Barloworld wants out of deal for Tongaat starch unit
Barloworld has triggered a rarely invoked material change clause, but the deal may be renegotiated
In a potentially severe setback for Tongaat Hulett’s efforts to pay down its debt pile, Barloworld is trying to back out of a R5.3bn deal to buy the sugar maker’s starch business on grounds that the Covid-19 pandemic has trashed the commercial merits of the deal.
Tongaat, once one of the country’s most recognisable blue-chip stocks, is in the middle of a a revival strategy that includes slashing its R13bn in debt by about 60%, tapping shareholders for about R4bn, and selling assets after a weak operational performance in recent years coincided with allegations of dodgy accounting practices.
As part of the plan under relatively new CEO Gavin Hudson, Tongaat struck an agreement with the industrial group in February to sell the starch business for up to R5.3bn.
However, 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.
The starch business is likely to suffer at least an 17.5% drop in annual core profit, or earnings before interest, tax, depreciation and amortisation (ebitda), Barloworld said in a statement on Tuesday. It cited the global health crisis that has brought whole industries to a grinding halt, triggered a scramble for cash and led economists to forecast one of the deepest recessions SA has ever faced.
But Tongaat has rejected Barloworld’s assessment.
The duo have referred the dispute to an independent third-party accountant to work out if Tongaat can push the deal through or if the biggest reseller of Caterpillar equipment in Southern Africa can extricate itself from the deal, or negotiate a lower amount.
This process is expected to take six to eight weeks, Barloworld said.
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%.
Barloworld may have realised it was overpaying for the business, given the economic effects of the coronavirus outbreak, and it is also unsurprising that Tongaat would want to stick to the terms of the sale, said Wayne McCurrie, a portfolio manager at FNB wealth and investments.
“Tongaat needs this sale, make no mistake,” he said, adding it is possible that the deal would be renegotiated.
An investigation by PwC into bookkeeping practices at Tongaat found that the company had overstated projected revenue as well as the valuations of its cane, plants an machinery. The company has launched a civil suit to recover bonuses and benefits of 10 executives it alleges played a role in misleading financial statements.
Barloworld’s share price had added 1.55% to R65 on Tuesday evening, having fallen 42.29% in the year to date.
Correction: May 12 2020
A previous version of this article said the expected drop in ebitda was 82.5%; it is, in fact, 17.5%.