Founder: Turnaround Talk
While many people around the world do observe some holidays in December, many countries are often surprised at how seriously South Africans take their December holidays. In-between festivities and the inevitable ke-Decemba Boss attitude, South Africans spend December relaxing and recharging their batteries for the new year. However, Tongaat Hulett did not have this luxury.
The company was placed into business rescue towards the back end of 2022 and there was quiet optimism that the company would eventually exit business rescue. One of the major employers in KwaZulu Natal, the sugar industry is a major driver of our economy. While not much has happened in the lives of some people during the festive period, Tongaat Hulett had to negotiate a tough period. Some of the events that unfolded during December may set the tone for what will either be a success story or a drama of SAA proportions.
IDC to the rescue
The sugar giant received an undisclosed sum from the Industrial Development Corporation (IDC) to help it complete its milling season and do maintenance.
The News24 article points out that the finance advanced by the IDC, effectively post-commencement finance, is the group’s largest cash injection since it was placed into business rescue. Tongaat told News24 it is not disclosing the amount it received.
Tongaat Hulett’s BRPs described the IDC’s finance as a meaningful step forward.
“This funding ensures that we are able to continue making payments to employees, growers and other suppliers whose livelihoods depend on Tongaat Hulett,” they told News24.
The News24 article adds that trade in the group’s stock was halted in July after it failed to publish its audited annual financial statements for the year to end March, 2022. Tongaat said it could not say when the JSE suspension would be lifted.
It said it would only be able to complete these financial statements after its business rescue plan has been approved. The plan is expected to be released by the end of January.
Photo By: Canva
Shareholders call for an end to the Deloitte issue
Business rescue is a stressful process with many affected parties left uncertain about what the future may hold. According to another News24 article, this prompted Tongaat shareholders to angry shareholders call for a speedy resolution to a damages claim against auditors Deloitte. The big question is how much Deloitte could pay (some speculate in the order of R1 billion) when Tongaat Hulett is in dire need of a cash injection.
The article adds that Tongaat’s business rescue practitioners are currently in mediation talks with Deloitte, and though while non-binding, could result in a payout.
Deloitte charged Tongaat Hulett R299 million in fees over 11 years, during which time there were major misstatements in the company’s annual finances that eventually led to the collapse of the company’s share price.
The News24 article points out that action by corporate whistleblowers exposed these. The misstatements resulted in huge debt. The exposé prompted a change in management, and civil and criminal charges were laid against former Tongaat Hulett boss Peter Staude, other company executives, and Deloitte’s Gavin Kruger.
Tongaat has since almost halved its R12 billion debt to R6.5 billion by selling off its profitable starch business. It is poised to sell interests in Mozambique and Zimbabwe to further reduce debt.
The News24 article pointed out that Tongaat Hulett shareholders have repeatedly expressed dissatisfaction with the pace of the claim against Deloitte.
We will focus on the Deloitte issue in more detail in an editorial that will be published on Friday.
Scrap sugar tax
Because of South Africa’s historically low tax base, Government has always been on the look out for low hanging fruits which would provide additional tax revenue on items that South Africans would find difficult to boycott. The fuel levy (which is included in the petrol price) is one of these fruits as is the sugar tax.
The introduction of the sugar tax was a major cause of debate in the country. Health experts called it a wise move as it would promote healthier living in a country that was fast become obese. Other parties said Government should not be taxing an item which the public uses on a daily basis.
Yet again, the South African Canegrowers Association has called for the suspension of the sugar tax or at least a reprieve on any increases in the tax as Tongaat Hulett tries to navigate its financial distress.
An article by the Mail&Guardian points out that in November last year, the association said that in the first year of its implementation, the sugar tax resulted in 16 621 jobs being lost, a R653 million decline in economic investment and a R1.19 billion decline in the sugar industry’s contribution to GDP.
The association is affiliated to AgriSA and the South African Sugar Association.
The Mail&Guardian article points out that the association said it made its submission to the treasury in light of the crisis in which the South African sugar industry finds itself and the fact that, to date, there is no evidence that the tax has had a positive impact on obesity levels in the country.
However, this is not true. Research shows that after the implementation of the sugar tax, purchases of sugar-sweetened beverages declined by 29% and sugar intake consumption decreased by 51%. The combined price increase and purchases of sugar-sweetened beverages generated R5.8 billion over the first two fiscal years of the tax being in place.
There were greater reductions in sugar sweetened beverages among both lower and higher socioeconomic groups. The lower socioeconomic groups bear larger burdens from obesity and related diseases, suggesting that this policy improves health equity, according to the research paper. The research adds that being overweight and obesity were estimated to cost South Africa’s health system R33 million a year. This represents 15.38% of government health expenditure and is equivalent to 0.67% of GDP. The annual per person cost of overweight and obesity was estimated at R2 769.
In comparison, the sugar industry contributes R18 billion to GDP, according to the South African Sugar Association. The beverage industry, which includes soft and energy drinks, contributes R17.5 billion in tax revenue to the fiscus, according to the Beverages Association of South Africa, an organisation that represents the interests of the non-alcoholic beverage industry.
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The numbers don’t lie
While the economic relief from the IDC is welcome, it is not enough to completely eliminate Tongaat’s hefty debt burden. This needs to be a priority if the company is going to successfully exit financial distress.
Tongaat needs cash. So where do they find it? Going forward, it is imperative that the sugar giant resolves the Deloitte issue as soon as possible. From there, selling certain asserts can generate significant cash, as Omnia proved last year.
Ultimately, Tongaat needs to find a suitable investor. An article published by Business Live points out that the company is not without its suitors. However, according to the article, none of these potential suitors have produced the kind of cash that would be attractive to Tongaat.
Let’s hope 2023 is laden with opportunities and positivity, especially for a company and industry that are major economic drivers. The fate of the sugar industry is linked to Tongaat’s survival. Here’s to a speedy resolution.
