Tongaat won’t let starch business go on the cheap, here’s why
Tongaat Hulett’s race to cut its debt by R8.1 billion in 2021 may have hit a stumbling block. The shares of the embattled sugar producer tanked 15 per cent today after it said the R5.3 billion sale of its starch business to Barloworld had reached a stalemate over differences on how Covid19 may impact future profits. The proceeds from the sale of the business were earmarked to lower Tongaat’s debt, which significantly exceeds it market value. Tongaat CEO, Gavin Hudson joins CNBC Africa for more.
Tue, 12 May 2020 15:57:29 GMT
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AI Generated Summary
- Tongaat Hulett faces a hurdle in reducing its debt as the R5.3 billion sale of its starch business to Barloworld encounters challenges related to projected Covid-19 impacts on future profits.
- While Barloworld estimates an 83% decline in the starch business's EBITDA, Tongaat's more optimistic models suggest a milder 17.5% drop, backed by resilient business categories and favorable upcoming maize crop prices.
- The outcome of the dispute will determine the fate of the deal and Tongaat's debt reduction plans, with CEO Gavin Hudson highlighting the company's commitment to employee well-being and willingness to consider reasonable price adjustments if proposed by Barloworld.
Tongaat Hulett, a major sugar producer, faced a setback as its plans to reduce debt by R8.1 billion in 2021 hit a stumbling block. The company's shares plummeted by 15% following a surprising announcement that the R5.3 billion sale of its starch business to Barloworld had reached a stalemate. The dispute arose due to differences in projections on how future profits may be impacted by the Covid-19 pandemic. The sale of the starch business was intended to alleviate Tongaat's overwhelming debt that far exceeds its market value. Tongaat CEO, Gavin Hudson, discussed the situation with CNBC Africa, shedding light on the challenges ahead. Hudson expressed disappointment over Barloworld's belief that there would be a significant decline in Tongaat's EBITDA for the forecast year ending in March 2021. The disagreement stemmed from contradicting outcomes of modeling processes based on assumptions about the pandemic's effects on business. While Barloworld forecasted an 83% plummet in EBITDA for the starch business, Tongaat's models indicated a milder 17.5% decline, painting a more optimistic financial picture. Hudson reassured that despite a difficult April impacted by the lockdown, Tongaat's various business categories showed resilience, with some even outperforming expectations. Moreover, a promising maize crop ahead bodes well for future pricing. Despite the uncertainties, Tongaat remains confident in its modeling's accuracy and downplays the likelihood of hitting the dreaded 'Material Adverse Change' clause. The future of the deal with Barloworld remains uncertain pending an arbitrator's decision, which could potentially lead to the termination of the sale. In the event of deal cancellation, Tongaat plans to revert to alternative strategies to manage its debt and uphold its commitment to employees. Addressing the possibility of renegotiating the sale price, Hudson emphasized that the agreed-upon sum of R5.3 billion was fair, considering the business's value and potential. However, he expressed openness to discussions should Barloworld propose a reasonable adjustment to the price tag. Tongaat's immediate focus remains on finalizing the sale to proceed with debt reduction while safeguarding the interests of its workforce.
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