Tongaat gets shareholder go-ahead on rights issue

‘It is too late in a sense because the shareholders are going to pay this price and they’ll be diluted by 90%.’ Independent analyst Dave Woollam.

FIFI PETERS: Today was an important day for the sugar producer and property developer listed on the JSE – that’s Tongaat Hulett. Its shareholders had to decide in an extraordinary meeting today whether to approve its upcoming rights issue. That is where it would be issuing shares for the latest round in exchange for cash to pay down its debts.

But of course there was a bit of contention ahead of the extraordinary general meeting that happened today, most notably the contention around the Mauritius-based company Magister Investments, which is run by the billionaire Rudland family. Magister has committed to giving Tongaat a considerable amount of support for the rights issue – around R2 billion.

Read: Tongaat Hulett secures shareholder approval for controversial rights offer

But the problem is the company which is run by Hamish Rudland, who runs Magister. He happens to be the brother of Simon Rudland, who is the CEO of Gold Leaf Tobacco. Gold Leaf Tobacco, you’ll remember, is one of those companies that have been accused of flooding South Africa with illicit cigarettes. But Hamish has told amaBunghane that his company, Magister, has no involvement in the interest of Gold Leaf Tobacco, nor does Gold Leaf Tobacco have anything to do with the transaction between Magister and Tongaat. It is messy, it’s a little complicated. It raises a whole lot of concerns, but we do have David Woollam, an independent analyst, to give us more on the story.

David, thanks so much for your time. Just before we begin, what is your exposure to Tongaat presently? How much of the shares do you hold?

DAVID WOOLLAM: Fifi, hi, good evening. I have a small shareholding in Tongaat. It’s about 10 000 shares, so it’s not significant. My interest in Tongaat goes back many years. I did a lot of research back in 2018, 2019 when I raised flags about issues that were happening there, which triggered the whole kind of ……2:12 irregularities and stuff coming out. So my interest has been more about the company; it doesn’t have a great financial interest in it.

FIFI PETERS: How would you describe the mood and the action that took place at the EGM earlier today?

DAVID WOOLLAM: Well, I guess from the side of Tongaat, they are probably quite elated. I wouldn’t describe it as that for anybody, quite frankly. I think it was a lose-lose situation; I don’t think it’s a win or a loss. I think it’s a disappointment for governance, because there were some very important questions raised and I feel that some of those questions were not adequately addressed, and were fudged. I think that’s a sad day for governance in the broader sense.

If we are going to restore our position in South Africa as an attractive investment destination, we have to show ourselves to be above some of the things that have blighted us in the past.

FIFI PETERS: Certainly. We were speaking with the market commentator just shortly, and she was saying that she wished that, when you look at the story of Tongaat, you’d be looking at a future that was full of less drama and less contention and fewer issues around governance – which is not presently the case. So she’s hanging on the fence.

Read:
Tongaat defies small investors on R4bn rights issue
Tongaat Hulett confirms civil claims totalling R450m against implicated former executives

I imagine that you’re speaking specifically to the contention around Magister investments and the questions around what this could mean for governance – where the money would be coming from, whether there were any links to perhaps the cigarette industry in terms of funding the money that would be forthcoming. I believe that Tongaat has refuted these claims, as even Magister has.

Nonetheless, what were some of the questions that came through regarding Rudland itself and what was Tongaat’s response to these questions?

DAVID WOOLLAM: I’d like to maybe start with my real questions around this transaction – not so much the specifics of the investor, but the structure of the deal. I believe that what has happened here is that the borders……4:30 decided that they need to raise a large amount of capital. They are doing it by a rights issue with the knowledge, the absolute knowledge that the vast majority of shareholders either won’t or can’t, possibly because of liquidity or because of regulatory limits, follow their rights. And so the rights-issue price, which I believe will be as low as below R3 – I think it will be between R2.75 and R3 – will mean that whoever gets those rights, whoever gets to pick up those shares, will get them very, very cheaply, and they’ll gain a very big percentage of the company.

DAVID WOOLLAM: So where does Warren Buffett ……5:06 Hathaway? I’d have the same concerns, I really would. I think it adds to the concern [with] this company, which we know very little about, and about which we’ve asked lots of questions; we know about the people but we don’t know about the company. I always say, if you can’t tell me, there must be a reason why we don’t know what their background is.

But my real concern is about the need to dilute shareholders by 90%, which is going to be the result here. We can argue whether it’s 88% or 92%, but it’s going to be around a 90% dilution. The shareholders have already lost 95% of their value, and they’re going to be diluted another 90%. That’s just a tragedy for the South African investment community. It’s a company that’s over hundred years old with maybe 400 000 people dependent on this industry, and one wonders where it will go.

FIFI PETERS: But did they have an alternative, in your view? What could they have done differently?

DAVID WOOLLAM: Well, I suppose as time goes on your options diminish. So I believe that this was too little, too late in the one sense. I believe that there should have been claims brought against Deloitte, the auditors, because they audited this company for 83 years and for the last eight years the numbers were materially incorrect. Had those errors been picked up earlier, you wouldn’t have a R12 billion problem. It might have been a R1 billion problem. So I think the company was wronged. I think those that were culpable for that should be  brought to account. We saw with Steinhoff they recovered R1.3 billion from the auditors, and I think Tongaat should be looking for a similar amount which would’ve dramatically reduced the capital requirements.

I just think they [should] be meeting with the banks; they were too easy with the banks. They should have been stronger with the banks, saying this is a socioeconomically important industry, and we need to ensure that there’s some stability; we will fix it.

And then lastly at an operational level the results have got worse, and this year the interim results to September were very poor. They left over a hundred thousand tonnes of sugar behind in the fields, a million tonnes of cane, because the mills were broken down and weren’t running efficiently. So the farmers have paid a R650 million price for that because they couldn’t sell their cane, and in the season.

So there are a lot of things that have all culminated, in my opinion, to a very sad situation.

Read:
Tongaat cuts executive pay
Tongaat: Deloitte in the firing line
Tongaat Hulett slashes chairman’s fees by more than half

FIFI PETERS: I see that today the chair of Tongaat, Louis von Zeuner, said that the company is in the process of a claim against the former auditor, Deloitte, for its role in the accounting scandal; they were holding up a strong legal team and they’re looking into that. Do you reckon that’s too little too late?

DAVID WOOLLAM: Yes, it is too late in a sense because the shareholders are going to pay this price and they’ll diluted be by 90%. Let’s just hypothetically say they get a billion rand back from a claim, in this instance Magister will get about 60% of that if the transaction goes ahead as planned. So it is too little too late. This is three years down the track. I understand the complexity with moving forward on these things – but Steinhoff was a significantly more complicated problem. I think they’ve done an incredible job in a sense with a much worse situation. They didn’t have to do a rights issue. They’ve dealt with a lot of the issues and they’ve moved forward decisively.

FIFI PETERS: Yes. We will leave it there. Thanks so much for your time, Dave Woollam, an independent analyst giving his reflections on the rights issue that has now been given the all-systems-go by Tongaat’s major shareholders at that extraordinary general meeting that took place earlier today.

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