September 22nd 2020
R5.35bn starch sale a relief for Tongaat Hulett.
The R5.35 billion sale of Tongaat Hulett’s starch business to Barloworld got the green light after an independent third party, Rothschild & Co, found that no material adverse change (MAC) had occurred due to the Covid-19 pandemic.
The two companies had reached a deadlock on the agreement for the sale of its starch business to Barloworld in May following the Covid-19 outbreak in the country in March.
Barloworld had said it was reasonably likely that the earnings before interest, tax, depreciation and amortisation (Ebitda) of the starch business for the financial year to end March 2021 would be 82.5 percent or less than the Ebitda of the starch business for the financial year to end March 2020 and that an MAC had, therefore, occurred.
Tongaat chief executive Gavin Hudson said yesterday that the group was pleased that the decision by the independent expert had confirmed Tongaat’s belief that a MAC event had not occurred and that the transaction would now go ahead.
“Throughout this process we have continued to work to close out work streams to meet our other obligations under the agreement reached with Barloworld in February this year, so that we can conclude the sale and move forward. It is expected that we will be able to finalise this process by the end of October with the starch business transferring to Barloworld from November 1,” Hudson said.
Hudson backed the asset and said the starch unit was a great business and Barloworld was fortunate to be buying such a valuable asset.
“However, the rationale for the sale remains unchanged – it will help us to continue meeting our debt reduction targets. Tongaat is a high-potential business with a significant asset base, and this decision will ensure that our focus remains on bedding down the turnaround of our organisation,” he said.
Tongaat has been disposing some of its assets in an effort to reduce its huge debt. In June the group also announced the sale of Tambankulu Estates to eSwatini’s Public Service Pensions Fund for R375 million in a share purchase agreement, with the proceeds earmarked to reduce its R13bn debt.
Tongaat’s target is to reduce its debt levels by R8.1bn by March 2021.
Barloworld said it was pleased that the starch business had shown resilience in the face of the economic challenges posed by the Covid-19 pandemic.
“The business is a highly cash generative, relatively asset light and defensive investment with a leading market position and a strong client base of highly regarded and well established multinational companies. These characteristics have underpinned the resilience of the starch business through the current economic challenges, validating Barloworld’s stated strategy of entering into the defensive consumer foods sector and serving industrial customers as a long term strategic pivot of its portfolio,” Barloworld said.
Barloworld also said it believed that the starch business would continue to show positive momentum into the financial year-end after the government moved the country to level 1 of the lockdown on Monday.