ADvTECH AGM: Curro bid still a no go – 2 big shareholders disappointed

Curro’s advances for ADvTECH have been well documented with the rejection of Curro’s R6 billion bid raising the prospects of it all turning hostile.The whole fiasco brings a long forgotten Chilean company called CFR to mind, and the hostility around Bidvest’s proposed takeover of Adcock – which is still ongoing 2 years down the line. A successful Curro bid though would create a $1.5 billion education giant, which ADvTECH doesn’t think is in the best interests of its shareholders. And at the group’s Annual General Meeting it was stated that to date Curro had declined to put a firm offer on the table that the Board could put to shareholders. Instead Curro preferred to present a ‘Conditional Firm Intent to Make an Offer’. The Bloomberg article looks at how ADvTECH’s two largest shareholders – Coronation and Kagiso – voted against re-electing the incoming chairman and an independent director, following their opposition to the proposed takeover from Curro, The full AGM statement is below. – Stuart Lowman

Advtech CEO Frank Thompson: "It wasn't a firm offer."
Advtech CEO Frank Thompson: “It wasn’t a firm offer.”
by Liezel Hill and Renee Bonorchis

(Bloomberg) – Advtech Ltd.’s two largest investors voted against the re-election of the company’s incoming chairman and another independent director as the South African schools operator reiterated its opposition to a proposed takeover offer from competitor Curro Holdings Ltd.

Lead independent director Chris Boulle and director Brenda Gourley were both re-elected at Advtech’s annual shareholders’ meeting on Tuesday, and received less than 59 percent of the votes cast. Coronation Fund Managers Ltd. and Kagiso Asset Management (Pty) Ltd., which voted on 33.5 percent of the company’s stock, opposed the re-elections, Boulle said after the AGM. He also said he will replace Jeff Livingstone as chairman.

ADvTECH_3_month
ADvTECH 3 month graph

Curro has made a “conditional firm intention offer” for the equivalent of 13 rand ($1.03) an Advtech share. The share- swap proposal also includes a 50 percent cash payout for investors who don’t want to accept Curro’s stock. Advtech’s board, which says it’s yet to receive a formal offer, broke off talks with Curro last week after deciding the deal wasn’t in the company’s best interests.

There were a large number of reasons for the decision, Frank Thompson, Advtech’s interim chief executive officer, said on Tuesday. These included concerns about the company’s reputation and brands, differences in culture of the two companies and whether Curro could continue to fund Advtech’s growth plans, Boulle said. There’s nothing preventing Curro from making an offer directly to shareholders, he said.

Should Curro succeed, it wouldn’t want to change the business, said Johan Holtzhausen, managing director of PSG Capital. PSG holds about 57 percent of Curro’s shares.

“It would be silly for us to pay a premium and then change values, ethos and brands,” he said at the meeting.

Cash Element

Any offer for Advtech should be firm and unconditional and “underpinned by a substantial cash element,” Boulle said at the meeting.

Curro_3_month
Curro 3 month graph

Both Kagiso and Coronation have said they’re disappointed the operator of Trinityhouse and Crawford Schools didn’t let shareholders vote on Curro’s proposal to buy Advtech.

The issues raised by Advtech’s board that don’t relate to the offer’s price are “relevant but they are manageable,” Simon Anderssen, a Kagiso representative, said at the meeting.

Coronation is “still digesting the results of the AGM and the process going forward,” and remains disappointed investors didn’t get a chance to vote on Curro’s proposal, the company said on Tuesday.

Advtech’s board commits to continue to engage with Kagiso and Coronation “in a proactive manner to try and resolve their concerns,” Boulle said after reading out the results of the vote at the meeting.

Board Support

Several parents whose children attend Advtech schools expressed support for the company’s board and concern about the Curro offer at Tuesday’s AGM. At least one parent said he’d vote with his feet if the proposed takeover succeeded.

“I’d be finding a new school for my daughter, 100 percent,” said Nicholas Reeks. “I chose Trinityhouse where my daughter is for the morals, the level of education and the development that my child gets.”

Advtech fell 0.3 percent to 12.25 rand at 2:13 p.m. in Johannesburg, bringing its gain this year to 41 percent. Curro rose 0.4 percent to 34.32 rand.

STATEMENT BY THE CHAIRMAN AT THE ADvTECH ANNUAL GENERAL MEETING

28 July 2015

Operations update

The last year has been an eventful one for ADvTECH. Organic growth, strategic acquisitions, and a rolling R3 billion capital investment programme, have placed the Group on an exciting new growth trajectory. The company will continue to deliver on this ambitious growth strategy while ensuring it remains adequately capitalized and properly resourced.

ADvTECH’s students, teachers, parents, employees and shareholders are reaping the benefits of this strategy. This is evidenced in the ADvTECH share price trend, which is up over 50% in the last year. On the 8th of July 2015, the Board advised shareholders that both basic earnings per share (“EPS”) and headline earnings per share (“HEPS”) for the six months ended 30 June 2015 would be between 20% and 30% higher than the comparative reporting period for the six months ended 30 June 2014. These increased earnings were thanks to organic growth delivered by the successful roll out of our growth strategy over the last few years.

The Tertiary division completed its turnaround last year and continues to perform strongly, while Resourcing maintained market share in very challenging economy market conditions, giving the company a steady stream of income. Our technology and online learning investments are showing good promise.

The Schools division has generated considerable excitement. Trinityhouse, Crawford schools and Abbotts College achieved 100% pass rates in 2014 – delivering on their promise of academic excellence to parents and learners alike, and creating further demand for top quality education.

The exciting Centurus and Maravest acquisitions, and the purchase of Gaborone International School in Botswana, which marked the first phase of our expansion into other African countries, have also been integrated into the ADvTECH family on the basis of our complimentary cultures, shared values and commitment to educational excellence. These are performing in line with or ahead of expectations both in terms of academic results and their contribution to the business. Our R3bn capital investment programme will continue to support greenfields development and carefully selected acquisitions in South Africa and elsewhere in Africa.

With enrolments up 71% at the beginning of 2015 and set to continue increasing at a rapid rate as our growth strategy matures, we believe that our long track record of providing quality education in schools, with the values and ethos parents and learners trust, will translate into excellent earnings and share price growth for the foreseeable future.

The Curro approach

In recent weeks there has been much market speculation about Curro’s conditional proposal to the ADvTECH Board. Let me explain why on 21 July 2015 the Board announced that it had reached a unanimous decision not to refer the Curro proposal to shareholders and to withdraw the cautionary.

The Board and management of ADvTECH have held protracted discussions with Curro and its principal shareholder, PSG, about their unsolicited proposal to acquire ADvTECH. Together with expert advisors, we spent considerable time evaluating the financial and operational terms of their proposal, the implications this could have for the integrity of our trusted brands, and the potential impact this would have on our learner community. We raised numerous concerns with Curro and PSG which were ignored. To date Curro has declined to put a firm offer on the table that the Board could put to shareholders. Instead it has preferred to present a ‘Conditional Firm Intent to Make an Offer’. This is a legal format which requires the ADvTECH Board to first approve the terms of the proposals and then propose this to its own shareholders by way of a Scheme of Arrangement.

The Board won’t recommend a deal to shareholders that we believe is inimical to the interests of the company and all its stakeholders. It would be irresponsible for the Board to do this for a number of reasons including:

  1. The unacceptable pre-conditions of the Proposed Scheme of Arrangement would have sanitised ADvTECH from following its R3bn growth strategy for up to a year by:
  • Preventing ADvTECH from raising new capital should it wish to
  • Preventing ADvTECH from making acquisitions should it wish to

ADvTECH would be hobbled, Curro would get a competitor’s commercially confidential information (including information regarding ADvTECH’s assets, liabilities, growth plans and acquisitions strategy) and could continue with its own expansion strategy. The implementation of the Scheme of Arrangement was also subject to the obtainment of certain shareholder, regulatory and other approvals and there was a high chance that one or more of these would not be met and that the transaction would not have been implemented. The ADvTECH Board does not believe that this would be in the best interests of the company.

  1. Failing to secure sustainable value for the company and all its stakeholdersincluding our learner community, staff and shareholders. ADvTECH is a profitable company, with a strong track record offering premium education and services which is firmly on a high growth trajectory. The ADvTECH Group’s earnings are currently about three times greater than Curro’s – and this is before the impact of our new acquisitions is felt. The Board felt that it was unlikely that the requisite number of ADvTECH shareholders will have much appetite for Curro scrip which is trading at an almost 200 times PE multiple. Consequently the Board believes that any offer should be a firm and unconditional one, underpinned by a very substantial cash element allowing those shareholders worried by the risk profile of Curro’s 200 PE scrip to be guaranteed a full cash alternative.
  1. Putting the integrity and reputation of our education brands at risk. The Board believes the sustained success of the ADvTECH education brands depends on maintaining the support and commitment of parents, staff and learners. Each brand is a promise about education quality and the values, ethos and learning environment of each school or college. The Board would not support any proposal which risked undermining the integrity or hard won reputation of these institutions. Curro is reportedly intent on implementing heavy cost cutting at ADvTECH. The Board believes aggressive cost cutting risks undermining ADvTECH’s premium offer with a predictable and negative impact on standards, staff and learners’ education and thus the reputation of the institution. While ADvTECH has prudent management which watches costs and profitability, we believe our first priority must be to ensure our students have an excellent education experience at our schools.
  1. Inadequate support for the business model and growth strategy. The Board was not convinced the proposal would ensure support for our business model and growth strategy. We have a vision for delivering quality education to more parents and students by expanding our education brands. ADvTECH has a R3bn rolling capital expenditure plan which may require further capital from time to time. Curro is much more highly leveraged than ADvTECH. Their current debt levels may make raising further debt difficult. If they leverage up even further for the proposed cash underpin it is unclear that they could afford their own and ADvTECH’s expansion plans. ADvTECH, as a lower risk and more profitable institution, has secured loan funds at rates considerably lower than Curro and is therefore better positioned to fund and deliver on its growth strategy.
  1. Has unacceptable implementation risk. The transaction as proposed also raises many easily foreseeable and unattractive implementation risks. To succeed it would require the support of very important stakeholders, such as the parents, shareholder and regulators. It is well understood that cultural incompatibility is the main reason company mergers fail. The Board does not believe the staff and management styles of the two companies are aligned. We have not received comfort from Curro that our concerns in this regard were taken seriously.

The Board’s decision

In terms of the Companies Act and the King Code of corporate governance the Board has a fiduciary duty to act in the best interests of the company. Nothing in ADvTECH’s Board’s actions precludes Curro from making a voluntary general offer to ADvTECH’s shareholders. The ADvTECH Board would ensure this is put to shareholders promptly and properly. Both Curro and ADvTECH would then have the opportunity, by way of a circular, to make a full and accurate disclosure of events to date and their views to shareholders and all ADvTECH stakeholders.

The ADvTECH Board has, with due regard to its duties and considerations outlined above reached the unanimous conclusion that the Proposal made by Curro is not in the best interests of the Company and that it will not pursue further discussions with Curro in this regard. While the Board and management deal with this situation it will continue to be business as usual for our schools, resourcing and tertiary education divisions.

The leadership team

While ADvTECH’s strong leadership team has delivered on these successes, this would have not been possible without strategic direction from the Board. I would like to stop for a moment to thank colleagues on the Board, and in particular Jeff Livingston for his wise counsel and leadership. Jeff has been a member of the Board since 2008 where he has provided invaluable service as a member of the Audit, Risk, Remuneration and Litigation Committees and who took the helm as chairman last August. It was under Jeff’s leadership that ADvTECH completed its recent strategic acquisitions while delivering excellent organic growth.

Jeff, your insight, support and guidance will be missed by the Board and indeed the whole of ADvTECH, which you have served with such distinction for so long. But we are at least glad that our loss will be your family’s gain as they will now get to see much more of you during your retirement. You will be sorely missed.

As we say good-bye to Jeff, I would also like to announce the appointment of Keith Warburton as a new independent non-executive director. Keith is a qualified CA with very wide-ranging and relevant experience first in the banking and steel industry, after which he spent many years in retail businesses. Most recently he was with Clicks, first as CFO and then as CEO.  He brings experience in dealing with JSE listed companies and we would like to welcome him to the Board ADvTECH.

The process to appoint a new CEO is underway. A top global executive search firm has been retained to assist the Board with the appointment of a permanent CEO. In the interim, our former CEO Frank Thompson has agreed to act in this position. We are very grateful to have someone of Frank’s calibre and intimate knowledge of all aspects of the business to lead the company.

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