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JIMMY MOYAHA: Every time you hear the words ‘urgent interdict’, you’re typically thinking it involves the political parties stopping each other from making certain decisions or from supposedly wasting more of our taxpayer money.
But this time the ‘urgent’ relates to Tongaat. I’m joined on the line by independent analyst Dave Woollam to take a look at the developments around Tongaat. Dave, good evening. Thanks so much for taking the time.
Before we get to the current interdict, let’s take a bit of a step back. Last week there were developments around court proceedings where business rescue practitioners went to court and asked for some form of relief. They weren’t granted that relief.
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Can you just give us a quick summary of what happened there?
DAVE WOOLLAM: Good evening, Jimmy. Yes, thank you. Look, it’s been a very complicated process as I guess is always the case when a business is in trouble, because there are a lot of people who have claims. They want to get their claims preferred – or get up in the queue.
What this particular matter is primarily about is the sugar industry is unique in that it is governed by an act, the Sugar Act.
And while some would say it has the effect of being like a cooperative structure, it isn’t.
It’s a regulated industry where essentially players are given quotas. Those quotas are effectively to grow and then ultimately mill sugar that gets sold effectively to Sasa [South African Sugar Association]. The millers will then refine that sugar, sell it in their branded form, such as Tongaat Hulett’s – [RCL’s] Selati is the other brand – and the balance gets exported.
What’s happened in this particular case is that Tongaat traditionally – because it has a very big refining operation – oversupplies or oversells its sugar in the sense that it sells more sugar than it produces, and therefore owes the industry that money to pay the other suppliers who’ve provided that sugar.
This happens only a few times a year, and the money builds up. In this particular case, when the business went into business rescue they decided that these monies were suspended.
The industry feels strongly that these are statutory obligations, and that’s what this court case has been about – primarily whether or not Sasa is entitled to be paid its share of the sugar that Tongaat sold into the market, and it has now become a very ugly fight.
Sadly the businesses and all the people – the employees, the farmers – are all paying the price while this process unfolds.
JIMMY MOYAHA: It’s interesting, Dave, that you mentioned that this is considered a statutory amount. This is the same thing that the judge ruled on last week as well.
I had a quick squiz at that judgment and the judge confirmed that and said that much like a company would pay its taxes, they must pay these levies due to the industry.
You also touched on something around the impact on the industry of not paying the levies. I suppose that’s probably why RCL [Foods] is involved. They had to cough up an extra R234 million because of the fees or the levies that Tongaat didn’t pay.
DAVE WOOLLAM: Jimmy, that’s correct. This is a process whereby the industry is regulated through this mechanism, and while the Companies Act allows business rescue practitioners to suspend all contractual relationships, the argument here was that you can suspend a contract that you entered into.
But these contracts are statutorily governed. The other parties didn’t enter into these contracts; they’re governed by a statute in the same way that under business rescue you must pay your PAYE, you must pay your taxes. You don’t get to renege on those elements.
And this was the argument by the industry – that there’s no escaping this mechanism. There’s no way that you can step out of it. It’s a functioning part of the industry and they feel that they’ve been left with R1.7 billion of monies owed by Tongaat with about R700 million back to Tongaat, which is the export proceeds.
So net-net, about a billion rand. And if Tongaat [doesn’t] pay it, the farmers and the millers have to pay it.
No one else is going to pick up the bill. So it’s a very substantial amount of money in an industry and in an environment which is pretty tough at the moment.
JIMMY MOYAHA: Now, what many of our listeners may or may not know is that Dave is actually one of the individuals who came forward around the Tongaat case initially. I don’t know if the term ‘whistleblower’ is still a good term to be using in this day and age [Dave chuckling], but Dave was one of the banking executives and private investors involved in Tongaat in the early days. I suppose, Dave, you’ve had a vested interest – whether it’s financial or otherwise – in just ensuring that this process unfolds properly, and that stakeholders like other farmers are put in a better position.
Does Tongaat have the money to pay these levies?
DAVE WOOLLAM: Jimmy, yes, it’s a very important question because this all could be very academic – because if it doesn’t have the money it can’t pay, and that might just trigger liquidation, which could be a much worse outcome.
So I think very high stakes are involved here for a very, very important industry that serves to provide a living and sustain hundreds of thousands of people.
It is really tragic that for nearly four years now, since I first delivered a report to the board, we’re in a way till kicking the can down the road. It is a very tragic situation.
I don’t want to get into any critical comments right now, but it does seem that the longer time goes on the less there is to recoup or to recover or to resuscitate.
The business is extremely important, but I do have confidence that something will come out of this. The industry will survive. The farming industry produces, just in the KZN [KwaZulu-Natal] region, about 500 000 tonnes of sugar.
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In one way or another I do think this will sort out, but I don’t think that Tongaat has the money, and I don’t know that anyone’s going to come up with the money. So this might just be a huge legal argument that doesn’t have any practical outcome.
JIMMY MOYAHA: Dave, let’s look then at what’s happening now. Perhaps this is part of the solution. Right now we find ourselves in a situation where the Sugar Association of South Africa, as well as other players like RCL Foods, have come forward to the courts to request an urgent interdict so that the R1.1 billion owed to the industry is settled and not set aside the same way it would set aside a creditor’s bill or something of the sort under business rescue proceedings.
But the interdict now is that there’s supposed to be a vote for potentially the new buyers. There are two buyers that are shortlisted, and the vote is supposed to take place to decide which of these two buyers is appropriate. Should the vote not go ahead, obviously either buyer doesn’t know if they have the right to buy the business or not.
Should we not be looking at this from a perspective of saying ‘let the buyer be determined’, but then make it a suspensive condition to say that the buyer must then settle or be committed to settling this fee. And if that is the answer, is that even attractive to the buyer? Does that still make the deal attractive to the prospective buyers?
DAVE WOOLLAM: Yes, I think you’re absolutely right.
At the moment it’s a complicated deal because the buyers are not buying Tongaat. They’re actually buying the banks’ loan claims, and the banks have about R7 billion of loans to Tongaat.
They are secured loans. They have secured over everything, over every single last asset in the group.
And these two bidders that have come in now – unlike [Robert] Gumede’s [Vision Consortium], who were going to buy the businesses directly – these two bidders now, Terris Vision and RGS Sugar, have come in with an offer to the banks to buy their claims.
And as they stand now in the shoes of the banks, at that moment they can effectively control the outcome and the process going forward.
Yes, they’ve done some quite interesting things like offer a bit of an inducement, I guess, to the creditors. They’re saying they’ll pay them R75 million, and they’re offering a very tiny allocation of shares to the shareholders.
But I’m not sure it’s enough and I don’t know that any of this is going to be really getting to the bottom of the industry problem.
Ultimately these businesses need to survive.
And what I fear at the moment is that this is a more of an asset-stripping, asset-type investment decision, rather than one that is about ensuring the sustainability of these businesses that have been really decimated in the last four years with neglect and generally poor management and oversight. So it is a really tragic situation.
I really do hope that someone comes to the fore with a common-sense approach here and says: ‘Let’s stop beating up the business [when] eventually there’ll be nothing left for anybody if we keep on going through these processes.’
JIMMY MOYAHA: I was just about to ask, Dave, do we know how much is left within the business from an asset point of view? Do we have an asset value or a NAV [net asset value] for where the business stands with what is on board now? Just an idea, I suppose.
DAVE WOOLLAM: Well, I think if we look at some of the parts …
Mozambique is a pretty good asset. It makes good solid cash flows. We know there are independent buyers who are prepared to pay between $160 million and $200 million, such as when you take out the minorities and the debt there is about a R2 billion rand net value that could be derived out of Mozambique.
Zimbabwe is a difficult one. It’s a fantastic asset with one of the finest sugar-growing regions in the world, but quagmired at the moment in a very complex political environment and economic environment. But it’s worth a lot of money in the longer term.
[Tongaat] South Africa needs resuscitation. I would say that the offers that have been made – around R3.5 billion – are probably at this stage reasonable.
But the part that I feel most people don’t have their eye on at all is the land value.
It might at the moment be seen that economic development is stalled – and in the medium term that will come back to the fore.
And that land that the group owns up the north coast, they had it in the balance sheet at R11 billion two or three years ago; now they’ve marked it down to R8 billion. I think those values are long gone, but it’s worth several billion in my mind, and I still think there’s a lot of value in this group. But unfortunately with the creditors fighting over it, it diminishes by the day – which is very, very tragic.
JIMMY MOYAHA: Well, we definitely hope that this is resolved, and resolved for the benefit of all stakeholders – being the sugar industry as well. Thanks so much for your time and your insights, Dave.
That’s Dave Woollam, who is an independent analyst giving us his thoughts on the latest unfoldings at Tongaat.
