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R5.35bn starch sale a relief for Tongaat Hulett

Group’s share price surges more than 15% as deal with Barloworld gets go-ahead.
Proceeds from the sale will go towards paying down Tongaat Hulett's huge debt burden. Image: Suren Naidoo, Moneyweb

Executives at agri-processing and land development group Tongaat Hulett would have breathed a collective sigh of relief on Tuesday as its R5.35 billion starch unit sale to Barloworld subsidiary, KLL Group, was told to go ahead by an independent mediator.

This comes after a dispute arose between the two JSE-listed groups, with Barloworld trying to get out of the deal (first announced in February), claiming that a material adverse change (MAC) had occurred due to Covid-19.

Tongaat Hulett, which is battling a R12 billion debt burden following an accounting scandal last year, did not agree with Barloworld’s MAC claims.

Both groups later agreed to an independent mediation process to settle the matter.

The groups announced in separate statements on Tuesday that Rothschild & Co South Africa, which was appointed the independent expert to adjudicate the matter, had determined that a MAC had not occurred.

Tongaat Hulett Starch’s Bellville plant in Cape Town. Image: Supplied

For Tongaat Hulett, the sale will come as a huge relief as proceeds are expected to bring down its debt significantly. Tuesday’s announcement saw the group’s share price surge 15.24% on the JSE.

Barloworld accepted the decision, but its share price was down just over 4% on Tuesday following the announcement.

Tongaat Hulett and Barloworld share prices

“Tongaat Hulett has welcomed the decision by independent third party Rothschild & Co that a MAC has not occurred with relation to the R5.35 billion sale of its starch business to Barloworld,” the group said in a statement.

Gavin Hudson, CEO of Tongaat Hulett, said he was pleased that the decision by Rothschild & Co had confirmed Tongaat’s belief that a MAC event had not occurred, and that the transaction would now go ahead.

“Throughout this process we have continued to work to close out workstreams to meet our other obligations under the agreement reached with Barloworld in February this year, so that we can conclude the sale and move forward,” he said.

“It is expected that we will be able to finalise this process by the end of October with the starch business transferring to Barloworld from 1 November 2020 …

“Starch is a great business and Barloworld is fortunate to be buying such a valuable asset with excellent people,” noted Hudson.

“However, the rationale for the sale remains unchanged – it will help us to continue meeting our debt reduction targets. Tongaat is a high potential business with a significant asset base, and this decision will ensure that our focus remains on bedding down the turnaround of our organisation.”

Collaborative approach

Hudson said Tongaat would work with Barloworld in a collaborative manner to close the starch transaction as soon as possible now that the issue of the MAC dispute is behind the two companies.

Meanwhile, Barloworld noted in its statement that the group had “continued to perform” in terms of its obligations as per the sale and purchase agreement with Tongaat Hulett.

“With the MAC determination now concluded, the transaction will continue as per the original agreement, subject to the fulfilment or waiver of the remaining conditions,” it said.

Barloworld CEO, Dominic Sewela commented: “While the uncertainty created by the Covid-19 pandemic necessitated the board to issue a MAC notice, we have remained of the view that THS [Tongaat Hulett Starch] will be a valuable addition to the Barloworld portfolio.”

Sewela added: “THS is a defensive business that will bolster the resilience of Barloworld as it is less cyclical than the businesses in our existing portfolio. THS is highly cash-generative, relatively asset-light and has a leading market position and strong client base of highly regarded and well established multinational companies.”

Barloworld said that as the lockdown regulations have eased, the group has “seen the momentum build in the THS business”.

“The long-term prospects for THS are exemplary as it is the sole manufacturer of starch and glucose in South Africa and supplies more than 85% of the South African market as well as exporting to regional markets. It offers a unique geographic positioning and growth opportunities for Barloworld to strengthen our portfolio in order to achieve our long-term value delivery aspirations.”

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