Founder: Turnaround Talk
One of the biggest stories in 2022 was the liquidation of Comair. One of the biggest factors that led to the liquidation of one of South Africa’s oldest low cost airline companies was that the external operating environment was applying to much pressure on the company for it to have a viable future. Lenders were reluctant to commit funds to a further business rescue effort, so the company was placed into liquidation.
In Tongaat Hulett, we are seeing another one of South Africa’s much-loved companies struggling to come to terms with the pressure that are being applied on it by the external environment. The company faced a rough 2022 with the July Civil Unrest and the devastating KZN storms which caused damage across the province. Add to that a leadership scandal where some of the company’s former top executives are accused of alleged profit inflation. This potent mix of challenges has seen the company in an impossible situation when it comes to debt. Lenders have had enough and want the situation to be resolved through business rescue as they feel that the company’s restructuring plan will simply not work.
But unlike Comair, where no word came from the company following the publication of its plight in the media, sources close to Tongaat Hulett are adamant that the fact that the company is being placed in business rescue does not mean that the company has reached the end of the road.
A good season
While Tongaat’s board had decided that business rescue – a form of bankruptcy protection – was the right thing to do, the message of the firm to its employees was to continue as normal as the group looks to continue produce about another R1 billion worth of sugar, CEO Gavin Hudson told News24.
“We are having a very good season. The green shoots are really there and we are seeing the hard work of the last three-and-a-half years now, specifically in SA, where our production is running very well. We are producing on plan, crushing cane on plan, producing sugar on plan,” he said.
The News24 article adds that Tongaat lenders, which include Absa, Investec, FirstRand, Standard Bank, Nedbank, and the Land and Agricultural Bank of SA, have decided not to back a restructuring plan for Tongaat, that took weeks of intense effort by management, and advisors, and aimed to finally get the firm out of its debt hole. The firm has about R6.5 billion in excess debt in SA, despite being only valued at about R545 million on the JSE, but lenders have ultimately decided not to extend further funds needed to implement the plan.
Photo By: Tongaat Hulett
Supportive of the group
Hudson told News24 that despite the business rescue, lenders had been very supportive of the group, and the business rescue practitioners’ discussions with them would continue. “The board took the decision that this is the responsible thing to do considering where we find ourselves. It is certainly not the end of the road by any measure. There is potential for the business to rectify itself,” he said.
Tongaat’s board approved a plan in October that includes disposing of its non-SA operations, securing investment for its SA business, introducing a five-year debt instrument that would be repaid through land disposals, as well as continuing to recoup money related to its accounting scandal. This was aimed at finally ensuring the SA sugar business, the source of the debt problems, would be able to operate on its own.
Business rescue will stay lenders for a while, while the appointed firm, Metis Strategic Advisors, now needs to come up with a plan.
The News24 article adds that Tongaat employs about 2 500 people directly in SA, saying it created another 23 000 indirect opportunities in SA. In 2021, it contributed about R11 billion to GDP, while it sources 43% of its sugarcane from independent farmers, over 15 000 of which are small-scale farmers and cooperatives.
In total, at the peak of the season, the company’s operations employ more than 23 000 people, and in its 2021 year, just under 60% of these were in Zimbabwe, which accounted for 41% of group revenue, just less than SA.
The firm’s Botswana, Mozambique and Zimbabwe sugar operations are not financially distressed, the group said. These three businesses are funded independently and “should be largely unaffected by the adverse circumstances affecting the company”.
Bitter history
The article adds that The firm is battling to recover from an accounting scandal, SA’s second biggest after Steinhoff, that has prompted a more than 95% fall in its share price over the past four years. It has been hit with a series of adverse events, including a downturn in the property market in KwaZulu-Natal that derailed plans to sell property, civil unrest in that province which led to destruction of cane fields, and, more recently, flooding in the province in April, as well as the war in Ukraine that has prompted a surge in costs, such as for fuel and fertiliser.
Tongaat had also sought to raise between R3.5 billion and R5 billion in a rights issue, but underwriter Magister Investments proved controversial, and regulators ultimately decided not to grant it a waiver that would have exempted it from making a formal takeover offer of the sugar producer. Magister had said it wanted Tongaat to remain listed, partly due to the increased scrutiny that results from being a public company.
Photo By: iol
The article points out that Operational headwinds were also encountered “in the form of the sugar loss at the refinery and poor milling performance, which revealed inadequate historic plant maintenance,” the company said on Thursday.
Hudson had been appointed in 2019 to drive a recovery for the group. The over 150-year-old sugar producer had asked the JSE to temporarily suspend trade in its shares in June 2019 after an investigation flagged accounting practices that meant previous financial results could not be relied on.
The article adds that a PwC investigation identified 10 executives, including former CEO Peter Staude, who were allegedly involved in profit inflation. It also found that there was a culture of deference within Tongaat that led to employees not questioning accounting practices. Fraud cases amounting to R3.5 billion are currently before the court.
Outlook
The article points out that CEO of Opportune Investments Chris Logan said on 27 October that Tongaat had come up with “a good plan,” but added: “Pity it was one minute before midnight.”
Ultimately, Tongaat had not made the necessary hard decision quickly enough, he said, despite the fact that Hudson and his team had clearly worked extremely hard. Ultimately, said Logan, this once again demonstrated why management needed “skin in the game,” which would push them to be more assertive with their boards.
“Quite how the massive socioeconomic consequences stemming from this move will be managed remains to be seen,” said Logan. “The one sliver of good news is that the global sugar price has recovered and apparently the local SA market need’s Tongaat’s sugar production.”
The article adds that Hudson also said on 27 October that given Tongaat produces about half of SA’s white refined sugar, it was critical it continue operating. “We need to keep our operation running, not just for Tongaat but all the take-off customers that buy sugar from us, the industrial customers,” said Hudson. “It’s all hands on deck.”
Hudson said the efforts made by management in engaging various parties, including shareholders, but other parties as well, had been intensive, and they included state-backed entities, such as the Industrial Development Corporation (IDC).
“We have continually engaged, not just with the obvious bodies, shareholders for one, but the likes of the IDC. We were unable to find a solution in the time allowed to us, but they remain very interested and supportive, and it does’t mean because we are in business rescue that those discussion, I suppose, stop,” Hudson told News24.
