Green light for Tongaat to pursue rights issue and slash debt

Despite vociferous opposition from some investors, Tongaat’s shareholders on Tuesday voted to pursue a rights issue of up to R4bn that will be underwritten by a Mauritius-domiciled company with links to Zimbabwe’s Rudland family.

The shareholders pushed through resolutions making this possible.

In terms of the rights issue, which Tongaat wants to pursue to pay down a significant portion of its huge debt pile — more than R6bn — the Mauritius-domiciled Magister could end up owning up to 60% of the JSE-listed company.  

At the same time, Tongaat maintains other investors are also entitled to exercise their rights and that the process is open to others also potentially underwriting the rights issue. This means Magister could also end up holding a minimal interest.  

The rights issue is aimed at settling at least R2bn of the debt, plus interest, which is due to Tongaat’s bankers at the end of the first quarter of this year.

At an extraordinary general meeting on Tuesday, the requisite majority — more than 75% of shareholders — voted in favour of resolutions to enable Tongaat’s rights issue to go ahead.

However, minority investors such as Chris Logan, MD of Opportune Investments, are “very disappointed”, but “not surprised” at the result, as “shareholders were not put in a position to make an informed decision”.

Logan has previously said Tongaat, which was mired in an accounting scandal in 2019, could potentially avoid a rights issue if it got a material settlement from auditor Deloitte, which oversaw Tongaat’s audits when there were large-scale accounting irregularities.  

Linda de Beer, who chairs Tongaat’s audit committee, would not be drawn on the quantum of the claim the group could potentially seek from Deloitte, adding that it will not be 'disclosing the numbers that we are thinking of because our job is to protect the company' and not 'weaken our position' by disclosing what it intends claiming.  

At the general meeting, Tongaat chair Louis von Zeuner said a strong legal team has been appointed and the group has started the process for claims against Deloitte.

Linda de Beer, who chairs Tongaat’s audit committee, would not be drawn on the quantum of the claim the group could potentially seek from Deloitte, adding that it will not be “disclosing the numbers that we are thinking of because our job is to protect the company” and not “weaken our position” by disclosing what it intends claiming.  

But, she said, it “was not something we are going to give up on” and hopefully there will be a “sensible settlement”, which Tongaat will “fight very hard” for.

Tongaat is also seeking R450m in damages from former executives for their role in the scandal, which came to light in 2019 after then new CEO Gavin Hudson appointed PwC to investigate past accounting practices at the group. The investigation uncovered widespread irregularities and misleading information that was released to shareholders over the years.

Logan told Business Times after the meeting that any claim against Deloitte will likely be material and could obviate the need for the rights issue, which he said will be dilutive for existing shareholders.

Tongaat said potential claims against Deloitte could take time to settle and that the urgent deadlines to repay portions of the debt mean a rights issue is the best option on the table.

At the meeting, Hudson told shareholders Tongaat, which flagged the necessity of a rights issue from July last year, has “considered many options through the journey”. He said the “biggest challenge” Tongaat has is an extensive debt burden and its operating cash flow isn’t able to service even the interest of the debt.

Analyst David Woollam said the rights issue will 'destroy and completely dilute the vast majority of shareholders who have already lost 95% of their value, to the tune of another 90%'.'I go on record to say I’ve heard everything you say, but it is a sad and tragic day in corporate South Africa that we have got to this point.'

“Restructuring did take place and we have restructured our business significantly over the period, but we still needed to reduce our debt. That is why we have sold assets and we get to the point now where we are left with the simple choice in terms of raising additional capital through the rights issue. The alternative to that is ... is not one we would entertain, which would mean selling our sugar core assets and ultimately breaking up the group,” said Hudson.

Logan said Tuesday’s vote effectively gives the green light to the resolutions needed to enable the rights issue, which could go ahead “absent any legal challenge”.

He added that he had been asking since the weekend for a postponement of the shareholders meeting to give investors more time to consider the rights issue.

While Logan himself is not going to launch a legal challenge against the rights issue, he said he will support such an action if it is brought by others.

Earlier during the meeting, analyst David Woollam said the rights issue will “destroy and completely dilute the vast majority of shareholders who have already lost 95% of their value, to the tune of another 90%”.

“I go on record to say I’ve heard everything you say, but it is a sad and tragic day in corporate South Africa that we have got to this point.”

He added that he found it “extraordinary” that there is so little known about the company that is “about to take control of Tongaat” and that he only has knowledge of one of their investments.

He said he found it “completely and utterly wrong” that a company, of which the market knows so little, is potentially coming in as a controlling shareholder.

“That is not how we do business in South Africa.”

Von Zeuner said at the same meeting that a due diligence has been done on Magister and the group places corporate governance “at the centre” of everything it does.