Inorganic growth
Looking ahead
The group remains highly cash generative and continues to pursue significant opportunities to invest capital in its growth strategy.
Our medium-term growth strategy focuses on opportunities that are expected to yield greater return on investment and effort at lower levels of risk.
In gaming the focus remains on capacity increases in our existing properties, particularly in specific markets where changing demographics are driving growth. With only one of the national licences that is not allocated an attractive proposition, we remain acquisitive for existing licences, but only at the right price. African expansion would only become attractive as regional economies develop a more robust middle market and enable regulatory environments. Expansion outside South Africa remains unattractive due to the additional risk of operating in diverse regulatory environments and the limited economies of scale that can be achieved.
In hotels we remain opportunistic in South Africa and will acquire properties if they are well located, align with our business model and are realistically priced. Although occupancies are improving they are not yet at long-term averages and there should not be significant hotel stock being added to the market at this stage of the cycle. We would, however, actively seek opportunities to land bank, or build, or lease in superior locations or nodes that are expected to grow more strongly in the future. In other jurisdictions we continue to evaluate opportunities to manage, lease or own hotel properties in markets where we believe we have a competitive advantage and will mostly focus on the territories we already operate in.
The Mpumalanga Gambling Board withdrew the previous request for proposal (‘RFP’) for the fourth licence in the province and restarted the project with a new RFP. The group submitted a revised bid and have been subsequently advised that the board has again withdrawn the RFP. The group will be pursuing a legal challenge in this regard.
The potential to bid for the relocation of one of the smaller casinos in the Western Cape to the Cape Metropole remains an opportunity for the group, although the increase in provincial taxes in the Western Cape has made this a less attractive opportunity than before.
The group is also exploring a variety of projects, including the expansion of the Suncoast Casino and related entertainment facilities, as well as a number of potential acquisitions which are at various stages. The group has closed a number of acquisitions subsequent to year end as follows:- As announced on SENS on 3 April 2014, SSHI, a group subsidiary, concluded agreements with Liberty for a 10% increase in the group’s equity interest in Cullinan to 60% and the acquisition by Cullinan of various hotel assets from SSHI and Liberty. The net investment by the group is R762 million and the effective date of the transaction was 30 April 2014.
- The group acquired a 25% interest in RedefineBDL Hotel Group Limited for R145 million, a leading independent hotel management company in the United Kingdom with approximately 60 hotels under management, with effect from 1 May 2014. This acquisition provides the company with access to additional management expertise, exposure to new markets and the potential for opportunities to deploy capital in attractive investments in the European market in the future.
- As announced on SENS on 13 May 2014, the group has entered into a transaction with Sun International Limited and Grand Parade Investments Limited for the acquisition of a 40% equity interest in each of SunWest International Proprietary Limited and Worcester Casino Proprietary Limited for an aggregate R2 185 million. The acquisition is subject to the fulfilment of conditions precedent which include the approvals of the provincial Gambling and the Competition Authorities.
- a fully marketed secondary placing of 301.7 million ordinary shares to selected South African and international institutional investors; and
- a specific repurchase of 133.6 million ordinary shares by Tsogo Sun for R2.8 billion.
Following the placing and the repurchase, the shareholding of Tsogo Sun as at 29 August 2014 changed to HCI holding 47.6% with the free float increasing to 52.4%.
The group opened the 353-room Southern Sun Abu Dhabi under management contract in the United Arab Emirates on 30 April 2014.
The ability to continue to pursue the group’s investment strategy will depend on the final outcome and impact of the variety of proposed regulatory and tax changes considered by government and will require the successful interaction with various regulatory bodies including gambling boards, city councils, provincial authorities and national departments.