1. SA investors faced with Hobsons choice over possible takeover of Tongaat Hulett by Zims
Rudland family Tim Cohen 10 Jan 2022 The South African investment community is on the
horns of a dilemma regarding the underwritten rights offer for Tongaat Hulett either do a deal
with one of Zimbabwes most notorious families or face the breakup of southern Africas leading
sugar producer. Tongaat Hulett has been through the wringer over the past few years following
the discovery of accounting irregularities in 2019, which resulted in the company having to
restate its results and being fined by the JSE. The result was an implosion in the companys share
price which, in 2018, was trading at around R130 to the roughly R6 at which it is trading today.
Despite a clean-up campaign, an extensive investigation by PwC and a new management sweep,
the company is still struggling. The share price implosion has had the effect of rendering the
companys balance sheet on the verge of being unsustainable, and its huge debt load of roughly
R6.6-billion is now at risk, causing a minor panic among its bankers. Into this morass has
jumped a Mauritius-registered company, Magister, which is owned and controlled by members
of Zimbabwes Rudland family, who have reportedly been consistent supporters of Zanu-PF and
its leadership. The family also owns the Gold Leaf Tobacco company, which, by some estimates,
is the largest cigarette company in South Africa measured by the number of cigarettes sold. The
company burst into the public spotlight when co-owner Simon Rudland survived a gangland-
style assassination attempt in August 2019. There is no direct link between Magister and Gold
Leaf, which is represented by Simon Rudlands brother, Hamish, whose main business is in the
transport industry. However, several reports have warned about Zimbabwes recent descent into a
Russian-style oligarchical system. Its becoming a regional hub for laundering illicit wealth that is
fuelling violent conflict, one report concludes. It also included a detailed breakdown of the
alleged activities of the Rudland family, including gold smuggling, money laundering and
mining in conservation areas. Magister announced on 17 November 2021 that it would
underwrite the first R2-billion of a R4-billion rights offer. If successful, the rights offer will go a
long way towards solving Tongaats debt problem and will probably maintain the integrity of the
company. The drama of the rights offer is illustrated by the fact that Tongaat currently has an
equity value of R770-million. The rights offer therefore has the likely outcome that it will
completely transform the ownership structure of the company. In terms of the deal, Magisters
shareholding is capped at a maximum of 60% of the enlarged shareholding. Magister will receive
a board seat for every 20% of the company that it owns, post the rights issue. It will also receive
a fixed underwriting fee of 1.5%, or R30-million. Tongaat itself has few other options outside
selling its assets piecemeal, a process which it had already begun, principally by selling its very
profitable starch operations and a number of smaller businesses including the Namibian trading
and marketing business and operations in Swaziland. At an operating level, the company is still

2. struggling. In a trading statement in September, it announced that headline earnings for the six
months to 20 September would be sharply down. And so it turned out when the company
announced its interim results on 9 December, with operating profit down from R1.67-billion to
R1.2-billion. Profit after tax fell to R23-million from R385-million. For SA investors, the
proposal is a double-edged sword do a deal with a notorious family or face the break-up of the
company, putting at risk the future of the 29,000 employees at peak harvest season in operations
across South Africa, Zimbabwe, Mozambique and Botswana. For its part, Tongaat has thrown in
its lot with the former option. Asked in the context of the Zondo Commission report, which
slated SA business for turning a blind eye to corruption, whether a deal with Magister is
advisable, the company said it considers that Magister would be a suitable investor. Head of
communications for Tongaat Virginia Horsley said as part of the companys assessment of
Magister, PwC, at Tongaats request, conducted an independent compliance due diligence
exercise which included gaining an understanding of Magister, its assets and investments and its
associates, as well as a review of a combination of publicly available information, selected
private corporate information, references and responses from Magister to specific questions.
Magister is invested in several reputable and substantial businesses, and Tongaat believes that it
would be a suitable investor. Magister has provided Tongaat with a South African bank
guarantee to support its underwriting commitments. As part of this process, Standard Bank
undertook Anti-Money Laundering and Know Your Customer checks, which Tongaat has taken
comfort from. We believe that through a rights offer of up to R4-billion, Tongaat will unlock
long-term growth, protect intrinsic shareholder value and create a legacy for the many people
dependent on the Tongaat business across the SADC. For their part, the Rudland family is
adamant that the notorious tag is inappropriate. In reply to questions from Business Maverick,
the company said Rudland family members have many business interests in reputable and
substantial businesses, including listed companies. There is no basis to suggest that they are
unsuitable to invest in Tongaat. The family has high regard for good corporate governance
practices. Magister has confidence in the management of Tongaat and has no intention of being
involved in the day-to-day operations of Tongaat. Family members already own 9.98% of
Tongaat through a United Arab Emirates-registered company, Braemar. But neither Braemar nor
Magister will be voting on the resolutions for corporate governance reasons even though they are
not technically related parties as defined by the Companies Act or JSE rules. Other investors are
not so sure: they range from reluctantly supportive to outright astounded that Magister could
conceivably pass any reputable Know Your Customer check. Representatives of the major
cigarette producers affiliated with the Tobacco Institute of South Africa claim that the
newcomers, affiliated with the Fair Trade Independent Tobacco Association (Fita), have been
selling enormous quantities of cigarettes very cheaply by the simple mechanism of not paying

3. SAs huge cigarette excise tax. Fita members deny the claim. The pandemic, particularly the
banning of tobacco sales for a period in 2020, was a huge boon to Fita members who had been
operating mostly under the radar anyway, often selling cheapie cigarettes individually rather than
by the packet. Magister says Gold Leaf has not financed Magister and is not financing the
underwrite or any part of it. The two biggest shareholders in Tongaat are the Public Investment
Corporation (PIC), which did not respond to media enquiries, and financial group PSG, which
own 14% and 15% of the company, respectively. Both PSG and the PIC have supported the
process of putting the notion of the rights offer to shareholders but have not yet agreed to support
the bid, which will depend on the pricing of the offer. Chief Executive of PSG Asset
Management, Anet Ahern, said juggling all the stakeholders interests is exceptionally tricky in
this case, as Tongaat also has a big impact on the society in which it operates. Tough choices
need to be made, and these will always be controversial. In effect, the bankers of the deal,
Standard Bank, have sought to place the responsibility for the decision to proceed with the board
and shareholders of Tongaat. Standard Bank complies with local and international anti-money
laundering legislation and takes this responsibility seriously. Standard Bank follows its internal
client risk assessment processes diligently and consistently, and will not put its reputation at risk
by doing business in an unethical, illegal or unprofessional manner. Any decision to proceed
with the rights offer and any related transactions will be the sole and independent responsibility
of the Tongaat Hulett board and its shareholders, it said. BM/DM Source:
https://www.dailymaverick.co.za/article/2022-01-10-sa-investors-faced-with-hobsons-
choiceover-possibletakeover-of-tongaat-hulett-by-zims-rudland-family/
Question 1 (10 Marks)
Identify the dilemma regarding the underwriting rights offer for Tongaat Hullett in the case study
and examine the ethical implications in the case study.