Gold Reef Resorts brings in 25,1% BEE in R1,4 Billion Deal
9th March 2007

In a landmark BEE transaction valued at over R1,4 billion, leading gaming group Gold Reef Resorts has introduced BEE at group level for the first time and in a single move taken its black-owned shareholding to over 25,1%. By exchanging shares in the company for the shareholdings of its BEE partners in certain of its casinos, the group has at the same time increased its exposure to its high-performing operations and consolidated its gaming platform.

As a result of the share exchange transaction Gold Reef has increased its shareholding in Gold Reef City, Silverstar Casino, Golden Horse Casino and Goldfields Casino to 100%. Shares were acquired from the group’s BEE partners in the operating companies of each of these casinos. In Casino Mykonos, Gold Reef increased its stake to 70,4%. A total of 55,2 million Gold Reef shares will be issued for the share exchange, equating to 21,03% of the company.

In a separate ‘top-up’ transaction 14 million Gold Reef shares will be issued for cash to certain of the same BEE partners at R20,50 a share, amounting to R287 million, taking BEE participation in the company to over 25,1%. The BEE initiative is in line with the Department of Trade and Industry’s Code of Good Practice on broad-based BEE and complies with the Gaming Board’s recommendations.

Gold Reef CEO Steven Joffe says that whilst the ‘top-up’ transaction will be externally funded, the share exchange transaction is distinguished from typical empowerment transactions: “The share swap is unencumbered for our BEE partners as the number of Gold Reef shares issued has been adjusted for any debt previously attaching to the BEE shareholdings in the underlying casinos. With a clean, straight swap our BEE shareholders will realise their value immediately.”

He says he is delighted with the nature of the transaction which will see Gold Reef continue its successful historic relationship with its BEE partners, simply at group rather than subsidiary level. “While the share exchange transaction and top-up will make us compliant with the letter of the law, which is pleasing, the benefit comes in that it is a ‘win-win’ for all parties concerned. An added advantage is that we will not face a period of adjustment as often follows typical BEE transactions, as these are our existing partners for some years already in the respective casinos.”

Although the transaction will dilute the group’s earnings in the immediate future, Joffe explains that it will be earnings-enhancing from 2008 onwards. “Earnings are diluted immediately for two reasons - the Gold Reef shares for the stake in Silverstar Casino will be issued upfront. However, the casino’s positive impact on group earnings will be experienced only from 2008 once Silverstar starts trading. ” Silverstar holds the seventh and final casino licence for Gauteng, the largest gaming market in South Africa, and is expected to reduce the group’s reliance on Gold Reef City.

The second reason relates to Gold Reef’s acquisition of 100% of the management contracts for Gold Reef City Casino and Goldfields Casino. Gold Reef acquired the remaining 25% in Gold Reef City Casino’s management contract, while wholly-owned subsidiary Gold Reef Management acquired the remaining 30% in the Goldfields Casino management contract. “The increased income from casino management activities will have a long-term positive effect on group earnings,” says Joffe. “However, accounting standards dictate that the group immediately and completely write-off the R44,5 million payable for these outstanding contract interests which is earnings dilutionary in the short-term.”

Joffe says he is excited by the appointment of three black directors to the board on finalisation of the BEE transaction. “We will boost black representation on Gold Reef’s board from one to four directors, or 25% of the total board.” Bongani Biyela, previously the General Manager of Gold Reef City Casino, will be appointed as executive director responsible for group strategy and development. Richard Moloko and Patrick September will be appointed as non-executive directors.

Looking ahead he says: “We view BEE as a business imperative and believe that the increased BEE shareholding will create long-term financial benefits for our shareholders.” In addition increased exposure to the individual operations through stakes of up to 100%, bodes well for the group’s future bottom-line growth.

The BEE transaction remains subject to a number of conditions including various regulatory approvals and shareholder approval at a general meeting to be held on Wednesday, 25 April 2007.

Gold Reef will be releasing annual results for the year to December 2006 on Monday 19 March 2007. Its shares closed yesterday at R22,90.

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