Tongaat Hulett’s planned rights offer to raise R4bn could be scuppered if an investigation ordered on Tuesday by the Takeover Special Committee goes against it, delaying the debt-laden sugar producer’s efforts to repay lenders.
Tongaat, which cannot meet its debt obligations and has R2bn due at the end of March, however, says it is still committed to “recapitalisation” to save the business, even if the current rights offer falls away.
This means the sugar producer, which owns land worth about R8.5bn, will try to redesign its rights offer, rather than sell more assets.
The rights issue on the table is controversial as it is structured in a way that could see Mauritian-based Magister Investments, run by Hamish Rudland, whose brother Simon operates Zimbabwe-based Gold Leaf Tobacco, take a majority stake in the company at a very low price.
The rights issue is underwritten by Magister Investments’s promise to buy up to R2bn worth of Tongaat Hulett shares should not all existing shareholders agree to buy the new shares.
Magister, which owns less that 1% of Tongaat, could therefore end up with a stake of more than 50%. Rights issues, a way to raise money for a company from shareholders, do not usually lead to ownership changes.
However, in SA law, if a shareholder buys more than 35% of a company’s shares they must make a mandatory offer to every shareholder to buy the whole company.
Magister does not want to own 100% of Tongaat Hulett and wants it to remain listed, so it will only underwrite the rights issue if it is exempt from making the offer.
Just over 77% of existing shareholders recently voted to give Magister the exemption it seeks. The waiver was also approved by the takeover regulation panel, a body that falls within the department of trade, industry & competition.
Minority shareholders such as Artemis Investment, an SA investment firm with an interest in retail property, have tried to stop the rights issue using every legal means possible. First, it approached the takeover special committee, through which decisions by the takeover regulation panel may be appealed, to have the exemption overturned, but it lost the case on Tuesday.
However, Artemis found another way to query the process: A regulation in the Companies Act prohibits a company or related party from buying shares in the time period between the rights offer being announced and its waiver being granted.
A firm called Betelgeux Investments, which is owned by Adamjee Group Enterprise, a Pakistani company and partner of Gold Leaf Tobacco, bought 2% of Tongaat’s shares during this period. The takeover regulation panel has ordered an investigation into the matter.
If the committee finds that Betelgeux Investments is indeed a related party to Magister Investments, the exemption that Magister has will be nullified.
Tongaat’s lenders expected the rights issue to be completed by the end of March, but if it doesn’t take place, the company will have to speak to shareholders and restructure a new rights offer or find a new way to raise R4bn.
Tongaat says lenders are supportive of it, even with the delays bound to be caused by the new investigation.
Tongaat is a large employer in KwaZulu-Natal and the largest private sector employer in Mozambique and Zimbabwe, opting to use rural people to harvest sugar cane over mechanising the process.
“The Tongaat board remains of the view that a recapitalisation will unlock long-term growth and is in the best interests of Tongaat’s stakeholders. It will protect intrinsic shareholder value and create a legacy for people dependent on the existence of Tongaat Hulett across the Southern African Development Community, including its 29,000 employees,” the group said in a statement.
“This investigation may result in further delays to the recapitalisation process. Tongaat will not be able to meet the timeline agreed with the SA lenders to conclude the rights offer by March 31.”
Another reason minority shareholders are so opposed to the rights issue is that the group is trying to raise R4bn even as its market capitalisation is about R532m and a successful rights issue would mean the value of existing shares would plummet. If Tongaat issues 1-billion new shares at R4 a share, current shareholders, who hold a total of 136-million shares, would have their existing shares diluted more than tenfold.
In 2019, Tongaat conducted an investigation that found former senior managers had overstated profits and the value of assets, in what turned out to be SA’s second-biggest corporate scandal, surpassed only by the fraud discovered at Steinhoff two years earlier.
Tongaat has launched still unresolved legal and civil claims against former directors.
Tongaat’s share price closed 0.51% higher at R3.94 on Tuesday.
Correction: March 24 2022
• An earlier version of this article incorrectly called Artemis Investments a UK firm, when it is from SA.
• This article has been corrected to say that if the rights issue is cancelled, Tongaat will have to speak to shareholders and restructure a new rights offer or find a new way to raise R4bn.
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