2. BACKGROUND

2.1 The BEE transaction

IMPERIAL entered into a BEE transaction with Lereko in 2005, whereby Lereko acquired approximately a 7% equity interest in IMPERIAL represented by approximately 14.5 million preferred ordinary shares.

In 2010 the preferred ordinary shares will automatically convert into ordinary shares (“the converted shares”).

Lereko funded the acquisition of the preferred ordinary shares through a combination of:

• equity capital provided by its shareholders;
• raising senior funding through the issue of redeemable preference shares to Rand Merchant Bank, a division of FirstRand Bank Limited, and Absa Group Limited;
• mezzanine funding by means of the issue of redeemable debentures which are listed on the JSE Limited; and
• the provision of notional finance by IMPERIAL.

A portion of the preferred ordinary shares were subscribed for at their par value of 4 cents each subject to Lereko providing IMPERIAL with a call option to purchase a formula-determined number of converted ordinary shares from Lereko in 2015 at their par value of 4 cents each.  The call option was designed to effectively provide IMPERIAL with a market-related return on the notional finance of R598 million which it provided for the BEE transaction.

2.2 Listing of Eqstra on the JSE Limited

On 18 April 2008 IMPERIAL shareholders approved the unbundling of IMPERIAL’s leasing and capital equipment division, Eqstra, subsequent listing of Eqstra ordinary share capital, the replication of the IMPERIAL BEE structure in Eqstra and the buy-out of the MCC group of companies’ minority shareholders in exchange for shares in the listed Eqstra.

In May 2008 Eqstra was unbundled to IMPERIAL shareholders.  IMPERIAL shareholders received ordinary shares in Eqstra on a one-for-one basis for IMPERIAL ordinary shares held.  Eqstra was separately listed on the JSE Limited on 12 May 2008.

3. SHARE PRICE TRIGGERS

The terms of both the preference shares and the debentures contain various conditions of default and security which are usual for funding of this nature.  Certain of these events of default are linked to the combined IMPERIAL and Eqstra share prices and in particular to the minimum cover level of the underlying security in relation to the debentures and preference share outstandings.

The minimum share cover ratio in respect of the debenture is 0.75 times, which as at 20 November 2008 translated into a minimum combined IMPERIAL and Eqstra share price of approximately R48.39.

The minimum share cover ratio in respect of the preference shares is 200% of the outstanding value of the preference shares, which as at 20 November 2008 translated to a minimum combined IMPERIAL and Eqstra share price of approximately R41.55.

4. EFFECTS OF BREACHING THE SHARE PRICE COVER TRIGGER

• The debentures and/or the preference shares will immediately become redeemable.
• The IMPERIAL preferred ordinary shares will convert to IMPERIAL ordinary shares.
• The Eqstra “B” deferred ordinary shares will convert to Eqstra ordinary shares.
• It will entitle the preference shareholders and the debenture holders to dispose of the IMPERIAL ordinary shares and Eqstra ordinary shares owned by Lereko.
• The board of Lereko will immediately be replaced by appointees of the funders in order to enable the funders to realise the shares and settle themselves.
• The Lereko structure would effectively collapse and an additional 14.5 million shares would be issued for effectively no consideration.
• IMPERIAL would lose approximately 7% of its BEE shareholding.
• Eqstra would lose approximately 5% of its BEE shareholding.

5. PROVISION OF ADDITIONAL ACCEPTABLE COLLATERAL

From an IMPERIAL shareholder perspective, there would have been an awareness from the Circular and Prelisting Statement of May 2005 and specifically the Documents which lay for inspection, when the approval of shareholders was sought and granted, that a feature was the possibility that collateral could be provided by the shareholders of Lereko, one of which was IMPERIAL.

There are no provisions in the original transaction documents which record that shareholder approval is required should IMPERIAL elect to provide collateral. Further, it is not a variation or amendment of the transaction and, therefore, the original transaction documents require no variation or amendment. 

IMPERIAL Group (Pty) Ltd and Eqstra Corporation (Pty) Ltd subsidiaries of IMPERIAL and Eqstra respectively are issuing guarantees or will provide cash collateral jointly (but not severally) for a total amount of R100 million which will count as additional acceptable collateral (in the proportions of R78 400 000 by the IMPERIAL subsidiary and R21 600 000 by the Eqstra subsidiary) in favour of the debenture holders and preference shareholders, which guarantees shall automatically come into effect on signature date and would expire in September 2010 upon full settlement of the debenture holders and preference shareholders.

The effect of the additional acceptable collateral will be to reduce the minimum combined IMPERIAL and Eqstra share prices as mentioned in 3 above to approximately R41.50 in respect of the minimum share cover ratio of the debentures and R34.66 in respect of the minimum share cover ratio of the preference shares.

In exchange for the provision of this additional acceptable collateral, Lereko has agreed that IMPERIAL and Eqstra’s call options over their shares may be brought forward by 1 (one) year to 2014 at the election of IMPERIAL and Eqstra, which is subject to shareholder approval.

6 WITHDRAWAL OF CAUTIONARY ANNOUNCEMENT

The cautionary announcement dated 19 September 2008 issued by Lereko is hereby withdrawn.

Johannesburg
21 November 2008