Picture: ISTOCK
Picture: ISTOCK

Short sellers made a killing on Steinhoff last week and among them was an until recently almost unheard-of entity called Viceroy. Its research has ripped into what its three-man team call Steinhoff’s "Ponzi scheme". Business Day this week asked them:

What is Viceroy?

(We’re) an independent research group based in the US. Our focus is to research entities that we find have signs of accounting irregularities and potential fraud.

To what end?

We take a financial position in our research and our readers should assume we have a position on the stock.

Why do you insist on being anonymous?

We do so because we don’t get really many nice things said to us … We don’t have a problem with criticism and we’re happy to be called out on inaccurate research. The major issue we have is that there have been issues in the past where short sellers are targeted that go beyond the realm of legality. There’s lots of emotional investment in the stock markets…

What alerted you to Steinhoff?

The business was growing very rapidly through a very aggressive acquisition stage and the oddity was that there was no real value added to shareholders in the transactions which were conducted via equity raises. From there it was a bit like War and Peace — this was like a big novel, there were a lot of names, there were related-party transactions, even down to major transactions like Pepkor. (There was) the reverse listing of Genesis (a shell company led by former Steinhoff CFO Siegmar Schmidt), which we thought was a totally financially nonsensical transaction – that was just a huge tip-off that there was something wrong. This business was basically a shell and yet Steinhoff lent them €375m to purchase (struggling Austrian furniture group Kika) and then months later Steinhoff purchased Kika’s real estate portfolio from Genesis for a premium of €77m.

When did you really start looking into Steinhoff?

From maybe mid-year. There’d been Reuters articles …about GT Branding (an entity that owns over 200 Steinhoff brands)… there were too many investigations going on … allegations that they weren’t paying enough tax; there were these related-party instances … so we said alright, let’s pick it up … We’re very focused on what we do invest in. Right now we’re only reporting on two entities.

Local buyers who’ve been badly burnt are asking why fund managers did not see this. Was it there to see if anyone had spent time and attention?

That’s absolutely fair criticism. But this business is inherently untransparent. It’s very difficult to actually break down things that might seem insignificant but actually have a very big impact on earnings because their margins aren’t great. The revisions that we made per our research are not material in comparison to the revenues that Steinhoff make … but when added together they’re very material to the quality of earnings … If you look at the ebit of Steinhoff and add that to their free cash flow, those figures don’t correlate at all. That’s hidden away as well behind the equity raises, because they are doing massive acquisitions all the time and cash isn’t really a problem when you’re going to the market and saying, we need to acquire x business and we need to raise X amount of cash.

Do you think Markus Jooste is the fall guy? And what do you make of Christo Wiese coming in to clean up?

We thought it was really odd, (his resignation) statement that was made to the employees. Obviously, yes, by admission in this letter he was complicit, but in terms of the actual relationships he had beyond Steinhoff — he didn’t have a clean sheet, he knew what was going on. But as far as his paper involvement, ie directorships in these related party entities, is concerned he was not listed. Maybe these are other internal accounting issues that we haven’t alluded to in our report that he’s referring to where he’s made "major errors"… but definitely it seems that Christo has been the key player. We’d find it difficult to believe there were any independent directors on that board. It’s a very incestuous kind of business.

This introduces cognitive dissonance: that Christo takes over, has his fingerprints everywhere, but is also the person with the most financially to lose?

Christo guaranteed a loan to purchase Mattress Firm and that’s very interesting because given that the loan is essentially guaranteed against his security, that would be very troubling for the debt holders. Because now they’re saying: okay, we’re going to have to materially revise our earnings down and at the same time the guarantor for the debt probably is not able to (meet his obligations).

How do you square the bankers backing Steinhoff for so long?

I know exactly what you mean, but don’t have a response — it’s the world we live in.

Were you in contact with Steinhoff at all?

We did not contact Steinhoff prior (to releasing the report). We didn’t expect to publish until a little bit further on. We don’t typically reach out to businesses … because you can’t call investor hot lines and ask tough questions. It just simply does not happen. We’ve published reports on an Australian business in the past called Quintus, and we got barrelled with shareholder abuse.