Sugar producer Tongaat Hulett, which is still struggling to put a devastating accounting scandal behind it, has appealed for shareholders to consider its longer-term prospects as it asks them to back a rights issue of more than five times its market value.
The former blue-chip stock, now valued at R784m on the JSE, is asking for shareholders to inject R4bn as it battles a R6.9bn total debt pile, but they seemingly have little choice given the punitive interest rates the group faces should a rights issue not proceed by mid-April 2022.
Tongaat has a collection of “irreplaceable assets” and a strategy to further diversify revenue, CEO Gavin Hudson told Business Day, with shareholder support offering the prospect of freeing up management focus for its operations, as well as saving the group R630m a year on interest rate payments.
“Failure of Tongaat Hulett is not an option,” he said.
Tongaat is in the midst of a turnaround strategy it started in 2019 after investigation found that managers had overstated profits and the value of assets, in what turned out to be SA’s second-biggest corporate scandal, surpassed by Steinhoff.
It has been struggling to generate cash and sell off assets to meet demands from lenders, and came under further pressure in its six months to end-September, including due to the civil unrest in July which hit both profits as well as its prospects for property sales.
Profit before tax for the period improved 23% to R677m, but taxation increased from R166m to R654m, due to deferred tax assets not being recognised on tax losses in SA.
The group has accumulated tax losses of R3.8bn in SA, but accounting rules stipulate it cannot account for the benefits of the prospect of reduced future taxes, given high interest costs in SA that would absorb any future profits, so it is not in a position to expect to pay any taxes.
Tongaat flagged its R4bn rights issue in November, the size of which surprised the market, but which offers the prospect of extinguishing its R3.6bn of high-risk debt instruments in which interest payments are made through more debt.
The group has R8.3bn in property, but the extent of its problem is evident in a R1.6bn facility meant to be paid off through property sales.
This carries an interest obligation of R581m over three years, and should a rights offer not proceed, it would increase to R2.17bn — more than a third of the value of the property Tongaat has available for sale.
Long-term agriculture investor Magister Investments has offered to underwrite the offer by up to R2bn, but will cap its holding of Tongaat at 60%, making shareholder support important to make full use of its offer. The group has already received backing for its rights offer from 39% of shareholders, but has not yet released a circular.
Tongaat on Thursday faced questions during its investor presentation, including about its vetting of Magister, as well as its level of engagement with smaller shareholders.
Hudson said in terms of compliance with the Companies Act the group is required to engage shareholders with 5% or more, but had in fact asked the Takeover Regulation Panel for an exemption to get as much coverage as possible.
Shareholder activist Harry Smit said he is engaging with Tongaat for more information, noting there has not been a circular yet. As with Ascendis Health, which faced a similar debt problem and the emergence of external parties, the issue is about fairness and transparency for smaller shareholders, he said.
Chris Logan, founder and CEO of Opportune Investments, said Tongaat’s shareholders were now facing the prospect of a dilutory rights issue, something it could possibly avoid as did Steinhoff.
This raises questions about how much attention its big shareholders have been giving Tongaat, he said, given their support may have allowed for better terms from lenders.
“It's an incredibly challenging task for any management team,” said Logan. “But the banks seem to be calling the shots here.”
Tongaat’s shares were down 7.41% to R5.37 in afternoon trade on Thursday, having lost 44.6% since November 17, when it flagged the rights issue and a need to refinance its debt. The group’s shares have lost more than 90% of its value over the past three years.
Updated: December 8 2021
This report has been updated with additional information
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