SA’s IDC embroiled in Tongaat acquisition row

In South Africa, questions have been raised over the IDC’s role in the business rescue scheme of Tongaat Hulett. Photo: supplied

In South Africa, questions have been raised over the IDC’s role in the business rescue scheme of Tongaat Hulett. Photo: supplied

Published Aug 28, 2023


Japhet Mathanda Ncube and Tawanda Karombo

The South African Industrial Development Corporation (IDC) is embroiled in a row in which it allegedly irregularly got into bed with an unknown Tanzanian company picked up to buy the assets of ailing sugar giant Tongaat Hulett, currently under business rescue since October last year.

With agro-processing operations in South Africa, Mozambique and Zimbabwe, Tongaat Hulett – roiled by accounting scandals and embroiled in choking debts – has courted controversy in the past two years. A bid to rescue it and put it on a path to recovery has seen Kagera, a little known Tanzanian company being picked to acquire the assets of the ailing South African sugar producer.

“This deal has all the hallmarks of irregularity and underhand dealings to railroad Kagera as the winning bidder. The deal is being resisted in two of the jurisdictions that Tongaat operates – Zimbabwe and South Africa – because losing bidders there feel unfairly treated,” a South African legal source told Business Report last week.

In South Africa, questions have been raised over the IDC’s role in the business rescue scheme. IDC advanced financing to Tongaat Hulett under the business rescue scheme to sustain operations.

Now, it is emerging that the IDC went into bed with Tongaat to prop up Kagera as the preferred bidder for assets under the sugar producer. The picking of Kagera came ahead of a consortium of South African bidders headed by Mpumalanga businessman, Robert Gumede as well as a Zimbabwean bidder.

“We pushed hard for a Zimbabwean bid to acquire the assets but we were essentially sidelined and to our surprise, a Tanzanian company whose structure and ownership is murky was chosen as the winning bidder. We are raising our objections,” said a Zimbabwean government official, declining to be named.

In a letter dated July 27, 2023 and addressed to the Tongaat Hulett Business Rescue Practitioners (BRP), Zimbabwean secretary for Treasury, George Guvamatanga, complained that the Zimbabwean Sovereign Wealth Fund “was not allowed to participate as a part of a consortium” to bid for the assets of Tongaat Hulett.

Guvamatanga was not immediately reachable for comment.

However, in the letter to Tongaat’s BRP, he raised concerns over issues to do with “transparency into the process by which BRP selected Kagera” as the eventual winner.

The Zimbabwe wealth fund had made a fair offer for Tongaat’s Zimbabwean units – which include controlling stakes in listed Hippo Valley and non-listed Triangle Sugar Corporation – and had also met all deadlines, in addition to guaranteeing proof of funds for the purchase, explained Guvamatanga in the letter.

“It is concerning that BRP has selected an SEP that does not appear to have operations in any of the countries where Tongaat has assets. It appears that there is no closing date set for the transaction and that many details are missing… the fund requests a meeting with the BRP to discuss whether there is any room for the fund’s participation in a consortium of the purchase of the Zimbabwe, Botswana or Mozambique assets,” wrote Guvamatanga.

The South African consortium fronted by Gumede and known as Terris Sugar, is one of at least eight bidders who lost to Kagera. It has asked the IDC and the Business Rescue Practitioners to explain how they chose Kagera, which it argues has no local BEE partner and has no experience running a sugar operation in the region.

Others sources said the business rescue practitioners for Tongaat “jumped the gun” as the voting for the deal by shareholders is on 30 September. Moreover, sources said, Kagera appears not to have the money and could be banking on funds from the IDC.

In a letter to the IDC dated August 9, 2023, Terris complained that while they had received communication from advisers of the Tongaat business rescue practitioners that any IDC funding support for a bid for the company was precluded, they had been shocked to learn that as much as 80% of the funding for Kagera had been secured from the IDC.

“We received an email from the BRP’s advisors, where we were made to understand that participants will not request the IDC to fund any portion of its purchase price and the Terris Sugar consortium had to provide proof of funds which we did. Surprisingly and incredulously, it has come to our notice that Kagera’s successful bid is predicated on 80% of its funding being raised from the IDC and/ or with the IDC’s assistance to raise such funding from the likes of the Public Investment Corporation (PIC),” reads a part of the letter signed off by Gumede and other principals of the consortium.

Subsequent to this, it is the consortium’s view that the due diligence on Kagera “was very limited and therefore its knowledge of THL’s existing operations, problems and challenges is scant at best” and cannot have formulated a proper basis for a well-informed determination.

The IDC has responded to the Terris’ letter of complaint on August 10, firstly acknowledging receipt of the letter and highlighting that its chairperson had requested a “comprehensive brief” on the issues from management.

”The IDC, either through the Chairperson or Management, will revert after the requisite consultations have been concluded,” wrote the IDC’s group company secretary in response.

It appears though, from sources that an official from the IDC, only identified as Fazel, committed IDC to funding Kagera without board or executive approval. It is understood that questions are now being raised over the manner in which the business rescue practitioners for Tongaat rushed announcement of Kagera as the winning bidder for its assets.

Briefings show that the rescue practitioners for Tongaat approached Terris in July to up the price but didn't tell them by how much and why, setting July 14 July as the deadline for a new increased bidding price as well as supplementary information.

It has also emerged that the BRP underscored the risks of breaking up assets into clusters - Mozambique, South Africa Zimbabwe and Botswana although some, including financiers, wanted this approach.

The BRP said it had obtained good bids for the entire company, hence “everything must go at once” to attain a higher value.

Tongaat has a long-term debt of R7 billion against working capital requirements of R1 billion to R1.5bn. The long-term debt is assured by Tongaat assets while working capital through inventory.

Although banks pulled out of deals involving Tongaat, the IDC came in, paid the banks and availed a working capital facility which means that current operations of the sugar processor are funded by the IDC, which according to legal, financial and other advisory sources I supposed to be neutral in the process.

According to a news report by IOL on Thursday, IDC spokesperson Tshepo Ramodibe disputed that its board had met over the weekend to discuss the Tongaat Hulett matter.

“The corporation has, as an interested party, been supportive of the business rescue proceedings. The Business Rescue Practitioner conducted a selection process and selected the strategic equity partner for THL,” said Ramodibe.

The IDC had also not provided any funding to Kagera yet, added Ramodibe, despite confirming that the South African financier was in the process of evaluating a request for funding from the company.

Attempts to obtain comment from the BRP did not succeed, but they said at the weekend that Kagera had been deemed the appropriate choice after a process that took several months “and involved a comprehensive vetting and scoring process”.