Tongaat Hulett’s R450m civil action against former executives

‘Shareholders are now faced with a highly dilutory rights issue which is actually going to facilitate a change of control’: Opportune Investments founder Chris Logan.

FIFI PETERS: Tongaat Hulett is targeting former directors who cooked the books at the sugar producer’s company by overstating profits for several years. Tongaat Hulett is targeting them to pay back the money. It’s looking for R450 million back in claims in a civil court case against its former CEO Peter Staude, former chief financial officer Murray Munro, and former finance executive Sean Slabbert.

To talk about more on this story, and how the market is thinking about Tongaat’s interventions at this stage, is activist shareholder Chris Logan, who’s also the founder of Opportune Investments. Chris, thanks so much for your time. Your thoughts on the latest developments in this saga?

CHRIS LOGAN: Ah, thanks a lot, Fifi, and happy new year.

FIFI PETERS: The same to you.

CHRIS LOGAN: Well, this announcement today about them targeting the former executives comes against the backdrop of their now proposing a massive rights issue and a 33-fold increase in shares in issue, which is going to dilute existing shareholders tremendously.

Just for the record, I’m not really a shareholder. I’ve analysed and followed Tongaat for well over 20 years and I grew up in (KwaZulu-) Natal. It was one of the first places I worked. So I have an emotional attachment.

Read:
Tongaat Hulett confirms civil claims totalling R450m against implicated former executives
Damning Tongaat Hulett forensic report fingers ex-executives, including Peter Staude

But shareholders, having been by [deceived] by this mismanagement and fraud of the previous regime, are now faced with a highly dilutory rights issue, which is actually going to facilitate a change of control. So it’s been a matter of shareholders just continuously being faced with bad news. I don’t know if that gives some context.

FIFI PETERS: It does, perfectly. It describes the picture that I have in my mind of a shareholder who is stuck between a rock and a hard place. It seems from the shareholders’ perspective right now what is being done is not to their benefit – perhaps particularly in the short term. But from an accountability point of view, if we are just looking at what Tongaat is trying to do – first of all by instituting the court case in itself, and demanding that money be paid – to what degree does that improve perceptions around governance at the company presently?

CHRIS LOGAN: Well, obviously that is the right thing to do. They have to hold the previous executive responsible. But it’s only part of the picture. For instance, what they are really faced with is huge debt. They’ve been conspicuously quiet about what they’re doing in respect to their previous auditors (Deloitte), who audited the business for 83 years.

As you may know, the fraud or the accounting shenanigans transpired over eight years, and they were material. So, unlike Steinhoff which recovered money from their previous auditors, nothing’s happened despite Tongaat telling shareholders at the last AGM that they’d commence negotiations with their previous auditors in October of last year, and they’d expected a speedy settlement.

We are talking big numbers here. The previous auditors, just for auditing the business over the period that the books were cooked, received R282 million.

If they’d moved faster it’s likely that this could be one of the reasons why shareholders wouldn’t be faced with this horrible new year of a dilatory rights issue.

I think the governance in holding the previous auditors to account is questionable, highly questionable. You’ve got to put substance over form. They’re going to take forever to get something back from the executives but, as they themselves said at the AGM, it’s likely that the previous auditors would want to put this thing behind them and settle quickly. So that’s one of the things they should do to avert this rights issue.

Read:
Steinhoff/Deloitte reach R1.22bn deal with claimants
Steinhoff: Deloitte now in the crosshairs
Ex-Deloitte auditor faces disciplinary action over Steinhoff

The other thing, the age-old problem at Tongaat, has been that there has not been alignment. What do I mean by that? I mean that the executives and the shareholders both have the same goals, largely brought by the shareholding. The shareholding of the board is insignificant, the whole board. It’s led from the chairman’s team.

So is the board really backing shareholders? I think there are questions in that regard.

The foundation of good governance is that you have alignment. They haven’t achieved that despite all the trauma that’s gone on in this company. Then they’ll mention King Code 27 times in their annual report, but these are blatant holes. You need an executive and a board working for the shareholders.

It’s not good for Tongaat shareholders or for the whole SA market when you have a Tongaat type of situation. We’ve had foreigners disinvesting from the JSE for as long as I can remember. This is one of the reasons we can’t rely on audited accounts.

I think existing shareholders should be demanding that there’s action, and quick action on some of these matters, and ideally that this rights issue is averted.

There are other ways to avert a rights issue. Tongaat in the past was talking about Milco, which was an initiative to bring in the farmers who supplied the sugar cane they milled into the milling operations to give them equity. Obviously the farmers would have to pay for that. But that sounded like a good initiative, which would once again result in alignment of interest.

The other problem, of course, has been that for the last year they’ve had once-off catastrophes in their sugar operation; first of all, in their sugar refinery in the second half of last year, 25 000 tonnes of sugar went missing. Quite how it went missing we still don’t know. Apparently they put a number on that of R390 million, which is a big number – even against their debt of R6 billion.

That was followed up in the first half of this [financial] year, where they made a loss where the mills didn’t function properly. Apparently the maintenance hasn’t been what it [should be] and something like a million tonnes of cane was left standing in a mill.

So the management has had an incredibly tough task. They’ve had to deal with the legacy of this horrific fraud and mismanagement, and then of course they’ve had to deal with Covid and the July riots. But there are things where they need to up their game.

Read: KZN’s July unrest deals a R158m blow to Tongaat Hulett’s turnaround plans

FIFI PETERS: It’s understandable that you have so much to say on this topic, especially if you look at the fact that before the scandal broke you had a company, Tongaat Hulett, that was valued at R16 billion and now, post the scandal, has a shrunk down to R751 million. But I think your point has come across quite well in terms of your encouragement or hope that they avert the rights issue and the ways in which they can possibly do so.

The auditors [firm] you’re talking about, which in question you feel has not been held accountable, is Deloitte, who paid R1.3 billion towards the settlement of Steinhoff in that matter.

Chris, we’ll leave it there for now. Thanks so much for your time. Chris Logan is the founder of Opportune Investments.

Just looking at the stock performance of Tongaat in the recent while, it is down 45% in the past year and almost down 100% in the past five years.

So it does really speak to how the market is viewing that stock – certainly not in a sweet light.

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