Sugarcane farmers in Zimbabwe’s Lowveld region have expressed concern over the corporate rescue process of Tongaat Hulett South Africa, saying the recent resignations of the company’s directors “is a show of no confidence” in the business rescue plan and its likelihood to succeed which could impact on local operations.
The farmers, who deliver nearly half of cane to Tongaat’s local mills, said developments in SA would “no doubt impact” the Zimbabwe operations and have since engaged Government, through the Ministry of Industry and Commerce to intervene.
Meanwhile, as shall be reported later in this story, a consortium of farmers in South Africa has also made an offer to buy the THL milling assets, reports say. Tongaat was placed under business rescue in October after banks declined the company’s restructuring plan meant to resolve an excess debt in SA of more than R6 billion.
Tongaat Hulett SA owns 51 percent in Hippo Valley Estates and 100 percent in Triangle Ltd.
Tongaat Hulett South Africa’s liquidity progressively worsened over the years, compounded by the unforgiving operating environment. This resulted in its South African operations largely being sustained by bank borrowings and by dividends and management fees remittances from the Zimbabwe operations, local farmers say.
Despite the exponential growth in expenditure and consequently debt (creditors and bank loans) against diminishing income / cashflows (revenue, debtors and cash), THL continued to leverage Zimbabwean operations’ profitability and strong balance sheets to “mask” its deteriorating solvency position. This delayed the onset of its insolvency and eventual business rescue, which finally happened in October.
With the Zimbabwean operations effectively managed and controlled by THL, in respect of inter alia, decision making, sugar exports, budgetary support, ICT (same ERP is used group wide and the servers are located and monitored in South Africa), technical support for mill maintenance, employee recruitment, Huletts sugar brand, and other shared services, the development at THL would impact on local operations.
“Despite Business Rescue Practitioner (BRP) taking full management control of THL, directors and pre-existing management could still have continued to function as before under the supervision of the BRPs through delegated power,” the farmers said in a recent letter to the Ministry of Industry and Commerce. “The Ministry should consider requesting the BRPs to clearly outline the powers and authority delegated to the pre-existing management to ensure a smooth management change-over that does not disrupt the Zimbabwean operations,” they said.
“No reasons have been given for the resignations of all the THL directors. Simplistically, their resignation is a show of no confidence in the business rescue plan and its likelihood to succeed. Due to the conflation of the THL and Zimbabwe operations, the business rescue at Tongaat will inevitably have a contagion effect on the Zimbabwean operations, on both economic and operating efficiencies. “The ministry should (also) consider obtaining an explanation from the BRP’s on the reasons for the en masse director resignations and what impact this may have on the Zimbabwe operations given its dependents on THL for various shared services.”
Implications on local operations
Before the business rescue, management of the THL Zimbabwean operations was effectively being conducted by the South African parent company management who were making all material decisions, according to the letter. THL had conflated its operations, and management control with those of the local operations.
From a Zimbabwean perspective, there is need for a smooth transition, alignment of expectations and redefining of reporting lines from the pre-existing management to the BRP’s.
The farmers said the disposal of Zimbabwean operations by a distressed parent (THL) is likely to result in “a distressed sale.” “The true value reflective of what the Zimbabwean business is worthy is unlikely to be realised. “The Government should consider possible buy-out by local players who could leverage the land intrinsic value as their equity contribution. NSSA is already a shareholder in Hippo Valley Estates. This would arrest capital flight occasioned by dividend and support fees remittances from a natural resource-based investment (land). The implications of disposal on the 99-year leases (if any) may need to be considered.”
The farmers said the disposal of the Zimbabwean operations to an investor unfriendly to Zimbabwe not aligned to the national goals and aspirations of the Government could adversely impact the country. They said the sugar industry was strategic both at national and provincial levels. Any likely disruptions will have serious ramification on the local market sugar supply and employment levels.
“The headwinds are strong and the market turbulences impacting THL are unlikely to relent in the foreseeable future,” according to the local farmers.
“With THL unable to generate adequate cashflows to meet its debt obligations from all its operations, this leaves the disposal of all or a significant portion of their investment in Zimbabwe the most feasible option available. With its in-country debt, Mozambique is an unlikely candidate for disposal,” the farmers added.
SA consortium offer
Metis Strategic Advisors, the rescue practitioner said the business rescue plan will be presented at the end of January, when the market will be updated in detail on the business rescue process. The SA consortium, provisionally named NewCo, said on Wednesday agreements would need to be “signed expeditiously” to enable maintenance to be completed in time for the 2023/24 season, News24 reported.
It added that funding arrangements would be concluded after binding letters of intent to finance NewCo were signed, and the financial model fully investigated and approved.
“This will in large part be determined by negotiations with the business rescue practitioners at Tongaat Hulett which have yet to begin,” the spokesperson of the consortium Simon Cleasby said in response to questions from News24. The offer to join the consortium will be extended to the more than 11 000 small-scale growers and 400 commercial and land reform growers that supply the Tongaat Hulett mills, as well as a number of strategic partners, iNews 24 reported.
“How many of these parties choose to participate in the consortium will depend in part on the deal reached with the business rescue practitioners at Tongaat Hulett.” – Business Weekly