Tongaat won’t let starch business go on the cheap, here’s why

Tongaat Hulett, a major sugar producer, faced a setback as its plans to reduce debt by R8.1 billion in 2021 hit a stumbling block. The company's shares plummeted by 15% following a surprising announcement that the R5.3 billion sale of its starch business to Barloworld had reached a stalemate. The dispute arose due to differences in projections on how future profits may be impacted by the Covid-19 pandemic. The sale of the starch business was intended to alleviate Tongaat's overwhelming debt that far exceeds its market value. Tongaat CEO, Gavin Hudson, discussed the situation with CNBC Africa, shedding light on the challenges ahead. Hudson expressed disappointment over Barloworld's belief that there would be a significant decline in Tongaat's EBITDA for the forecast year ending in March 2021. The disagreement stemmed from contradicting outcomes of modeling processes based on assumptions about the pandemic's effects on business. While Barloworld forecasted an 83% plummet in EBITDA for the starch business, Tongaat's models indicated a milder 17.5% decline, painting a more optimistic financial picture. Hudson reassured that despite a difficult April impacted by the lockdown, Tongaat's various business categories showed resilience, with some even outperforming expectations. Moreover, a promising maize crop ahead bodes well for future pricing. Despite the uncertainties, Tongaat remains confident in its modeling's accuracy and downplays the likelihood of hitting the dreaded 'Material Adverse Change' clause. The future of the deal with Barloworld remains uncertain pending an arbitrator's decision, which could potentially lead to the termination of the sale. In the event of deal cancellation, Tongaat plans to revert to alternative strategies to manage its debt and uphold its commitment to employees. Addressing the possibility of renegotiating the sale price, Hudson emphasized that the agreed-upon sum of R5.3 billion was fair, considering the business's value and potential. However, he expressed openness to discussions should Barloworld propose a reasonable adjustment to the price tag. Tongaat's immediate focus remains on finalizing the sale to proceed with debt reduction while safeguarding the interests of its workforce.