Tongaat Hulett abandons planned R5bn rights offer

The decision by JSE-listed Tongaat Hulett to terminate an underwriting agreement of up to R2 billion with Magister Investments, for its planned R5 billion rights issue to reduce the company’s massive debt, has been welcomed.

Analyst and shareholder activist David Woollam has welcomed the Tongaat board’s decision.

“We always argued that a rights issue of this magnitude, based on unaudited results and an extremely weak share price, wasn’t a fair or optimal solution,” he said this weekend.

“The proposed rights issue would have resulted in an 85% to 90% dilution of a company that had already lost 95% of its value while all other stakeholders were sitting pretty.

“At a secondary level, allowing an unknown entity [Magister] to gain control of the company through a heavily discounted rights offer was prejudicial to shareholders,” he said.

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Shareholder activist Chris Logan said the termination of the planned rights issue is “very positive”.

“The banks have been shown to be paper tigers. They are not going to pull the plug on Tongaat; they keep extending and, given the apparent legitimacy of this Mozambique approach, there is value to be unlocked,” he said.

This is a reference to reports that US-based Lusitania Investment Capital had made an offer of about $220 million for Tongaat’s sugar operations in Mozambique, but Tongaat was unable to enter into negotiations because of the rights offer process.

Tongaat announced the termination of the underwriting agreement with Magister on Friday, highlighting that it was subject to the fulfilment of certain conditions precedent on or before 30 June and it does not anticipate these conditions will be fulfilled on or prior to that date.

The ‘real reason’

However, Logan said that date could be and is often extended, adding the real reason Tongaat is not proceeding with the rights offer and underwriting agreement is because this transaction had been effectively struck down by the Takeover Regulation Panel (TRP) and that decision is not being appealed.

“So they [Tongaat] are not being straight with the market,” he said.

Logan said Tongaat has not denied the offer for its Mozambique operation and, from the price mentioned, Tongaat would be realising full value for an operation that does not make much profit.

Restructuring

Tongaat on Friday also announced the establishment of a restructuring committee and the appointment of non-executive director Piers Marsden as chief restructuring officer to intensify focus on the turnaround of the company due to the delay in implementing the rights offer.

The company said the primary responsibility of Marsden and the restructuring committee will be to further focus on developing solutions to reduce and repay debt to sustainable levels while improving the liquidity of the company.

It said Marsden’s appointment will also provide Tongaat executives with additional capacity to focus on strategic progress, operational issues and the day-to-day demands of managing the group to deliver future value to all stakeholders.

Tongaat Hulett CEO Gavin Hudson said they have taken some very important steps to secure the future of the company in light of the Magister development and the delay in the rights offer requires them to bring in extra resources to further accelerate their restructuring plans.

Hudson said the lender group remains supportive of Tongaat and the company is currently engaging with them and other parties to provide liquidity, which will provide them with additional time as they work to progress a comprehensive restructuring solution.

“The chief restructuring officer we have appointed has a strong track record in turning around and restructuring companies for sustainable growth and we have a clear intent to move forward,” he said.

Open to options

Logan believes Tongaat is no longer categoric about a capital raise and is opening the door to other options.

He said the potential sale of the Mozambique operation “could be a game-changer” in terms of the price mentioned and would remove the need for a rights issue.

However, Tongaat on Friday repeated that it remains firmly of the view that a capital raise is a better alternative to strategic asset disposals, particularly an accelerated disposal programme which is unlikely to realise full value for the assets.

Redress

Logan said there is still Tongaat’s claim against auditor Deloitte that he believes is “well north of R1 billion”.

Tongaat reported in February that six former company executives – Peter Staude, Murray Munro, Michael Deighton, Rory Wilkinson, Kamlasagrie Singh and Samantha Shukla – and Deloitte audit partner on the Tongaat Hulett audit Gavin Kruger had appeared in the Durban commercial crime court in relation to fraud charges and were all granted bail.

The charges stemmed from alleged fraudulent activity between March 2015 and September 2018 related to the alleged backdating of land sale agreements, which had a significant impact on the company’s financial results and led to a loss of value to shareholders.

In separate proceedings, Tongaat Hulett Developments, a subsidiary of the group, instituted a civil case in the Pietermaritzburg High Court in February 2020 against the former MD Michael Deighton.

In total, Tongaat is claiming about R450 million from these past directors and executives.

The civil action is based on the findings of the PwC forensic investigation.

Tongaat anticipates the cases will be scheduled to be heard in early 2023.

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Woollam said Tongaat obviously needs to restructure its balance sheet and reduce its debt, but maintains there are better and more equitable solutions available than a rights issue, including:

• Pursuing damages claims from those allegedly responsible for or complicit in the fraud, such as the auditors;

• Negotiating a haircut or partial rebate from the lenders, including the conversion of some of the debt into a subordinated instrument, such as a preference share or convertible debentures;

•  Proceeds from the sale or partial sale of assets;

• A moderate equity raise; and/or

• Extension of the remainder of the debt into medium-term debt with interest-only payments for three years.

In regard to his proposal of a haircut or partial rebate from lenders, Woollam highlighted that all the lenders advanced more than R12 billion in debt to a company that “any half decent due diligence would have had red flags popping up everywhere”.

Woollam said Tongaat still has a lot of work to do and fears this board is acting out of desperation and as a last resort rather than being proactive and strategic.

“All these decisions and announcements are too little too late and I don’t see that changing.

“The full-year results will reveal what I told them more than six months ago – that the operational performance had significantly deteriorated and that regardless of the capital structure, the operating earnings were dismal and blaming external factors – Covid-19, riots and floods – was a denial of the real problems and that they would therefore fail to be fixed,” he said.

Shares in Tongaat Hulett rose by 4% on Friday to close at R2.60.