SOUTH AFRICA – Struggling sugar producer, Tongaat Hulett has been met by a setback on the sell of its 100-year-old starch business to KLL Group for R5.35billion (US$342.6m), with the company wanting an out of the deal on grounds that the Covid-19 pandemic has affected the commercial merits of the deal.
Tongaat had announced in February that it would be selling its starch business to the subsidiary of logistics company Barloworld in an effort to reduce its debt and cover on-going operations.
Barloworld has since triggered a material change clause — a rarely invoked clause in mergers and acquisitions that allows buyers to withdraw from deals if the value of the transaction has been undermined by a significant development.
In a statement, the country’s largest sugar producer said the Barloworld felt that the effects of Covid-19 were likely to negatively impact the business and result in material adverse changes.
According to Tongaat, Barloworld believes the earnings of the starch business for the financial year ending March 2021 would be 82.5% or less compared to the 2020 financial period, in what would diminish value for the transaction.
However, Tongaat is not convinced that any material adverse changes had occurred, with its CEO Gavin Hudson saying the matter “would be referred for arbitration if both parties fail to reach common ground on the matter.”
“We do not believe that a MAC (material adverse change) has occurred,” he said.
The duos have referred the dispute to an independent third-party accountant to work out if Tongaat can push the deal through or if Barloworld can extricate itself from the deal, or negotiate a lower amount.
This process is expected to take six to eight weeks.
Shares in Tongaat dropped 12.6% to R7.60, their biggest one-day decline in three weeks, bringing losses over the past two years to more than 90%.
Tongaat, once one of the country’s most recognisable blue-chip stocks, is in the middle of a revival strategy that includes slashing its R13bn (US$706m)in debt by about 60%, tapping shareholders for about R4bn (US$217m), and selling assets after a weak operational performance in recent years coincided with allegations of dodgy accounting practices.