THE STEINHOFF FILES: Inside SA's biggest corporate meltdown
All the latest stories on the drama surrounding one of SA's largest companies as regulators close in
Since the dramatic collapse of Steinhoff's share price following news it was under regulatory scrutiny in Europe, top writers from Business Day, Financial Mail and Business Times have worked to unpack what went wrong and who is to blame.
In the most significant move since news of the Steinhoff collapse broke, Christo Wiese has announced that he is resigning as chairman. This from our story:
Steinhoff International chairman and largest shareholder, billionaire Christo Wiese, is stepping down from the supervisory board following the accounting scandal that has engulfed the retail giant.
The board accepted Wiese’s resignation to resolve questions of conflict of interest, the owner of furniture chains such as Mattress Firm in the US and Conforama in France said in a filing on Thursday.
Heather Sonn, a member of the board and its independent subcommittee, will take the role of acting chairwoman.
The resignation comes a day after Steinhoff said its accounting errors stretch back into 2016, highlighting the extent of wrongdoing at the retailer that has led to a more than 80% stock slump since the beginning of last week.
Business Day's Hanna Ziady has been digging into the causes of the Steinhoff collapse. This from her article 'Claims against Steinhoff uncover revolving tangle of dodgy deals':
A report by Viceroy Research – published on the same day Steinhoff admitted to financial wrongdoing and its longtime CEO, Markus Jooste, resigned – provides some indication as to how the financial engineering apparently took place.
So, if there has been fraud, how did it happen? It seems by using three off-balance-sheet related party entities: Campion Capital, Southern View Finance — controlled by entities linked to chairman Christo Wiese — and Genesis Investment Holdings.
Steinhoff lent money to these entities to buy its unprofitable businesses and then booked interest revenue on these loans, says Viceroy. The picture that emerges is of a company consistently on both sides of a transaction.
A Financial Mail article also takes us 'Inside Steinhoff's house of cards' to reveal how Markus Jooste saw himself playing 'a game for money'.
This from the article:
A "game for money" is an odd choice of words since Jooste was, at the time, the pivotal figure in a German tax investigation that hinged on whether Steinhoff had cooked its books. (The Germans were investigating, because Steinhoff had listed on the Frankfurt Stock Exchange in December 2015.)
Jooste, the charming son of a Post Office worker and one of the unofficial dons of the so-called Stellenbosch mafia, said at the time that it was all a media witch-hunt. "They twist it to make it sensational — it’s the same as we had here in SA. But at the end of the day, what will happen will happen."
Those media reports, in the Manager Magazin, said Steinhoff’s empire may be "built on quicksand", as "vulnerable to collapse as (Steinhoff’s) cabinets and drawers made of cheap chipboard".
Business Day's Hilary Joffe writes that the fall-out from the Steinhoff disaster is yet to be fully tallied. She writes in 'Steinhoff lessons come at a colossal cost':
The damage to SA’s reputation could be significant. SA Inc has been a place where stakeholders could trust the accounts and the veracity of the audit reports, a country highly rated for its accounting standards, corporate governance and protection of minority shareholders.
Steinhoff has put question marks over all of that, especially coming as it does so soon after the KPMG scandal.
Questions have now been raised about the probity of some of SA’s regulators. Before Steinhoff moved its primary listing to Frankfurt exactly two years ago, the German tax authorities raided its offices and were investigating irregularities. Even if much of the dodgy debt-fuelled stuff was offshore, it’s not clear why it took Germany’s law enforcers to pick up what SA’s regulators seem to have missed.
Politically, the scandal could not have come at a worse time, feeding into the "white monopoly capital" narrative and providing fuel for those — such as Energy Minister David Mahlobo — desperate to use private sector corruption allegations to distract from public sector corruption and state capture.
The resignation sent the Steinhoff shares into freefall, leaving a mountain of questions in its wake. The company is saying nothing at all. It is impossible to know anything until it does. All we have is a huge paper loss and speculation about why it happened and what it might cost investors.
The speculation, as far as I understand, is that Steinhoff was built on debt and that it hid the debt with friendly shell companies. That’s fraud, just like the Guptas’ faked inflation of their Oakbay share price ahead of its listing will prove to have been fraud. Nonetheless, Steinhoff was considered bankable. That’s the “old school” effect, where friends lend to friends. I have written endlessly about how toxic cosy networks of like-minded people are to South African capitalism.
In a seperate article, Peter writes about 'How Steinhoff has exploded the myth of Afrikaner business':
The essence of South African capitalism's disease is that business chases short-term gain at the expense of long-term stability. Chief executives set themselves quarterly earnings targets. Meet your target and the equities analysts and fund managers hold on to your shares and recommend to their clients that they buy more. You win.
But to meet your targets you cut costs. Jobs go, investments are put on hold. The CEO spends more time running the executive share incentive scheme than the business. Managers have too much power and boards are weak - often a group of like-minded friends of the CEO. The accountants who provide these companies with the cover of respectability are part of the mess. Many end up running the companies they once audited.
Business Times editor Ron Derby wrote in his column Private sector's genius by reputation lies exposed how some of SA's top business leaders presided over Steinhoff's woes from its boardroom:
On Steinhoff's board of erstwhile gentlemen and a paltry two women are five chartered accountants, and on these most hallowed of seats, well up until a few weeks ago, sat three former chief executive officers of major corporations. Among the people leading the company along with retailing legend Christo Wiese and his 36-year-old son, Jacob, are heavy hitters such as Steve Booysen, former CEO of Absa, and Johan van Zyl, the former head of Sanlam, who has been credited with inspiring its comeback story over the past decade. For good measure, in its executive management, Sean Summers, former Pick n Pay CEO, is listed as a retail executive.
That's quite an impressive bunch of CVs that would on any given day pass any credibility test. Yet these very same people have somehow been duped, missing fraud that amounts to billions, for which former CEO Markus Jooste has admitted ultimate responsibility.
Business Day editor Tim Cohen pointed out that warnings that something was wrong at Steinhoff had been ignored. This from his column, A few saw it coming, but nobody listened:
For the record, it must be said that for years, there has been a rumbling undercurrent about the integrity of Steinhoff’s accounts. Auditor Deloitte gets huge kudos for finally blowing the whistle, and some brickbats for not doing it earlier. Investment house UBS gets an honourable mention because its one-time retail analyst Darren Cohn terminated coverage out of concern about its financial structure, while Futuregrowth’s Andrew Canter acutely managed to avoid investing in the company’s bonds.
However, the singular hero here is financial analyst Shaun Holmes, who at the time worked for JP Morgan and who now works for Deutsche Securities and is currently the Financial Mail’s top-rated analyst of retail stocks.
Holmes wrote an excoriating report way back in 2013 about Steinhoff, which was then a medium-sized furniture retailer. I don’t know Holmes beyond saying "hi", but I know about his research because I wrote about the report then, and like Holmes, got into some trouble for it.
Much more eloquently than I, however, was now deceased Business Day columnist David Gleason, who wrote the following in Business Day in 2013: "According to Steinhoff’s latest integrated report, the group held net interest-bearing debt of R24.2bn, which meant it had a net debt-to-equity ratio of 45%. The net debt was determined after deducting R8bn in cash and cash equivalents. Long-term loans stood at R3.368bn, short-term loans were R5.136bn, the bank overdraft was R2.092bn and liquid investments and loans totalled R8.827bn."
The problem, said Gleason, was the R8.27bn, which he said did not appear to pass the test of being "immediately available for extinguishing the debt". He then related how he was shunted from pillar to post by Len Konar, the then chairman, and Mariza Nel, the corporate services director, before appealing for some more transparency, which of course he never got.
Writing in Business Day under the headline, Steinhoff catastrophe biggest yet in SA and ranks among notorious global collapses, Stuart Theobald captured the extent of the meltdown:
The Steinhoff corporate disaster is the biggest yet to hit SA. The value destruction in Steinhoff so far is 30 times the 2015 collapse of African Bank, depending on how it is measured, and multiples more the size of JCI, Tigon, Fidentia, First Strut, and the many other corporate collapses of the past two decades.
Steinhoff’s implosion ranks alongside global corporate collapses such as that of WorldCom, Tyco and drug company Valeant. Only 27% of Steinhoff’s revenue was generated in Africa. The company was global in operations and its collapse is global in its consequences.
The company is not yet dead, though there has been very little information to assess its chances of survival.
Its shares continue to trade, almost 90% down on their value a week ago.
Its listed bonds are trading at about half of their face value. The company has said it is concerned about the "validity and recoverability" of €6bn in non-South African assets. That is equivalent to R96bn. But R187bn has been wiped off Steinhoff’s market capitalisation.