On paper, with accountants and lawyers helping to direct the process, it must have been an easy decision to make. The volatile and uncertain returns of the fruit canning industry were likely to ensure the recently acquired Tulbagh canning operation (Fruit Products Western Cape, or FPWC) would be a blight on Premier Food Group’s otherwise sparkling returns. The obvious thing to do, say the finance guys, is shut it down.
Yet it is still a strange decision to take. Just four months after buying the plant, closing it will involve writing off R1bn. This is hefty in comparison to the R6.5bn Premier paid for Rhodes Food Group, which owned FPWC.
The good news, for Premier shareholders, is that there’s no cash flow impact and the earnings figure can be ‘adjusted’ so it looks like the write off never happened. Best of all, by reducing equity, the write-off boosts return on equity, more so given the comparatively low profits generated by the canning operation. Calculations that will probably enhance executive remuneration.
Ask Premier CEO Kobus Gertenbach whether their due diligence flagged the Tulbagh plant as problematic, and he says no.
“The trajectory wasn’t looking great, but we thought we could get it to break-even”. What’s more, he tells the Financial Mail, the other businesses in Rhodes Food Group justified paying R6.5bn.
And, say the lawyers, given the circumstances there’s nothing to stop Premier from closing the business. Gertenbach says no formal approval is required to shut down the Tulbagh operations. He reckons annual losses of an estimated R300m is justification for invoking ‘force majeure’, which would help Premier dodge some hefty contractual commitments to farmers. As for the competition authorities, who as recently as March gave a conditional go-ahead for Premier to acquire Rhodes Food Group, well, says Gertenbach the decision to close down the cannery had absolutely nothing to do with the merger.
The Del Monte disaster
Gertenbach is absolutely emphatic about that. And for good reason. Premier undertook not to retrench any employees as a result of the merger for a period of three years.
The Competition Commission, which was notified about the closure a few weeks before the end-July public announcement, is currently investigating Premier’s proposed move.
Gertenbach says it all changed between January and July when the bottom fell out of the global canning market. He points to the February liquidation of 139-year old US group Del Monte Foods as evidence of the difficulties and says the Chinese are now landing product into the important US market at half the South African cost. “We’re dealing with an obsolete product in a declining market,” says Gertenbach.
But hundreds of farmers and thousands of workers in the Western Cape Tulbagh area beg to differ. They don’t deny the market is currently facing difficulties but believe these are not insurmountable. They are incensed by the seemingly casual way Premier made the announcement and the speed with which it looks set to be implemented.
Farmers, who are on three-year rolling contracts with Tulbagh, say as recently as March they were given the go-ahead to make the necessary investment in this year’s harvest.
Devastating impact
Closure will have a devastating impact beyond the fruit farmers and workers. Jacques Jordaan, CEO of the Canning Fruit Producers’ Association said, it will affect an entire regional economy: transport, engineering, packaging, sugar suppliers, retailers and numerous rural businesses – not just one processing business.
But there is the Labour Relations Act. It’s not insurmountable but it might slow Gertenbach down. According to the Section 189A notice issued to workers “no final decisions have been taken” but the Premier CEO tells Financial Mail “If no alternative options” are found, by end-October the company will pay off the workers.
This, however, assumes things will go swimmingly with the Section 189A process as well as the Competition Commission’s own investigation into the proposed shut down.
But the prospect of things going swimmingly are remote. The factory’s staff, who are being represented by the South African Clothing and Textile Workers’ Union (Sactwu), have already called for the Section 189A process to be suspended until the Competition Commission’s investigation is completed.
The timing of the decision to close will be front and centre in that investigation. Farmers and workers say there was nothing unforeseen in the situation facing Tulbagh and market conditions have not significantly deteriorated in recent months, so the timing looks strange.
Certainly, the views on the future of the industry are not as uniformly bleak as Premier suggests, despite the Chinese, the stronger rand and US tariffs. Although not even the most optimistic say this is an easy market, they do say that with good management teams and good strategies these challenges can be addressed, particularly given the quality fruit produced in South Africa.
Patient capital
As for the liquidation of Del Monte, that had more to do with servicing the heavy debt raised at the time of its 2014 acquisition by Del Monte Pacific than with market conditions.
If it turns out the proposed closure was a planned part of the merger, the commission will cry foul and presumably impose its employment condition. But what does the commission do if Sactwu contends the closure would not have happened without Rhodes selling the business to Premier?
Although he appears determined to be shot of the Tulbagh operation, Gertenbach is hoping for options. One of these is that Langeberg Foods, which also cans deciduous fruit, takes over the business, or at least a large part of it. Langeberg, which was rescued and relaunched last October under the ownership of Norfund (the Norwegian Investment Fund for developing countries), local fruit farmers and the community, was offered Tulbagh for R1. The offer, described by some in the industry as “a hospital pass” was rejected.
In fact, Langeberg CEO Edwin Kriel is emphatic: “No we won’t take over the plant,” he tells the FM.
At this early stage in Langeberg’s new life, it would make little sense to take on Tulbagh even for R1 and even though Rhodes Food Group spent R200m upgrading the plant just a few years ago. The business is heavy on working capital and it’s likely Langeberg would not want that additional pressure right now.
One Langeberg insider talks about ‘patient’ capital being needed. “You can’t run this sort of business if you’re trying to satisfy shareholders whose focus is six monthly profits and dividends,” he says. For the Tulbagh plant, profit is only part of the picture. Protecting jobs and communities is as important.