The South African investment community is on the horns of a dilemma regarding the underwritten rights offer for Tongaat Hulett – either do a deal with one of Zimbabwe’s most notorious families or face the break- up of southern Africa’s leading sugar producer. Tongaat Hulett has been through the wringer over the past few years following the discovery of accounting irregularities in 2019, which resulted in the company having to restate its results and being fined by the JSE.

The result was an implosion in the company’s share price which, in 2018, was trading at around R130 to the roughly R6 at which it is trading today. Despite a clean-up campaign, an extensive investigation by PwC and a new management sweep, the company is still struggling. The share price implosion has had the effect of rendering the company’s balance sheet on the verge of being unsustainable, and its huge debt load of roughly R6.6-billion is now at risk, causing a minor panic among its bankers.

Into this morass has jumped a Mauritius-registered company, Magister, which is owned and controlled by members of Zimbabwe’s Rudland family, who have reportedly been consistent supporters of Zanu-PF and its leadership. The family also owns the Gold Leaf Tobacco company, which, by some estimates, is the largest cigarette company in South Africa measured by the number of cigarettes sold. The company burst into the public spotlight when co-owner Simon Rudland survived a gangland-style assassination attempt in August 2019.

There is no direct link between Magister and Gold Leaf, which is represented by Simon Rudland’s brother, Hamish, whose main business is in the transport industry. However, several reports have warned about Zimbabwe’s recent descent into “a Russian-style oligarchical system”. “It’s becoming a regional hub for laundering illicit wealth that is fuelling violent conflict,” one report concludes. It also included a detailed breakdown of the alleged activities of the Rudland family, including gold smuggling, money laundering and mining in conservation areas.

Magister announced on 17 November 2021 that it would underwrite the first R2-billion of a R4-billion rights offer. If successful, the rights offer will go a long way towards solving Tongaat’s debt problem and will probably maintain the integrity of the company. The drama of the rights offer is illustrated by the fact that Tongaat currently has an equity value of R770-million. The rights offer therefore has the likely outcome that it will completely transform the ownership structure of the company. In terms of the deal, Magister’s shareholding is capped at a maximum of 60% of the enlarged shareholding. Magister will receive a board seat for every 20% of the company that it owns, post the rights issue. It will also receive a fixed underwriting fee of 1.5%, or R30-million.

Tongaat itself has few other options outside selling its assets piecemeal, a process which it had already begun, principally by selling its very profitable starch operations and a number of smaller businesses

including the Namibian trading and marketing business and operations in Swaziland. At an operating level, the company is still struggling. In a trading statement in September, it announced that headline earnings for the six months to 20 September would be sharply down. And so it turned out when the company announced its interim results on 9 December, with operating profit down from R1.67-billion to R1.2-billion. Profit after tax fell to R23-million from R385-million.

For SA investors, the proposal is a double-edged sword; do a deal with a “notorious” family or face the break-up of the company, putting at risk the future of the 29,000 employees at peak harvest season in operations across South Africa, Zimbabwe, Mozambique and Botswana. For its part, Tongaat has thrown in its lot with the former option. Asked in the context of the Zondo Commission report, which slated SA business for turning a blind eye to corruption, whether a deal with Magister is advisable, the company said it considers that Magister “would be a suitable investor”.

Head of communications for Tongaat Virginia Horsley said as part of the company’s assessment of Magister, PwC, at Tongaat’s request, conducted an independent compliance due diligence exercise which included gaining an understanding of Magister, its assets and investments and its associates, as well as a review of a combination of publicly available information, selected private corporate information, references and responses from Magister to specific questions. “Magister is invested in several reputable and substantial businesses, and Tongaat believes that it would be a suitable investor. “Magister has provided Tongaat with a South African bank guarantee to support its underwriting commitments. As part of this process, Standard Bank undertook Anti-Money Laundering and Know Your Customer checks, which Tongaat has taken comfort from. “We believe that through a rights offer of up to R4-billion, Tongaat will unlock long-term growth, protect intrinsic shareholder value and create a legacy for the many people dependent on the Tongaat business across the SADC.” For their part, the Rudland family is adamant that the “notorious” tag is inappropriate. In reply to questions from Business Maverick, the company said “Rudland family members have many business interests in reputable and substantial businesses, including listed companies”. “There is no basis to suggest that they are unsuitable to invest in Tongaat. The family has high regard for good corporate governance practices. Magister has confidence in the management of Tongaat and has no intention of being involved in the day-to-day operations of Tongaat.”

Family members already own 9.98% of Tongaat through a United Arab Emirates-registered company, Braemar. But neither Braemar nor Magister will be voting on the resolutions for corporate governance reasons even though they are not technically “related parties” as defined by the Companies Act or JSE rules.

Other investors are not so sure: they range from reluctantly supportive to outright astounded that Magister could conceivably pass any reputable Know Your Customer check. Representatives of the major cigarette producers affiliated with the Tobacco Institute of South Africa claim that the newcomers, affiliated with the Fair Trade Independent Tobacco Association (Fita), have been selling enormous quantities of cigarettes

very cheaply by the simple mechanism of not paying SA’s huge cigarette excise tax. Fita members deny the claim. The pandemic, particularly the banning of tobacco sales for a period in 2020, was a huge boon to Fita members who had been operating mostly under the radar anyway, often selling “cheapie” cigarettes individually rather than by the packet. Magister says Gold Leaf has not financed Magister and is not financing the underwrite or any part of it.

The two biggest shareholders in Tongaat are the Public Investment Corporation (PIC), which did not respond to media enquiries, and financial group PSG, which own 14% and 15% of the company, respectively. Both PSG and the PIC have supported the process of putting the notion of the rights offer to shareholders but have not yet agreed to support the bid, which will depend on the pricing of the offer. Chief Executive of PSG Asset Management, Anet Ahern, said “juggling all the stakeholders’ interests is exceptionally tricky in this case, as Tongaat also has a big impact on the society in which it operates. Tough choices need to be made, and these will always be controversial.”

In effect, the bankers of the deal, Standard Bank, have sought to place the responsibility for the decision to proceed with the board and shareholders of Tongaat. “Standard Bank complies with local and international anti-money laundering legislation and takes this responsibility seriously. Standard Bank follows its internal client risk assessment processes diligently and consistently, and will not put its reputation at risk by doing business in an unethical, illegal or unprofessional manner. “Any decision to proceed with the rights offer and any related transactions will be the sole and independent responsibility of the Tongaat Hulett board and its shareholders,” it said. BM/DM

Question 1 

Identify the dilemma regarding the underwriting rights offer for Tongaat Hullett in the case study and examine the ethical implications in the case study.