In a victory for Tongaat Hulett, which almost collapsed amid SA’s biggest accounting scandal after Steinhoff, an independent expert has determined that the Covid-19 pandemic is not an excuse for Barloworld to back out of a deal to buy the sugar maker’s starch business.
Shares in Tongaat, which is cleaning up its balance sheet after dodgy bookkeeping practices forced it into hefty writedowns, rallied more than 15% to R6.20 on Tuesday, the biggest one-day gain since early May, as the ruling is seen as key to its efforts to shore up its finances and fix its lopsided capital structure.
The decision by Rothschild & Co ends a four-month tussle between the two companies after industrial heavyweight Barloworld tried to call off the R5.3bn acquisition on the grounds that the depressed economy since the Covid-19 outbreak has ruined the commercial merits of the deal. That assessment was swiftly rejected by Tongaat, which is desperate to slash its debt load.
The two companies picked Rothschild to determine if the starch business would suffer a 17.5% drop in core profit in 2021, a decline that would have been enough for Barloworld to trigger a material adverse clause — a rarely invoked M&A mechanism that allows buyers to withdraw from deals if the value of the transaction has been undermined by a significant development.
But Rothschild, one of the world’s biggest corporate advisory groups, determined that the starch business is unlikely to suffer an earnings drop of that size.
The decision puts back on track Tongaat’s plan to slash debt by R8.1bn, or 60%, by March 2021 through asset sales, job cuts and a possible rights issue.
The plan came shortly after Tongaat, which was one of the biggest employers in KwaZulu-Natal before the scandal, revealed dodgy accounting practices involving the overstatement of its revenue as well as valuations of its cane, plants and machinery, forcing it to write down assets by R12bn, or 34%.
Controversial appointment
Tongaat brought in former SABMiller executive Gavin Hudson in January 2019 to replace Peter Staude, whose last few years of a 16-year reign were marked by declines in earnings before the irregularities came to light. The new CEO launched a revamp to stabilise the business and started a civil suit to recover bonuses and benefits of 10 executives who allegedly played a role in misleading financial statements.
The scandal also caused finance minister Tito Mboweni to be dragged into the controversial appointment of a new CEO for the Independent Regulatory Board for Auditors after the body chose Jenitha John, who previously chaired Tongaat’s audit and compliance committee.
Despite the share price rally on Tuesday, the stock is still down 94% over the last three years, underscoring the daunting task facing Hudson in restoring the fortunes of what was once one of SA’s most recognisable blue chips.
For Barloworld, which agreed to buy the business two months before President Cyril Ramaphosa imposed a nationwide lockdown in March, the resolution forces it to stump up more than R5bn while the auto dealership and car rental owner is building cash buffers to withstand the crisis.
Shares in Barloworld, which is cutting jobs and forcing employees to take pay cuts to save about R400m, skidded 4.2% to R57.27, underperforming a 2.4% drop in the JSE all share index.
Barloworld, the biggest reseller of Caterpillar earth-moving equipment in Southern Africa, said resilient performance of the starch business soon after the piecemeal reopening of the economy validated its strategy to enter the consumer foods sector to serve its industrial customers.
“The business is a highly cash-generative, relatively asset-light and defensive investment,” Barloworld said in a statement, adding that the business has a well-established client base of multinational companies.
The deal is expected to close at the beginning of October.
Update: September 22 2020
This article has been updated with information throughout.
With Tiisetso Motsoeneng
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