Tongaat whistleblower Dave Woollam calls for EGM postponement – must read for all shareholders

Tongaat analyst and whistle-blower Dave Woollam has called for a postponement to tomorrow’s extraordinary general meeting. There are several reasons for this, which Woollam has penned below. Tongaat is looking to raise as much as R4bn to reduce its large debt burden, but the sheer size of the rights issue brings a host of complications, including increasing the shares in issue by 33-fold. This means existing shareholders unable to follow their rights will be diluted by more than 90%, according to Woollam’s research. To add to shareholder woes, Tongaat and Magister entered into an agreement whereby Magister will underwrite R2bn of the proposed rights issue, which Woollam calls a disguised takeover bid from Magister. His research on Magister and its beneficiaries – the Rudland family – leads to more unanswered questions. A must-read for all Tongaat shareholders. – Justin Rowe-Roberts

Why Tongaat should postpone or cancel the EGM planned for 18 Jan 22, and reconsider the capital raise proposals

By Dave Woollam*

Tongaat Hulett (THL) is asking shareholders to pass various resolutions at the proposed EGM on 18th Jan 22. Amongst others, the key resolutions are:

  • Spl Res #2 – increase in authorised ordinary shares from 150m to 5 billion – a 33x increase.
  • Spl res #4 – Board authorised to issue shares ito the Rights Offer and the Magister Underwriting Transaction.  
  • Ord Res #1 – Waiver of Mandatory Offer requirements if Magister acquires more than 35% of the ordinary shares. Please note, the circular sets a maximum holding by Magister 

THL and Magister have entered into an underwriting agreement whereby Magister will underwrite R2bn of the proposed Rights Offer (RO). Post the transaction, Magister (and its affiliates) are restricted to owning no more than 60% of THL, however, this can be waived by THL and Magister. Braemar, a Magister affiliate, already owns 10% of THL.  

So what’s wrong with this transaction and proposed structure?

Reason #1 – The structure of the transaction, presented as a Rights Offer, is a disguised takeover bid by Magister, without the normal protections a takeover bid would require.  

  1. THL has not provided a Rights Offer price, the actual amount of capital to be raised and therefore, the number of shares to be issued. This leaves THL and Magister to decide at what discount the Rights Offer will be pitched and, therefore, the dilution for existing shareholders
  2. Given the enormity of the capital raise, many shareholders will be unable to follow their rights – liquidity constraints, regulatory limits etc, and these shares will be handed to Magister at whatever Rights Offer price is set.  
  3. The normal protections required for an investor to acquire control of the company at a fair and reasonable price and with minority protection rules are being waived.

Clause 3.1 (i) of the circular states, “The Rights Offer will enable Shareholders to participate alongside Magister in the equity capital raise”.  

Maybe this was a slip of the tongue, but I believe it betrays the real intention behind this transaction i.e. a takeover bid by Magister.  

Reason #2 – Shareholders are being asked to increase the authorised number of shares by 33 times from 150 million to 5 billion shares and to place all the unissued shares in the hands of the directors. In theory, this means that if the board were to issue all the unissued shares, the existing shares would be diluted by 97%.

  1. The board states that they intend to raise up to R4bn through the Rights Offer with R2bn underwritten by Magister. The circular states that the RO price will be agreed between THL and Magister with reference to the THL VWAP, but does not give any firm indication of the parameters of the pricing other than an oblique reference to market norms.  
  2. In a worst-case scenario, assuming a R4bn Right Offer is launched, and all the unissued shares are offered, the RIGHTS OFFER price could be lower than R1 per share. This would provide shareholders with an impossible dilemma – either dig into their pockets for money they may not have or can’t invest or have their shares diluted by 97%.
  3. In a more likely scenario, assuming a discount of between 35% and 50% of the prevailing VWAP, the RIGHTS OFFER price could be between R2.50 and R3.50 per share, and this would result in a dilution of existing shares of around 90%.

Shareholders are likely to be massively diluted, and Magister allowed to gain control of the company at a substantial discount. There is no mechanism provided to ensure that Magister acquire their shares at a fair and reasonable price.

Reason #3 – There are material omissions in the circular which, in my opinion, do not allow the shareholders to make an informed and balanced decision on the proposed resolutions.

Claims against Mgt, the previous Board, Deloitte and others

  1. It is common cause that the previous management, under the board’s control, materially falsified the accounting records and financial statements by overstating the profits and assets of the group. The PWC findings and the subsequent accounting restatements set out, in detail, the various aspects of these alleged fraudulent activities.
  2. THL has instituted legal claims against various executives. A media announcement was issued on 11 Jan 22 stating that these claims amount to R450m. This information was not included in the circular, nor was it released on SENS.
  3. Of much greater significance, THL has failed to commence proceedings and quantify a negligence claim against Deloitte, its external auditors. In my opinion, the nature of the accounting fraud (blatant accounting manipulation) and the period over which it was perpetrated (more than 8 years) provides THL with significant prospects of success in terms of a negligence claim against Deloitte. THL has indicated on several occasions that it intends to pursue this claim, but the circular is completely silent.  
  4. If the precedent of the settlement between Deloitte and Steinhoff has any relevance, the potential claim for damages could be very substantial and mitigate a large part of the need for a capital raise.  
  5. If such a damages claim were successful, Magister would likely be the majority beneficiary of such a claim whilst their acquisition price may have been materially discounted.Financial prospects and operating performance

Financial prospects and operating performance

The circular contains details of the interim results, which were by all accounts poor and contributed to the nearly 50% fall in the share price over the last few months. The company has disclosed details of the restructured debt and has stated that the majority of the proceeds of the capital raise will be used to settle the PIK loans.  

However, the circular is very thin on any details regarding the prospects of the company, especially with regards to its annual results to March 22, and what its funding and cashflow requirements will be over the next 12 to 24 months.  

The bankers and funders are demanding that the group reduce the debt to acceptable levels, but this is no guarantee that the company will have the financial resources to undertake the operational improvements required to produce a profit.  

In my opinion, fixing these remaining businesses is going to require both human and financial capital, and it is unclear to me how the group is going to fund these critical operational improvements.

How can shareholders make an informed decision on this massively dilutive transaction without knowing whether the group has the financial resources to not only continue as a going concern but, more importantly, to return to profitability.

Reason #4 – Shareholders don’t have sufficient knowledge about Magister and the Rudland family to understand what value they bring to the group. There remain unanswered questions about their previous business activities.

  1. The circular describes Magister as a private company registered in Mauritius and owned by the Casa Trust, of which Hamish Rudland and his family are the beneficiaries. The circular describes Magister as having significant investments in agriculture, agro-processing, distribution, property etc., via various listed and unlisted companies. THL has referred to the following companies as being invested in by Magister – Agriterra, CFI Holdings, TSL Ltd, Unifreight, ZimRe Holdings and Tefco Finance.
  2. I have scoured the internet, company websites, companies registration sites etc, and the only company in the above list which I can confirm has Magister as a shareholder is Agriterra – a small Company listed on AIM in which Magister acquired 50% of the shares for approx $4m.
  3. I have reviewed the latest annual reports of all of the other companies mentioned above and cannot find any reference to Magister being directly or indirectly a shareholder and any of those companies.
  4. The Rudland family certainly owns (and in most cases controls) these companies, but what is not clear is whether Magister is a shareholder in these companies, as stated in the circular. This issue requires clarification and further explanation.  
  5. Some significant claims have been made about the Rudland family and their source of income and business practices in Zimbabwe and South Africa. I emphasise that these claims may or may not be factual or substantive; however, I believe shareholders deserve greater transparency and clearer information about this investor who will in all likelihood gain control of the Tongaat Hulett Group. Furthermore, given South Africa’s recent past in connection with State Capture and rampant corruption, has THL done enough to ensure that reputational risk spillover is adequately mitigated.
  6. It was only recently disclosed that Braemar, the owner of 10% of THL shares, is controlled by Rudland family members. Furthermore, a review of the most recent shareholder register reveals that business associates of Simon Rudland have accumulated approx 4% of the group’s shares in recent weeks. Whilst not illegal, this subterfuge and stealth are not a good start in terms of good governance and transparency by the acquirers.

For the reasons set out above, I believe that shareholders cannot make an informed decision regarding the resolutions put before them. Accordingly, the Board should postpone the meeting, pending greater clarity on these critical issues, or shareholders should vote against the resolutions presented to them.

A footnote: 

Whilst not directly the purview of this opinion, a matter that should never be forgotten in South Africa is the impact that this transaction will have on transformation and BBBEE.  Tongaat recently reported that it had attained level 2 BBBEE status, largely due to its 80% voting rights of black people and 72% economic interest of black people.  I cannot verify the accuracy of these numbers, but it is clear that this transaction is likely to decimate these numbers.

Furthermore, Tongaat has played an enormously important role in the development of thousands of independent black farmers up the KZN North Coast and in supporting the lives of hundreds of thousands of people who live in the region. This is of socio-economic importance to South Africa, and I believe it is a problem that should matter to South Africans and a South African solution found to it.

I urge shareholders to attend the General Meeting tomorrow, participate in the discussion, and vote your shares.  To join the meeting, you will need to register on the Computershare Summitt platform using the following link
https://apps.computershare.com/MeetingsShareholderWeb/Home?Code=MAM6CRX&Locale=en

You will need to upload a copy of your ID and a Letter of Rep from your broker

Disclosure: The writer owns shares in THL and will be attending the meeting on Tues 18 Jan 2022.

  • Dave Woollam, independent analyst

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