Founder: Turnaround Talk
When Tongaat Hulett was placed into business rescue, there were many concerns within the industry about the future of the company and the root causes of the company’s financial distress. Was the company a viable candidate for business rescue, or should the company have been placed into liquidation?
What transpired in the following months was a myriad of factors that complicated the company’s distress. Loadshedding has played an increased role, as has the sugar tax and sugar levy.
The debate mentioned in the first paragraph may be irrelevant. Instead, the question that should be asked is: is Tongaat Hulett too big and too important to fail? The company is a significant contributor to the country’s GDP and employs many suppliers whose sustainability depends on Tongaat’s survival.
A recent article by News24 points out that there may be more pain ahead for a much-loved South African stalwart. And it’s not good news for shareholders.
Saving grace?
The News24 article points out that the business rescue plan for SA’s biggest sugar producer, Tongaat Hulett, would see the company sold off in whole or in part to eight potential bidders. While the embattled company’s lenders have agreed to share part of the potential proceeds of the sale of its local sugar business with unsecured creditors, shareholders look set to get nothing.
Creditors will vote on 14 June on the business rescue plan for the group and subsidiaries.
Plan A
The News24 article points out that Plan A is to sell off the group’s assets – resulting in new owners being installed for the South African, Mozambique, Zimbabwe and Botswana sugar operations. Plan B would essentially mean a fire sale of its SA operations, while the international operations would be handed to its lenders, presumably for them to sell.
Failing either of these plans being implemented, liquidation is the most likely outcome, which would net about an estimated R4 billion, all of which would be snapped up by its secured creditors, who are owed R7.3 billion. They also hold 74% of creditors voting rights and, among numerous banks, Standard Bank is owed the most at R1.93 billion.
The Industrial Development Corporation (IDC), which has been providing post-commencement financing, is owed about R613 million.
The article adds that Plan A also involves an immediate move to rationalise the group’s cost-base, including cuts to the company’s 2 563 employees as of the end of March, though the intention is the new owners would retain the majority of them.
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Shareholders, however, look set to get nothing, with the plan noting that unless a specific offer was made for the shares, there was unlikely to be a return.
The plan notes that, after engagements with potential acquirers, this is unlikely, and it isn’t further addressed in the plan. Creditors would still hold security over the assets and are unlikely to be repaid in full.
The article points out that unsecured creditors, excluding inter-company loans, are owed a collective R1.7 billion – however will receive 15% of the sale of the SA sugar business. This, however, would net a minimum of R45 million for them, and a maximum of R90 million. This implies the most they will get is about 5c to the rand.
Tongaat’s list of unsecured creditors is enormous, ranging from the SA Sugar Association, which is owed R757 million, to small businesses owed a few rands. The SABC has put in a claim of R265 for TV licences.
Tongaat’s failure
The News24 article points out that Tongaat entered business rescue in October, putting at risk the livelihood of hundreds of thousands of people across southern Africa, most of them in KwaZulu-Natal.
Tongaat’s salary bill currently comes to R850 million annually, with its total effect estimated at over 25 000 employment opportunities. Adding all the direct, indirect and induced impacts it generated an estimated economy-wide effect measuring almost R25 billion in 2021, the plan reads, including through 1 400 suppliers. It sources almost half its sugarcane from 15 000 small black farmers and cooperative members.
The article adds that lenders had rejected the group’s own plan in late October 2022 as too little, too late, and its shares had been suspended since July due to late financials. In the four years until then, they had crashed more than 95% as the company battled the fallout of an accounting scandal, SA’s second-largest after Steinhoff. The company had also suffered external shocks, including from the floods in KZN in April, as well as riots and looting in the same province.
Amid cash burn due to an unsustainable debt pile in SA, it has also acknowledged it didn’t spend enough on its own operations.
Worth nothing
The News24 article points out that Tongaat said on 31 May (2023) it was worth noting and that during the course of the business rescue, R1.26 billion was paid to unsecured creditors. This means that unsecured creditors could have been owed almost R3 billion.
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In excess of R400 million was invested during the annual off-crop capital maintenance period between December 2022 and April 2023. “This is the most comprehensive maintenance performed in in many years,” the business rescue practitioners, Metis Strategic Advisors, said in a statement.
“We have made significant progress towards securing a potential strategic equity partner with a view to developing a long-term sustainable business solution,” they said.
“We are also grateful to have been able to stay up to date with grower, unsecured creditor and employee payments. We thank the lender group and the IDC for their support.”
Retail attrition
There will only be more pain ahead for Tongaat if it survives. Tiger Brands released a statement on Wednesday pointing out that retailers face the worst retail environment in 25 years.
With discretionary spending under pressure, sugar-based items may be seen as a luxury and will increasingly feature further down on consumers’ priority lists. How will this impact Tongaat’s already shaky future?
