Massmart Annual Report 2008

Fairness opinion by an Independent Professional Expert

 
1 October 2008

The Directors
Massmart Holdings Limited
Massmart House
6 Peltier Drive
Sunninghill Extension 6
Sandton
2196

Attention: Mr Ilan Zwarenstein

Dear Sirs

Fairness opinion on the proposed sale of Massmart ordinary shares to certain black non-executive Directors of Massmart Holdings Limited (“Massmart” or “the company”)

Introduction

Massmart Management and Finance (Proprietary) Limited (“MMF”), a wholly owned subsidiary of Massmart, has entered into an agreement with five of Massmart’s black non-executive Directors to sell 100 000 Massmart ordinary shares, currently held by MMF as treasury shares, to them at their par value of 1 cent per share (“the transaction”).

In terms of section 5.51 of the Listings Requirements (“Listings Requirements”) of the JSE Limited (“JSE”), as the Massmart shares are to be sold at their par value, which is at a discount to the weighted average traded price of Massmart shares on the securities exchange operated by the JSE measured over the 30 business days prior to the date that the sale of the Massmart shares is agreed, a fairness opinion is required from an independent professional expert acceptable to the JSE on the terms and conditions of the transaction. Furthermore, in terms of the Listings Requirements, as the transaction is with related parties, a fairness opinion is required.

As a consequence of the above, the directors of Massmart have appointed the Corporate Finance division of Deloitte & Touche to provide the required opinion, indicating whether the transaction is fair to all the shareholders of Massmart.

Scope and limitations of review

The scope of our work was limited to the matters set out herein.

Our procedures and enquiries did not include verification work nor did the scope of our work constitute an audit in terms of statements of International Standards on Auditing. Accordingly, we do not express any opinion on the financial data reviewed by ourselves.

Our fairness opinion does not purport to cater for individual shareholder positions but rather the general body of Massmart shareholders. Each Massmart shareholder’s decision may be influenced by their particular circumstances. We suggest that a shareholder should consult an independent advisor if they are in any doubt as to the merits of the transaction considering their personal circumstances.

Information utilised and procedures carried out

In arriving at our opinion, we have considered information from the following sources:

  • a strategic analysis of the company, including, inter-alia, a summary of the strengths, weaknesses, opportunities and threats applicable thereto as well as details regarding market share and market growth rates
  • sale of shares agreement between MMF and the black non-executive Directors entered into pursuant to the transaction
  • the forecast financial information of Massmart for its financial year ending 30 June 2009, prepared by management
  • the historic financial information of Massmart for its financial years ended 30 June 2007 and 2008
  • recent analysts’ reports on Massmart and the industry in which it operates
  • review of publicly available information on emoluments payable to black non-executive directors by other entities listed on the securities exchange operated by the JSE
  • a price earnings multiple valuation of Massmart ordinary shares which we have prepared to estimate the pecuniary benefit to be received by the black non-executive Directors pursuant to the transaction

We consider a comparative earnings multiple valuation approach to be appropriate in this instance as the shares of Massmart and its peers are widely traded.

Where practical, we have corroborated the reasonability of the information provided to us for the purpose of our opinion, including publicly available information, whether in writing or obtained in discussion with management of Massmart.

Our approach to considering the transaction

For the purposes of our opinion, fairness was based primarily on a quantitative assessment. In considering the transaction, we performed a benchmarking exercise on the estimated pecuniary benefit to be received by the black non-executive Directors pursuant to the transaction, compared to the benefit received by other black non-executive directors involved in similar recent transactions. In addition, we compared the emoluments paid by Massmart to its black non-executive Directors to emoluments paid by other entities listed on the securities exchange operated by the JSE to their black non-executive directors.

In estimating the pecuniary benefit to be received by the black non-executive Directors pursuant to the transaction, we performed a valuation of Massm shares. The key external value driver of our valuation is forecast levels of consumer spending and the key internal value driver of our valuation is new store openings planned by Massmart.

The transaction would be considered fair to Massmart shareholders if the aggregate of the pecuniary benefit to be received by the black non-executive Directors of Massmart as a consequence of the transaction and their current emoluments received from Massmart is less than or equal to the emoluments paid by other entities listed on the securities exchange operated by the JSE to their black non-executive directors.

Opinion

We determined that the transaction brings the emoluments that Massmart pays to its black non-executive Directors in line with emoluments paid to other black non-executive directors by other entities listed on the securities exchange operated by the JSE, taking into account the difference between the sale price of the shares to be sold and our market valuation of the Massmart shares.

Based upon and subject to the aforegoing, we are of the opinion that the terms and conditions of the transaction are fair to the shareholders of Massmart.

Our opinion is based upon the market, regulatory and trading conditions as they currently exist and can only be evaluated as at the date of this letter. It should be understood that subsequent developments may affect our opinion, which we are under no obligation to update, revise or re-affirm.

Limiting conditions

Forecasts relate to uncertain future events and are based on assumptions, which may not remain valid for the whole of the forecast period. Consequently, forecast financial information cannot be relied upon to the same extent as that derived from audited financial statements for completed accounting periods. We express no opinion as to how closely actual results will correspond to projections made by the management of Massmart and made available to us during the course of our review.

Our procedures and inquiries did not constitute an audit in terms of International Standards on Auditing. Accordingly, we cannot express an audit opinion on the financial data or other information used in arriving at our fairness opinion.

Independence

We confirm that we have no financial interest in Massmart, MMF and the outcome of the transaction. Furthermore, we confirm that our professional fees are not contingent upon the successful conclusion of the transaction and are payable in cash.

Deloitte & Touche, of which Deloitte & Touche Corporate Finance forms a part, is appointed as the independent auditor of Massmart and MMF.

Consent

We hereby consent to this letter lying open for inspection at the registered office of Massmart and references thereto in the 2008 Annual Report of Massmart in the form and context in which they appear.

Yours faithfully

David McDuff

David McDuff
Partner