Tongaat shares slump 20% after news of rights offer, aimed at cutting crippling debt

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Tongaat has proposed a rights issue to deal with its debt
Tongaat has proposed a rights issue to deal with its debt
  • Sugar producer Tongaat has proposed a rights issue of up to R4 billion, as it seeks to cut its R6.5 billion debt burden.
  • As part of the proposed transaction, Mauritius-based Magister Investments could hike its holding in the group to a maximum of 60%.
  • CEO Gavin Hudson said that if the rights issue was not successful, it will sell some of its larger sugar assets.

Sugar producer Tongaat has proposed a rights issue of up to R4 billion, as it aims to reduce its R6.5 billion debt pile.

The embattled group announced the proposal on Wednesday, saying that the Mauritius-based Magister Investments will partially underwrite R2 billion of the transaction.

Its share price was last down 20% in late morning trading. After plummeting to 556c in the wake of the announcement, from an opening level of 970c, it was last trading at 780c.

Explaining the rationale for the R4 billion rights offer, Tongaat’s CFO Rob Aitken said the group has excess debt of R3.7 billion that can’t be repaid through operational cashflows, resulting in the proposed offer.

Through the rights offer, Magister may increase its 0.15% stake in Tongaat to a maximum of 60%, as per the underwriting agreement.

For the past two years, Tongaat has been working to regain its footing after the revelation that the company inflated its financials by almost R12 billion over a period of seven years.

Since then the company has since embarked on a turnaround strategy, disposing of non-core assets to cut down on the debt and tightening corporate governance.

On Wednesday, CEO Gavin Hudson, who was appointed in 2019, explained that as part of its refinancing package negotiation with lenders, the company agreed that if the equity raise is not successful, then it will sell some of its larger sugar assets. But this is something the group will do its best to avoid.

"The intention is to try and keep the group together as a whole, so the fact that we have Magister as an underwriter for R2 billion certainly is a very big plus and it supports the proposed rights issue," said Hudson.

He added that the group was fortunate that it didn’t have to rely on shareholders only to raise the money.

Magister will get a board seat for every 20% that it owns in Tongaat.

"I think this marks (…) a very important milestone for us. We have really been struggling under a huge amount of debt (...) for the last many years. We’ve been trying to change the culture of the organisation and to undo some past practices that weren’t necessarily aligned to the way we would see a good business operating," Hudson said.

Tongaat is pursuing criminal and civil action against the directors involved in the irregularities, including former CEO Peter Staude.

Hudson said cases are ongoing and the National Prosecuting Authority has been involved in the criminal aspect of the case, while the civil matter is likely to go before the court in 2022.

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