Barloworld gets more starch in its diet

The deal was originally announced in March. Barloworld would buy the Starch division from Tongaat Hulett for R5.35 billion in a critical move for Tongaat which is on a recovery road.

As ever, the deal remained subject to shareholder and regulatory approvals. The norm for corporate transactions is to include something called a Material Adverse Change clause, or MAC clause. This gives companies an escape hatch in case something terrible happens with the asset being acquired while the deal is being closed.

Covid-19 happened and Barloworld tried to get out the deal by invoking the MAC clause.

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The role of the independent expert

Independent experts are critical in the dealmaking world. They provide objective opinions on valuations and whether offers are fair. In cases like this, they do detailed work on whether the MAC clause can be applied by the acquirer to try get out of the deal.

When Barloworld invoked the MAC clause, its SENS announcement read as follows:

“Barloworld is of the view that that COVID-19 global pandemic and the consequences thereof constitute an event that is reasonably likely to cause the EBITDA of the Sale Business for the financial year ending 31 March 2021 to be 82.5% or less of the EBITDA of the Sale Business for the financial year ended on 31 March 2020, and that, therefore, a MAC has occurred.”

The key learning here is that well-drafted MAC clauses have an objective measure for whether the adverse change is indeed material. In this case, Barloworld wanted the ability to walk away if Earnings Before Interest, Taxes, Depreciation and Amortisation would drop by more than 17.5% year on year.

Tongaat Hulett pushed back, noting that they were “firmly of the view that a MAC has not occurred” which implies that the starch business would not suffer an earnings decline of more than 17.5% this year.

Nobody has a crystal ball, but the independent expert was called in to provide the best possible estimate of profitability for the year ending March 2021.

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Everyone is a winner

Rothschild & Co SA, a highly respected global corporate advisory house, confirmed that the EBITDA decline is not reasonably likely to breach the threshold for the MAC clause. This means that Barloworld will take transfer of the business, expected to be by November.

Why does everyone win here?

Tongaat Hulett gets its money and continues on a road to recovery. Barloworld buys the business it wanted to buy anyway, safe in the knowledge that it withstood the lockdown nightmare. Rothschild & Co executives got closer to meeting their annual advisory budget.

I did have a chuckle at Barloworld’s public comment that it was “pleased that the starch unit has shown resilience during the pandemic” and that it is a “defensive investment” – they weren’t so confident back in March when they wanted to get out of the deal!

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