19 December 2018
Dear Greencross Shareholders
On behalf of the Greencross Board, I am pleased to provide you with the Scheme Booklet, which contains important information for your consideration about the proposed acquisition of Greencross by Vermont Aus Pty Ltd (TPG BidCo), an entity ultimately owned by the TPG Shareholders.
On 5 November 2018, Greencross announced that it had entered into a Scheme Implementation Agreement with TPG BidCo to acquire 100% of Greencross Shares. The proposed acquisition will be effected via a scheme of arrangement (Scheme or TPG Proposal) (which is a commonly used legal procedure to enable one company to acquire another company), subject to Greencross Shareholder and Court approval, and certain other conditions. Full details of the Scheme are set out in the Scheme Booklet.
Scheme Overview
If the Scheme is approved and implemented, Greencross Shareholders (other than those who make a valid Election to receive either of the Mixed Consideration Options described below) will receive cash payments equal to $5.55 per Greencross Share (Cash Payments) in respect of all their Greencross Shares, comprising:
- a fully franked dividend of up to $0.21 per Greencross Share for each Greencross Share they hold as at the Special Dividend Record Date that may be declared and paid by Greencross before the Scheme is implemented (Special Dividend); and
- consideration under the Scheme of $5.55 per Greencross Share they hold as at the Scheme Record Date, less the amount of any Special Dividend that may be declared and paid by Greencross before the Scheme is implemented (Cash Consideration).
The Cash Payments represent:
- a 44.5% premium to the 1 month VWAP of $3.84 (up to and including 9 October 2018, being the last closing price prior to the announcement made by Greencross to ASX on 10 October 2018 that it was assessing indicative, incomplete, confidential and non-binding proposals covering a number of transaction types);1
- a 34.1% premium to the undisturbed closing price of Greencross Shares on 9 October 2018 of $4.14;
- an implied equity value of $675 million and enterprise value of $970 million;2 and
- implied acquisition multiples of ~18x FY18A P / E, ~14x FY18A EV / EBIT and ~10x FY18A EV / EBITDA.3
Subject to certain conditions which are described below, Greencross Shareholders will have the option to elect to receive the Scheme Consideration (as defined in Section 15) in the following ways and based on their choice made on or prior to the Election Date:
- Cash Consideration: Cash Consideration (being $5.55 per Greencross Share held by each Greencross Shareholder on the Scheme Record Date, less the amount of any Special Dividend that may be declared and paid by Greencross). A Greencross Shareholder who receives the Cash Consideration will also receive any Special Dividend that may be declared and paid by Greencross in respect of each Greencross Share held by that Greencross Shareholder as at the Special Dividend Record Date; or
Mixed Consideration Options:
- Mixed Consideration Option 1: Cash Consideration in respect of 50% of their Greencross Shares held on the Scheme Record Date, plus Scrip Consideration in respect of the remaining 50% of their Greencross Shares held on the Scheme Record Date, subject to the qualifications below; or
- Mixed Consideration Option 2: Cash Consideration in respect of 25% of their Greencross Shares held on the Scheme Record Date, plus Scrip Consideration in respect of the remaining 75% of their Greencross Shares held on the Scheme Record Date, subject to the qualifications below.
In each of Mixed Consideration Option 1 and Mixed Consideration Option 2, the Scrip Consideration will be such number of Class B Shares in Vermont Aus Holdco Pty Ltd (ACN 626 842 135) (HoldCo) as is equivalent to $5.55 minus the amount of any Special Dividend that may be declared and paid per Greencross Share held on the Scheme Record Date. Each HoldCo Share issued as Scrip Consideration will be a Class B Share in the capital of HoldCo and issued at a notional issue price of $1.00 per HoldCo Share.
If a Special Dividend is declared and paid, a Greencross Shareholder who elects to receive either of the Mixed Consideration Options will also receive any Special Dividend that may be declared or paid by Greencross in respect of each Greencross Share held by that Greencross Shareholder on the Special Dividend Record Date.
Those Greencross Shareholders who are able to realise the full benefit of franking credits could receive additional value of up to $0.09 per Greencross Share if a Special Dividend of up to $0.21 is paid. Whether you will be able to realise the full benefit of the franking credits will depend on your individual circumstances.4
Default Election
A Greencross Shareholder who does not make a valid Election by the Election Date will be deemed to have made an Election to receive the Cash Consideration. Ineligible Foreign Shareholders and persons who become Greencross Shareholders after the Election Date will also be deemed to have elected to receive the Cash Consideration.
Mixed Consideration Options
The Greencross Board makes no recommendation in relation to the Mixed Consideration Options.
The alternative to elect to receive the Mixed Consideration Options formed part of TPG BidCo’s initial proposal to the Greencross Board. It has been included as a feature of the Scheme to give all Greencross Shareholders with a Registered Address in Australia an equal opportunity to retain an ongoing investment in Greencross’ business during the TPG BidCo Group’s ownership, if they wish.
The notional value of the Scrip Consideration issued under the Mixed Consideration Options will be equal to the value of the Cash Consideration. If Greencross does not declare a Special Dividend, or declares a Special Dividend of less than $0.21 per Greencross Share, the notional value of the Scrip Consideration will be increased by the corresponding amount, such that the total notional value received by Greencross Shareholders who elect to receive the Mixed Consideration Options and participate in both the Special Dividend and the Scheme will be $5.55 per Greencross Share.
Greencross Shareholders considering whether or not to make an Election to receive the Mixed Consideration Options should note that the notional issue price of $1.00 per Class B Share does not equal or otherwise reflect the underlying economic value of that Class B Share. In particular, Greencross Shareholders should note that the Independent Expert has assessed the current value of the total payments under the Scrip Consideration to be either:
- between $4.42 and $4.76 for Mixed Consideration Option 1 (inclusive of a Special Dividend of up to $0.21 per Greencross Share); or
- between $3.85 and $4.36 for Mixed Consideration Option 2 (inclusive of a Special Dividend of up to $0.21 per Greencross Share).
Risks of electing the Mixed Consideration Options
You should form your own view as to whether you wish to make an Election to receive a Mixed Consideration Option based on your individual circumstances, financial situation, taxation position, investment objectives and risk profile. You should also consider obtaining professional advice appropriate to your specific circumstances before making any Election.
It is important to understand that any investment in unlisted Class B Shares would represent a fundamentally different investment than your current investment in Greencross. In particular, your continuing exposure to Greencross would have materially different risks and a different investment and financial profile to your existing investment in Greencross as an ASX listed company. Greencross Shareholders who receive Class B Shares in HoldCo will also become parties to the HoldCo Shareholders’ Deed, a copy of which is attached at Appendix D. Furthermore, the value of the Mixed Consideration Options is less certain than the Cash Consideration and there is no assurance that the future value of Class B Shares in HoldCo will be equal to or higher than the value of the Cash Payments.
Accordingly, you should carefully read Sections 10, 11 and 12, and consider obtaining appropriate professional advice before making any Election to receive a Mixed Consideration Option. In particular, you should consider the risks associated with an investment in HoldCo set out in Section 11.4.
It is also important to understand that there is no guarantee that the Mixed Consideration Options will eventuate. The Mixed Consideration Options are subject to the following qualifications:
- the Mixed Consideration Options will only operate if Elections made would result in Greencross Shareholders holding, in aggregate, at least 1.5% of the total issued capital of HoldCo on the implementation of the Scheme. In the event this criterion is not satisfied, all Greencross Shareholders will receive the Cash Consideration; and
- if Elections made would result in Greencross Shareholders holding, in aggregate, more than 15% of the total issued capital of HoldCo on the implementation of the Scheme, then the Scaleback Mechanism will apply to ensure that the total number of Class B Shares does not exceed 15% of the total shares on issue in HoldCo.
Special Dividend
The payment and amount of the Special Dividend is at the discretion of the Greencross Board. The Special Dividend is expected to be fully franked. If Greencross does not declare a Special Dividend, or declares a Special Dividend of less than $0.21 per Greencross Share, the Cash Consideration will be increased by the corresponding amount, such that the Cash Payments received by Greencross Shareholders who participate in both the Special Dividend and the Scheme (other than those who make a valid Election to receive either of the Mixed Consideration Options) will be $5.55 per Greencross Share. Please refer to the worked examples in Section 4.4 of the Scheme Booklet.
If Greencross Shareholders or the Court do not approve the Scheme, the Greencross Board does not intend to declare or authorise any Special Dividend.
Importantly, to be eligible to receive both the Special Dividend and the Scheme Consideration, you must be registered as a Greencross Shareholder on the Special Dividend Record Date (currently expected to be Wednesday, 13 February 2019) and also the Scheme Record Date (currently expected to be Friday, 22 February 2019). If you buy (additional) Greencross Shares after the Special Dividend Record Date and before the Scheme Record Date, those Greencross Shares will not carry any right to the Special Dividend.
Directors’ recommendation
The Greencross Directors unanimously recommend that you vote in favour of the Scheme in the absence of a Superior Proposal, subject to the Independent Expert continuing to conclude that the Scheme is in the best interests of Greencross Shareholders. Subject to those same qualifications, each of the Greencross Directors intends to vote all the Greencross Shares held or controlled by them in favour of the Scheme which collectively represent approximately 6.8%5 of Greencross Shares currently on issue.
The Greencross Board makes no recommendation in relation to the Mixed Consideration Options. If Greencross Shareholders elect to receive a Mixed Consideration Option it will allow them to have an indirect ongoing interest in Greencross. Greencross Shareholders should carefully read Sections 10, 11 and 12 of the Scheme Booklet and seek professional advice before making any Election to receive the Mixed Consideration Options. In particular, you should carefully consider Section 11.4 of the Scheme Booklet which sets out the risks involved in investing in the Class B Shares in HoldCo.
In reaching the unanimous decision to recommend the Scheme to Greencross Shareholders subject to the qualifications described above, the Greencross Directors considered a number of alternatives to maximise value, including assessment of standalone value creation opportunities. Greencross received various proposals from a number of parties covering a range of transaction types, which were expressed as being indicative, incomplete, confidential and non-binding. The various alternatives including the TPG Proposal were evaluated across a number of criteria including a comparison to the status quo and taking into account future capital requirements of the business. The TPG Proposal was selected on the basis of it delivering the highest and most certain value to Greencross Shareholders.
Whilst the Greencross Directors remain positive about the outlook for Greencross as an independent ASX listed company, including its capacity to deliver growth for Greencross Shareholders into the future, the Greencross Board has also considered the general and specific risks that Greencross faces which may impede the delivery of that potential future growth. The Greencross Board was unanimous in its decision to recommend the Scheme, in the absence of a Superior Proposal, for the following reasons:
- the Independent Expert has concluded that the Scheme is fair and reasonable and hence in the best interests of Greencross Shareholders in the absence of a superior alternative proposal.
- the value of the Cash Payments represents a significant premium for your Greencross Shares;
- the value of the Cash Payments represents attractive acquisition multiples;
- if a Special Dividend of up to $0.21 is paid, those Greencross Shareholders who are able to realise the full benefit of franking credits could receive additional value of up to $0.09 per Greencross Share6;
- the Cash Consideration, together with any Special Dividend that may be declared and paid by Greencross, provides Greencross Shareholders with certainty of value and the opportunity to realise their investment for cash, avoiding the uncertainties and risks associated with Greencross’ business. These are discussed further in Section 11.3 and include:
- increasing competition for Greencross’ retail business, particularly with the recent entry of Amazon in the Australian pet retail segment; and
- risks associated with the execution of Greencross’ strategy.
- no Superior Proposal has emerged as at the date of the Scheme Booklet;
- if the Scheme does not proceed, you will continue to be subject to the risks and uncertainties associated with Greencross’ business and general market risks;
- the leverage and gearing ratios of Greencross exceed listed peers in retail and veterinary sectors. If Greencross' leverage and gearing ratios remain at current levels this may constrain Greencross' ability to fund growth initiatives or adversely impact its ability to pay dividends. As a result of these constraints, the business may be required to raise equity or sell assets to reduce current debt levels should the Scheme not proceed. This may result in further downward pressure on the share price; and
- you will not incur any brokerage charges on the transfer of your Greencross Shares if the Scheme proceeds.
In forming their unanimous decision to recommend the Scheme to Greencross Shareholders subject to the qualifications described above, the Greencross Directors considered the potential disadvantages of the Scheme proceeding. In particular:
- certain Greencross Shareholders may disagree with the Greencross Directors’ unanimous recommendation and the Independent Expert’s conclusion and believe that the Scheme is not in their best interests;
- Greencross Shareholders may wish to maintain a direct investment in Greencross as an ASX listed company;
- the Mixed Consideration Options will not be available unless the Minimum Scrip Threshold is reached;
- Class B Shares have very different features compared to Greencross Shares;
- the tax consequences of the Scheme may not suit certain Greencross Shareholders; and
- potential for a Superior Proposal to be made in the foreseeable future.
The Greencross Directors unanimously believe that the benefits of the Scheme outweigh its potential disadvantages and risks.
If the Scheme does not proceed, Greencross will continue as an independent entity listed on ASX and Greencross Shareholders will not receive the Scheme Consideration or the Special Dividend. In addition, if the Scheme does not proceed and no Superior Proposal emerges, the Greencross Directors currently anticipate that the market price of Greencross Shares on ASX may fall below current trading levels, all other things remaining equal.
Independent Expert
The Greencross Directors' unanimous recommendation of the Scheme is supported by the conclusion of Grant Thornton, the Independent Expert engaged by the Greencross Board to assess the merits of the Scheme and opine on whether it is in the best interests of Greencross Shareholders.
The Independent Expert has concluded that the Scheme is fair and reasonable and hence in the best interests of Greencross Shareholders in the absence of a Superior Proposal.
The Independent Expert has assessed the full underlying value of Greencross at between $5.05 and $5.67 per Greencross Share. The Cash Payments are within this range. Greencross Shareholders should note that the Independent Expert has assessed the current value of the total payments under the Scrip Consideration to be either:
- between $4.42 and $4.76 for Mixed Consideration Option 1 (inclusive of a Special Dividend of up to $0.21 per Greencross Share); or
- between $3.85 and $4.36 for Mixed Consideration Option 2 (inclusive of a Special Dividend of up to $0.21 per Greencross Share).
In both scenarios, the Independent Expert’s valuation of the Scrip Consideration is lower than the Independent Expert’s valuation range of $5.05 to $5.67 for each Greencross Share. It is also lower than the Cash Payments.
A complete copy of the Independent Expert’s Report is attached at Appendix B to the Scheme Booklet.
How to vote
Your vote is important and I encourage you to vote by completing and returning the Proxy Form accompanying the Scheme Booklet or alternatively by attending the Scheme Meeting in person, or by proxy, attorney or corporate representative. The Scheme Meeting is currently expected to be held at 10:00am on Wednesday, 6 February 2019 at Northside Conference Centre, Cnr Oxley St & Pole Ln, Crows Nest, New South Wales. For more instructions on how you can vote, please see Section 6.
If you wish the Scheme to proceed, it is important that you vote in favour of the Scheme Resolution.
Further information
The Scheme Booklet sets out important information regarding the Scheme, including the reasons for the Greencross Directors’ recommendation and the Independent Expert’s Report. It also sets out some of the potential reasons why you may wish to vote against the Scheme.
Please read the document carefully and in its entirety as it will assist you in making an informed decision on how to vote. I would also encourage you to seek independent financial, legal and taxation advice before making any investment decision in relation to your Greencross Shares.
If you require any further information, please call the Greencross Shareholder Information Line on 1800 260 668 (within Australia) or +61 1800 260 668 (outside Australia).
Yours faithfully
Stuart James
Chairman
Greencross Limited
1 1 month VWAP based on cumulative trading volume from 10 September 2018 up to and including 9 October 2018.
2 Implied diluted equity value of A$675 million based on the Scheme Consideration of A$5.55 per share multiplied by current Greencross Shares on issue of 120,463,450 Greencross Shares and 1,166,680 unlisted performance rights. Enterprise value includes Greencross net debt of A$268.2 million and minority interests of A$26.3 million as at 1 July 2018.
3 Multiples calculated using FY18A NPAT, FY18A EBIT and FY18A EBITDA and diluted Greencross Shares on issue. Based on Greencross underlying FY18 EBITDA of $97.6 million, underlying FY18 EBIT of $71.1 million and underlying FY18 NPAT attributable to Greencross Shareholders of $37.2 million.
4 Whether a Greencross Shareholder will be able to realise the full benefit of the franking credits will also depend (among other things) on whether a Special Dividend is declared and paid, the value of that Special Dividend, the class ruling issued by the ATO and the circumstances of the Greencross Shareholder. For more information on the Special Dividend see Sections 4.2 and 4.4.
5 This percentage does not include the Greencross Performance Rights referred to in Section 8.2.
6 Whether a Greencross Shareholder will be able to realise the full benefit of the franking credits will depend (among other things) on whether a Special Dividend is declared and paid, the value of that Special Dividend, the class ruling issued by the ATO and the circumstances of the Greencross Shareholder. For more information on the Special Dividend see Sections 4.2 and 4.4.
