Sweet relief Tongaat sees a brighter future without yoke of debt

Shareholders approve rights issue of up to R4bn underwritten by Magister

● Tongaat Hulett hopes its planned rights issue, opposed by some minority shareholders, will enable it to focus on its operations without the stifling grip of its more than R6bn debt keeping its growth ambitions in check.

“Repairing the balance sheet, paying down our debt, will take a lot of the load off the business. This unsustainable debt is just like a collar around your neck all the time,” said CEO Gavin Hudson.

This follows an extraordinary general meeting on Tuesday at which about 80% of shareholders voted in favour of the resolutions enabling a rights issue of up to R4bn.

It is being underwritten by Magister, a company with links to Zimbabwe’s Rudland family, and has alarmed some minority investors, who say it will cause major dilution for shareholders who do not follow their rights.

Magister could potentially own a stake of up to 60% in Tongaat but might end up with a smaller stake, because Tongaat maintains other investors are entitled to exercise their rights.

Tongaat said the Magister underwrite acts as a “significant de-risking mechanism” and that it was unlikely Tongaat could have launched a rights offer of this magnitude without an underwriter.

Hudson said the group planned to use the proceeds to reduce gearing, the most pressing aspect being R2bn of the debt, plus interest, due to Tongaat’s bankers at the end of the first quarter of this year.

Once the debt levels had been addressed Tongaat could focus on growth opportunities offered by its R8.3bn property portfolio as well as other potential projects for its three main businesses in SA, Zimbabwe and Mozambique.

“We would like to raise up to R4bn and that will only happen with shareholders following their rights. If we can do that we will be able to resize the balance sheet, re-gear the company completely to more sustainable levels, and we certainly hope that in the medium term, operationally, the business will start performing a lot better,” said Hudson.

Protea Capital Management analyst Richard Cheesman said debt-free companies seldom went bankrupt and Tongaat would be “in a much better position after the capital raise”.

He said Tongaat — along with other companies in KwaZulu-Natal — had suffered because of the July riots, especially in terms of trying to sell parts of its property portfolio. The rights issue “gives them time to work through that”.

Investment analyst David Woollam said that, “operationally, Tongaat is still in a lot of trouble” and would have its work cut out even with a successful rights issue.

“Even if they were to raise R3bn tomorrow and pay down the debt, your earnings before interest and tax still needs to be sufficient to generate a return for your shareholders.”

Woollam said Mozambique and Zimbabwe were good businesses, though hyperinflation and currency fluctuations in Zimbabwe made it difficult to get a handle on the group’s figures there.

He said the South African business was in poor shape, with operating earnings at practically zero in its last set of results, and it needed to “up its game”.

Woollam, who holds shares in Tongaat, said at the shareholder meeting the rights issue would “destroy and completely dilute the vast majority of shareholders, who have already lost 95% of their value, to the tune of

This unsustainable debt is just like a collar around your neck all the time Gavin Hudson

Tongaat CEO

another 90%”.

But after the vote in favour, he said the shareholders’“democratic right to vote is absolute” and he accepted the outcome.

“My objective was to raise awareness around the issues and promote strong corporate governance, and I think that was achieved.”

He said he hoped that if the transaction went ahead, larger shareholders such as the Public Investment Corp, which holds 16.8%, would follow their rights and ensure that “there is a good spread of shareholders” to maintain high standards of governance.

Opportune Investments MD Chris Logan said Tongaat, which had been mired in an eight-year accounting scandal, could have avoided a rights issue if it had been “forthright about material settlements”.

Tongaat confirmed a legal team had been appointed and had started engaging with Deloitte, which oversaw the audits during the period in question.

Deloitte responded that it was open “to continue engaging with Tongaat in pursuit of a resolution of this matter”.

Asked if Tongaat, which is suing former executives for R450m for their role in the accounting scandal, also planned legal action against nonexecutive directors who had sat on its audit committee, Hudson said: “All claims are evaluated by our legal team and we are co-operating fully with the JSE investigation into the conduct of previous directors, including the audit committee.”

Logan said it would be inconsistent to take action against Deloitte and not against the audit committee, which also appeared to have “failed miserably with its statutory duties in terms of the Companies Act, the JSE listings requirements and common law”.