Minority shareholders and activists in Tongaat Hulett are mounting a fightback against a proposed R2-billion sale of new shares by major sugar group Tongaat Hulett to the Zimbabwean Rudland family, accused of building their fortune on ties to Zimbabwe’s ruling Zanu PF and questionable cigarette sales.
Hamish Rudland, the face of the deal, supplied a lengthy response to questions (published here in full) specifically asserting that “there is absolutely no substance” to this link to the family’s cigarette business.
The deal takes the form of a rights issue that, if successful, will hand control of Tongaat to a Rudland entity in Mauritius called Magister Investments – at a steep discount to the current share price (see sidebar: A shocking deal).
The proposed deal is being put to a vote today in an extraordinary general meeting amid concern about the Rudlands’ probity and the alleged prejudice towards existing minority shareholders. On face value, existing shareholders could face a massive dilution of their equity.
AmaBhungane has established that a significant alliance of minority shareholders has coalesced in an attempt to vote down today’s deal.
The swing votes however belong to only two major asset managers.
They are the state-owned Public Investment Corporation (PIC), which owns nearly 14% of Tongaat on behalf of the Government Employee Pension Fund (GEPF) and smaller public sector entities and the Stellenbosch-based PSG Asset Management, which controls 15%.
Both the PIC and PSG have given Tongaat “non-binding letters of support”.
PSG’s support is seemingly a done deal. The company told amaBhungane: “After detailed assessment, we agree with the THL [Tongaat Hulett Limited] board’s recommendation, and this informed our decision to extend a letter of support to the board…While we will vote in favour of the resolutions necessary to progress the capital raise, we have given no undertaking to participate in the rights issue.”
This means that PSG supports the investment by Magister but is not committed to providing funding itself to maintain its shareholding, which would be a very expensive exercise considering the extent to which Tongaat plans to dilute its existing shares by issuing new ones.
At the PIC things are not as clear cut. In response to questions, it said:
“It would be imprudent for the PIC to express any view publicly on a transaction which is still inconclusive. The PIC will act responsibly and lawfully in its investment decisions in this regard.”
AmaBhungane understands from a source close to the GEPF, on whose behalf the PIC is acting, that the PIC is under pressure to reconsider their support. An alternative underwriting agreement with the PIC putting up the money instead of Magister might even be on the cards.
The source, who cannot be named as they are not authorised to speak to the media, said:
“The GEPF is concerned. They know who these guys are.”
Apart from the reputational fears, the deal is also highly prejudicial for existing investors.
“If it was Warren Buffett proposing it, I would still oppose it on the investment merits,” one activist shareholder told amaBhungane.
But it is not Warren Buffett proposing it.
The Rudlands are one of Zimbabwe’s major business dynasties with known investments relating to transport, agriculture and financial services.
The family, in particular Hamish’s brother Simon, is however best known in South Africa for their tobacco business Gold Leaf Tobacco Corporation which (alongside a number of other manufacturers) has been accused of flooding the South African market with cigarettes that are priced in a way that suggests they somehow avoid paying the steep excise “sin” tax normally imposed by the South African Revenue Service (Sars).
Gold Leaf and the Rudlands have consistently denied any wrongdoing, but in the mid-2000s, Simon was arrested in South Africa for cigarette smuggling – though the case went nowhere – and in 2019 he survived a hit on his life in Johannesburg as he was arriving for a meeting of the Free Trade Independent Tobacco Association (Fita), which represents the smaller manufacturers.
The market share of these “cheapie” cigarettes rocketed during Covid with Gold Leaf being the biggest beneficiary, according to one University of Cape Town study.
According to the UCT survey, Gold Leaf sold 30% of all cigarettes during the initial lockdown in 2020, during which cigarette sales were technically illegal, up from 12% pre-Covid – and maintained much of this market gain after the ban was lifted.
Hamish Rudland told amaBhungane: “Magister has no involvement or interest in Gold Leaf Tobacco Corporation, nor does Gold Leaf Tobacco Corporation have anything to do with the transaction between Magister and Tongaat.”
But concerned minority shareholder activists have questioned the source of the R2-billion the Rudlands have committed to underwrite the share issue.
There seems to be a disjuncture between the little-known Magister and the R2-billion it has committed to this deal.
One well-known activist, Dave Woollam, has challenged the deal in a letter to shareholders, mostly based on its allegedly extremely prejudicial effect on the minor shareholders.
“I’m not making any allegations, but I still want to know where they got the money,” he told amaBhungane.
Hamish Rudland told amaBhungane, “Magister’s funding arrangements are proprietary and confidential, suffice to state that Magister has provided Tongaat with a bank guarantee issued by The Standard Bank of South Africa to support its underwriting commitments and, as such, this has gone through and passed all banking regulatory processes such as Know Your Client and Anti Money Laundering requirements. Whilst it may be salacious to allege that the transaction is funded by proceeds of illegal cigarette sales, there is absolutely no substance to this.”
Further questions about how insulated Magister is from the wider Rudland empire are raised by the terms of the proposed transaction, which make provision for Magister to potentially act together with a much wider “Magister Group”, which is widely defined as any company or person with links to Magister.
Both Tongaat and Hamish Rudland emphasised that the company had entered into a transaction “with Magister, not the Magister Group”.
Rudland said, “Magister’s underwriting obligations have nothing to do with any other entity.”
But the deal takes place in the context of a number of parties seemingly related to Rudland increasing their influence at Tongaat, long before the current deal was thrust on shareholders.
A shocking deal
Leaving aside any qualms about the Rudlands’ alleged unsavoury businesses, the Tongaat deal has been lambasted as shockingly prejudicial to existing shareholders in the sugar group.
Rudland acknowledges this in his response to us, downplaying the separate concerns about the source of Magister’s cash:
“Most of the concern rather, has been around the size of the rights offer, control and the potential dilutive effect on existing shareholders who may not wish or are unable to follow their rights. This is understandable, but perhaps unavoidable given Tongaat’s financial situation.”
The deal involves a rights issue, a mechanism for companies to raise money from existing shareholders by giving them an opportunity to buy new shares in addition to the ones they already own. The shareholders who do not exercise their rights will see their percentage shareholding fall when other shareholders who do follow their rights buy new shares.
The Rudlands will participate through Magister which is “controlled by Mauritian International Trust Company Limited as Trustee of the Casa Trust, a trust operating for the benefit of Hamish Rudland, his wife, and their children”.
The remarkable feature of the Tongaat rights offer is the extreme level of dilution and the high cost of following your rights.
Depending on the price at which the shares get issued it could cost an existing shareholder with shares worth R10 anything between R40 and R80 just to maintain their shareholding at the previous level.
The most likely outcome is that most small shareholders just have their holdings diluted into insignificance.
Magister has underwritten the rights issue with R2-billion, half of the maximum R4-billion Tongaat would raise if all existing shareholders followed their rights to maintain their exact shareholding.
Magister (alongside Braemar) will however very likely control between 50% and 60% of Tongaat after the rights issue.
This is why activist shareholders are calling it a de facto takeover masquerading as a rights offer.
In November last year large shareholders in Tongaat were separately summoned to confidential presentations by the company’s executives.
They were made to sign nondisclosure agreements and then given a presentation about “Project Knight”, likely an allusion to the ‘white knight’ the Rudlands would supposedly be for Tongaat, which has struggled in the wake of crippling debt and alleged accounting fraud under its previous management.
These meetings were repeated several times to try and get irrevocable support for the rights issue. As late as last week the Tongaat executives were allegedly trying to twist recalcitrant shareholders’ arms.
Meanwhile, the Rudlands and associates have been buying up Tongaat shares in the background long before the Magister deal – something the Tongaat bosses failed to mention when selling the deal in these secret meetings.
The Project Knight presentation only reflects that Magister already owned an immaterial 0,15% of Tongaat before the deal.
However, between March and April last year Braemar, a United Arab Emirates entity controlled by Simon and Hamish’s mother Adrienne, bought 9,981% of the company from Nedbank.
Another associate of the Rudlands has also been quietly buying up shares.
Ebrahim Adamjee, Simon Rudland’s partner in Gold Leaf, made a small investment in Tongaat the same month Braemar bought its first shares. He then steadily increased his shareholding to 1.5% in November last year, the last month we have data for.
Yet another seeming associate, a company called Betelgeux Investments, recently bought 2% of Tongaat. Betelgeux shares the address of a host of Adamjee companies.
Tongaat has fended off criticism of its planned entanglement with the Rudlands with an ostensibly thorough due diligence exercise by audit firm PricewaterhouseCoopers (PwC).
“As part of Tongaat’s assessment and due diligence process on Magister, PwC, at Tongaat’s request, conducted an independent specified scope compliance due diligence exercise,” the company told us in response to questions.
It is not clear how much of a deep dive this due diligence was. PwC itself told us that it “conducted a specified scope, integrity due diligence based on information available in the public domain for Tongaat Hulett Ltd”.
Tongaat continued: “The sub-committee and the Board considered PwC’s findings and being satisfied therewith, agreed to pursue the rights offer with the underwriting support from Magister. Magister and Hamish Rudland have extensive and relevant expertise and experience and are invested in several publicly listed businesses and Tongaat believes that Magister is a suitable investor.”
Both PwC and Tongaat declined to provide any details of the results of the due diligence.
Standard Bank, which has provided the R2-billion guarantee, told amaBhungane it “does not discuss the business of our clients with third parties”.
The bank said it took its anti-money laundering checks seriously but added, “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.”
*Disclosure: AmaBhungane receives funding from the Jannie Mouton Foundation. Mouton is the co-founder and major shareholder of PSG, which is mentioned in this article.