Little sweetness or light in the secretive world of sugar

Is commodities giant ED&F Man doing backdoor deals with Cuba? Paul Farrelly investigates

The commodities world plies a vast, but highly secretive trade. The business of shipping billions of tonnes of foodstuffs year in, year out is dominated by a handful of global giants, privately owned and publicity shy.

Firms such as Cargill, the Minneapolis-based trader which owns Sun Valley Poultry over here; Bunge, the huge Argentinian agri-business, registered in tax haven Bermuda for added good measure; and Louis Dreyfus, the giant French "King of Wheat", founded on a farm in Alsace 150 years ago.

ED&F Man, Britain's champion on the world stage, should be that rare exception to the secretive tendency. It is quoted on the stock exchange. Analysts research it. The firm issues six-monthly and annual accounts. It should, you would think, be as open and approachable as any publicly quoted company.

City experience since the firm's flotation in 1994, however - and that of a stonewalled Independent on Sunday in the past four months - suggests that Man is still possessed by the obsessive secrecy of its peers.

Sure enough, it might have good reason. With the US once more flexing its muscles, the main object of our interest, Cuba, is a highly delicate area. But obduracy often raises further questions - about profits and balance sheets - and rarely wins friends.

It also loses advisers. Last month Financial Dynamics, the PR firm that guided Man through its flotation, resigned - an unusual step but one taken in frustration at the lack of wherewithal to woo the press and the City, where the group remains little understood and largely shunned.

Man trades a variety of commodities around the world, from cocoa to nuts, spices, molasses and alcohol. It also has a growing and respected financial services arm, with $1bn (pounds 600m) of funds under management, and operations in the US.

It is in sugar, however, that the group retains its niche, reflecting the sugar broking roots of its founder James Man over 200 years ago. Man has 16 per cent of world cross-border sugar trade, a remarkable achievement for a pounds 480m company.

And if you are big in sugar, you are inevitably in Cuba, one of the world's largest exporters of the stuff.

Or at least, you used to be. Last March, in a pre-election pitch for votes, President Clinton signed anti-Cuba legislation sponsored by right- wing Republican senators Jesse Helms and Dan Burton. The Helms-Burton Act caused panic among foreign firms "trading with the enemy", as the US still styles Fidel Castro.

Last July, the former deputy governor of the Bank of England, Rupert Pennant-Rea, was among top executives barred from the US over their Cuban trading links.

Foreign firms face the prospect of having their US assets seized if they do business with Cuban enterprises operating from US property taken by Castro in his 1959 revolution. In January, after international uproar, President Clinton suspended US firms' ability to sue foreigners for damages for six months, but the threat remains.

And to make matters worse, the European Commission hit back with a directive making it illegal for European firms to comply with the US law. "It is a matter of principle. We don't accept the pretensions of the US to legislate about what European companies do outside America," EU spokesman Peter Dixon said.

The directive still has to be incorporated into member states' law, but European firms doing business with Cuba find themselves wedged between a rock and a hard place.

Some, including top sugar refiner Tate & Lyle, have opted to toe the US line. "They have not touched one tonne of Cuban sugar this year, as far as we know," one trader said.

Others have taken a more circuitous route. Last July ING, the Dutch bank which rescued Barings, said it had pulled out of financing the Cuban sugar crop - to the tune of $30m, according to Cuban sources. Instead, two other banks have taken its financing on, but whether ING has abandoned the business is less clear.

Man has years of involvement in Cuba, not that investors would know that from its accounts. Company insiders say that of sugar profits of $85m last year, the European trading book made $30m, the US book $8-9m and the balance - 30 per cent of total profits - came from Cuba.

The geographical analysis of profit in last year's accounts gives no clue to this. Outside Europe and North America, it points to profits of just pounds 2m from "the rest of the world".

"There's no mention of Cuba. It's as if it's has been wiped off Man's world map," said one industry source.

Man furthermore has been the biggest player in the so-called "pre-financing" of the Cuban sugar crop. Under this system, foreign traders and banks provide Cuba's provinces with money for fertilisers and pesticides in return for a profit-sharing agreement on sale of the crop.

Man's commitment to this year's crop was at least $50m in three of the country's 15 provinces - Villa Clara, Sancti Spiritus and Camaguey - out of a total $190m, Cuban sources say.

But as far as the City, including ED&F Man's broker, Barclays de Zoete Wedd, is concerned, Man has pulled out of pre-financing deals because of concern over Helms-Burton.

But investigations by the Independent on Sunday have established that Man has secretly restructured its dealings to give the impression it has no direct Cuban links.

Last October Christopher Murphy, Man's 38-year-old chief sugar trader, suddenly resigned and sold all his shares in the group. With another ex- Man sugar director, Michael Cronk, Mr Murphy is now running Pacol, a commodity trading outfit with 15 other former Man sugar staff in London, a Paris- based offshoot Pacol SA, and an office in the Cuban town of Miramar.

Pacol - originally Plantation and Colonial Products - used to be a dormant Man subsidiary. In February 1996 a new off-the-shelf company Faxcorner was formed, and on 7 October took the Pacol name. At the same time, in a tidy switch, the original - which remains a Man subsidiary - took the Faxcorner name. Pacol SA, too, was a Man company.

The new Pacol's ownership remains unclear. It has only one director, Napleton Holdings, a Guernsey-registered firm. All its statutory filings have been carried out by Katie Hutchinson, Man's assistant company secretary, however. Sources say Man's Cuban sugar financing now sits in Pacol, but that Man guarantees Pacol's credit lines.

"The Cuban authorities also believe that ED&F Man is behind Pacol," one industry source said. "The objective is for Man to be able to say that it does no official business with Cuba ... but the structure would fall apart if the US really looked at it."

Last week, Peter Clarke, Man's director of corporate finance, declined to return calls. In January, he had agreed to talk to the Independent on Sunday, but later refused.

Man's full arrangements with Pacol remain unknown. And, if it is truly independent, also unclear is how Man will replace the Cuban trading profits and what price it received for transferring the business.

Pacol does more than trade Cuban sugar. It is involved in coffee and other commodity business around the world, and would appear to be in competition with its mentor.

So far, Man appears to have done very well out of Cuba. The island's sugar industry recovered last year, producing over 4m tonnes against a record low of 3.3m in 1994-95 as it struggled to replace markets after the collapse of communism in the Soviet Union and the eastern bloc.

Cuba's pariah status and need for hard currency means that firms like Man can drive hard bargains, which may help to explain the firm's surprisingly high sugar margins.

Industry sources say Man has cleaned up when Cuba has failed to deliver, finding new supplies for countries such as Kazakhstan. They question, however, whether part of Man's sugar profits may be paper only, not cash - coming from the rolling-over of deals, which Cuba may have been unable to fulfil, into better contracts the following year.

Sugar in Cuba is now in a state of flux, with unpredictable consequences. The crop this year will be lower than expected, and all of Cuba's contract commitments are unlikely to be fulfilled. In January, Alberto Betancourt, head of Cubazucar, the state sugar company, was sacked with two other senior staff.

No reasons were given, but Cuban sources cite a Russian oil-for-sugar deal that went wrong, and concern at pre-financing deals which were too favourable to foreign firms.

Man's shares have disappointed hugely since the firm's flotation in October 1994. At 185.5p, they are barely above their 180p debut price and trade on a multiple of just nine times earnings. A rash of "buy" recommendations have largely gone by the board, the most recent from BZW a fortnight ago, suggesting a sum of the parts valuation of 275p.

Doubts about the quality of earnings - to which the key, and so far undisclosed, role played by Cuba can only add - still turn investors off. Share sales by staff and memories of disasters at commodity rivals Berisford and Gill & Duffus in the 1980s also combine to leave the City cold.

Man will have to answer more questions to turn investors' heads when it reports its annual results in June. How much of its new pounds 800m worth of bank facilities have been utilised, for example? Why is it operating negative or weak cash flow - to the tune of a net outflow of pounds 220m over the last 51/2 years? Why do debtors keep on rising? How are they composed - at pounds 757m in September they vastly exceeded creditors of pounds 481m? And when will returns flow from new investments? Explaining about Cuba would be a start.