Internalisation of Management
Posted on: 22 June 2010
New Europe Property Investments plc, the Central and Eastern European property investment company which has a primary listing on the AIM market of the London Stock Exchange and a secondary listing on the Alternative Exchange of the JSE Limited, announces that it has agreed to acquire all of the issued shares of the Company`s investment adviser, NEPI Investment Management Limited ("NEPI IML"), (the "Internalisation") from the vendors, consisting of Fortress Asset Managers (Proprietary) Limited, Slabbert Family Limited, Focus CEE Investments Limited and CEMZ Holdings Limited (collectively the "Vendors").
Rationale for the Internalisation
NEPI IML was established in 2007 to provide investment advisory services to the Company. NEPI remains the only client of NEPI IML. The appointment of an experienced external investment adviser with the requisite skills and expertise has enhanced NEPI`s performance and growth since listing. However, the board and management of NEPI believe that the Company is now at a stage where it is preferable to internalise its investment adviser. The Company expects that the management of the Company`s property portfolio going forward may be achieved more efficiently and cost effectively with the management team of NEPI IML being employed and incentivised directly by the Company. These efficiencies are expected to result in better returns to NEPI shareholders over time and enhanced distributable earnings per share.
Terms of the Internalisation
The purchase price of approximately Euro6.3 million will be settled through the issue of 2,450,748 ordinary shares in NEPI ("Vendor Shares") at a price of Euro2.58 per Vendor Share. The purchase price for the shares of NEPI IML is based on a seven times multiple of current estimated annualised after tax profit of NEPI IML, where annualised profits were estimated at a share price of Euro2.58 per Company share (the last issue price). NEPI IML`s fee from the Company is calculated at 1% of the average annual market capitalisation of the Company. Given the current Company share price, the implied multiple of the NEPI IML purchase price is likely to be lower than seven times after tax annualised profit.
Of the Vendor Shares being issued, 1,531,717 will be issued for the benefit of Fortress Asset Managers (Proprietary) Limited (a wholly-owned subsidiary of Resilient Property Income Fund Limited ("Resilient"), which owns 20.3% of the Company`s issued ordinary shares). 735,224 Vendor Shares will be issued for the benefit of Slabbert Family Limited (a company in which Martin Slabbert has an indirect interest), 122,537 will be issued for the benefit of Focus CEE Investments Limited (a company in which Victor Semionov has an interest) and 61,270 will be issued for the benefit of CEMZ Holdings Limited (a company in which Alexandru Morar, an executive of NEPI IML, has an interest).
In addition, the Company will also be issuing 2,832,515 ordinary shares at a price of Euro2.58 (the "Scheme Shares"), pursuant to the share incentive scheme (the "Share Incentive Scheme") of NEPI IML. Of the Scheme Shares being issued, 2,266,012 will be issued for the benefit of Slabbert Family Limited (Martin Slabbert being the key participant under the Share Incentive Scheme`s rules in respect of this issue), 377,669 will be issued for the benefit of Focus CEE Investments Limited (Victor Semionov, being the key participant under the Share Incentive Scheme`s rules in respect to this issue) and 188,834 Scheme Shares will be issued to CEMZ Holdings Limited (Alexandru Morar being the key participant under the Share Incentive Scheme`s rules in respect to this issue).
These Scheme Shares are subject to trading restrictions and will vest over a five year period in equal portions, provided that the key participants remain employees of the Company. As a result, the Internalisation is not only expected to be earnings enhancing to the Company, but also serves to incentivise and retain the services of the senior executives.
The Vendor Shares and Scheme Shares are expected to be admitted to trading on AIM and the JSE Limited on 28 June 2010.
The Vendor Shares and Scheme Shares shall rank pari passu with the existing ordinary shares of the Company which are currently in issue.
The Internalisation will become effective from 30 June 2010.
NEPI IML made profits before tax of approximately Euro0.5 million for the year ended 31 December 2009. The net asset value of NEPI IML as at 31 December 2009 was approximately Euro1.0 million. Under the terms of the Internalisation a pre-completion dividend will reduce NEPI IML`s net assets by approximately Euro0.5 million resulting in an expected adjusted net asset value as at 31 December 2009 of Euro0.5 million which substantially represents NEPI IML`s net working capital. Under the terms of the Internalisation, net working capital of NEPI IML as at 30 June 2010 less the 2010 interim dividend distribution in respect of the Company`s shares issued in terms of the Internalisation will be paid by NEPI to the Vendors. A further announcement will be made when this amount, which is subject to post-completion audit, has been determined. The employees of the investment adviser will become full time employees of the NEPI group as a result of the Internalisation.
Directors and other interests
As a result of the Internalisation, Share Incentive Scheme share issues and allocations of previously unallocated shares in the Share Incentive Scheme: Mr Slabbert`s indirect beneficial interest in the equity of the Company is 4,294,038 ordinary shares, representing 6.93% of the enlarged issued share capital of the Company; Mr Semionov`s indirect beneficial interest in the equity of the Company is 940,206 ordinary shares, representing 1.52% of the enlarged share capital of the Company; and Resilient`s beneficial interest in the Company is 13,981,975 ordinary shares, representing 22.58% of the enlarged share capital of the Company.
Related party transaction
Martin Slabbert and Victor Semionov are directors of the Company and Resilient is a substantial shareholder in the Company. Accordingly, in terms of the AIM rules, the transaction is a related party transaction, requiring an opinion on the fairness and reasonableness of the Internalisation. Desmond de Beer and Jeffrey Zidel are directors of the Company and of Resilient. In this regard, the independent directors of NEPI (being the directors of the Company excluding Martin Slabbert, Victor Semionov, Desmond de Beer and Jeffrey Zidel) consider, having consulted with the Company`s nominated adviser, that the terms of the Internalisation are fair and reasonable insofar as the Company`s shareholders are concerned.