Hippo Valley Estates

• Late in October, it defaulted on payments to creditors and was placed under business rescue 
• On Friday, the sugar producer held a virtual shareholder meeting, to vote on the remuneration of the company’s (BRPs)
• The rescue practitioner, Metis Strategic Advisors, says the business rescue plan will be unveiled at the end of January

The ramifications of Tongaat Hulett’s balance sheet fraud, allegedly carried out by former chief executive Peter Straude and other managers, have been on full display this year. While the issue has been widely reported with sensationalism, there’s no sugar-coating the consequences of THL, currently under business rescue, collapsing. Late in October, it defaulted on payments to creditors and was placed under business rescue after banking institutions rejected the business recovery plan presented by its new leadership, which took over in 2019.

Tongaat Hulett is a leading agri-business in sugar, ethanol, animal feeds and cattle, with a significant asset base and footprint in Southern Africa.  Last Friday, the besieged sugar producer plans to hold a virtual shareholder meeting, to vote on the remuneration of the company’s business rescue practitioners (BRPs), with its shares remaining suspended on the JSE. A fee agreement can only conclude if the requisite majority support is obtained from the creditors and shareholders of such company.  

Although progress was made by the new board on a variety of fronts, including realising cost savings and improving available funding there was still the debt challenge. Debt, specifically, was reduced by more than R6.6 billion from a high of R11.7 billion, however, there remained a shortfall in the company’s working capital facilities of about R1.5 billion, largely owing to the impact of Covid-19 and the unrest experienced in July 2021, in KwaZulu-Natal. This shortfall is necessary to fund the peak working capital requirements to complete the 2023 financial year.

THL’s South African lender group informed the company that they will not be able to continue supporting the company with additional funding in South Africa. Without this funding, the board concluded that Tongaat is, or would be, facing “financial distress”, as defined by the Companies Act and that the South African operations are no longer financially sustainable without further liquidity.

In this context, the board resolved to enter voluntary business rescue proceedings. The company appointed Peter Van den Steen, Trevor Murgatroyd and Gerhard Albertyn of Metis Strategic Advisors as the BRPs. They are said to be highly experienced and well-qualified, having recently completed various high-profile business rescues in South Africa.

Tongaat has made it abundantly clear that it is not being liquidated, but that the business rescue is rather a means to proactively protect the business, jobs, creditors and other stakeholders. The board sees the rescue as a more formidable approach with better return to creditors than liquidation.

The company has operations in South Africa, Botswana, Mozambique, and Zimbabwe. However, only two South African operations are entering the business rescue. Yet, that doesn’t mean that these markets will not be affected, according to sugarcane farmers in Zimbabwe’s Lowveld region, who have expressed concern over the corporate. THL SA owns 51 percent of Hippo Valley, a sugar estate found near the town of Chiredzi in south-eastern Zimbabwe and 100 percent in Triangle Ltd.

Hippo Valley controls over 53% of the local sugar industry market, operating in a highly complementary environment with the likes of Star Africa, at different levels of production. In its latest financial results for the six months ended 30 September 2022, Hippo Valley’s revenue grew 61%, registering an impressive ZW$63.1 billion up from ZW$39.3 billion in comparative period prior year. The sugar giant recorded a 63% increase in adjusted EBITDA despite recording a 54% loss for the period. 

How the business rescue could affect local operations

A letter written to the Ministry of Industry and Commerce by local farmers in a bid to engage the government shows that the farmers fear that the developments in SA will no doubt impact the Zim operations. The farmers deliver nearly half of cane to Tongaat’s local mills.

The document reveals that 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.

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. The farmers say that 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, Hulett’s 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 elated.

“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 BRPs 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.”

Now, dissecting this document reveals that before the business rescue, THL conflated its operations and management control with those of THL Zimbabwean operations. That is why the local producers are calling for a smooth transition, aligning expectations and redefining reporting lines from the pre-existing management to the BRPs.

The fear is that the disposal of Zimbabwean operations by a distressed parent (THL) will likely result in a distressed sale. “The true value of what the Zimbabwean business is worth is unlikely to be realized. The government should consider a possible buy-out by local players who could the land’s 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 lease (if any) may need to consider.”

Strategically, the disposal of Zimbabwean operations to an investor aligned with the interests of the country and the local producers could prove to be more effective. “The headwinds are strong and the market turbulences impacting THL are unlikely to relent in the foreseeable future,” according to the local farmers.

The rescue practitioner, Metis Strategic Advisors, says the business rescue plan will be unveiled at the end of January when the market will be updated in detail on the business rescue process. Going forward, the stability of THL Zimbabwean operations calls for a review of its alignment with its parent company. This inside look at the local operations undoubtedly calls for a more comprehensive approach by the government, looking into the company’s local operations and finances.

Equity Axis News