🔒 Tongaat Hulett: tale and timeline of SA titan’s downfall. MUST READ!

By Nadya Swart

Still reeling and bruised from the Steinhoff debacle, South Africa has also been grappling with another corporate scandal: Tongaat Hulett appears to have pulled a Steinhoff on its shareholders. When the scandal broke in mid 2019, the business’s share price plunged to a level where the market cap was suddenly worth a tenth of the R25bn pre-scandal value.

Over the years prior to the scandal, Tongaat had been capitalising more and thus inflating the balance sheet – that created a cycle which got out of control through numbers that were a little over-optimistic each year. This misrepresentation occurred under the leadership of former CEO, Peter Staude, who – because of his charisma and appearance of being a really solid, stand-up guy – no one questioned.
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Sugar producer Tongaat Hulett has been fined twice this year following reports of the company’s R11bn scandal. Interestingly, due in part to South African’s severely suffering economy, both penalties were reduced significantly. The FSCA fine was slashed by R100m this week.  

This 180-degree turnaround for the once-revered South African company is a stain on an industry heavyweight, particularly in the province of KwaZulu-Natal. One cannot help but ask: how did this happen? Was it a perfect storm or was it malfeasance that brought this company to its knees? Experts suggest it was a combination. 

Tongaat Hulett, the JSE listed sugar producing and property development giant, was formed in 1962 through the merger of two sugar companies – Tongaat Sugar Company and Hulett Sugar – that are each almost 130 years old. The company’s longevity in itself makes it a landmark titan of industry in South Africa. 

The beginning of Tongaat Hulett’s decline

In March 2019, the Tongaat Hulett share price fell to the lowest point since January 1994 after the company warned shareholders that “certain practices” had been discovered that may lead to a restatement of earlier financial information. This sparked the beginning of a corporate scandal that had the whiff of deep-seated deceit, with onlookers cautioning that Tongaat Hulett is looking like another Steinhoff.

Gavin Hudson, who took over as CEO from Peter Staude in February 2019, was given the 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 path towards acceptable returns for shareholders. A forensic investigation into the group’s financials and corporate governance failures was launched by PricewaterhouseCoopers Advisory Services Proprietary Limited (PwC) the following month. 

By June 2019, the disgraced sugar producer’s share price had dropped by 95% as a result of the scandal and to date, the total number of job losses across the group is in excess of 10 000. In almost all cases of financial collapse, these meltdowns are the result of mismanagement by company executives – sometimes with the use of deceptive accounting practices. 

Corporate corruption stain

South Africa is not short on corporate corruption; sometimes painted as creative accounting. Former Tongaat CEO Peter Staude presided over the company from 2002.

It was under Staude’s governance that the accounting irregularities took place and the company turned in miserable figures for a decade. In June 2018, Investec’s consumer staples sector analyst Anthony Geard, a chartered accountant who is also a qualified CFA, very publicly called for Staude’s head. Another key figure who had warned the Tongaat board of directors about their looming crisis was former banker turned shareholder activist Dave Woollam. Both Woollam and Geard were ignored.

In November 2019, PwC released the key findings of their investigation which ripped open the Tongaat scandal as it revealed a lot of revenue overstatements and expenses understated. The investigation found that the following 10 executives inflated profits to boost their own financial incentives:

• Mr John Chibwe (Hippo Valley Estates Finance Director) 
• Mr Michael Deighton (former managing director of THD) 
• Mr Steve Frampton (former Zimbabwe Sugar Sales General Manager) 
• Mr Shelton Nhari (Triangle Finance Director) 
• Mr Sydney Mtsambiwa (former managing director of THL’s Zimbabwean operations) 
• Mr Les Munro (former Finance Executive of Tongaat Hulett SA Sugar) 
• Mr Murray Munro (former Chief Financial Officer of THL) 
• Mr Raphael Pfunye (Zimbabwe Sugar Sales Finance Executive) 
• Mr Sean Slabbert (former Finance Executive of THL) 
• Mr Peter Staude (former Chief Executive Officer of THL).

The PwC report further notes that: “From a criminal law perspective, the Board is engaging with the South African Police Services (SAPS) and the National Prosecuting Authority of South Africa (NPA).”

In December 2019, Tongaat Hulett published its financial results which were far worse than the company itself had projected when the bombshell hit in March 2019. The asset write-off was more than double the R4.5bn maximum that was anticipated and the financials released show a business that is hopelessly insolvent with R3bn in negative equity and over R11bn in debt. 

Revelations of deceit

After the sugar producing giant restated its 2017 and 2018 results, South Africa’s financial accountability watchdog – the Financial Sector Conduct Authority (FSCA) – found that the company had breached the Financial Markets Act by misrepresenting its financial performance in prior years.

The FSCA initially imposed a proposed administrative penalty of R118.34-million, but Tongaat applied for the remission of the penalty. After considering the application for remission, the FSCA agreed to reduce a portion of the penalty, ordering the sugar producer to pay R20-million and a Court Order to that effect was executed on 24 August 2020.

Mercy for Tongaat’s financial jiggery-pokery

The reduction of this penalty by a staggering R100m is hard to digest. The FSCA, however, has explained their agreement to this reduction based on consideration of the troubled sugar maker’s current management providing full cooperation during the investigation and enforcement process and in the interests of avoiding further penalisation of innocent shareholders. The FSCA’s agreement to the reduction of the penalty was also contingent upon Tongaat Hulett undertaking to continue cooperating with the FSCA to ensure that those responsible for contravening the FMA are brought to book.

The pursuance of criminal and civil actions against the named ex-senior executives involved in the accounting fraud are now being driven by the NPA. Staude and the affected former executives have kept a low profile since the accounting scandal broke last year. 

Tongaat Hulett: timeline of the sugar producer’s scandal

• 14 January 2019: Tongaat releases a media statement announcing the appointment of John Gavin Hudson as the CEO and an Executive Director of Tongaat Hulett with effect from 1 February 2019.
• 22 February 2019: Tongaat shares plummeted 20% after the company warned that it would post a full-year loss and planned to hold discussions with lenders.
• 13 March 2019: Bowman Gilfillan Inc., at the instance of the Tongaat Hulett Board, appointed PricewaterhouseCoopers Advisory Services Proprietary Limited to assist with a legally privileged investigation into alleged irregularities.
• 31 May 2019: Tongaat made an announcement advising shareholders that the Board had concluded that the Company’s audited consolidated financial statements for the year ended 31 March 2018 (“March 2018 Financial Statements”) will need to be restated, and that the financial information therein should not be relied upon.
• June 2019: Tongaat requests the suspension of the listing of Tongaat Hulett shares on the Johannesburg Stock Exchange. The request was voluntary, and followed the delay in publishing Tongaat’s financial statements and the ongoing review into past financial practices.
• November 2019: PwC released the key findings of their investigation, which identified major historical shortfalls in a number of important areas, including: governance practices, delegation of authority, decision-making, oversight, financial discipline, record keeping, systems usage and financial reporting. 
• December 2019: Tongaat Hulett published its financial results
• July 2020: JSE fined Tongaat R7.5m, with R2.5m suspended for five years, for breaching listing requirements by publishing incorrect, false and misleading financial information to the detriment of investors.
• 24 August 2020: Court Order imposing an administrative penalty of R20m on Tongaat is executed