RHI and Magnesita to combine to create a leading refractory company

Transaction Overview
RHI AG (“RHI”) and the controlling shareholders of Magnesita Refratários S.A. (“Magnesita”), investment vehicles affiliated with GP Investments (“GP”) and Rhône Capital (“Rhône”, and together with GP, “Magnesita’s Controlling Shareholders”), announce that they have reached an agreement to combine the operations of RHI and Magnesita to create a leading refractory company to be named RHI Magnesita.

Accordingly, RHI’s Management Board has agreed to sign a share purchase agreement (“SPA”) with Magnesita’s Controlling Shareholders regarding the acquisition of a controlling stake of at least 46%, but no more than 50% plus one share of the total share capital in Magnesita (the “Transaction”), pending RHI’s Supervisory Board approval. The purchase price for the 46% stake will be paid in cash amounting to € 118 million and 4.6 million new shares to be issued by RHI Magnesita, a new RHI entity to be established in the Netherlands and listed in London. Based on RHI’s six-month volume-weighted average price (“VWAP”) of € 19.52, the implied value of the 46% stake amounts to € 208 million.

As a result of the Transaction, GP will become a relevant shareholder of RHI Magnesita. The combined company’s corporate governance will be constituted on a one-tier board structure while GP will be represented on the board of directors. All RHI Magnesita shares issued as a result of the Transaction and subsequent mandatory tender offer will be subject to a minimum 12-month lock-up period.

The resulting combination will be a leading refractory company. Refractories are materials that retain their strength at high temperatures and are used in various industrial processes in the steel, cement, nonferrous metals, glass and chemicals industries. The combination will bring under one roof two complementary businesses, both in terms of products and geographical footprint. RHI, based in Austria, is a global supplier of high-grade refractory products, with 2015 revenues of € 1,753 million and adjusted EBITDA of € 198 million. Brazil-based Magnesita is a global provider of integrated refractory solutions, services and industrial minerals, with revenues of US$ 1,013 million (€ 914 million) and adjusted EBITDA of US$ 145 million (€ 131 million) in 2015.1

The completion of the Transaction is amongst others subject to (i) approvals by the relevant competition authorities, (ii) the migration of RHI to the Netherlands, (iii) the listing of RHI Magnesita’s shares in the premium segment of the Official List on the Main Market of the London Stock Exchange and (iv) RHI’s shareholders not having exceeded statutory withdrawal rights in an amount of more than € 70 million in connection with organizational changes preceding RHI’s migration from Austria. The migration and the preceding organizational changes in Austria require qualified approval by RHI’s shareholders’ meeting. If the Transaction is terminated for reasons not under the control of Magnesita’s Controlling Shareholders, an aggregate break fee of up to € 20 million is payable by RHI to Magnesita’s Controlling Shareholders.

The migration of RHI to the Netherlands and the subsequent listing on the London Stock Exchange have the objective of reinforcing and underlining the truly international scope of the enlarged combined company, enhancing its capital markets presence and maximizing value potential for the company’s shareholders. The migration of RHI will be effected by RHI Magnesita becoming the ultimate holding company of RHI Group and the shareholders of RHI will cease to hold shares in RHI and instead hold RHI Magnesita shares. Following registration of the corporate restructurings, RHI’s shares cease to be listed on the Vienna Stock Exchange. The place of effective management of RHI Magnesita will be Austria.

The Transaction is expected to complete in 2017. Until then, the two companies will remain completely separate and independent. Therefore customers, suppliers, employees and other stakeholders should expect no change in management teams, commercial relationships, supply chains and product offerings during this period.

Mandatory Tender Offer
Following completion of the Transaction, a mandatory tender offer will be launched by RHI Magnesita or one of its affiliates (“Offer”) for the remaining shares in Magnesita. As part of the Offer, a maximum number of 5.4 million RHI Magnesita shares will be issued, resulting in an aggregate number of no more than 10.0 million newly issued shares to finance the acquisition. The Offer will include the option to sell shares on the same payment terms as the Transaction as well as a cash-only alternative amounting to € 8.19 per Magnesita share (subject to certain adjustments according to the SPA). If some or all of Magnesita’s other shareholders elect not to receive RHI Magnesita shares in the Offer, Magnesita’s Controlling Shareholders have committed to purchase additionally at least 1.9 million and at most 3.4 million of the remaining new RHI Magnesita shares, thereby increasing their total number of RHI Magnesita shares to a maximum of 8.0 million. RHI may decide to combine the Offer with a delisting offer and/or a voluntary offer to exit Magnesita from the “Novo Mercado” listing segment. The Offer will follow applicable Brazilian laws and regulations. Any RHI Magnesita shares that are not taken up in the Offer by Magnesita’s shareholders may be either placed into the market or with institutional investors.

Financial Terms of the Transaction
Based on RHI’s six-month VWAP of € 19.52, the implied value for the entire share capital of Magnesita will be € 451 million, 45% above Magnesita’s market capitalization as of October 4, 2016.2 The Transaction will be financed by additional debt and the issuance of 4.6 million RHI Magnesita shares to Magnesita’s Controlling Shareholders. The Transaction will increase RHI’s current financial leverage, measured as net debt to EBITDA, to 4.0x at closing of the Transaction when assuming an acquisition of Magnesita’s entire share capital. RHI expects, however, that leverage will decline to below 2.0x by 2020 as a result of the strong cash generation profile of the newly combined company. Magnesita will continue to finance itself on a standalone basis without credit support from RHI Group. Before or at completion of the Transaction, Magnesita is expected to adopt RHI's accounting practices, which, according to RHI, could lead to significant, however substantially non-cash adjustments in Magnesita's book equity value.

Enhanced Growth Profile and Global Footprint
The combination of RHI and Magnesita represents a unique opportunity to accelerate growth in certain regions, resulting from the high complementary of the businesses both in terms of geographic footprint and products.

Magnesita’s presence in South America and the United States fits well with RHI’s presence in Europe and Asia. It results in strengthened geographic clusters of the combined company by adding production facilities in several markets in which RHI and Magnesita are lacking capacity on their own. This combination will also strengthen the competitive position against the Chinese refractory industry, which is expected to consolidate in the coming years as announced by the Chinese government. Moreover, Magnesita’s position in dolomite-based products is highly complementary to RHI’s asset portfolio, which traditionally has a strong focus and an excellent market reputation for high-quality magnesite products.

The combination of RHI and Magnesita will enable the combined company to offer its customers an even broader product and service portfolio thereby delivering enhanced value-add. Additional potential for value creation will be realized through synergies and the implementation of common proven standards of operational and commercial excellence.

Significant Value Creation and Synergy Potential
The Transaction will result in meaningful synergies in the following key areas, amongst others:

(i)      a highly complementary offering of value-added products and services as a result of the combination of both product portfolios;

(ii)     a more efficient cost structure, benefitting from economies of scale in important operational areas such as raw materials supply, freight, marketing and administration, as well as an optimized operational set-up leading to enhanced flexibility in production and an improved cost basis;

(iii)    an optimized working capital structure, especially given Magnesita’s presence in the Americas, by means of improved inventory management and related costs, resulting from the complementary regional footprint of RHI and Magnesita’s operations and customer base; and

(iv)   a relevant reduction in capital expenditure requirements and maintenance costs.

As a result of the Transaction, RHI expects minimum net run-rate synergies on EBIT level of approx. € 36 million by 2020. However, RHI is optimistic that as a result of the Offer, RHI Magnesita’s stake in Magnesita will significantly exceed 46%. In this case, RHI expects substantially higher synergies of approx. € 72 million, especially in the areas of enhanced production efficiency and cost benefits in research and development, marketing and administrative functions. In addition, capital expenditure synergies are expected to amount to between € 2 million and € 7 million annually, while aggregate working capital savings of € 40 million are expected in the coming years.

Cash integration costs as a result of the Transaction are expected by RHI to be of the magnitude of € 50 million to € 90 million, while non-cash integration costs, effectively write-offs, should vary between € 20 million and € 35 million, depending on the amount of Magnesita shares acquired pursuant to the Transaction and subsequent Offer. Both cash and non-cash integration costs will mainly crystallize in 2017 and 2018.

Increased Financial Targets
As a result of the Transaction, RHI’s mid-term financial targets will surpass RHI’s current targets. RHI expects the combined company to generate fully consolidated revenues of € 2.6 billion to € 2.8 billion (previously € 2.0 to € 2.2 billion) with an operating EBIT margin of more than 12% (previously more than 10%) by 2020. It projects a cumulative operating cash flow of approx. € 1.1 billion for the period from 2017 to 2020 for the combined business, assuming an acquisition of Magnesita’s entire share capital.

RHI expects RHI Magnesita to pay stable dividends in 2017 and 2018, in line with RHI’s previous years’ payment levels. In the mid- to long-term, however, RHI Magnesita aims to increase its dividend payments, as a result of stronger cash flow generation resulting from synergies, organic growth and de-leveraging of the company’s capital structure.

About RHI
RHI is a globally operating supplier of high-grade refractory products, systems and services, which are indispensable for industrial high-temperature processes exceeding 1,200 °C. With approx. 7,900 employees, over 30 production facilities and more than 70 sales offices, RHI serves more than 10,000 customers in the steel, cement, nonferrous metals, glass, energy and chemical industries in nearly all countries around the world. RHI produces more than 1.5 million tons of refractory products p.a. and supplies customized product and system solutions. The Company’s shares are listed on the Vienna Stock Exchange under the symbol RHI, with RHI being a member of the ATX index.

About Magnesita
Magnesita is a Brazilian publicly traded company, dedicated to mining, producing and marketing an extensive line of refractory and industrial mineral materials. Its products are mainly used by the cement, glass, and steel industries. Industrial activities began in 1940, soon after the discovery of magnesite deposits in Brumado, in the Brazilian state of Bahia. Today, it operates 26 industrial and mining units, sixteen in Brazil, three in Germany, one in China, one in the United States, two in France, one in Belgium, one in Taiwan and one in Argentina, with a refractory production capacity of more than 1.3 million tons per year. The company is a leader in refractories in the Americas and in dolomite-based refractories worldwide, and its products were sold to more than 100 countries in 2015. Its shares trade on the Novo Mercado of BM&FBOVESPA in Brazil and through level 1 ADRs in the United States.

About GP Investments
GP Investments is a leader in alternative investments in Latin America. Since its inception, the company has raised approx. US$5.0 billion from international investors and has acquired 54 companies in 15 sectors. In May 2006, GP Investments concluded its initial public offering (IPO), becoming the first listed private equity firm in Brazil.

About Rhône
With 20 years of investing experience, Rhône, together with its affiliates, is a global alternative asset management firm with a focus on investments in market leading businesses with a pan-European or transatlantic presence and expansion prospects. Currently investing capital from its fifth private equity fund, Rhône has offices in London and New York and prior investment experience in the business services, chemicals, consumer products, food, packaging, security services, specialty materials and transportation sectors

1Magnesita net revenues and adjusted EBITDA converted at 2015 average €/US$ exchange rate of 1.11. Magnesita EBITDA adjusted for other operating income and expenses. RHI EBITDA adjusted for negative effects on earnings of approx. € 58 million related to a necessary change in the measurement of long-term energy supply contract.

2 Assuming that 10 million RHI Magnesita shares will be issued

This document is for information purposes and shall not be treated as giving any investment advice, financial analysis and/or recommendation whatsoever; it does not constitute an offer or marketing of securities of RHI, nor a prospectus.

This press release contains forward-looking statements based on the management’s current views and certain presumptions and is subject to risks and uncertainties; if those materialize, actual results may vary materially. Many factors could cause our results of operations, financial condition, liquidity, and the development of the industries in which we compete, to differ materially from those expressed or implied by the forward-looking statements contained herein. Subject to applicable securities law requirements, RHI does not intend or assume any obligation to update or revise these forward-looking statements.

10.10.2016, RHI

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