corporate governance and accountability; and 13.2 the new corporatized structure was to be set up to achieve significant Broad-Based Black Economic Empowerment ( BBBEE ). 4

14 Gauteng horseracing was afforded a 30% stake (later increased to 35%) in Phumelela and provincial taxation on totalisator bets in Gauteng was reduced with the aim of providing the sport with relief. 15 By agreement with the Gauteng government, the Racing Association, with a membership comprised of racehorse owners (the former racing club members), was established to represent the interests of owners. The Racing Association is run by a board of directors elected from the ranks of members of the erstwhile Gauteng racing clubs. The agreement with Government also included the constitution of the Thoroughbred Horseracing Trust ("the Trust"). The Trust is a non-profit organisation whose purpose is to promote the interests of the sport and which was granted 35% of the shareholding in Phumelela to provide it with the annual financial means to do so. The Racing Association appoints five of the seven trustees to the Trust. Two further trustees are appointed by the Government s representative, the South African Sports Confederation and Olympic Committee, which, through Gride Investments (Proprietary) Limited, was allocated 5% of the shares in Phumelela at the time. 16 Unfortunately this intervention did not go far enough and, accordingly, the horseracing industry continued to deteriorate when legal casinos opened and the National Lottery commenced. 17 Experiencing similar financial difficulties as a result of the introduction of other legal forms of gambling, the horseracing clubs in the Free State, later followed by the Eastern Cape and the Northern Cape, subsequently transferred their business operations to Phumelela and their members became members of the Racing Association. Phumelela was listed on the JSE in June 2002. 5

18 For the same reasons, the 3 racing clubs in KwaZulu-Natal (Greyville, Clairwood and Scottsville) first merged, and thereafter, the Western Cape was merged into their operations under the banner of Gold Circle. 19 The Western Cape held extensive negotiations with a view to joining Phumelela, but at the last minute was persuaded to instead join the 3 KwaZulu-Natal racing clubs, based on the explicit commitment that the Western Cape would receive 42% of the combined Gold Circle stakes pot. 20 Horseracing is in competition with other forms of gambling that were legalised and which proliferated since the late 1990s. These are available to punters every day of the year and enable a punter to place bets very frequently in a given gambling session. Horseracing administrators have had to combine their efforts to achieve a number of objectives to attract punters: 20.1 In order to achieve the imperative of providing punters with betting opportunities every day of the year (except Christmas), and to support the infrastructure used for horseracing and the totalisator betting shops that depend on it, it became imperative to cooperate regarding the scheduling and administration of horseracing throughout the country. 20.2 In order to attempt to compete with the attractiveness of the large payouts offered by the single national lottery, and the large jackpot payouts of the casino slot machines, totalisator betting operators have had to commingle their pools, firstly on a national and thereafter on an international basis. For example, the recent introduction of the extremely popular Soccer13, commingled with Swedish pools (with pools regularly over R10 million and guaranteeing no less than 10 million Swedish Krone (about R12 million) payout if there were to be a single winner), indicates that pool sizes drive 6

tote betting. This is the only effective means for tote betting to compete with other forms of gambling and betting. 21 This process of rationalisation and combination of efforts is widely reflected by the developments observed in other countries around the world. Where other forms of gambling have been liberalised, the sources of funding for the sport that are derived from betting on horseracing have been cannibalised. Rationalisation has been necessary, combined with a more intensive use of remaining assets, in order to maintain the racing programme. 22 Phumelela and Gold Circle have made numerous submissions to local and national government in respect of the challenges facing local horseracing administrators and totalisator betting operators. In particular, Phumelela has made submissions and engaged in the lobbying of government on, inter alia, the following topics: Legislation for a single national totalisator 22.1 The National Lottery is regulated and pays gambling taxes on a national basis whereas totalisator operator licences are issued by the provincial gambling boards. Each gambling board applies its own rules and tax rate to licensed totalisator operators. Moreover, for the reasons I have already indicated, small totalisator betting pools are unattractive to punters and, as a result, commingling occurs. Accordingly, Phumelela has submitted to government that a single national totalisator should be established. Restructuring the taxation of betting and the funding of the sport, and in particular bookmakers' contributions to the funding of the sport 7

22.2 The sport of horseracing is the only sport in South Africa that depends on gambling and betting for most of its revenue. Totalisator betting represents approximately 54% (fifty four percent) of total betting on the sport and contributes approximately 88% (eighty eight percent) to the costs of staging the sport. Fixed-odds betting, on the other hand, represents approximately 46% (forty six percent) of total betting on the sport and contributes only 12% (twelve percent) of the cost of staging the sport. Accordingly, bookmakers are required to contribute disproportionately less of their betting revenue towards the funding of the sport. Phumelela has proposed that increased betting taxes should be levied on bookmakers and allocated to funding the sport of thoroughbred horseracing. Further forms of tax relief proposed by Phumelela include the exemption of totalisator operators from the withholding tax on gambling proposed by the National Treasury and zero rating totalisator bets for value-added tax. Proposed legislation prohibiting the open bet 22.3 As discussed further below, the open bet involves a punter placing a bet with a bookmaker. The bookmaker does not place the bet on the totalisator, but holds the money and pays the punter the totalisator dividend if the bet wins. The odds are not fixed at the time that the bet is struck. Accordingly, the open bet enables the bookmaker to accept totalisator bets without being licensed to operate a totalisator or being required to return the same amount of funding to the sport of horseracing. Liberalisation in respect of the licensing of totalisator and bookmaker outlets 22.4 The National Lottery is permitted to offer gambling opportunities in approximately 7,000 retail outlets, whereas totalisator betting opportunities 8

are far more restricted. Phumelela and Gold Circle collectively operate in approximately 400 retail betting outlets. Phumelela has proposed that licensing should be liberalised to render totalisator betting more competitive. Phumelela has proposed measures such as the granting of more permissions for venues where totalisator terminals can be deployed, the granting of casino licences ("racinos") to racing venues, provision for route operator licences for limited payout machines at all racing venues and in all totalisator outlets, and the provision for fixed-odds betting licences in all totalisator outlets. 23 Despite all of these efforts, the core business of horseracing and totalisator betting remains unprofitable in South Africa. Horseracing is a costly and heavily labour intensive form of gambling, in which costs have increased ahead of inflation. In short, it would be far more cost-effective to bet on races staged by other operators, but this commercial attitude would hasten the demise of horseracing in South Africa. Horseracing administrators have had to diversify and internationalise, in order to find other sources of revenue, with which to subsidise the continued existence of horseracing within South Africa. 24 Specifically with regard to this transaction, unless the Western Cape business of Gold Circle is repositioned and restructured, thoroughbred horseracing will not be viable or sustainable in the Western Cape. The failure of thoroughbred horseracing in the Western Cape will be detrimental to the interests of persons interested in, and affected by, the sport of thoroughbred racing and the viability of the sport, not only in the Western Cape but also in the rest of South Africa. 25 Racing in the Western Cape is an important part of South African racing. The quality and size of the population of horses in training in the Western Cape (many 9

of which are located in the Western Cape to be close to their owners) and the unique climatic conditions in the Western Cape, combined with a rich historical heritage, make for particularly attractive, high-quality racing during the peak racing season in the Western Cape of December, January and February. Racing in the Western Cape is important in supporting significant betting revenues throughout the country, and is an integral part of South African racing as promoted and commercialised internationally. The Western Cape also constitutes the third largest volume of horseracing betting turnover, which significantly increases the national pools available to totalisator betting punters throughout the country. 26 I describe below the two distinct activities of horseracing administration and commercialisation. Horseracing administration 27 The primary function of horseracing administrators is to administer the sport of thoroughbred horseracing by staging race-meetings and providing racing and training facilities in their respective provinces. 28 Aside from providing the infrastructure and associated services required for horseracing to take place, the administrators offer prize money ( stakes ) to the owners of racehorses that compete successfully in the races that the administrators stage. The total value of stakes provided by the administrators in each of the previous four years was approximately R300 million per year. These stakes are primarily funded by turnover yielded by the totalisator. Thus, unless punters can be attracted to participate in the totalisator, this turnover declines and, along with it, the stakes for which owners compete will also decline. Owners spend approximately R500 million annually to purchase racehorses and a further approximately R600 million annually on training, stabling, veterinary and other 10

ancillary costs in racing their racehorses, yet compete for only R300 million in stakes. This is a threat to the sustainability of, and broad-based participation in, the sport. 29 In addition to attracting owners, trainers, jockeys and spectators to these race meetings, the content generated by the administrators holding of race meetings is used to enable the provision of totalisator (and other) betting services to punters (both at race venues and off-course betting outlets, telephone and internet websites). It is provided as audiovisual content to domestic and international broadcasters and gambling operators (i.e. bookmakers and totalisator operators). 30 The horseracing administrators in South Africa also supply data for the publication of form guides to be used by punters. These form guides are either published directly by the administrators (e.g. Computaform and Computaform Express ), or are provided to third-party publishers. Some of these form guides are also made available electronically. These activities are considered further below. I merely note here that the racing operators took over the publication of Computaform from the Caxton Group and of the Tellytrack broadcast production, from the previous owners who had decided to discontinue these operations as a result of the losses incurred, in order to continue to make this information available to punters. Both of these avenues of providing racing-form information to punters continue to make a loss. 31 The administrators also make contributions to the following organisations necessary for the operation of thoroughbred horseracing and betting thereupon in South Africa: 11

31.1 Racing South Africa, an independent organisation which administers programmes such as equine health and research and promotes the export of thoroughbred racehorses; 31.2 the National Horseracing Authority, the independent regulator of the sport of thoroughbred horseracing; 31.3 the South African Jockey Academy, an independent school responsible for the training and education of jockeys; 31.4 the National Racing Bureau, which keeps records of racing events and statistical information; 31.5 the training of grooms at grooms training schools; and 31.6 various corporate social investment programmes. 32 At present Phumelela operates and administers thoroughbred race meetings in the Eastern Cape, Free State, Gauteng and the Northern Cape. Gold Circle operates and administers race meetings in KwaZulu-Natal and the Western Cape. There are no horseracing administrators active in Limpopo, Mpumalanga and the North West, and it would probably not be feasible to stage thoroughbred horse racing in these provinces as a result of the prevalence of African Horse Sickness, Equine Flu, Foot-and-Mouth Disease and Tuberculosis. 33 In general, owners and trainers do not readily move their horses between provinces in response to stakes differentials: 33.1 By far the majority of horses predominantly race in one racing centre throughout a season, and even across multiple seasons. This is typically where the owner resides, so that the owner can attend the race course 12

and watch his or her horse train and run. This is part of the thrill of being an owner. 33.2 A relatively small number of the better quality horses move between provinces in response to historical patterns of seasonal racing, following races such as the Sansui Summer Cup, the J&B Met, and the Vodacom Durban July. Exceptional horses may also move on to international venues, such as Dubai and Hong Kong, based on their ability. 33.3 Finally, horses with a lower merit rating are moved to racing centres such as the Eastern Cape, the Northern Cape and also Zimbabwe, Kenya and Mauritius where the races staged are for horses of comparable ability or, failing such a move, they are simply retired from racing. Cooperation between horseracing administrators 34 It is necessary to coordinate the activities of the horseracing administrators in respect of the administration of the sport of horseracing, in order to most efficiently provide a high quality sport that will attract interest from owners, trainers, jockeys and punters. In particular this cooperation most effectively provides: 34.1 an attractive competitive contest in which the outcome is difficult to predict; 34.2 high quality racing; and 34.3 efficient scheduling. An attractive, competitive contest. 35 In common with all sports, and perhaps accentuated in the case of horseracing by the close linkage with the betting activities which ultimately fund the sport, punters, viewers, owners and trainers place a huge value in participating in a sport 13

which is competitive and in which there is genuine uncertainty as to the likely winner. The two key features of thoroughbred horseracing in this regard are as follows: 35.1 The merit racing system provides an initial mechanism by which horses of a similar ability are directed to race against one another. Under this system, factors such as the results of past horse races are used to assign merit ratings to every horse that wishes to race in South Africa. Winning races and times achieved will improve a horse s merit rating. Races are then categorised according to the merit ratings required for entry into each race. Accordingly, the merit rating system allows much wider participation by a much larger population of horses, as each horse is rated to only race against similarly ranked horses. It also extends a horse s racing career as, once it has been established that it does not have the ability to win a top race, it can still compete fairly against horses with a similar merit rating. Such a system is similar to the leagues that are used to group athletes and teams with similar abilities in golf, soccer, rugby and other sports. 35.2 Handicapping then provides a finer layer of adjustment by which horses of similar ability are given a slight weight advantage or disadvantage, relative to one another, with the objective of making each such race as even a contest as possible. Higher rated horses carry bigger weights than the lower rated horses. Handicapping is subjective by its very nature as the ratings allocated are based on the opinions of the national panel of handicappers, who operate in terms of a set of guidelines in an attempt to be as consistent as possible. Consistency in applying the system is vital as it affects the outcome of handicap races. Nationally, around 80% of all races are handicap races. If there are inconsistencies it affects the 14

credibility of the racing product with stakeholders and betting customers. The handicappers are employed by the NHA. Quality control 36 Punters and viewers also place a high value on participating in a sport in which there is a uniformly high standard of quality. This extends beyond providing consumers with a consistent and familiar format, both for the competition, and for the way in which the sport is made available (e.g. through televised content), but also through providing a consistently high quality of sporting product across all race meetings, regardless of the operator staging them. 36.1 First, punters want to know that when they watch South Africa racing, they can always expect to watch a fair race. Stipendiary stewards (who are also employed nationally by the NHA) ensure that the rules of the sport of horseracing (captured in the NHA Rules) are implemented and adhered to at all times by the various participants in the sport (i.e. owners, trainers, jockeys etc, all of whom are licensed by the NHA). Stipendiary stewards ensure the integrity of the sport by policing the rules at every race meeting, thereby monitoring and ensuring that all races are run fairly and that no cheating is permitted or unfair advantage gained. This applies, inter alia, to dealing with interference in races, and testing and enforcing the applicable medication rules for jockeys and horses. Consistency in applying the NHA rules is essential to ensure a credible product for both stakeholders and punters. Phumelela are currently investigating (with the NHA) the feasibility of having a single national stipendiary steward panel to preside over all races run nationally, so as to further improve the required consistency. 15

36.2 Second, both local and international punters expect a consistent quality and depth of each field in South African horseracing. Punters value larger fields, with 10 to 12 runners per race being optimal. A greater or lesser number of runners in a race will fail to capture punters interest. Punters also value watching high quality fields. Punters not only value the depth and quality of a field on any given race, but also value the consistency and predictability of knowing that South African horseracing will consistently be of a high quality. This, again, is common across many sporting contests, where consumers will place a high value on the expectation that a given product (e.g. PSL soccer) will always be of a particular quality. Scheduling 37 Punters, who are the predominant consumers of the content that arises from horseracing events, have a strong demand for horseracing to be staged all around the country, and for it to take place on a continuous basis. 38 In competition with other forms of gambling, which are available every day of the year, horseracing administrators therefore must provide horseracing events on every day, so as to support the infrastructure used for horseracing and the totalisator betting shops that depend on it. 39 Subsequently, South African horseracing content is commercialised internationally to a number of partners who require racing content on every day of the year (except Christmas Day). These customers would include the majority of those customers identified in paragraph 61, below. 40 Furthermore, punters value consistency and predictability in racing scheduling (e.g. racing in Port Elizabeth on Fridays). 16

41 Weather plays a particularly important role in scheduling of race meetings. Racing in the wet and windy winter months in the Western Cape is almost impossible. Similarly, racing on the Highveld in the harsh winter months is arduous on the horses. To ensure that South African punters can enjoy racing consistently throughout the year it is therefore necessary to schedule racing according to optimal weather conditions, with KwaZulu-Natal being the ideal province in which to race during Winter, the Western Cape in the Summer (especially during the holidays in December and January when many inland enthusiasts are on holiday at the coast) and the Highveld in Autumn and Spring. 42 A full schedule of horseracing events also provides efficient employment for jockeys and trainers, who can compete in multiple race meetings in any particular week. 43 There are practical constraints on what can be achieved by any particular horseracing administrator, not only in terms of the need to repair and treat the physical tracks on which the horses have raced, or the months in which inoculation takes place, but also more generally in scheduling fixtures to recognise demands placed on the horse population that is locally available in each region. 44 In order to take into account these different factors, primarily driven by punter demand, as well as the constraints of the industry within each province in South Africa, it is necessary to coordinate scheduling between the different horseracing administrators. 45 In the absence of such coordination, scheduling clashes (e.g. every racecourse only operating on a Saturday) would not only negatively impact upon consumers (punters, who have a much higher valuation for continuous racing opportunities), but would also have disastrous cost consequences for owners as jockeys would 17

not be able to make a living riding at only one race meeting per week. Such coordination over fixtures and scheduling is the case in most major racing countries (even in countries like the UK and USA where the ownership of racecourses or racing operators is fragmented). 46 Within South Africa the racing schedule, or fixtures, are decided by the Fixtures Committee with the objective of maximising the output of the combined activities of horseracing and the output of betting activities which primarily fund horseracing administration. The operators sit on this committee and determine an annual calendar of horseracing fixtures. This calendar takes account of the following factors: 46.1 there must be racing every day (except Christmas Day) in South Africa, including by taking account of seasons and the likelihood of weather disruptions; 46.2 there must be maximum opportunity to attract participation in betting (by avoiding scheduling clashes); 46.3 there should be consistency and regularity of scheduling between racecourses; 46.4 the demand arising from the size of the available horse population in a region; 46.5 the wear and tear and maintenance requirements of the racetracks; 46.6 the obligation to export South Africa racing broadcasts to other racing destinations including the U.K., Australia, Italy, Turkey, Singapore and France; and 18

46.7 the need to accommodate weather abandoned race meetings within the schedule. 47 Once the fixtures have been determined, each region determines the programme to fill those fixtures. Each operator will determine the type, distance and grade of race that will take place on a given race day fixture. The programming committee that determines these programmes is comprised of the operator concerned together with local trainers' representatives and the local Racing Association. This includes determining and facilitating entry and declaration of horses for particular races ahead of that fixture. Commercialisation 48 Income from horseracing for operators is primarily derived from totalisator betting, although smaller amounts are derived from the betting taxes paid by fixed odds punters and collected by bookmakers, part of which is passed on to the horseracing administrators. In addition, income is derived from the sale of the content generated by the racing activities and the foreign racing content licensed for inclusion on televised racing channels to local bookmakers and foreign broadcasters and betting operations. 49 As noted above, in addition to their administration activities, Phumelela and Gold Circle offer totalisator bets to punters, and operate totalisator betting offices within their relevant provinces. Offering totalisator bets requires a licence from a provincial gambling board. Phumelela holds totalisator licenses in the Eastern Cape, Free State, Gauteng, Limpopo, Mpumalanga, the Northern Cape and North West Provinces. Gold Circle holds totalisator licences in Kwazulu-Natal and the Western Cape provinces. 19

50 These providers offer totalisator betting services at the race venue, at retail outlets in the provinces in which they are licensed or via the telephone or internet. 51 A totalisator works in the same way as the National Lottery and cumulative jackpots from slot machines in casinos, namely by placing all punters bets into a pool. Operators then extract a take out from this pool, which includes valueadded tax, provincial betting taxes and other fees, and the net pool is then divided amongst the winners. As in the case of the National Lottery and slot machines, the bigger the pool, the larger the attraction for a punter to place a bet. 52 Through commingling, operators can make the pool even larger and more likely to attract the gambler s rand, by combining the betting pools from punters from more than one province (or indeed internationally). There are at least two direct benefits to punters that derive from commingling. 52.1 First, a larger pool renders the payout less sensitive to any individual punter s bet. 52.2 Second, if a larger pool adds diversity through the addition of new and different punters, commingling will additionally make the totalisator bet more attractive by improving the payout for successful punters. 53 The open bet is detrimental to the sport as the same outcome and the same payout contributes about 16% of turnover to the funding of the sport when placed with the Tote, whilst it generates less than 3% if placed as an open bet with a bookmaker. The open bet is also detrimental to tote punters since bookmakers stand the bets that are less risky for them. Bookmakers who accept the open bet will lay off (i.e. insure themselves by placing a corresponding bet on the tote itself) the bets with greater risk, where the they perceive that they are in greater risk of having to pay out the bet. Accordingly in those cases, the bookmaker s 20

payout to winning punters will effectively be paid by the tote (as the bookmaker will effectively win on the tote, and pass those winnings on to the punter who placed the open bet with the bookmaker in the first place). The result is that the winning punters on the tote will accordingly receive a much smaller payout than they would have received if the open bets (withheld by the bookmaker) were included in the tote pool. 54 Horseracing content is also made available to punters both locally and internationally, by television, internet, and feeds broadcast in tote and bookmaker outlets. These broadcasts are not essential since punters may place several bets at a time and not be present when the races are actually run (and broadcast) or even bet on sporting events that are not televised at all, but they do enhance the atmosphere in tote and bookmaker outlets. Cooperation in the commercialisation of horseracing 55 It is necessary to ensure cooperation between the activities of the different totalisator operators, and the different horseracing administrators in respect of the administration of the commercialisation of the sport of horseracing in order to provide a competitive offer to punters, and in order to efficiently provide a consolidated set of content to consumers. In particular: 55.1 It is necessary to commingle tote pools nationally, in order to provide an attractive betting opportunity, in competition with other forms of gambling. But for the existence of exchange controls and other legislation preventing cross-border gambling, South African punters would far prefer to bet into the much larger lottery and tote pools available in foreign jurisdictions. 21

55.2 It is necessary to coordinate amongst the horseracing administrators, in order to provide consolidated content that does not suffer from scheduling conflicts including South African horseracing from around the country. Commingling 56 In South Africa, Phumelela s betting operations in Gauteng operate the host tote, SAFTOTE. The smaller pools from Phumelela s other provinces are commingled into the host tote as guest totes. SAFTOTE is the host tote since it generates the largest pool but it is not necessarily the operator hosting race meetings on a given day. Gold Circle commingles all their tote bets in the Western Cape and KwaZulu- Natal into Phumelela s host tote pools. Consolidation of content 57 Consumers place a higher value on consolidated and coordinated content across a given sport, than they would place on a number of discrete but uncoordinated offerings. In particular, the sport of horseracing is inextricably linked to the commercialisation of the sport, which largely occurs through betting. Given that betting is a real time activity, consumer valuation significantly increases if scheduling clashes are avoided, and there is a significant increase in demand for continuous provision of betting opportunities on a daily basis. 58 Consumers also place significant value on not having to visit several channels in order to consume content across a given sport (so called multi-homing, which might involve different television channels, or visits to different betting outlets, or different public venues). Such consolidation of content requires significant coordination, not only of formats, but also scheduling and timing, which can result in a significant increase in consumer welfare. 22

59 Gold Circle and Phumelela partner to provide data and audio visual horseracing content locally via Phumelela Gold Enterprises ( PGE ). 60 The "local" horseracing channel, Tellytrack, is a satellite channel broadcast on DSTV in Sub-Saharan Africa (Angola, Botswana, Lesotho, Malawi, Mozambique, South Africa, Namibia, Swaziland, Zambia and Zimbabwe), which is different, in terms of content, operation and distribution, to the various mediums of South African horseracing that are sold and distributed to the international market. Tellytrack is an aggregated service, which includes audio visual coverage of South African horseracing (about 25% of content) and coverage of other horseracing that is imported from 14 (fourteen) different countries around the world (about 75% content). Bookmakers bargain collectively with PGE in respect of the fee they are charged for the South African material displayed on Tellytrack. 61 Audio visual coverage of South African horseracing is distributed internationally in the following mediums: 61.1 a clean feed of South African thoroughbred horseracing which has no graphics, previews, tips, in-studio production or continuity. This feed is sold to international totalisator operators, broadcasters, and bookmakers in the UK (SiS and ATR), Ireland (Cobain) and Australia; 61.2 a fully produced feed of South African thoroughbred horseracing, Horseracing SA, which is sold to totalisator jurisdictions such as Singapore, Malaysia and Macau and has graphics, previews (both in English and Cantonese), tips, betting scrolls and non-stop comment. This feed is displayed at the race tracks in the territories in which the feed is distributed and in their totalisator betting shops; and 23

61.3 the Racing International (RI) branded channel, which is comprised predominantly of South African racing but also includes simulcast audio visual content of race meetings in respect of which PGE has acquired international distribution rights (e.g. Zimbabwe, Dubai, Mauritius and Singapore). RI is primarily distributed to bookmakers in the Caribbean, Belgium, Austria, Romania, Denmark, Italy, the Netherlands, Poland, Spain, Turkey, Pakistan, Kenya, Cyprus, Azerbaijan, Germany and the USA. The Proposed Transaction 62 The proposed transaction will occur through the implementation of a suite of agreements, described below. Their commercial and practical effect is also set out below. Replacement of pre-existing agreements 63 In terms of the Demerger Sale of Business Agreement, Kenilworth Racing will acquire 14.04% of the interest in the PGE partnership, which was constituted between Phumelela and Gold Circle. 1 Accordingly, it would be necessary to dissolve and reconstitute the PGE Partnership to admit Kenilworth Racing as a party to the partnership. To this end, the Demerger Sale of Business Agreement provides for the conclusion of an agreement to admit Kenilworth Racing to the partnership in respect of the partnership interest forming part of the assets sold. 2 64 During the process of negotiation, the parties agreed that it would be more appropriate for the PGE Partnership Agreement to be replaced by three 1 Item 2.1 of Schedule 1 of the Demerger Sale of Business Agreement concluded by Gold Circle and Kenilworth Racing on 24 October 2011. 2 Clause 3.1.4.5 of t the Demerger Sale of Business Agreement concluded by Gold Circle and Kenilworth Racing on 24 October 2011. 24

agreements: the Sport Administration Agreement, the Substitute Partnership Agreement and a Licence Agreement. '''''''''''''''''' ''''''''''''' '''''''''''''''''''''''''''''''''' '''''''''''''''''''''''''''' '''''''''''''''''''' '''''' ''''''' ''''''''''' ''''''''''''''''''''''''''''''''' ''''' ''''''''' ''''''''''' ''''' '''''''''''''''''''''''''''''' ''''''''''''''''''''''''' '''''' ''''''''''''''''''''''''''' '''''''''' '''''''''''''''' ''''''''' '''''''' ''''''''''' '''''''''''''''''''''''''''' ''''''''''''''''''''''''' '''''''''''''''''''''''''''''''''' ''''''''''''''' ''''''''''' '''''' ''''''''''''''''''''''''''' ''''''''' '''''''''''''''''''' '''' '''''''''''''' '''''''''''''' ''''''''''' ''''''''''''''' '''''''''' ''''''''''''''''''''''' '''''''''''' ''''''''''''''''''''''''' '''''''''' '''''''''' '''''''''' ''''''''''''''''''''''''''''''' '''''''''' ''''''''''''''''''' ''''' ''''''''' ''''''''''''' '''' '''''''''' ''''' '''''' ''''''''''''''''''''' ''''''''''''''''''''''''' ''''''''''''''''''' '''''''''''''''''''''' ''''''''''''''''''''''''' ''''''''''''''''''''''''''' ''''''' '''''''''''''''''''''' ''''''''''''''''''''''''' '''''''''''''''''''''''''' ''''''''''''''''''' '''''' ''''''' ''''''''''''''''''''''''''' ''''' ''''''''' ''''''''''' ''''''''''''''''''''''''' ''''' ''''''''''''''''' ''''''''' ''''''''''' ''''''' '''''''''''''' '''' ''''''' ''''''''''''''''''''''''' '''' '''''''' '''''''''''''''''' '''''''''' '''''''''''''''''''''' ''''' ''''''' '''''''''''''''''''''''' ''''''''''''''''''''' '''''''''' ''''''''''''''''''''''''''' '''''''''''''''''''''' '''''''''' '''''''''''''''''' ''''' ''''''' '''''''''''''''''''' '''''''''''''''''''' '''''''''''''''''''' '''' ''''''''''''''' '''''''''''''' '''''''''' ''''''''''''''''''' '''''''''''''''''' ''''''''''''''''''' '''''''''''''''''''''''''' ''''''''''''''''''''' '''''' '''''''' '''''''''''' '''''' ''''''''''' ''''''''''''' ''''' '''''''''''''''''''''''' ''''' ''''''' '''''''''''''''' '''' '''''''''' ''''''''' '''''''''''''''''' '''''''''''''''' ''''' ''''''''''''' '''''''''''''' ''''''''' '''''''''''''''''''' '''''''' ''''''''''''''''''''''''''' ''''''''''''' '''''''''' ''''''''''''''''''''''' ''''''''''''''''''' ''''' '''''''''''''''''' ''''' '''''''''' '''''''''''''''''''''' '''''''''' ''''' '''''''''''''' ''''''''''''''''' '''''''''''''''''''''''''''''''' '''''' '''''''''''' ''''''''''''''' '''''''''' ''''''''''' ''''' ''''''''''' '''' ''''''''''''' ''''' '''''''' '''''''''''''''' '''''''''''' '''''''''''''''''''''''' '''''''''''''''''''''''' ''''' ''''''' ''''''''''''''''''''''''''' ''''''''''''''''''''''' '''''''''''''''''''' ''''''''' '''''''''''''''''''''''''''''''' ''''''''''''''''' ''''' '''''''''''''' ''''''''''''''''''''''''' ''' ''''' ''''''''''''''''''''''''''' '''''''''' ''''''' '''''''''''''''''''''''''''' '''''''''''''''''''''''''' ''''' '''''''''''''''''''''''''' '''''''''''' '''''''''' '''''''''''''''''''''''' '''''''''''''''''''' ''''' '''''''''''''''''' '''' ''''''''''' ''''''''''''''''''''' '''''''''' ''''' ''''''''''''' '''''''''''''''''' ''''''' '''''' ''''''''''''''''''''''' '''''''''''''''''''' '''' '''''''''''''''''' '''''''''''''''''''''''''''' ''''''''''''' ''''''''''' ''''' '''''''''''' ''''' ''' '''''''''''''''''''''''' ''''''''''''''''''''''''' 65 At the time that the Demerger Sale of Business Agreement was signed, it was not envisaged that the PGE Partnership Agreement would be replaced by the three 25

agreements referred to in paragraph 64 above. In the Fifth Addendum to the Demerger Sale of Business Agreement, the parties provided for the conclusion of the Sport Administration Agreement and the Tellytrack Partnership Agreement between Phumelela and Gold Circle and for the conclusion of addenda thereto to admit Kenilworth Racing as a party to those agreements. 3 Although the Demerger Sale of Business Agreement does not provide for the conclusion of a Licence Agreement between Phumelela and Kenilworth Racing (or between Phumelela and Gold Circle for that matter), it is envisaged that each of Gold Circle and Kenilworth Racing will enter into licence agreements, as licensors, with Phumelela, as licensee, for the use and exploitation outside of South Africa and Namibia, of the commercial rights and intellectual property in respect of race meetings held at their respective racing venues. 66 In terms of the Fifth Addendum, 4 the Demerger Sale of Business Agreement is also made conditional upon the conclusion of a commingling agreement between Phumelela (as the host tote) and Kenilworth Racing (as the guest tote). The Commingling Agreement entered into between Phumelela and Gold Circle on 12 April 2002 ("the Commingling Agreement") will be amended by a Substitute Commingling Agreement to provide for the application of host tote rules and other matters that have been agreed between Phumelela and Gold Circle. Changes to the pre-existing agreements which were inevitable irrespective of the proposed transaction 67 Aside from the changes necessary to reconstitute the PGE partnership to admit Kenilworth Racing as a party, the PGE partnership would have been restructured in any event to provide for the continued conduct of Tellytrack, the broadcasting of 3 Clause 3.1 of the Fifth Addendum to the Demerger Sale of Business Agreement concluded on 15 December 2011. 4 Clause 3.2 of the the Fifth Addendum to the Demerger Sale of Business Agreement concluded on 15 December 2011. 26

race meetings internationally and the administration of the sport as separate undertakings. What was previously the PGE partnership agreement would, in any event, have been modified to provide for points of commercial agreement between Phumelela and Gold Circle, such as the payment of royalties for the use of Phumelela's soccer and rugby sports betting products (and not only the payment of a host track fee). The Commingling Agreement contemplated that Phumelela would be the manager of Gold Circle's totalisator activities. ''''' ''''''''''''' '''' '''''''' ''''''''''''''''''''''' '''''''''''''''''''''''''''''' '''''''''''''''''''''''' '''''''''''''''''''' '''''''''''''''''''''''''''' ''''' ''''''' ''''''''''' ''''''''''' ''''''''''' ''''''''''''''' '''' ''''''''' '''''''''''''''''''''''''' '''''''''''' ''''''''''''''''''''''''' ''''''' '''''''''''''''''''' ''''' ''''''''''' '''''''''' '''''' '''''''''''''''''''''''''''''' '''''''' '''''''''''''''''''''' '''''''''''''''''''''''''''''''' '''''''''' '''''''''''''''''''' '''' '''''' '''''''''''' Changes to agreements which were necessary as a result of the Piggs Peak decision 68 I am advised that the effect of the Casino Enterprises (Proprietary) Limited v Gauteng Gambling Board and Others 5 judgment by the Supreme Court of Appeal ( the Piggs Peak decision ) is that where a betting operator accepts a bet placed telephonically or via the internet, betting will occur where the punter is located and where the betting operator's call-centre or server is located. The betting operator is therefore, in the absence of provisions to the contrary in applicable legislation, required to be licensed to accept such bets in the province in which the punter is located and in the province where its call-centre or server is located should these provinces not be the same. 69 In view of the Pigg's Peak decision, it was necessary to provide, in the Substitute Commingling Agreement, for instances where a punter located in a province in which one party holds a licence places a bet with a party which holds a licence in 5 2011 (6) SA614 (SCA). 27

a different province. ''''''''''''''''''''''''''' '''''''''''''''' ''''''' ''''' ''''''''' '''''''''''' '''''''''''''''''''''' '''''''''''''''''''''''''''''''' '''''''''''''''''''''''''''' '''''''''''''''''''''' ''''''''' ''''''''''''''' '''' '''''''''''''' ''''''''''''''''' ''''' ''' '''''''''''''''''' ''''' ''''''''''''' ''''''''' '''' ''''''' '''''''''''''''' '''' ''''''''''''''''''' '''''''''''''' '''' ''''''' ''''''''' '''''''' '''''''''''''' ''''''''''''''' ''''''' ''''''' ''''''''''' '''''' ''''''''''''''''''''' ''''' '''''''''''' ''''''''''''' ''''''''''''''''''''''' ''''' ''''''' '''''''''''' '''''''''' '''''''''''''' ''''''' '''''''' '''''''''' ''''''''''''''' ''''''' '''''''''''''''' '''' '''''''''' '''''' ''''''' '''''''''''''' '''' ''''''' ''''''''''''' '''' ''''''''''''''' ''''''''''''''''''' ''''''' ''''''''''''''' '''' '''''''''''''''''''' Changes in the agreements arising from the proposed transaction 70 There are no provisions that would be changed in the agreements which arise solely from the proposed transaction save for changes necessary to give effect to the admission of Kenilworth Racing to the Tellytrack Partnership Agreement and the Sport Administration Agreement. Post-merger, it is anticipated that the Tellytrack Partnership business will be conducted in a similar way as it was previously conducted. Changes to the agreements governing the administration of the sport, and the motivation for and the effects of these changes 71 In terms of the Sport Administration Agreement the parties recognise that the sport of thoroughbred horseracing is in decline, and the parties make commitments in order to ensure the sustainability of the sport. In particular, the parties commit to holding specific numbers of fixtures or race meetings or races. 6 72 The Sport Administration Agreement specifically contemplates that, if further thoroughbred racecourse administrators are established and licensed in South Africa it is their intention that each such licensed administrator of the sport in 6 Clause 4 of the draft Sport Administration Agreement between Phumelela and Gold Circle dated 28 August 2012. 28

South Africa will be invited to participate with the parties in the administration of the sport. 7 73 The agreement terminates and supersedes the NRB Agreement, 8 which provided for the establishment of the National Racing Bureau. The functions performed by the Bureau and its management by Gold Circle remain largely unchanged postmerger. 74 The agreement provides that if a party is responsible for the production of racing information that circulates predominantly in another party's regions, the party in whose region the racing information is predominantly circulated shall be entitled to direct the editorial and advertising content of such information. 9 '''''''''''''''''''''''' '''''''' ''''''''''''''''''''''''''' ''''''''''''''' ''''''''''''''''''''''' ''''''' '''''''''''' ''''''''''''' ''''''''''''' '''''''''''''''''' '''' ''''''''''''' ''''''''''''''''''''''''''''''''' ''''''' ''''''' '''''''''''''''''' '''''''''' '''''''''''''''''''''''''' '''' ''''''''''''''''''''''''''''' ''''''''' ''''''''''''''''''''''''''''''''''' '''''''''''''''''''' '''''''''''''''''''''''''''' ''''''''''''''' '''''''''''''''''''''''''' ''''''''''''''''''''''''''''''' ''''' ''''' ''''''''''' ''''''''''''''' '''' '''''''''''' '''''''''''''' ''''''' '''''''''' ''''''''''' '''''''''''''''''''' ''''' '''''''''''' ''''''''''''' '''' ''''''''''''''''''''''''' ''''''' ''''''' '''''''' ''''''''''' ''''' '''''''''''''''''''' '''''''' '''''''''''''''''''''''''' '''''''''' ''''''''''''''''''' ''''' '''''''''''''''' ''' ''''''''''''''''''''''' ''''' '''''''''''' '''''''''''''' ''''''''''''''''''''''''''''''''''''''' 75 The Sport Administration Agreement provides for the establishment of a Racing Committee to oversee the management of the Bureau by Gold Circle, the National Fixtures Committee and the joint administration of the sport by the parties. 10 Although the PGE Partnership Agreement provided for an Executive Committee, each party shall have the same number of votes at meetings of the Racing Committee and an equal number of votes. The chairman will have a casting vote except in respect of certain matters which are resolved by a deadlock provision in 7 Clause 3.2 of the draft Sport Administration Agreement between Phumelela and Gold Circle. 8 The agreement concluded by Phumelela and Gold Circle on 25 April 2007 in order to establish the National Racing Bureau. 9 Clause 6.6.4 of the draft Sport Administration Agreement. 10 Clause 7 of the draft Sport Administration Agreement. 29

the agreement 11 The Executive Committee in the PGE Partnership Agreement was comprised of 3 representatives from Phumelela and 2 representatives from Gold Circle 12 with each partner having the same number of votes as the number of the partner's participation share so that Phumelela would have 61 votes and Gold Circle 39 votes. Management Agreement between Gold Circle and Phumelela concluded on 15 November 2011 76 The Demerger Sale of Business Agreement is conditional upon the conclusion of a management agreement between Phumelela and Gold Circle, which provides for the management of the Western Cape division of Gold Circle's horseracing and gaming business for the period from 1 February 2012 until the Closing Date of the Demerger Sale of Business Agreement. 77 ''''''''' ''''''''''''''''''''''''''''''' '''''''''''''''''''''''''' ''''''''' '''''''''''''''''''''' '''''''''''''''''''''' ''''''''''''''''''''''''''' '''''''''' '''''''''' '''''''''''''' '''''''''''''''''''' ''''''''''''''' '''''''''''''''''''''' ''''' '''''''' '''''''''''''''''''''''''''''''' ''''''''''''''''''''''''''' ''''''''''''''''''' '''''''''''''''''''''''' ''''''''' ''''''''''''''''''''''''''' '''''''''''''''''' ''''''''''''''' ''''''''' '''''' ''''''''''''''''''''''''''''' '''''''' '''' '''''''''''''''''' '''''' ''''''''''' ''''''''''''''' ''''' ''''''''''''''''''''''' ''''''' ''''''' ''''''''''''''''''''''''''' ''''' '''''''' '''''''''''''''''''''''''''''' ''''''''''''''''''''' '''''''''''''''' ''' ''''''''''''''''''''''''' '''' '''''''''''''''''''''''''''''' ''''' ''''''''''''''''''''''''' ''''''''''''' '''''''''''''' ''''''''''''''''''' ''''' ''' ''''''''''''''''''''''''''''''' '''' ''''''''''''''''''''' '''''''''' ''''''''' '''''''' ''''''''''''' ''''' ''''''''''''''''''''''''''''' ''''''''''''' ''''''''''''''''''''''''' ''''''''' '''''''' '''''''''''''''' ''''''''''''' ''''''' '''''''''''''''''''''''' ''''' ''' '''''''''''''''' '''''''''''''''' ''''' ''''''''''' ''''''''''' '''''''' ''''' ''''''''' ''''''''''''' '''''''' ''''''''''''' Under the agreement with Kenilworth Racing, Phumelela is, at all times, required to perform the management services subject to and in accordance 11 Clause 7.2.8 of the draft Sport Administration Agreement. 12 Clause 9.2.2 of the PGE Parthership Agreement dated 28 November 2002. 30

with the lawful and reasonable directives, instructions and requirements issued in writing by the Board from time to time. 13 78 I describe below the envisaged post-merger operation of Western Cape racing: The role of Kenilworth Racing 78.1 In terms of the proposed transaction, Kenilworth Racing will conduct the business comprised of the Western Cape division of Gold Circle's horseracing and gaming business. Kenilworth Racing does not have its own management or totalisator infrastructure. It is subject to control by a Board of Directors on which Phumelela has no representative. Prior to the Management Agreement between Phumelela and Gold Circle concluded on 15 November 2011, the management of racing in the Western Cape was performed by the KwaZulu-Natal division of Gold Circle. The role of Phumelela 78.2 Phumelela will fulfil the functions and duties as may, in terms of generally accepted management practice, be required in respect of the management of the business, subject to the lawful instructions and control of the board of Kenilworth Racing. 14 ''''''''''''' ''''''''''''''''''''' '''''''''''''''''' '''''''''''''''''''''' '''''''' '''''''''''''''''''' '''' '''''''''''''''' ''''' ''''''' ''''''''''''''''''''''' '''''''''''''''''''''''''''''' ''''''''' ''''''''''''''''''''''''' ''''' ''''''' '''''''''''''''''''''' ''''''' '''''''''''''''''''''''' ''''' ''''''' '''''''''''''''' ''''''''' '''''''' ''''''''''''''''''''' '''''''''' ''''''''''''''''''''''''''''' ''''' ''''''''''''' '''''''''''''''''''''''' '''''''''''''''''''''''''''' ''''''''' ''''''''''''''' '''' ''''''''''''''''''' ''''' ''''''''' ''''''''''''''''''''''''''' 78.3 ''''''''''''''' ''' '''''''' '''''''' ''''''''''''''''''''''''' '''''''''''' ''''''''' '''''''''''''''''''''''''' ''''''''''''''''''''''''''' '''''''' ''''''''''' '''''''''''' ''''''' ''''''' ''''''''''''''''''' '''''''''''''''''''''''''''' ''''''''''''''''''''''''''' ''''''''''''''''''''''' ''''' ''''''''''''''''''''''''' ''''' 13 Clause 4.2 of the Management Agreement between Phumelela and Gold Circle dated 15 November 2011. 14 Clause 5.1 of the Management Agreement between Phumelela and Kenilworth Racing dated 3 May 2012. 31

''''''' ''''''''''''''''''''''''''''' '''''''''''''''''''''''''''''' ''''''''''''''' '''''''''''''''''''''''''' ''''''''''''''''' '''''''' ''''''''''''''''''''''' ''''''''' '''''''''''''''''''''''''''' '''' '''''''' '''''''''''''''''''''''''''' '''''''''''''''''''''' '''''''''''''' ''''''''' '''' '''''' '''''''''''''''''' ''''' ''''''''''''''''''''''' ''''''''''''''''' ''''' ''''''''''''''''''''''''''' ''''''''' '''''''''''''''''''''''' '''''''''' '''''''''''''''''' '''''''''''''''''''''''''''' ''''' ''''''''''''''''''''''''' '''''''''''''''''''''''' ''''''''''''''''' ''' '''''''''''''''''''''' ''''''''''''''''''' ''''' '''''''''''' '''''''''''''''''''' ''''''''' ''''''''''''' '''' '''''''' ''''''''''''''''''''' ''''''''''''' ''''''''' '''''''''''''''''''' ''''''''''''''''''''''' ''''''''''''''''''''''' '''''''''''''''''''''''''''''' ''''''''' ''' ''''''''''''''''''' '''''''''''''' ''''' '''''''' '''''''''''''''''''' '''''''''''''''''' '''''''''''''''''''' '''' '''''''''''''''''' ''''''''''''''' ''''''''''''''''''' '''' ''''''''''''''''''''''''' '''''''''''''''''''''''''''''' ''''''''' ''''''''''''''''''''''''''' '''' '''''''''''''''''''''''' '''''''''''''''''''''''''''''' ''''''''' ''''''' ''''''''''''''''''''''''''' ''''' '''''''''''' ''''' ''''''''''''''''''''''' '''''''''''''''''''''''''''''' ''''' '''''''''''''''' '''''''''''' '''''''''''''' ''''' '''''' '''''''''''' '''''''''' ''' ''''''''''''''''''''' '''''' ''''''''''''''''''''''' '''''''''''''''''''' ''''' ''''''''''''' '''''''''''' '''''''''''''' 15 ''''''''''''''' '''''''''''''''''''' '''' ''''''' '''''''''''''''''''' ''''''' ''''''' '''''''''''''''' ''''' ''''''''''''''''''''''' '''''''''''''''''' ''''''''''''''' '''''''''' '''''''' '''''''''''''''''''''''''''''' ''''''''''''''''''''''''' ''''''' ''''''''''''''''''''''''''''''''' ''''''''''''''''''''''''' '''''''''''''''''''''' '''''''''' ''''''''''''''''''''''''''''' '''''' ''''''' ''''''''''''''''''''' '''''''' '''''' '''''''''''''''''''''' '''' ''''''''''''''' ''''' ''''''' '''''''''''''''''''''''' ''''''''' ''''''''''' '''' ''''''''''' '''''''''''''''' ''''' ''''''' ''''''''''''''''''''' '''''''''''''''''''''''''''''''' ''''''''' '''''''''''''''''''''''' ''''' ''''''''''' '''' ''''''''''''''''''''''' '''''''''''''''''''' ''''''' ''''''''''''''''''''''''''''' ''''' ''''''' '''''''''''''''''' '''''''''''''''''''''''''''''''' ''''''''' ''''''''''''''' ''''''''''''''''''''''''''' ''''''''' ''''''''''''''''''''''''' '''' '''''''''''''''''' ''''' '''''' '''''''''''''''''''' ''''''''''''''''''' '''''''''' '''''' ''''''''''''''''''''''''' ''''''''''' '''''' '''''''''''''''''''''''''' '''''' ''''''' ''''''''''''''' ''''' '''''''''''''''''''''''''' '''''''''''''''''''''' '''''''''''''''''''' ''''''''' ''''''''''''''''''' '''' '''''''''''''''' '''' '''''''''''''''''''''' ''''''''''''''' '''''''''' ''''''' '''''''''''' ''''''''''''''''''''' '''''' '''''' '''''''''''''''''''''''' '''''''''''''''''''' ''''''' '''''''''''''''''''' '''' '''''''''' ''''''''''''''''' ''''''''''''''''''''''''' ''''' ''''''' ''''''''''''''''''''' '''''''''''''''''''''''''' '''''''''''''''''' '''''''''''''''''''''' '''''''''''''''''' '''''''''''''''''''''''''''' '''''''''' ''''''' ''''''''''''''''''''' '''' '''''''''' ''''''''''''''''''' '' ''''''''''''''''''''''''''''''''' ''''''''''''''''''''''' The exchange of information 78.5 As a result of commingling, the betting information in respect of the Western Cape which is exchanged with Phumelela pre-merger is no 15 Item 4.5 of Schedule 1 of the Management Agreement between Phumelela and Kenilworth Racing dated 3 May 2012. 32

different to the information exchanged post-merger. The totalisator business in the Western Cape will be too small to stand alone. Through commingling with Phumelela, Phumelela will be exposed to the customers' information as the bets are pooled into a commingled pool. Moreover, both Phumelela and Kenilworth Racing will pay the same dividend. Phumelela and Kenilworth Racing have undertaken not to exchange any commercially sensitive information which does not relate to the management, administration and day to day operation of the business. 78.6 Total stakes are determined under the stakes agreement (which cannot be amended by Phumelela without the agreement of the Racing Association), and Kenilworth Racing will approve the allocation of stakes between different types of races. 78.7 Totalisator outlets will be managed by Phumelela, but with total provincial separation. As discussed above and following the Pigg s Peak decision, totalisator betting over the internet, or by telephone will be managed as follows: 78.7.1 In respect of punters using online and telephone betting, and located in the Western Cape, Eastern Cape and Free State: 78.7.1.1 I am advised that it is illegal for a betting operator licensed only in the Western Cape to accept telephone and internet bets from punters outside the Western Cape, except for punters located in the Eastern Cape or Free State. 16 16 Section 118(1)(1)(a) of the Free State Gambling and Liquor Act, 6 of 2010, section 74(4)(c) of the Eastern Cape Gambling and Betting Act, 5 of 1997 and section 30(1)(b) of the National Gambling Act No.7 of 2004. 33

78.7.1.2 In order to accept internet or telephone totalisator bets from punters situated in the Western Cape, a betting operator is only required to be licensed to accept such bets in the province in which its server or call centre, as the case may be, is located. 17 78.7.1.3 A betting operator which accepts internet and telephone totalisator bets from persons located in the Eastern Cape or the Free State is only required to be licensed to accept such a bet in the province in which its server or call centre, as the case may be, is located. 18 78.7.1.4 ''''''''''' ''''' ''''''' '''''''''''''' '''''''''''''' ''''''''''''''''''' '''''''' '''''''''''''''''''''''''''''''''' '''''''''''''''''''''''''' '''' ''''''''' '''''''''''' ''''''''''''' '''''''''''''''''''' '''''' ''' '''''''''''' '''''''''' '''' '''''''' '''''''''''''''''' ''''''''''''''''''''''''' ''''' '''''''''''' ''''''''''''' '''''' ''''' '''''''''''''''''' '''''''''' '''''''''''''''''''''' '''''''''''''''''''''' ''''''''''''''''' ''''''''''''''''''' '''''' ''''''' '''''''''''' '''''''''' ''''''''''''''''''''''''''' ''''''''''''''''''' '''''''''' '''''''''''' '''''''''''' '''' '''''''' '''''''''''''' ''''''''''''''''''''''' ''''''''''''''''''''''''' ''''''''''' '''''''' ''''''''''''' '''''''''''' ''''''''''''''''''''' ''''''''''''' '''''''''''' '''' ''''''''''''''''''' '''' '''''''''' ''''''''''''''' '''''' ''''''' '''''''''''''' '''' ''''''''' ''''''''''''''''''' '''''''''''''''''''''' The bookmakers are able to compete for these punters in any event. 78.7.1.5 Post-Transaction, Phumelela, Gold Circle KZN will continue to compete for these punters in the same manner that they compete pre-transaction. Additionally, Kenilworth Racing 17 18 Section 84D(1) of the Western Cape Gambling and Racing Act, 4 of 1996 Section 74(4)(c) of the Eastern Cape Gambling and Betting Act, 5 of 1997 and section 118(1)(1)(a) of the Free State Gambling and Liquor Act, 6 of 2010 34

will be able to compete for these punters, subject to the provisions of the Substitute Commingling Agreement. 78.7.2 In respect of punters using online and telephone betting, and located in any other provinces (other than Western Cape, Eastern Cape and Free State): 78.7.2.1 I am advised that it is illegal for a betting operator licensed only in the Western Cape, such as Gold Circle Western Cape, to accept telephone and internet bets from these punters. 19 78.7.2.2 Pre-Transaction, Phumelela and Gold Circle (in respect of the license it holds within KZN), and other betting operators, compete for these punters based on their respective license conditions, subject to the provisions of the Commingling Agreement. 78.7.2.3 Post-Transaction, Phumelela and Gold Circle KZN, and other betting operators, will continue to compete for these punters in the same manner that they compete pre- Transaction, subject to the provisions of the Substitute Commingling Agreement. 78.7.2.4 It will be illegal for Kenilworth Racing to compete for these punters. 19 Section 118(1)(1)(a) of the Free State Gambling and Liquor Act, 6 of 2010, section 74(4)(c) of the Eastern Cape Gambling and Betting Act, 5 of 1997 and section 30(1)(b) of the National Gambling Act No.7 of 2004). 35