Annexure D

Share-based payment plans

The information noted below summarises all key assumptions, valuation inputs and key disclosures relating to the Tiger Brands share-based payment plans.

1

General employee share option plan

Certain senior employees are entitled to receive options based on merit. Options are issued annually by the board of directors of the company.

Between January 2006 and March 2013, a cash-settled option scheme was applied by the company, which replaced the previous equity-settled share option scheme. During March 2013, a hybrid scheme was introduced where executives and managers of the company and its subsidiaries are offered a weighted combination of:

  • Allocations of share appreciation rights
  • Conditional awards of full value performance shares
  • Grants of full value restricted shares (bonus matching and deferral element).

This hybrid scheme is regarded as an equity-settled share option scheme.

Equity settled

All outstanding options under this scheme were fully exercised in the 2015 financial year (106 600 shares at a weighted average exercise prices (WAEP) of R75,13).

Share appreciation rights

The following table illustrates the number and WAEP of and movements in, share appreciation rights during the year:

  2016     2015  
  Number WAEP     Number WAEP  
Outstanding at the beginning of the year 1 185 560 301,3     955 159 274,8  
Granted during the year 376 004 297,2     292 850 385,3  
Forfeited during the year (493 489) 300,2     (62 449) 284,7  
Exercised during the year (3 292) 282,0     _  
Outstanding at the end of the year 1 064 783 301,4     1 185 560 301,3  
Exercisable at the end of the year         _  
Weighted average remaining contractual life (years)   4,2 years        4,3 years  
Weighted average fair value of options granted (per option)   R93,9        R95,7  
Range of exercise prices outstanding at the end of the year (per option)   R254,5 – R385,3        R254,5 – R385,3  

Options were valued using a modified Black-Scholes model taking into account the dividend cover, expected exercise pattern and volatility of the Tiger Brands share price. Subject to certain performance conditions, one-third of the equity- settled share options vest on each of the third, fourth and fifth anniversary dates from the date of the original grant date. All equity-settled options mature six years after the grant date.

The following inputs were used:

Date of grant Strike price
of option (Rand)
Expiry date Market price
of the underlying
stock at grant
date (Rand)
Expected volatility
of the stock over
the remaining life
of the option (%)
Expected
dividend
cover (times)
 
13/02/2013 299,8 12/02/2019 289,5 24,5 2,0  
30/09/2013 299,8 29/09/2019 299,1 23,2 2,0  
13/02/2014 254,5 12/02/2020 250,0 21,5 3,0  
02/05/2014 272,9 01/05/2020 279,5 21,8 3,0  
02/06/2014 298,3 01/06/2020 299,8 21,8 2,9  
04/02/2015 385,3 04/02/2020 394,9 21,3 2,9  
02/09/2016 291,7 09/02/2021 302,9 25,5 3,0  
31/03/2016 322,4 31/03/2021 325,2 25,7 3,0  
24/05/2016 341,7 24/05/2021 337,0 25,7 2,9  

Volatilities are based on the historical volatility of the Tiger Brands share price matching the remaining life of each option.

Performance shares

The following table illustrates the number of, and movements in, performance shares during the year

  2016
Number
    2015
Number
 
Outstanding at the beginning of the year 170 890     128 261  
Granted during the year 70 580     56 230  
Forfeited during the year (76 158)     (13 601)  
Exercised during the year (8 462)      
Outstanding at the end of the year 156 850     170 890  
Exercisable at the end of the year      
Weighted average remaining contractual life (years) 1,5 years     1,5 years  
Weighted average fair value of options granted (per option) R481,8     R611,3  

Options were valued using the Monte-Carlo simulation approach to estimate the price of the options that are subject to TSR market performance conditions using 50 000 simulations taking into account the dividend cover, expected exercise pattern and volatility of the Tiger Brands share price.

The following inputs were used:

Date of grant Expiry date Market price
of the underlying
stock at grant
date (Rand)
Expected volatility
of the stock over
the remaining life
of the option (%)
Expected
dividend
cover (times)
 
13/02/2013 12/02/2016 289,5 20,8 2,0  
28/02/2014 27/02/2017 244,4 22,4 3,0  
04/02/2015 04/02/2018 394,9 23,6 2,9  
09/02/2016 04/02/2019 302,9 27,5 3,0  
24/05/2016 24/05/2019 337,0 27,0 2,9  

Volatilities are based on the historical volatility of the Tiger Brands share price matching the remaining life of each option.

Restricted shares

The following table illustrates the number of, and movements in, restricted shares during the year:

  2016
Number
    2015
Number
 
Outstanding at the beginning of the year 130 122     26 950  
Granted during the year 79 560     108 842  
Forfeited during the year (13 875)     (5 670)  
Exercised during the year (3 429)      
Outstanding at the end of the year 192 378     130 122  
Exercisable at the end of the year      
Weighted average remaining contractual life (years) 1,6 years     2,1 years  
Weighted average fair value of options granted (per option) R286,5     R359,7  

Options were valued using a modified Black-Scholes model taking into account the dividend cover, expected exercise pattern and volatility of the Tiger Brands share price.

The following inputs were used:

Date of grant Expiry date Market price
of the underlying
stock at grant
date (Rand)
Expected volatility
of the stock over
the remaining life
of the option (%)
Expected
dividend
cover (times)
 
13/02/2013 12/02/2016 289,5 20,8 2,0  
28/02/2014 27/02/2017 244,4 22,4 3,0  
03/12/2014 03/12/2017 367,9 23,4 2,9  
28/02/2014 10/09/2017 319,0 23,0 3,0  
04/02/2015 04/02/2018 394,9 23,6 2,9  
03/12/2015 03/12/2018 320,0 26,3 3,0  
09/02/2016 09/02/2019 302,9 27,5 3,0  
31/03/2016 31/03/2019 325,2 27,4 3,0  

Volatilities are based on the historical volatility of the Tiger Brands share price matching the remaining life of each option.

Cash settled

The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in, cash- settled options during the year:

  2016     2015  
  Number WAEP     Number WAEP  
Outstanding at the beginning of the year 696 622 238,2     1 764 355 207,9  
Granted during the year      
Forfeited during the year (160 441) 251,6     (785 498) 226,1  
Exercised during the year (265 105) 195,0     (282 235) 187,3  
Outstanding at the end of the year 271 076 249,5     696 622 238,2  
Exercisable at the end of the year 155 031 195,0     267 042 204,5  
Weighted average remaining contractual life (years)   1,4 years        2,0 years  
Range of exercise prices outstanding at the end of the year (per option)   R280,0 – R399,9        R281,0 – R399,3  
Weighted average share price at the date of exercise (per option)   R316,8        R367,0  

Cash options were valued using a modified Black-Scholes model taking into account the dividend cover, expected exercise pattern and volatility of the Tiger Brands share price. Subject to certain performance conditions, one-third of the cash-settled share options vest on each of the third, fourth and fifth anniversary dates from the date of the original grant date. All cash-settled options mature six years after the grant date

The following inputs were used:

Date of grant Strike price
of option (Rand)
Expiry date Market price
of the underlying
stock at grant
date (Rand)
Expected volatility
of the stock over
the remaining life
of the option (%)
Expected
dividend
cover (times)
 
13/02/2013 299,8 12/02/2019 289,5 30,4 2,9  
01/10/2012 265,4 30/09/2018 272,4 31,3 2,9  
02/07/2012 252,0 01/07/2018 247,0 31,3 2,9  
03/02/2012 253,2 02/02/2018 255,0 31,3 2,9  
02/02/2011 189,1 01/02/2017 188,2 31,3 2,9  

The average volatility was 31,1% (2015: 24,6%) and the risk-free rate was approximately 7,5% (2015: 6,7% to 7,4%) during the year.

The carrying amount of the liability relating to the cash-settled options at 30 September 2016 is R36,4 million (2015: R37,9 million) – refer to note 29. Cash-settled options exercised during the year amounted to R35,6 million (2015: R52,5 million).

Volatilities are based on the historical volatility of the Tiger Brands share price matching the remaining life of each option.

2

Black Managers Participation Rights Scheme (equity settled)

In terms of the BEE transaction implemented on 17 October 2005, 4 381 831 Tiger Brands shares were acquired by the Tiger Brands Black Managers Trust.

The allocation of vested rights entitles beneficiaries to receive Tiger Brands shares (after making capital contributions to the Black Managers Trust) at any time after the lock-in period. In respect of options allocated on or before 31 July 2010, the lock-in period ends on 31 December 2014. In respect of allocations made after 31 July 2010, the lock-in date will be the latter of 31 December 2014 or, in respect of one-third of the allocations, three years after the allocation, the next third, four years and the last third, five years after the allocation. These vested rights are non-transferable.

After the lock-in date, the beneficiaries may exercise their vested rights, in which event the beneficiary may:

  • Instruct trustees to sell all of their shares and distribute the proceeds to them, net of the funds required to pay the capital contributions, taxation (including employees’ tax), costs and expenses
  • Instruct the trustees to sell sufficient shares to fund the capital contributions, pay the taxation (including employees’ tax), costs and expenses, and distribute to them the remaining shares to which they are entitled or
  • Fund the capital contributions, taxation (including employees’ tax) costs and expenses themselves and receive the shares to which they are entitled.

The expense recognised for employee services received during the year to 30 September 2016 is R16,4 million (2015: R22,7 million).

The following table illustrates the number of, and movements in, share participation rights during the year:

  2016
Number
    2015
Number
 
Outstanding at the beginning of the year 1 330 442     3 081 442  
Granted during the year 65 000     48 000  
Forfeited during the year (97 135)     (78 086)  
Shares sold (death of employees) (296 023)     (1 720 914)  
Outstanding at the end of the year 1 002 284     1 330 442  
Exercisable at the end of the year 627 060     773 441  
Weighted average remaining contractual life (years) 11,0 years     12,0 years  
Weighted average fair value of options granted during the year (per option) R293,9     R292,0  
No weighted average exercise price has been calculated as there were no participation rights exercised R101,49      R86,15  

Participation rights were valued using the Monte-Carlo simulation approach to estimate the average, optimal payoff of the participation rights using 5 000 permutations. The payoff of each random path was based on the projected Tiger Brands share price, outstanding debt projections and optimal early exercise conditions.

Volatility is measured as the annualised standard deviation of the daily price changes in the underlying share under the assumption that the share price is log-normally distributed. Historical daily share price data was used to estimate the expected volatility.

The following inputs were used:

Date of grant Initial strike
price of
participation
rights (Rand)
Expiry date Market price
of the underlying
stock at grant
date (Rand)
Expected volatility
of the stock over
the remaining
life of the
participation
right (%)
Expected
dividend yield
of the stock
over the
remaining
life of the
participation
right (%)
 
31/01/2014 85,84 30/09/2027 266,0 25,3 3,8  
31/07/2014 85,87 30/09/2027 308,8 25,3 3,8  
31/01/2015 81,91 30/09/2027 394,2 25,3 3,8  
31/07/2015 82,47 30/09/2027 284,9 25,3 3,8  
31/01/2016 79,01 30/09/2027 291,0 25,8 3,8  

The risk-free interest rate was obtained from constructed ZAR swap curves on the valuation dates using key inputs being South African money-market rates and swap rates as published by Bloomberg.

In terms of the BEE Phase II transaction implemented on 20 October 2009, 2 835 427 Tiger Brands shares were acquired by the Black Managers Trust II and 1 813 613 shares by Brimstone Investment Corporation Limited (Brimstone).

3

Black Managers Trust II and Brimstone participation right schemes (equity settled)

Brimstone

Brimstone is required to hold its shares via Brim Tiger SPV Proprietary Limited (previously, Business Venture Investments No 1323 Proprietary Limited (Brimstone SPV). Brimstone and the Brimstone SPV may not sell or encumber such shares until 31 December 2017 (the end date). The IFRS 2 charge of R61,9 million relating to Brimstone has been expensed upfront.

At the end date, Tiger Brands will be entitled to repurchase a certain number of shares from Brimstone at the subscription price of R7,40. The number of shares will be calculated in terms of a repurchase formula, whose inputs are:

  • the total discounted value of the shares (being an amount equal to R148,07 per share) less the initial equity contribution by Brimstone, increased over the transaction term by a hurdle rate (being 85% of the prevailing prime rate);
  • an amount equal to 85% of the distributions declared by Tiger Brands but not received by Brimstone SPV as a result of the condition attaching to the issue of the shares increased over the transaction term by the hurdle rate;
  • the market value of a Tiger Brands ordinary share at the end date; and
  • the subscription price of R7,40 per share.
Black Managers Trust II

Originally allocations of vested rights to these shares were made to a total number of 484 black managers and are non-transferable.

The effective dates of these allocations were 31 January 2010 and 31 July 2010.

With effect from 31 December 2017, the black managers may elect to take delivery of the full benefit of a portion of the shares allocated to them in accordance with their vested rights (after Tiger Brands has exercised its right to repurchase a certain number of the shares from the Black Managers Trust II at the subscription price of 10 cents per share).

The number of shares to be repurchased by Tiger Brands will be calculated in terms of a repurchase formula, the inputs of which are similar to those as disclosed under the Brimstone heading above, other than for the fact that 90% of any distributions declared by Tiger Brands are not received by the Black Managers Trust II (as opposed to 85% in the case of Brimstone SPV) and the subscription price is 10 cents per share (as opposed to R7,40 in the case of the Brimstone SPV).

Upon termination of the trust on 31 December 2018, the black managers shall take delivery of all benefits due to them, failing which these will be forfeited, and the trustees shall transfer those benefits and any unallocated Tiger Brands ordinary shares, or the net proceeds thereof, to the black managers who are beneficiaries of the Black Managers Trust II at that time.

In calculating the IFRS 2 charge, the following input parameters were utilised to determine the fair value of the rights granted to the beneficiaries of the Black Managers Trust II in terms of the BEE Phase II transaction:

  • The allocation date
  • The maturity date of the rights
  • The market price of the underlying equity as at the valuation date
  • The strike price of the rights
  • The expected volatility of the underlying equity over the life of the rights
  • The expected dividend yield on the underlying equity over the life of the rights
  • The risk-free interest rates over the life of the rights
  • The prime interest rates over the life of the rights.

Volatility is measured as the annualised standard deviation of the daily price changes in the underlying share on the assumption that the share price is log-normally distributed. Historical daily share price data was used to estimate the expected volatility.

Participation rights were valued using the Monte-Carlo simulation approach with the “market variable” being the Tiger Brands share price. The path dependency of the option results from the relationship between the Tiger Brands share price and the strike price of the option, by virtue of the impact on the strike price of dividends paid by Tiger Brands during the life of the BEE Phase II transaction.

The expense recognised for employee services received during the year to 30 September 2016 is R16,9 million (2015: R21,6 million).

The following table illustrates the number of, and movements in, share participation rights during the year:

  2016
Number
    2015
Number
 
Outstanding at the beginning of the year 2 783 305     2 682 356  
Granted during the year 111 000     212 000  
Forfeited during the year (199 412)     (109 663)  
Shares sold (death of employees) (16 521)     (1 388)  
Outstanding at the end of the year 2 678 372     2 783 305  
Exercisable at the end of the year      
Weighted average remaining contractual life (years) 2,3 years     3,3 years  
Weighted average fair value of options granted during the year (per option) R158,7     R153,0  
Notional average exercise price (per option) R190,3     R181,2  

No weighted average exercise price has been calculated as there were no participation rights exercised.

A risk-free rate was constructed using a zero-coupon ZAR swap interest rate curve as at the valuation date using a raw interpolation bootstrapping algorithm, with inputs from South African money-market rates (interbank acceptance rates and Forward Rate Agreement (FRA) rates) and swap rates, as published by Bloomberg.

The following inputs were used

Date of grant Initial strike
price of
participation
rights (Rand)
Expiry date Market price
of the underlying
stock at grant
date (Rand)
Expected volatility
of the stock over
the remaining
life of the
participation
right (%)
Expected
dividend yield
of the stock
over the
remaining
life of the
participation
right (%)
 
31/07/2013 168,0 31/12/2018 317,0 25,4 2,0  
01/01/2014 173,8 31/12/2018 264,8 25,4 2,0  
31/01/2014 169,9 31/12/2018 266,0 25,4 2,0  
31/07/2014 174,3 31/12/2018 308,8 25,4 2,0  
31/01/2015 206,3 31/12/2018 394,2 25,4 2,0  
31/07/2015 99,7 31/12/2018 284,9 25,4 2,0  
31/01/2016 104,3 31/12/2018 291,0 27,6 2,4  
31/07/2016 193,1 31/12/2018 389,9 29,8 1,8  

4

Tiger Brands Limited shares held by subsidiary and empowerment entities

On 19 September 2005, shareholders approved a scheme of arrangement (section 311 of the Companies Act No 61 of 1973) in terms of which Tiger Brands would facilitate the acquisition of a 4% direct ownership interest in its issued ordinary share capital by a broad base of staff employed within the group. The court order sanctioning the scheme was registered by the Registrar of Companies on 29 September 2005, being the effective date of acquisition of the scheme shares.

The total value of the staff empowerment transaction was R723,5 million, based on the closing price of the company’s shares on the JSE Limited on 13 July 2005 of R112 per share. The transaction was implemented on 17 October 2005 through a number of trusts and a special purpose vehicle. The acquisition of 5 896 140 Tiger Brands shares by the Black Managers Trust and Thusani Empowerment Investment Holdings Proprietary Limited in terms of the scheme, at an aggregate cost of R649,5 million was shown as a deduction from equity in the group statement of financial position. This reduced to R502,2 million in 2008 as a result of the Adcock Ingram unbundling. As from 2008 such shares in Adcock Ingram are reflected as listed investments classified as available-for-sale.

The cost of the Tiger Brands shares acquired by the general staff trust (547 733 shares), together with the total expenses of the BEE transaction, was reflected as an abnormal item of R69,4 million in the group income statement in 2005.