The planned recapitalisation of Tongaat Hulett to reduce its massive debt has been dealt a huge blow by a Takeover Regulation Panel (TRP) decision withdrawing an exemption previously granted to the company from the obligation to make a mandatory offer to its shareholders.
Shareholder activist Chris Logan said on Sunday the withdrawal by the TRP of the exemption places Tongaat Hulett “in a horrific position”.
“The rights issue is dead unless Tongaat or Magister appeal it, which I doubt they will,” he said.
Tongaat Hulett said on Friday that in terms of the regulations, Tongaat Hulett and Magister Investments may apply to the Takeover Special Committee (TSC) for a hearing regarding the TRP ruling within five business days after receiving it.
The JSE-listed sugar producer and property company said it is currently considering the TRP ruling and will advise the company’s shareholders in due course of its intended course of action.
Tongaat Hulett previously successfully applied to the TRP for the exemption after obtaining shareholder approval at a special general meeting of the resolutions required to implement an equity capital raise of between R2 billion and R4 billion by way of a rights offer.
The rights offer was to be partially underwritten by up to R2 billion by Mauritian-based Magister Investments Limited, a privately-held group controlled by the Zimbabwe billionaire Rudland family.
The underwriting of the rights offer was subject to Magister being exempted from making a mandatory offer under Section 123 of the Companies Act in the event that it underwrites 35% or more of the issued shares in Tongaat Hulett.
However, the TRP on Friday announced it had declared the waiver resolution a nullity, rendering the waiver to have no legal force or effect, and also withdrew its previous exemption ruling because of third party share acquisitions.
The TRP said the effect of its ruling is that Magister, acting alone or with its concert parties, will be compelled to make a mandatory offer to the shareholders of Tongaat Hulett should Magister wish to underwrite the contemplated rights offer, and reach the bright line of 35% of the total issued share capital in Tongaat Hulett.
Logan said Tongaat Hulett is technically insolvent and needs capital, and that Magister Investments was the only party prepared to come forward that they were aware of among the shareholders to partially underwrite the planned rights offer.
Logan doubts that another party will come forward to underwrite the rights offer and believes Magister will make another attempt.
“It’s going to be quite hard given the reputational risk attached to them and whether Tongaat would agree to it,” he said.
Logan believes the only logical thing that can happen now is for the banks to convert Tongaat Hulett’s debt to equity, unless an entity like the Public Investment Corporation (PIC) steps forward but “haven’t done up until now”.
“There is about R7 billion of debt held by the banks, which are calling the shots and are demanding a higher and higher interest rate on that debt,” he said.
Logan added that Tongaat Hulett has spoken about either a capital raise or selling off assets.
But he said Tongaat Hulett could only get proceeds of R5 billion from selling off assets, which would “leave a hole in the middle” apart from the social consequences of closing any of its operations.
“The company can’t be allowed to collapse. They could definitely sell off Zimbabwe, which is profitable, and Mozambique,” said Logan.
“The problem is SA Sugar, which has made losses of R1.61 billion for the past four financial years and is scheduled to make another this year – and those are the only years we have got reliable figures [for]. It’s not clear that this division can ever be viable. That is where the big problem is.
“Can it be fixed? That is an open question mark. It has been made more difficult by Covid-19 and the KZN floods,” he said.
Tongaat Hulett said on Friday it remains committed to a recapitalisation and is continuing to proactively engage with stakeholders regarding a capital raise transaction and a sustainable solution for the group.
“There is a positive commitment from various stakeholders who recognise the critical social impact THL [Tongaat Hulett] has in South Africa and across the SADC region,” it said.
The group added that it remains firmly of the view that a capital raise is a better alternative to strategic asset disposals, particularly as an accelerated disposal programme is unlikely to realise full value for the assets.
In regard to the TRP decision, Tongaat Hulett highlighted that:
No adverse finding was made against Tongaat Hulett, which was not directly or indirectly involved in the third-party share acquisitions and only became aware of them after they had occurred.
The TRP ruling does not in and of itself trigger an obligation to make a mandatory offer.
Obtaining an exemption from an obligation on Magister to make a mandatory offer to Tongaat Hulett shareholders pursuant to the Magister Transaction is a condition precedent to the Magister transaction.
Tongaat Hulett advised shareholders in April that the quantum of the envisaged rights offer is expected to increase to between R4 billion and R5 billion because of a combination of issues, including the extended timelines to conclude the equity capital raise and the higher level of borrowings within the group.
Tongaat Hulett further advised shareholders last week that to assist the company with its liquidity requirements, the lenders have made the seasonal overdraft facility available to the company earlier than previously contemplated.
In addition, the lenders have granted an extension to June 30 2022 on all key debt reduction milestones, including the date to implement the proposed rights offer and the step-up in the applicable interest rates, it said.
Current company chair Louis von Zeuner last month resigned effective from June 30 due to a change in his personal circumstances. His departure comes at the worst time for the group.
Von Zeuner was appointed to the Tongaat Hulett board in December 2018 as part of a new leadership team, following the accounting scandal that rocked the group earlier that year and saw the departure of several implicated former executives.
Shares in Tongaat Hulett declined 1% on Friday to close at R2.96. The stock has fallen more than 47% year-to-date, valuing the group at just under R400 million.
Prior to the accounting scandal, Tongaat Hulett’s share price was more than R120 a share, giving the group a market cap of several billion rand.
Its share price has plunged more than 97% over the past five years.