Starch sale deadlock hits Tongaat shares
In February Tongaat Hulett agreed to sell the starch business to Barloworld’s subsidiary, KLL Group, for R5.35billion in an effort to reduce its huge debt. However, Barloworld said yesterday that the KLL Group had issued a material adverse change (MAC) notice to Tongaat.
“Barloworld is of the view that the Covid-19 global pandemic and the consequences thereof constitute an event that is reasonably likely to cause the earnings before interest, tax, depreciation and amortisation (Ebitda) of the sale business for the financial year to end March 31, 2021, to be 82.5 percent or less of the Ebitda of the sale business for the financial year to end March 31, 2020, and that, therefore, an MAC has occurred,” Barloworld said.
But Tongaat chief executive Gavin Hudson said the group was surprised at the notification by Barloworld that it believed an MAC had occurred. “We believe that Barloworld does not have sufficient information at its disposal to come to such a conclusion, given that we are only one month into our trading year. We do not believe that an MAC has occurred,” Hudson said.
It is anticipated that the matter will be referred to an independent third party for review, whose decision about the MAC event will be binding and final. The starch business is a strong contributor to Tongaat’s earnings and in the six months to end September 2019, it contributed an adjusted Ebitda of R366 million into the group’s overall Ebitda of R1.59bn.
Hudson said Tongaat understood the impact that the Covid-19 pandemic and subsequent lockdown has had on most businesses, notably the combined impact of the alcohol ban and reduced manufacturing demand on the starch business. “However, we have taken this into account in our modelling, we have stress-tested various scenarios and are confident that at this point there is no MAC event. As such, we believe it is premature to make such a call,” he said.
Tongaat’s share closed 12.64percent lower at R7.60, while Barloworld's shares gained 1.55percent to close at R65 on the JSE yesterday.
Hudson said Tongaat remained willing to work with Barloworld in a collaborative way to ensure the company had a better understanding of its starch business.
Meryl Pick, a portfolio manager at Old Mutual Equities, said the announcement indicated that Barloworld might be pushing for a lower price than previously discussed given their view that profits would be lower due to Covid-19.
“If the parties cannot see eye to eye the deal might eventually fall through but that is not a foregone conclusion. We have seen M&A (merger and acquisition) reduction in some instances, like Bidvest walking away from the Eqstra deal and Life Healthcare has chosen not to sell its Polish Scanmed business at this stage,” Pick said.