Tongaat Hulett shares nosedive after shareholders express strong disapproval of R4bn rights issue

Investors are becoming more exasperated with the slow and herculean efforts to turn Tongaat Hulett’s fortunes around, judging from the market response to the sugar producer’s possible plan to tap shareholders for funding worth as much as R4-billion. 

Tongaat’s share price finished 24% lower on Wednesday (but fell by as much as 34% during the day) — wiping off R313-million from its value on the JSE of R997-million. At Tuesday’s close, Tongaat was worth R1.3-billion. 

To raise as much as R4-billion, Tongaat might embark on a rights issue, which would involve inviting existing shareholders to purchase additional company shares. In this process, Tongaat would raise money that would go towards reducing its smothering debt load of more than R6-billion.

Shareholders don’t like a rights issue, because it usually dilutes their existing shareholding in a company. This might be the reason for the market’s negative reaction to Tongaat’s announcement about a possible rights issue. 

It has reached an agreement with Mauritius-based investment holding company Magister, which has offered to spend as much as R2-billion to underwrite the Tongaat rights offer. Magister is an investment holding company that focuses on investments in agriculture, logistics, and other sectors across Southern Africa. Magister is an existing Tongaat shareholder, holding 0.15% of its shares. It could hike its holding in Tongaat to a maximum of 60% after the possible rights issue.

The amount of capital to be raised and the pricing of the rights offer is yet to be determined, but it is expected to be conducted in the first three months of 2022, pending approval from shareholders and lenders, Tongaat said.

Tongaat, which produces 43% of SA’s sugar, has been attempting to turn its fortunes around after irregular accounting practices emerged at the company in 2019. 

Like Steinhoff, Tongaat suffered a crippling accounting scandal that a PwC forensic investigation found to have been “undesirable” because the company’s profits were falsified and overstated. Put differently, Tongaat’s books were cooked.  

Before major problems in Tongaat’s accounts were discovered, its shares had blue-chip status and were considered a must-have in the investment portfolios of many fund managers. Over the past decade, Tongaat’s shares reached a high of R170.62. But today its shares trade in a narrow range of R5.55 to R9.61.

While the previous management (led by CEO Peter Staude) was in effect falsifying profits, debt at Tongaat grew to unsustainable levels. Borrowings had more than doubled over six years to R11.4-billion by March 2019. 

But Tongaat’s new management – led by CEO Gavin Hudson, who was appointed in 2019 – has made progress in reducing the company’s debt to R7.2-billion (in local and foreign-denominated currency) at the end of March 2021. 

It took tough negotiations by Tongaat management for lenders to accept new payment terms and, in the process, reduce the company’s debt. To raise money and reduce debt, Tongaat was forced to sell its non-core assets, including selling a parcel of prime real estate in Umhlanga Rocks to JSE-listed residential property developer Balwin Properties for R167-million. 

But its problems – especially those relating to its operations – are far from over. Tongaat cannot pay its debt through operational cash flows because the company is facing production difficulties in SA and navigating hyperinflation problems in Zimbabwe that eat into its profits. 

Without strong cash flow on its balance sheet, Tongaat doesn’t have many options but to look to its shareholders for help. DM/BM

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