Tongaat must take advantage of business rescue process

For the 500,000 people who rely on Tongaat Hulett in the Southern Africa region, a gloomy festive season beckons. A household name in corporate SA, Tongaat’s SA operations tumbled into business rescue earlier this month, with management throwing in the towel four years after disclosures of dodgy accounting practices punched a R12bn hole in its balance sheet, making it the latest high-profile SA company to seek protection from creditors.

But filing for business rescue — a form of bankruptcy protection — might be the only way to get Tongaat back on track, save jobs in the region and keep sugar mills at home humming.

That is not to say the executive team led by Gavin Hudson, who was drafted in after it became clear that fraud had been committed second only to Steinhoff in scope — sat back and did nothing. The team pursued a turnaround strategy that included slashing Tongaat’s debt load by more than half to just over R6bn, selling noncore assets and canvassing shareholders for a R5bn cash injection.

None of that was enough though. Tongaat was losing money faster than the turnaround measures could filter through operations, with its sugar mills running at 30% below capacity. Hudson shunned as value-destroying other options, including a so-called accelerated disposal programme — which worked wonders for Sasol in 2020/2021 when its future hung in the balance.

Other strategic interventions simply failed to get off the ground. The most crucial of them was the R5bn equity fundraising effort, 40% of which would have been underwritten by Magister Investments, a little-known investor in Southern African agriculture based in Mauritius. But Magister would have emerged with more than 35% of the company, prompting the takeover regulation panel to exempt it from having to make an offer to the remaining shareholders as takeover rules generally dictate.

Then some Tongaat shareholders objected, saying Magister should be compelled to make a mandatory offer to shareholders, which is normally triggered when an investor buys more than 35% of a company, on the grounds that Magister was related to a murky outfit called Betelgeux Investments. Betelgeux had picked up Tongaat shares in the period between the rights offer being announced and the takeover waiver being granted.

As a result the exemption was withdrawn, making it all but impossible for Tongaat to carry out a rights offer by the end of June because one of the conditions for Magister — which raised eyebrows because it was run by Zimbabwean businessman Hamish Rudland, brother of the notorious Simon Rudland — to underwrite the deal had been for Tongaat to remain listed on the JSE. It also triggered a frantic scramble for cash, leading to the appointment of Piers Marsden, a turnaround expert with a long history in guiding distressed businesses, including Cell C, Edcon and Ascendis Health, through cash-flow crises, to draw up a new survival plan.

Under the plan Marsden, who chaired a board subcommittee comprising nonexecutive directors Jean Nel, Andile Sangqu and Graham Clark, as well as executive director Rob Aitken, suggested the sale of Tongaat’s operations in Zimbabwe and Mozambique and a debt-for-equity swap, with lenders taking ownership of some properties. This would have left the SA operations debtfree, with some capital to keep running. The money from the asset sales would have allowed the company to conclude this year’s sugar processing season, which wraps up in December, and perform maintenance on the mills before next year’s season.

Alas, Tongaat’s lenders, including Nedbank and Standard Bank, rejected the plan, giving Tongaat no choice but to collapse into the arms of business-rescue practitioners, who have wideranging powers to cut costs, restructure the businesses and fix its lopsided capital structure while keeping creditors at bay.

Tongaat, under the guidance of turnaround specialists Peter van den Steen, Trevor Murgatroyd and Gerhard Albertyn of Metis Strategic Advisors, must take advantage of this process or risk emerging out of it as vulnerable as it went in.