Abandoning core sugar business killed off Tongaat Hulett

Had Tongaat Hulett kept its focus on its core sugar business, it might not be facing collapse, threatening thousands of jobs.

The fate of the biggest producer in South Africa’s R18-billion sugar industry now lies in the hands of business rescue practitioners after it amassed a crippling R1.5-billion debt which it cannot pay back. 

In a statement last month, the struggling company said its debt levels were well in excess of what could be serviced and delays in its recapitalisation had worsened the situation. 

“While the company has interest from both existing shareholders and potential new equity investors to support the recapitalisation and retain our existing operating footprint, no one has been able to provide the total funds required within the time needed to do so,” it said.

Analysts said Tongaat’s downfall is a consequence of having its fingers in too many pies and straying from its core business, a move that ultimately landed the company in the second-biggest corporate case of fraud and accounting irregularity committed in South Africa. 

Tongaat diversified from sugar to become one of the most prominent property players in KwaZulu-Natal. Since 1990, the company and its partners have facilitated investment of more than R70-billion in the region, from land conversion activities across sectors such as leisure and tourism, as well as residential, retail and commercial property. 

By 2018, property development made up to 34% of the company’s operating profit.

Some of Tongaat’s best-known developments include the Zimbali Resort on the KwaZulu-Natal North Coast, La Lucia Ridge, the Mount Edgecombe Country Club Estate, the Canelands Industrial Park and office parks such as Riverhorse Valley and Millennium Bridge.

According to David Shapiro, chief global equities strategist at Sasfin Securities, the foray into property served Tongaat well when conditions in the global sugar market were unfavourable but “property always comes to an end and it goes in wild cycles”. 

“I think they overextended themselves. And, of course, once you overextend, once your balance sheet starts to stretch, you start to fiddle and that’s when financial engineering comes in,” Shapiro said.

During the sugar downturn, Tongaat’s property business activities protected its income after the company developed about 4 000 hectares of agricultural land that had been used to cultivate sugar cane.

Tongaat remains dominant in the township development sector in the north of Durban, particularly industrial townships, according to property expert Erwin Rode.

“From our statistics we could see that, for the past two to three years, the prices of industrial urban stands have been growing faster in Durban than other areas. 

“[With Tongaat in business rescue] we hope new competitors and new developers can take over, otherwise Durban might experience a shortage of industrial stands,” he said. 

Shapiro said that Tongaat could, in theory, sell some of its property to prop up the business but this would not be easy.

“This is not exactly an expanding economy at the moment. Interest rates are high and that brings down property values,” he told the Mail & Guardian.

“So, while they have got property, it is nothing more than a piece of ground. I don’t know if there are any takers in this economy. Yes, they’ve got the property, it’s an asset in the balance sheet, but at what value and what use?”

According to the South African Sugar Association the country consistently ranks among the top 15 out of the 120 sugar-producing countries worldwide.  

A paper recently published by the United States department of agriculture’s Foreign Agricultural Service forecast that South Africa’s domestic sugar consumption would maintain its strong growth, rising by 2% to 1.75-million metric tonnes in the 2022/23 financial year. 

This is based on growth in population and continued strong demand.

The sugar industry is certainly not struggling and not the source of Tongaat’s woes, said Shapiro.

“Sugar didn’t fail, sugar did what it always does. 

“Like any commodity, it’s volatile because you never know what the sugar price is going to be. If there’s a hurricane in Cuba, the sugar price goes up. 

“It’s always been a difficult, volatile area,” he said.

“The problem with Tongaat is that as the population grew and the popularity grew, they wanted to develop, they didn’t want low-yielding sugar cane in this area, and that’s why they moved their operations away from KwaZulu-Natal but they had this valuable ground. And so they moved to property.”

Stretching across Mpumalanga and KwaZulu-Natal, the sugar industry makes a positive difference to the lives of more than a million people and is a catalyst for economic growth and development. 

“The economic impact of the industry has proven over decades to be so significant that entire towns, for example, Tongaat in KwaZulu-Natal and Malelane in Mpumalanga among many other rural towns and regional centres, have been established based on the business of growing sugar cane and supplying sugar,” the sugar association says on its website. 

In recent years the Tongaat municipality has been rocked by allegations of mismanagement and financial misstatements, leaving it nursing a R6.3-billion debt burden.

After the appointment of current chief executive Gavin Hudson in February 2019, the Tongaat board of directors gave him a mandate to conduct an immediate and comprehensive strategic and financial review with the objective of stabilising the business, addressing the debt levels and setting the company back  on a path to acceptable returns for shareholders. 

PwC was commissioned to conduct an investigation which found certain senior executives had initiated or participated in undesirable accounting practices that resulted, among others things, in revenue being recognised in earlier reporting periods than it should have been and expenses being inappropriately capitalised to assets. 

This led to profits in the respective years being overstated and in the overstatement of certain assets in Tongaat’s financial statements.

The investigation also identified 10 executives, including former chief executive Peter Staude, who were allegedly involved in profit inflation. It also found a culture of deference within Tongaat, which led to employees not questioning accounting practices.

The former executives responsible for the financial irregularities have had criminal charges laid against them.

Staude, former chief financial officer Murray Munro, four other directors, Deloitte auditor Gavin Kruger and several other managers are out on bail over the fraud. They are due to appear in court again in February.

Tongaat Hulett recently went to court to recover R450-million from four former top executives, who resigned in 2019 over balance-sheet fraud of around R11-billion, which crippled the company, as the Mail & Guardian previously reported. 

The implicated executives overstated the company revenue by R2.4-billion, which, once discovered, exposed Tongaat to “negative publicity and it has been brought into disrepute with shareholders, lenders, regulatory authorities and the broader public”, according to Shapiro.

“Whenever you want to get into companies where directors start to expand and they start to get too ambitious and borrow lots of money, things start to go wrong. In order to keep the creditors at bay you start to lift the value of your company.”

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