Tiger Brands: Integrated annual report 2019

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 (last allocation to employees – 5 June 2019)
• Conditional awards of full value performance shares
• Grants of full value restricted shares (bonus matching and deferral element).

As a result of the unbundling of Oceana, and to put shareholders (including holders of instruments under the plan) into a position, which is approximately similar to what shareholders would have been in had the unbundling not taken place, adjustments were made to the strike prices (where applicable) and the number of instruments in issue at the date of unbundling. Since the adjustments to the terms of the issued instruments were designed to be financially neutral, the impact of the adjustments would not lead to an increase in the total value of the instruments previously granted, and therefore no additional costs are required in terms of IFRS 2.

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

Share appreciation rights

The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in, share appreciation rights during the year.

Options were valued using a modified Black-Schöles 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 the equity-settled options mature six years after the grant date.

The following inputs were used:

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:

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:

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:

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

The following inputs were used:

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:

Cash options were valued using a modified Black-Schöles 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 the cash-settled options mature six years after the grant date. At 30 September 2019, six years after grant date, all cash-settled options have been forfeited due to the performance conditions not being met.

The following inputs were historically used:

The average volatility was 0% (2018: 30,5%) and the risk-free rate was 0% (2018: 7,2%) during the year.

The carrying amount of the liability relating to the cash-settled options at 30 September 2019 is Rnil (2018: R0,3 million) – refer to note 27. Cash-settled options exercised during the year amounted to Rnil (2018: R9,1 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 employee’s tax), costs and expenses, and distribute to them the remaining shares to which they are entitled
• 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 2019 is R16,3 million (2018: R25,3 million).

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

Participation rights were valued using the Monte-Carlo simulation approach to estimate the average, optimal payoff of the participation rights using 10 000 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:

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.

3

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

Brimstone

Brimstone held 1 813 613 Tiger Brands shares via Brim Tiger SPV Proprietary Limited (Brimstone SPV). Brimstone and the Brimstone SPV were prohibited from selling or encumbering such shares until 31 December 2017 (the "end date"). The IFRS 2 charge of R61,9 million relating to Brimstone was expensed upfront.

Tiger Brands repurchased 861 257 shares from Brimstone SPV at a subscription price of R7,40 and the number of shares were calculated in terms of a repurchase formula, whose inputs were:

• 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.

The remaining 952 356 Tiger Brands shares were retained by Brimstone SPV.

Black Managers Trust II

Over the period of the Tiger Brands Black Managers Trust No II (BMT II), 2 814 149 Tiger Brands shares were allocated to qualifying black managers. The lock-in period for the scheme expired on 31 December 2017. Immediately following this date, Tiger Brands exercised its rights in terms of a repurchase option, and repurchased 1 389 685 shares from BMT II at a subscription price of 10 cents per share.

The remaining shares, 1 424 464, were distributed to the participating black managers, with 130 361 shares subject to a further retention period of three years, which will expire on 30 September 2020.

The number of shares repurchased by Tiger Brands was 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).

The expense recognised for employee services received during the year to 30 September 2019 is R9,1 million (2018: R21,1 million).

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