As embattled sugar producer Tongaat Hulett prepares to digitally gather shareholders on Tuesday morning, asking them to back the implementation of a R4bn rights offer, the necessity for the potentially dilutive capital raise to settle the outstanding debt is being questioned.
Tongaat, whose SA borrowings exceed R6bn, has been struggling to generate cash and sell off assets to meet demands from lenders and had its plans thrown off course after the July civil unrest whacked its profits and prospects for property sales.
The plan to tap shareholders for cash, which was flagged in 2021, would come up to a shareholder vote on Tuesday, and forms part of efforts to shore up Tongaat’s balance sheet after the discovery of dodgy bookkeeping practices that inflated profits and asset values.
The company framed the rights offer as a way to tackle its unsustainable debt levels, unlock long-term growth and protect intrinsic shareholder value while averting the need to dispose of large tracts of its strategic landholdings in a depressed property market, resulting in the loss of valuable cash flows.
But just hours ahead of the approval vote, activist shareholders have been kicking up the dust and calling for Tongaat’s upcoming extraordinary general meeting (EGM) to be postponed.
Activist shareholder Harry Smit, who said retail shareholders had formed a grouping of about 15%, on Monday lobbied Tongaat to postpone the meeting to allow shareholders more time to digest the December circular and get more details.
“We are not against a rights issue, we understand that certain funds need to flow,” said Smit. The December circular had dropped during the holiday period, while a major concern was the lack of transparency surrounding underwriter Magister Investments, he said, referring to a Mauritius-based investor in the Southern African agricultural industry that would end as the controlling shareholder should the equity cash call go through.
There needed to be more detail on Magister and its plans for Tongaat, said Smit, adding he believed Tongaat’s lenders would be accommodating if the meeting was postponed for a few weeks.
Smit’s negative sentiments were echoed by Chris Logan, founder of Opportune Investments and a minority shareholder in Tongaat.
“The EGM shouldn’t happen,” said Logan, who bemoaned that shareholders had not been put into a proper position to exercise their vote in the hastily convened meeting.
Logan said the minority investors were not fully behind the capital raise and would rather the company sought a settlement payout from Deloitte, the auditors of the books during the years of accounting fraud.
“There’s actually a massive material claim against Deloitte and that claim would do away with the necessity of a rights issue,” Logan said.
The Tongaat board voted in favour of continued use of Deloitte’s services even after the accounting fraud was uncovered.
Deloitte agreed to put $85m in Steinhoff’s more than $1bn pot to settle all lawsuits from aggrieved shareholders and former businesses partners who had sued the company for misleading information about its financial health. But no such settlement has been embarked upon in the case of Tongaat.
Deloitte, which signed off Steinhoff’s books, declined to comment.
Tongaat spokesperson Virginia Horsley emphasised the lack of time on the company’s hands to make good on their debt payments.
The sugar producer negotiated a 2022 deadline after failing to meet the cumulative R8.1bn debt reduction milestone originally agreed with local lenders.
Despite asset disposals, stringent cash flow management and cost reduction efforts it only managed to pay down a little more than R6bn, and it subsequently commenced a debt refinance in March 2021 to negotiate extensions.
The terms of the refinanced facilities are that the equity capital raise, which is five times its market value, be fully implemented by the end of March 2022 and that proceeds of at least R2bn be paid to the SA lenders by April 14 2022.
“The company cannot base its future on uncertain and likely protracted litigation,” said Horsley. “The company must take actions to bring in sufficient monies in the near term.”
But Tongaat’s process to put the rights offer to shareholders has the backing of some its biggest shareholders, the Public Investment Corporation and investment house PSG Group, which own 14% and 15% of the company, respectively, but support for actual cash call will depend on the pricing of the offer.
PSG maintained that should the capital raise fail, it would destroy value far in excess of the dilution resulting from a potential rights offer.
“Alternative courses of action, such as attempting to persuade the lender group to forgo its rights, in our opinion, potentially increases the risk for shareholders as well as the various stakeholders and communities dependent on Tongaat,” PSG told Business Day.
“While we will vote in favour of the resolutions necessary to progress the capital raise, we have given no undertaking to participate in the rights issue itself. This will depend on the terms of the rights issue,” PSG head of research Kevin Cousins said.
With Karl Gernetzky
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.