Shares in sugar producer Tongaat Hulett fell by nearly 17% on Tuesday morning following the announcement that the sale of its starch business to a subsidiary of Barloworld had hit a snag.
Tongaat had announced in February that it would be selling its starch business to the KLL Group for R5.35 billion.
The transaction hinged on the undertaking that no “material adverse changes” should occur after the signing of the agreement that could affect the business.
In a statement on Tuesday, the country’s largest sugar producer said the KLL Group felt that the effects of Covid-19 were likely to negatively impact the business and result in material adverse changes.
According to Tongaat, KLL 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,” he said.
“We do not believe that a MAC (material adverse change) has occurred.”
Tongaat shares on the JSE dived 16.90% to R7.23, after opening at R7.99.
In a statement published on the JSE news service, the company stressed that Barloworld does not have sufficient information at its disposal to come to a conclusion of adverse financial impact, given that the company was only one month into trading year.
The company was in 2019 embroiled in an accounting scandal which showed that it may have overstated profits and certain assets in its financial statements.
‘Selling crown jewels’
According to Patrick Mathidi, Head of Equities at Aluwani Capital, a lot of deals which were negotiated before the Covid-19 pandemic are likely to be reviewed as buyers are likely to feel that they might no longer yield the expected financial returns.
“Given their financial position, Tongaat needed to deal to go through, as they need to fix the balance sheet following their accounting scandal. Chances are that we are likely to see more companies moving away from deals that were negotiated before the pandemic. The Tongaat case might just be the beginning,” he said.
“The company had been selling their crown jewels and this particular starch business had been doing fairly well before Covid-19 struck, but now the world has since changed. There is a growing concern out there that whatever value that anticipated might not be materialised, given the current conditions,” he added.
Tongaat says it remains committed to concluding the transaction, saying its disposal will position the company for longer-term sustainability.