Sun International announced recently that agreements had been concluded between Sun International and the holders of ordinary shares, preference shares and mezzanine debt in the Peermont Group, in terms of which Sun International will acquire 100% of the Peermont Group.
In addition, Sun International and Peermont have reached agreement to settle the objection by Peermont to Sun International’s Menlyn Maine project in Tshwane.
Peermont operates a portfolio of gaming and hospitality businesses in South Africa and Botswana, owning nine casino resorts, including its flagship Emperors Palace casino resort, three stand-alone hotels and one stand-alone casino.
Sun International Chief Executive, Graeme Stephens said, “Peermont has a number of complementary attributes that will enhance our group. These include the fact that Peermont has established and well-maintained assets and infrastructure, particularly Emperors Palace, which also has extensive hotel and conference facilities Their portfolio also has high EBITDA margins in excess of 37%, and an experienced and highly regarded management team.”
The acquisition will be subject to approvals, including the relevant regulatory bodies and the approval of the requisite majority of Sun International shareholders. In this regard, the major shareholders have already been approached and have indicated their support for the transaction.
The acquisition provides Sun International with an opportunity to increase gaming revenue from Gauteng, which is the provincial jurisdiction with the highest gambling spend in South Africa. Emperors Palace is one of the largest casinos in South Africa with an attractive financial and operating profile. The property has an EBITDAM margin (ie pre—management fees) in excess of 41%, which is well above the average of Sun International.
As a result of the Proposed Transaction, Sun International’s portfolio of South African assets will be further diversified. This diversification has the effect of reducing Sun International’s reliance on its GrandWest property in the Western Cape, which currently represents 27% of the Group’s EBITDA.
Stephens added, “Sun International remains committed to its strategy of diversifying the Group’s portfolio to increase exposure to offshore opportunities, in particular Latin America. While the Peermont portfolio of assets will initially increase the proportion of the combined business that arises in Southern Africa, it also opens the possibility of further restructuring of local assets, with a medium term objective of creating a portfolio of fewer, larger, quality assets.”
Fulfillment of the regulatory conditions precedent may take between 9 to 12 months, during which time Sun International will explore the possibility of disposing of certain of the smaller assets within the Peermont portfolio.
Peermont Group CEO Anthony Puttergill said, “The proposed transaction is a positive development for Peermont and supports the momentum that we have built during the past few years. We believe that a number of strong growth opportunities can be unlocked by being part of a larger and well-resourced Group.”
The purchase consideration has been determined with reference to an enterprise value of Peermont of R9,425m As at 31 December 2014, Peermont reported revenues of R3,253m and EBITDA of R1,205m. The Thaba Moshate casino resort in Burgersfort is scheduled to be opened during April 2015 and is anticipated to generate R40m EBITDA in its first full year of operations. Emperors Palace contributed R872m of the EBITDA. Given the anticipated time frame (9 to 12 months) for implementation and closing of the proposed transaction, the Enterprise Value can be referenced to Peermont's 2015 earnings (which are anticipated to be higher than the 2014 earnings, due not only to the opening of Burgersfort but also to organic growth in the existing business.)
The acquisition will be funded by way of the placement of over 10 million Sun International shares at R120 per share to the Peermont ordinary shareholders and the holders of preference shareholders for a total value of R1,250m, an underwritten renounceable rights offer up to a maximum value of R3,750m, a rollover of an estimated R3,850m of the senior debt within Peermont and a new debt facility.
“Peermont shareholders will receive shares in Sun International as part of the proposed transaction and therefore stand to benefit from the critical mass and growth potential of the enlarged Sun International,” added Puttergill.
“As a consequence of the settlement agreement between the parties, Peermont’s objection to our proposed relocation of the Morula licence from the current site in Mabopane to Menlyn Maine has been withdrawn. While there is one remaining objection, it seems less likely to impede progress on the proposed relocation," said Stephens.
In the event that the acquisition of Peermont is not successfully implemented and Time Square at Menlyn Maine opens to the public, Menlyn Maine will issue Peermont with a financial instrument that obliges Menlyn Maine to pay Peermont a capital amount of R700m, which may increase to R900m in certain defined circumstances. This Note has a term of five years and is without fixed terms of repayment. The Note is guaranteed by Sun International.
Stephens concluded, “This acquisition will enhance Sun International’s position and scale as a leading hotel, resort and gaming operator, which in turn positions it well to undertake larger developments and acquisitions globally.”