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Tongaat hangs on to Deloitte and African Rainbow Capital Investments’ management continues to rake in fees.

It reads like evidence of what could be the first-known instance of Stockholm Syndrome in the corporate world. How else can you explain that Tongaat Hulett not only hasn’t fired its external auditor Deloitte but is now paying it multiples of what it was paying two and three years ago.

In 2018, when it became apparent to all and sundry that there was a large fictional element to Tongaat’s audited accounts, Deloitte was paid a nifty R19 million in fees.

In 2019, when you thought it might have done the audit for free to try to compensate for the earlier damage, the fee was hiked to R30 million.

And then, as if propelled by some devious geometric progression, it was almost trebled to an astounding R88 million in 2020.

How is that possible? Why hasn’t Tongaat fired Deloitte? Why hasn’t the sugar group initiated legal action against its external auditor?

The notice for the annual general meeting (being held on September 28) provides some insight and holds out the encouraging prospect of new auditors in financial 2022. The notice contains a rather detailed list of reasons why the board is seeking to reappoint Deloitte for 2021. (Does this put it in line for a fee of R200 million or so?) The reasons are persuasive, in a Stockholm Syndrome sort of way.

In denial

Here’s how psychiatrist Dr Frank Ochberg, who defined the term ‘Stockholm Syndrome’, described some of its symptoms: “The hostages experience a powerful, primitive positive feeling towards their captor. They are in denial that this is the person who put them in that situation. In their mind, they think this is the person who is going to let them live.”

Now check out the AGM notice for signs that the Tongaat board believes the relationship with Deloitte is necessary to ensure its survival.

The ‘primitive positive feeling’ towards Deloitte isn’t just evident in the R88 million fee.

In his annual statement chair Louis von Zeuner goes as far as acknowledging the audit firm’s contribution to its business during 2020.

Fortunately there was some good news for Tongaat last week; goodness knows, it deserves some. The R5.35 billion sale of its starch business is back on, although finalisation of the deal is still subject to some conditions precedent.

It looks like a good price and the cash will be extremely useful when it eventually hits the Tongaat tills.

Full marks to Barloworld for graciously accepting defeat in the battle over whether or not Covid-19 represented a material adverse change that would allow it to walk away from the purchase of Tongaat’s starch business.

According to Barloworld the starch business, which held up remarkably well in the face of the Covid-19 challenges, is an extremely attractive asset. “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 multi-national companies,” the group said.

Being forced to sell this business should be added to the cost of the damage wreaked upon Tongaat by years of mismanagement.

Little value for a lot of money?

You don’t get much for around R500 million these days. Or at least you don’t if you’re invested in the fund management business.

The guys behind African Rainbow Capital Investments (AIL) have paid themselves hundreds of millions of rands in fees since setting up just three years ago.

The investors who bought AIL shares haven’t done quite so well.

But isn’t that what we here in the cheap seats are trained to tolerate?

On its first day of listing back in September 2017 the share traded at R8.68, it had an underlying net asset value of around R9 billion, and there was talk of building it into a fund of R25 billion.

On paper it looked like a real winner: the Prince of BEE Patrice Motsepe uniting with the financial muscle of Sanlam and two former Sanlam heavy-hitters Johan van Zyl and Johan van der Merwe to set up a fund that would ‘leverage’ off the opportunities offered by the BEE obligation on businesses.

“The money can go a long way because black empowerment partners have the ability to negotiate discounts and financing deals before they invest,” Van Zyl told journalists in 2017, adding: “For empowerment there is a lot of money available to do financing, to be clever, and this is a big part of the skills we have.”

What could go wrong? Almost everything it seems.

The share price drifted steadily and determinedly lower – to the current level of R2.70 – so investors were left nursing hefty losses. But management, rendered oblivious to reality by self-serving performance fees set in stone, persisted in referring to intrinsic net asset value of R9.5 billion.

Last week’s rights issue fiasco reflected more of that oblivious mentality. Did no one within Motsepe’s Ubuntu-Botho empowerment empire stop to think that directing almost one-third of the proceeds of a rights issue might be seen as a little excessive?

Last Friday’s decision to scrap the plan to spend R205 million (of the R750 million being raised by AIL) on management fees looks like the response of someone just jolted out of oblivion. But management needn’t worry. The R205 million will still be paid to them, only now it will come from ARC Fund’s internal cash resources, which may – in the greater scheme of things – amount to the same thing.

Much more disturbing was the correction (apparently to a typographical error) about the interest on management fees accruing not at prime plus 5% but prime plus 2%.

How chilling all of this must have been to African Rainbow’s partners.

Last note

Finally, how lucky was RCL CEO Miles Dally?

Controlling shareholder Remgro bought back a chunk of his shares at R10.29 apiece a few months ago and last week Dally was able to top up his holding by buying in the market at the bargain-basement price of R6.

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