Massmart Holdings Limited - The acquisition by Massmart of the Builders
Warehouse and Tile Warehouse business
Massmart Holdings Limited
(Incorporated in the Republic of South Africa)
(Registration Number1940/014066/06)
("Massmart" or "the company")
The acquisition by Massmart of the Builders Warehouse and Tile Warehouse
businesses
Introduction
Shareholders of Massmart are advised that Massmart has reached agreement,
subject to the fulfilment of the conditions precedent, to acquire 100% of the
business trading as Builder Warehouse and Tile Warehouse.
Terms of the acquisition
The initial purchase consideration for the business is R140 million, payable in
cash on the effective date, which is after fulfilment of the conditions
precedent, estimated to be 1 January 2003.
It has been agreed that Massmart will pay an additional cash consideration, up
to a maximum of R25 million, if the earnings after tax of the acquired
businesses for the first year increase by 30% or more above base earnings for
the year ending 31 May 2002.
Massmart will purchase the assets and trade liabilities of the businesses, with
the terms conditions and warranties normal to agreements of such a nature.
The sellers will retain properties owned by them and new, market related leases
will be entered into.
Nature of the acquired businesses
Builders Warehouse is a 60 year-old family-owned business, with current annual
sales of approximately R500m through four outlets in Pretoria and one in
Johannesburg. A sixth outlet is opening in Boksburg in November 2002. Tile
Warehouse outlets adjoin or are nearby four of the six Builders Warehouse
outlets.
Builders Warehouse services the burgeoning home improvement industry and the
small builder, on a mainly cash and carry basis, through large warehouse format
stores. The Builders Warehouse outlets are typically 6,000m2 to 8,000m2 and
Tile Warehouses are typically 2,000m2, with a distribution centre of 5,000m2.
The target customers are: the DIY home owner undertaking small home improvement
projects; emerging middle class consumers constructing home extensions; small
building contractors undertaking such projects on behalf of customers; and
larger building contractors seeking top up materials ex-stock from a convenient
location.
Strategic and Financial Rationale
The acquisition complies with Massmart`s espoused strategy of organic and
acquisitive growth in Southern Africa through high volume, low margin, mainly
cash, distribution formats, offering mass-market merchandise categories in which
the Group has strategic, merchandise or operating expertise.
The Builders Warehouse target market complements those of other Massmart
formats.
The Builders Warehouse merchandise mix extends beyond the lighting, paint, power
tools, hardware, flooring, bathroom, electrical and plumbing accessories
supplied by other Massmart formats.
The management of Massmart and in particular Makro have specific experience and
expertise in the operating practices, business model and merchandise categories
of Builders Warehouse.
Following its integration into Massmart, the potential exists to expand the
business to other markets throughout Southern Africa.
The acquisition complies with Massmart`s espoused acquisition criteria in that
it is earnings accretive, enhances Massmart`s market presence and will benefit
from Massmart`s ownership.
Integration
Once the acquisition has been approved, the following structural developments
will take place to ensure the rapid realisation of synergies and the effective,
profitable integration of Builders Warehouse into the Massmart Group:
The divisional restructuring, first announced in February 2002 on the release of
Massmart`s results for the 6 months to December, made provision for the division
currently comprising only Makro, to be named Masswarehouse, to house the Groups
large warehouse chains. This will now be put into effect and Massmart will
comprise four divisions: Massdiscounters - Game and Dion, Masswarehouse - Makro
and Builders Warehouse, Masscash - CBW and Jumbo, and Masstrade - Shield and
Furnex.
The Masswarehouse division will be led by Gareth (Joe) Owens, currently Chief
Executive of Makro, which has a successful historical 5 year compounded growth
of profit before tax of 34% per annum, with no new store development.
Linton Lewis, the current owner of Builders Warehouse, together with its
existing management team, will work closely with Massmart management, Gareth
Owens and a new Massmart appointed Managing Director designate, to ensure the
realisation of benefits arising from the combined expertise of the parties and
the continued development and growth of the Builders Warehouse chain.
Conditions precedent
The transaction is subject to the following conditions:
A satisfactory outcome to a due diligence exercise to be carried out by Massmart
Approvals by the Boards of the parties
Regulatory approvals including that of the competition authorities
Financial effects (Past full year to May 2002)
The acquired businesses had an audited sustainable Profit Before Tax of R38.7m
and Earnings After Tax of R27.1m for the year ended 31st May 2002.
Massmart will internally fund the acquisition from cash resources. Had the
acquisition been effective from 1 July 2001, the after tax interest cost would
have been approximately R12m. The full year enhancement to Massmart`s earnings
in the year to June 2002 would have been approximately R15m and the enhancement
to Massmart`s earnings per share would have been approximately 7.5 cents per
share. If the sellers achieve the new targets necessary to earn the additional
cash consideration, this will increase to an earnings enhancement of
approximately 10.5 cents per share.
Sales for the 3 months to August 2002 at R129.4m are currently 38% ahead of the
comparative period and unaudited earnings for the first quarter were R9.9m. On
this basis, Massmart believes that the sellers` earnings targets are realistic.
Johannesburg
October 2002
Corporate Law Advisers to Massmart
Edward Nathan & Friedland (Pty) Limited
Corporate Law Advisers ans Consultants
(Registration number 1999/026464/07)
Date: 09/10/2002 08:45:00 AM Produced by the JSE SENS Department
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