Gavin Hudson, the Chief Executive of Tongaat Hulett, discusses the recent ‘standstill’ of the transaction between Tongaat Hulett and Barloworld due to the latter’s call of a material adverse change (MAC) event for the full year due to Covid-19. Hudson expresses his disbelief that such a MAC event is present while remaining positive that, whichever way the deal goes, Tongaat Hulett will continue. – Nadya Swart
Gavin Hudson is the Chief Executive of Tongaat Hulett and a man who’s had his hands full over the past few months since he took over there. But even fuller today, Gavin, with the announcement that you put out to say that the life-saving (perhaps) transaction that you’ve done with Barloworld (which was announced on the 28 February) for the sale of the starch business for R5.35bn now might be in jeopardy, because of Covid-19. Just take us through that, because from reading the SENS reports – there was an auction process, Barloworld won the auction process, this goes back quite a few months. Are they now wanting to renege on the deal?
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Hi Alec, and thanks for having me on the show and the opportunity to chat – I’ve certainly looked forward to the time. It’s been an interesting year on many fronts. We’ve worked hard on this specific deal with Barloworld. Our ambition has never been to break up Tongaat Hulett. We’ve always looked at an opportunity to reduce our debt – as you know, we have significant debt in the business – and our survival as a company is really to deleverage as best we can. We shook hands, we signed the SPA and for all intents and purposes – the deal is done – outside of the Competition Commission’s approval, which we’ve been working on aggressively to conclude the deal and our ambition was to have the deal finalised in August.
To be honest, I think these are unprecedented times. All of us are seeing the impact of Covid-19 and the subsequent lockdown in South Africa. My personal view is that Barloworld is exercising their right. We disagree in terms of the fact that they have called a material adverse change for the full year. We believe it’s a little bit premature, considering it’s only one month into the new financial year, which makes it interesting. We also believe that we have all the information available to ourselves, which we have modelled in a hell of a lot of detail, to be frank. And we’ve reached out to them and suggested that we work with Barlow to support or augment their modelling processes, and to provide more accurate and updated information to assist and to ensure that they also see that we don’t believe that there is a MAC event.
This is really strange though, because as far as shareholders and outside parties are concerned and (presumably) the people who actually work in the starch division (of which there are many thousands) – the deal was done on the 28th of February. As you say you shook hands, it was announced in the media. If this deal can be reversed, it would suggest that any other transactions that were done at that stage can also be reversed? These are confusing times, I know. But surely, there’s certain things that you’ve got to stick with.
Obviously, this MAC process was included in the share purchase agreement at the time of signing, and I think with larger transactions that take a long time to complete (it could be anything between four and six or eight months, depending on Competition Commission approval) – it’s to protect the purchaser that there isn’t a material adverse change in the organisation that’ll impact what they were initially buying, I suppose, and Barlow are exercising their right in terms of this. The point is, it seems very premature and for somebody that was really committed to purchasing a fantastic business (by the way) – it does feel that the messaging just seems a bit odd at the moment.
It is a business that delivers R4bn in revenues, nearly R800m in EBITDA, after tax – R460m. If, however, the transaction does not go through – would this have an impact on the sustainability of Tongaat, given that R5bn was going to be used to repay debt?Â
It certainly puts us on another trajectory completely. We need to consider Plan B and Plan C in terms of how we keep Tongaat. I’m very optimistic. First of all, I’m optimistic that the deal will go ahead. I believe our modelling is sound and I believe that we don’t have a MAC event at the moment, but if we have to keep the starch business – then we will make sure that this business continues. But we will need to go back to our lenders, our borrowers, we potentially would have to renegotiate some of the terms in terms of our debt, and at the same time – we continue streamlining our business.
We have improved our cash flow this year by over a billion rand in less than nine months and our commitment is to improve our cash flow by R3bn by the end of this financial year that we’re in at the moment. So, we’ve made significant progress in terms of streamlining this business and making it a far more efficient business. We seem to have a good crop in our sugar business. We continue focusing on our property portfolio – we have a really great portfolio of premium property on the KZN North Coast.
So, there are many moving parts in terms of how we are viewing the business. We’re not going to roll over, certainly I’m not going to roll over my management team should we have to keep the starch business. I think we just need to knuckle down and make the business work, either way. Though, I remain optimistic.Â
What is this material adverse change or MAC that you’ve referred to? We’ve heard of force majeure – is it something similar?
What it suggests in the way I understand it (I’m not an expert – I’ve actually got my legal counsel tonight for a full session), but I think the way generally it works is: if you have a business that has multiple customers and you sell one business to the purchaser – they buy the business as a going concern. And if something changes within that business from the time you signed the deal until transfer essentially takes place (until you’ve cleared all the hurdles). If, for example, a massive customer decided to leave or there was a change in supply or people started importing product versus buying from yourself directly – one would call that a material adverse change in the organisation.
Now, obviously with Covid-19 coming along, it has impacted many businesses – now ours is just one of them. I suppose Barloworld are looking at this and saying there is going to be a material change in terms of the EBITDA that your business will generate. In terms of ours, it’s a reduction of 17.5% on EBITDA, bearing in mind – it’s a forward looking calculation. So, by full year 2021 – we need to be 17.5% down on EBITDA vs. our financial year 20. So, it becomes quite complex when you’re calculating it and how you view all the various working parts getting to whether it is a material change or not. This is the crux of the discussion we’re going to have.
Gavin, we’re seeing wider implications of this, though. Many companies are now trying to get out of their leases, because they’ve realised you don’t need a big office anymore, you can send people to work from home and thus cut back on the office accommodations. There would be others who were purchasing companies or like Barloworld, who are now seeing that the economy is in a different place – so maybe they can get a discount. Is this a discussion to renegotiate the price or is it an outright cancellation of the deal?
There’s actually been no discussion, Alec. To date, I have had no indication as to what the preferred outcome of this process would be. I assume in the days to come, we will start getting engaged, but to be fair to the CEO of Barloworld – on each engagement I’ve had with him, he has been committed to the deal and his board, via himself, has been committed to the deal. So, I’ve got no reason to believe that they’re not committed to the deal. The reason for calling the MAC so early is still a bit of a mystery to me.
