The high cost of delaying corporate distress decisions

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JEREMY MAGGS: The Tongaat Hulett rescue may have dominated headlines, but perhaps the more important question is what it says about the health of South African business.

Too often companies wait until options have completely disappeared before confronting distress.

Henico Schalekamp is the chief executive officer of accounting and advisory group HLB CBS, and he joins us now to discuss why successful business rescue is about preserving value, about protecting ecosystems and creating sustainable businesses rather than simply delaying failure.

Henico, a very warm welcome to you. Why do you think, then, so many executives refuse to acknowledge distress until it’s almost too late?

HENICO SCHALEKAMP: Thanks for the opportunity, and welcome to the listeners. I think sometimes there could be some hope that things will maybe get better in the future. But what’s very important is to act quickly.

Normally in the beginning it’s much easier to restructure, because you will still have options available, especially if the business is in a loss-making position.

But most of the time it can still be a good business, like Tongaat Hulett is a good business, and my view is they can definitely get it back on the right track.

JEREMY MAGGS: You talk about acting quickly. Do you think, though, denial among boards and management or exco teams is one of the biggest destroyers of value?

HENICO SCHALEKAMP: Yes. Sometimes, these individuals can also be in a position where  they stress a bit and maybe they hope things will change. We must also take into account that the last couple of years was a very tough economy globally.

So sometimes they don’t take immediate action, but what would be a good thing to do is to then go and discuss these types of issues with corporate financiers, because they obviously have access to private equity funds and institutions.

In Tongaat Hulett’s case, they were a listed company, so they had other options, like they could have used rights issues.

They could have put a formal plan together. But, yes, they did wait for too long, in my view.

JEREMY MAGGS: At some point, though, a company does move from being temporarily stressed to being fundamentally broken. Is there a specific red flag in that case?

HENICO SCHALEKAMP: Yes, you must look at the financial ratios on the balance sheet. So it is possible that the company is making profits, but it’s got no cash flow because there’s a delay in debtor payments or maybe shipments that are on the sea and they are struggling to get the product to their offices.

What has also happened in the past, is companies with strong balance sheets couldn’t trade because of cash flow issues. That’s why it’s important to take decisions quickly and raise additional capital for these timing differences.

JEREMY MAGGS: Do you think, Henico, there’s still stigma attached to restructuring in South Africa and going into business rescue?

HENICO SCHALEKAMP: I think there are very few examples where business rescue has worked. So I think the boards are often scared to go into business rescue. Then if you go into business rescue, you do hand over the business in a way to business rescue practitioners, and they might feel they won’t have much input into the business. So I think that’s why it’s not used often.

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But in the case of Tongaat Hulett, it really can destroy a lot of things. It’s been noted that they’ve saved approximately 250 000 jobs. It’s pretty much the whole of the KwaZulu-Natal (KZN) economy.

If that company fell, it would have had a huge impact on cane growers in certain areas like Mpumalanga and KZN. There are not necessarily other options available for these farmers and their workers.

JEREMY MAGGS: Any business that is going to think about business rescue has got to look at the wider impact. You rightly referenced the Tongaat Hulett case. A lot of headlines about the company, but there wasn’t that much conversation about growers, suppliers and even the communities that depend on that. And that’s the point that you’re making.

HENICO SCHALEKAMP: Yes, exactly. It’s far more than just the shareholders that lost money. How many families does 250 000 employees support? It’s all those farmers who worked closely with Tongaat Hulett.

I think if they didn’t manage to conclude this deal, I think it would have had a devastating impact for all those businesses.

JEREMY MAGGS: But sometimes there’s a lot of short-sightedness. Lenders and shareholders, I imagine, are sometimes guilty of prioritising their own narrow interests at the expense of longer-term value.

HENICO SCHALEKAMP: Yes, unfortunately that would happen. I’m sure the bankers would have been quite scared to put extra capital in. The same with shareholders, especially all the negative headlines that were also in the media on all the irregularities. I think that just made it much worse.

JEREMY MAGGS: Henico, in your experience, what then distinguishes a business that emerges stronger from one that simply survives?

HENICO SCHALEKAMP: I think you must go and look at the overall health of the business.

You mustn’t only look at what’s on the balance sheet, but also what are the opportunities of a business.

So if you can see there are good long-term opportunities, there’s an opportunity to grow or maybe scale the business a bit, but it only needs capital, then those are the businesses that you want to back and put additional money in.

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I think that was the view that was taken by Vision Group and the IDC (Industrial Development Corporation), to take on this initiative to effectively save Tongaat Hulett. If it went into liquidation, then they would have broken it up into parts.

I think there could have been a lot of retrenchments, and it would have been a really ugly situation.

JEREMY MAGGS: There are a lot of lessons from that particular business case. I’m going to leave it there. Henico Schalekamp, thank you very much indeed. He’s the chief executive officer of the accounting and advisory group HLB CBS. Thank you very much indeed.