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REPORTS that creditors of South African-based and technically-insolvent Tongaat Hulett sugar and property company may be willing to split the empire now spread across South Africa, Mozambique, Zimbabwe and Botswana should initiate a serious effort to acquire the Zimbabwean assets by a local concern.
Tongaat Hulett owns the Triangle Sugar Mill and associated works in Chiredzi, and is in an almost 50-50 partnership with quoted Zimbabwean company Hippo Valley for the other mill. There are leases and partnerships involving outgrower farmers. There might be some residual in the way of value for improvements made before land reform, although there have been new land deals and investments involving the outgrowers since then that might have extinguished any compensation claim.
In Zimbabwean operations, the value was in the mills, with every other investment simply to ensure that the farmers can grow and deliver the cane.
Zimbabwean sugar cane is grown by outgrower farmers rather than by sugar companies on their own estates and in Zimbabwe Tongaat Hulett is a refining and packing company although with very close relations with its outgrowers.
The Zimbabwe operations are strongly dependent on irrigation water supplied by a range of dams, old and new, but all built by the Government in the Lowveld and Tongaat Hulett and their farmers have accumulated a raft of water rights so they are allowed to buy the water they need from Zinwa.
There is no property business in Zimbabwe that can raise complications.
Once the financial morass enveloping the company emerged in South Africa, there was major pressure, and to a degree acceptance by creditors, of selling off the whole of Tongaat Hulett to a single buyer with a major Tanzanian sugar producer selected as the preferred buyer a few months ago.
At this stage the possibility of splitting the company into its four national components, and even splitting the South African sugar and property businesses into two, was rejected by those representing the creditors. Latest reports now suggest financing problems for a single buyer, and that creditors might in any case get a better deal if the company is split.
One odd reason is that the Zimbabwean operations could be a drag on the price, because of sanctions, although these are only likely to kick in if financing for the deal is arranged in America or perhaps Europe, and there are other investors than nationals of sanctions-imposing countries.
In general, splitting an insolvent company into its component parts, especially when some are profitable as is the case with the Zimbabwean operations, usually produces more money to pay off creditors and so there is a strong argument for such a split of Tongaat Hulett.
Of course, removing the Zimbabwean profits, and perhaps the Mozambican and Botswana profits, might reduce the value of the South African core by more than the price obtained for those assets, but this is unlikely. It is fairly obvious that the creditors would rather have a cash pay out rather than organise terms and so any Zimbabwean bid should ensure that the cash was available up-front.
The mechanism for buying out the assets would be to form a new company, perhaps called ZimSugar or ZimSweet, and have that company buy out Tongaat Hulett in Zimbabwe.
So who could form this company. Hippo Valley already have a significant investment with their 49,7 percent holding in the sugar mill at Hippo Valley. Their shareholders could increase their investment, but at the very least would get back their half of the sugar mill.
It might be possible to bring in the another major Zimbabwean company into the sugar business. Green Fuel, who process a separate supply of outgrower cane into ethanol, is that company if it was interested in diversifying its interests while remaining within the sugar cane industry where it does know the business rather well.
It also strikes us that this would be an ideal opportunity and opening for our sovereign wealth fund, Mutapa Investment Fund, which has already moved into mining to support the takeover of viable mines in partnership with others with expertise in mining. A similar partnership could well work with the sugar industry.
The Zimbabwean operations of Tongaat Hulett tick a lot of boxes that Mutapa needs to be convinced about. Many thousand families either grow sugar or work in the sugar mills or are part of the general sugar community, and securing their future is important.
It is an important food industry and adds a lot of value to a crop grown in the Lowveld. It ensures Zimbabwe’s self-sufficiency in sugar. And it is operationally profitable and is not to blame for the financial meltdown of its South African parent.
Localising ownership would ensure that investment could still continue. There is a danger that an outsider buying out the assets of the whole group could well be seriously cash-strapped, at least for a while, that new investment was not on the cards and even maintaining the present assets might well be hard. Our growers deserve better.
So a major option would be for Mutapa to help float “ZimSugar” and become a major shareholder and backer, but also bringing in Hippo Valley and perhaps Green Fuel. The operational management is already in place, the Zimbabweans actually running and staffing the sugar mills, and Mutapa and any partners would be more interested in enforcing high efficiency and first class financial management.
There are reports that the two-mill Mozambican operation would also like to be hived off from the South African company, and that seems possible.
Even the Botswana operation, a large packaging plant, could be hived off and possibly some sort of link with the Zimbabwean company, as the closest supplier of sugar, could be arranged. Botswana does not have the irrigation to grow sugar. If a local buyout of the Zimbabwean business of Tongaat Hulett could not be arranged, then investors might well have to be ready to move into the Lowveld and build a new sugar industry there, moving outgrowers across to ensure reliable markets for the cane and reliable local supplies of sugar for Zimbabweans.
This might be a cheaper option if a lot of inherited debt is attached to any deal. The land and water are already Zimbabwean, and the farmers are Zimbabweans, so we would not be starting from scratch if that route was chosen.
There appears to be growing lobbying within the creditors of Tongaat Hulett, who after all just want their money back, or as much as they can realistically get, to examine other options than settling on a single buyer, and this needs to be examined, fast, and if there is a good deal in the offing then assembling the finance and the cash.
Online Reporter