The group intends to transfer a significant portion of its casino real estate assets to HPF following the two transactions concluded in 2016 and 2017 whereby a significant portion of the group's hotels properties was transferred to HPF. On conclusion of the proposed transaction, HPF will become the property company and is expected to own investment property with a fair market value of approximately R36 billion. The intention is to distribute the group's holding in HPF to the Tsogo Sun shareholders.
In addition to the property company, the group intends to separate the operations into two asset light operating companies:
The group anticipates that the separation of Tsogo Sun into these three focused companies will unlock value and provide greater investment choice for shareholders. The proposed unbundling of the hotel and property businesses will then result in the separate listing of the hotel, property and gaming businesses with all three resultant entities remaining subsidiaries of the HCI group. Refer to the proposed post-strategic review business model on pages 12 and 13. Until the unbundling of the hotel and property businesses is completed, it is intended that HPF will remain a subsidiary of Tsogo Sun Gaming.
Deliver to our beneficiaries
The HCI shareholding post the intended transactions would be 51% in Tsogo Sun Gaming and Southern Sun Hotels and 44% in HPF and thus it remains important from a BBBEE perspective. Both the gaming and hotel operating companies will be reliant for their BBBEE ratings on HPF qualifying to utilise the HCI BBBEE rating as a subsidiary of HCI due to the quantum of rental they pay to HPF. It is intended that the majority of the existing community, supplier development and environmental programmes would continue within the HCI group and its subsidiaries.
Financial strength and durability
Gearing levels following the intended split of the group into three listed businesses will need to be carefully managed as the gaming and hotel operating companies will have higher levels of operational gearing and will retain limited properties that can be utilised as security, potentially reducing their financial strength and durability. This is mitigated, however, by the sale of the casino real estate assets to HPF at a 35% LTV which will result in reducing the gearing levels in the operating businesses. The HPF gearing is expected to remain relatively low at below 30% LTV.
Product relevance to customer experience
The group will need to continue to invest in the product in order to deliver relevant experiences to our customers. The gaming and hotel customer reward programmes are currently not integrated and thus splitting the operating companies will have little impact. Group branding would, however, be impacted and will need to be relaunched for both operating companies.
The intended transactions should have no impact on regulatory compliance.
The intended transactions should not have a material impact on human resources as most employees will naturally fit into either of the operating businesses. In order to retain the efficiencies achieved in the integration of the group over the past few years, some shared services are expected to remain where relevant.
Organic growth in action
The intended transactions are anticipated to increase focus within the businesses thus maximising returns in each operating business. There is limited commonality between the gaming and hotel operating company customers and thus no significant revenue issues are anticipated. The intended transaction to transfer a significant portion of its casino real estate assets to HPF will result in the loss of capital allowances to the group which will result in additional cash tax of approximately R41 million per annum which will have an adverse impact on profitability.
The intended transactions would result in a significant increase in cash distributions from the group due to the distribution of all of HPF's distributable income. This will constrain future growth in both the gaming and hotel operating companies although HPF could acquire properties that they could operate, either through debt or issuing additional shares. Both the gaming and hotel operating companies will in addition have less funding headroom due to the reduced cash flows and the sale to HPF of the assets they would have utilised as security. Effectively the hotel operating company will become mostly asset light in South Africa and may grow through additional management contracts. The gaming operating company retains more assets and profit but it needs to maintain and expand its properties out of its cash flows.