Tongaat’s debt plan critical for group’s future​

JSE-listed Tongaat Hulett this week outlined its plans to loosen its more than R6bn debt chokehold, including possible equity capital injections from strategic partners or the sale of some or all its operations elsewhere in Africa. 

It also issued a trading and operational update showing that while it was facing significant headwinds, its South African operations were performing far better this year.

This was the group’s first detailed update to the broader market about its plans to save the company since turnaround specialist Piers Marsden was appointed chief restructuring officer in June.

The company’s shares were suspended in July because it failed to release provisional results on time.

CEO Gavin Hudson and CFO Rob Aitken said if the debt burden could be dealt with effectively, the company could be saved and operate sustainably.

But it was clear significant interventions, including new investor capital or possible asset sales were needed as the company would be unable to reduce its debt pile through trading alone. The group was also working with its lenders to find ways to finance additional working capital.

We believe when we pay down debt, Tongaat Hulett will be a sustainable business and even with headwinds we have, we will see a far improved operation

—  Gavin Hudson, CEO 

Aitken said of the total South African debt of R6.6bn, about R6.3bn would not be able to be repaid through the proceeds of “normal trading” and would need the debt-reduction initiatives Tongaat had flagged to successfully achieve this.

For Hudson, the “first prize” or “plan A” would be to get enough capital from potential equity investors to “keep the group intact”.  But if this was not possible the group would have to look at selling some or all its operations elsewhere in Africa.

“Ideally we would want to get a big enough capital injection to pay down debt and keep our African operations intact. There are various scenarios or iterations of that depending on what deal the group comes up with.”

Hudson said the group was speaking to “interested parties who are looking at deploying equity into the business”.

He said the group was working with all stakeholders, including large shareholders and “potential equity injectors”, to co-construct a plan.

Tongaat is on a knife edge because if the company cannot be stabilised, it could affect up to 500,000 jobs across its supply chains in the Southern African Development Community region.

The company, which employs 23,000 people in SA, Zimbabwe and Mozambique, became mired in an accounting scandal in 2019 when it emerged that key former executives had allegedly manipulated accounts for years. At least six, including former CEO Peter Staude, ex-CFO Murray Munro and an external auditor, are facing charges for their alleged role in the corporate fraud amounting to R3.5bn.

Hudson, who has been at the helm for three years, said the business was starting to see the green shoots of all the efforts” of management and employees to turn it around.

“We believe when we pay down debt, Tongaat Hulett will be a sustainable business and even with headwinds we have, we will see a far improved operation.”

He said it was essential to save Tongaat, not just from a business perspective but because of the broader effect on the larger KwaZulu-Natal north coast economy of any failure of Tongaat.

He said failure was “too horrible to contemplate”.

Dave Woollam, on behalf of Artemis Investments and a wider group of minority shareholders representing about 20% of the shares in Tongaat, said they were “encouraged Tongaat had provided a fairly detailed trading update and guidance on the restructuring process”.

He added that the company should continue to engage the market in a “transparent manner so stakeholders can make informed decisions when the time comes to do so”.

He said it was critical that the debt restructuring plan not only addressed the excessive debt burden but that the businesses that emerge out of that process are funded and positioned for operational excellence.

“These two pillars are inextricably linked: without sufficient funding, the operations will struggle to recover, and without free cash flow from the operations, the business will be unable to service its debt.”  

Woollam said Artemis was encouraged that Tongaat’s restructuring committee was casting the net wide in its search for a solution.

“We have always believed that the only viable solution comprises a combination of asset sales [where full or fair value can be achieved], a compromise and concessions from the lenders and a fresh injection of equity from shareholders and investors. For this three-legged stool to be stable and strong, each component needs to be in balance with the others.”