Could KZN cane growers’ plan to save the industry work?

In a race against time to save the sugar industry from disaster, cane growers in KwaZulu-Natal have formed a consortium and submitted a proposal to the business rescue practitioners (BRPs) of JSE-listed sugar producer and property company Tongaat Hulett to acquire certain of its South African assets.

If the acquisition is approved, these assets will be held in an unlisted limited liability company (NewCo).

Spokesperson Simon Cleasby said on Wednesday NewCo is eagerly awaiting a response from Tongaat’s BRPs “as time is of the essence if the mills are going to be operational when the milling season commences in April 2023”.

Cleasby is the son of a former  Tongaat Hulett CEO and has a wealth of experience in the industry. He said the appropriate starting point for all discussions around the proposal are the BRPs, whom Newco has approached.

It will in due course engage all other relevant stakeholders, he said.

Cleasby said the offer was made on behalf of growers delivering more than five million tons of sugar cane to the Tongaat mills on the North Coast of KwaZulu-Natal to ensure the survival of these farming operations, the thousands of livelihoods they support, and socio-economic stability for the greater region.

Context

An industry insider stressed how vitally important it is to ensure that the mills continue operating because of their fundamental importance for the conversion of cane to sugar.

Without operating mills, the growers are looking at a “R4 billion hole” from not being able to do anything with their cane.

“If the mills aren’t operating, this is game over for a lot of people. If people think this business [Tongaat] can be euthanised, then they have got R20 billion or R30 billion coming at them and it could be worse over time because the first line will be about R9 billion of debt from the farmers, another about R5 billion of debt from key industries like transport, with the hauliers totally dependent on transporting cane, plus all the suppliers and people up and downstream.

“It will have a ricochet effect into the economy, which you will count in tens of billions of rand,” he said.

The industry insider said the major problem is that nobody is prepared to put up the between R300 million or R400 million required for the maintenance and refurbishment of the mills.

No numbers yet

The assets include the operating mills at Maidstone, Amatikulu and Felixton, the mothballed factory at Darnall, the Huletts Refinery, Voermol animal feeds, and all associated brands and trademarks.

Cleasby said NewCo is not currently in a position to discuss the value of the proposed deal, adding that this will in large part be determined by negotiations with the BRPs, which have yet to begin.

He was coy on how Newco will pay for the assets if the proposal is successful.

“The consortium has a number of mechanisms available to it. What is ultimately decided will depend on the quantum required based on the outcome of the negotiations.

“This is why negotiations must get underway soon to enable the consortium to definitely conclude these critical arrangements,” he said.

Cleasby said the consortium has received overwhelming support from growers, the broader industry and affected stakeholders.

But he said this support will only be concretised when the terms of a deal are agreed with the BRPs at Tongaat so the ultimate partners to the consortium can be confirmed.

Consortium

Cleasby said the offer to join the consortium will be extended to the more than 11 000 small-scale growers and 400 commercial and land reform growers that supply the Tongaat mills, as well as a number of strategic partners.

“How many of these parties choose to participate in the consortium and what their shareholding will be will depend in part on the deal reached with the business rescue practitioners at Tongaat Hulett.

“This is why we would like to see negotiations get underway as soon as possible, so that these critical details can finalised timeously,” he said.

Cleasby said the consortium’s vision is to create a collective investment in the assets of NewCo by all Tongaat-supplying growers.

“We envision a 51% black shareholding, with the majority of this comprising black growers.

“This will ensure that NewCo meets the industry’s transformation objectives. Realising this vision will depend in part on securing the necessary development funding for the empowerment shareholding,” he said.

Cleasby said NewCo represents one of the few viable opportunities to save more than 11 000 small-scale growers, more than 20 000 jobs in the cane growing sector alone, and a significantly greater number of indirect job losses in the region.

“It is also an opportunity for commercial growers and small-scale growers to align and optimise synergies for mutual viability and sustainability over the longer term,” he said.

Proposal ‘should be considered ‘

Shareholder activist Chris Logan said in principle, the concept of the farmers taking control of these assets of the whole value chain has a lot of merit and is an option that should be considered.

“If the farmers have a monetary or shareholding interest in the mill, then they obviously have an interest in making it run properly,” he said.

“Obviously these assets have not been running properly.”

However, Logan stressed the importance of the consortium being as inclusive as possible to ensure it does not limit its capital, cane supply and knowledge base.

He said a possible alternative is that Tongaat retain a stake in these assets, adding that there was similar initiative several years ago, called MillCo, but nothing came of it.

Desperate times call for solutions

The industry insider said the growers cannot be blamed for making the proposal but does not believe it was a strategic solution to the problem, rather almost a “solution out of desperation”.

“Their future depends on a mill operating and they are saying that if nobody else is sorting it out, then we will have to try and sort it out ourselves.”

He said there is a lot of complexity to the offer because of the proposed extraction of businesses out of a business that is in business rescue, and the rights of creditors and shareholders, plus the quite complex legal arrangements.

He favours a more holistic solution, adding that R400 million must be secured to spend on the refurbishment and maintenance of the mills to ensure they are ready at the start of the new season at the end of March.

“If they are not ready, that five million ton crop that is now growing for next year … is going to just sit in the fields – and therefore the KZN industry is broken,” he said.

He said it will not be easy for NewCo to secure the money to execute its proposal.

The industry insider believes Tongaat’s SA sugar business can be profitable but the business currently cannot sustain its total size because of the size of its debt and it is “fat and lazy with too many cost layers”.

Read: Tongaat Hulett makes progress with its debt restructuring

He said Tongaat’s Mozambique and Zimbabwe businesses will not be paying dividends for four or five years, with Tongaat’s debt doubling in that time.

“That doesn’t make sense, but the South African business cannot fail,” he added.

“At some point, the cash value of something is worth more than the dividend flow, in which case, realise the cash, pay down the debt and degear.”

Listen: Dr Thomas Funke of  SA Canegrowers Association says over 14 000 jobs are at risk as Tongaat Hulett misses payment deadline (read the transcript)