Only Steinhoff’s financial advisers seem to be doing well from its implosion
The most important passage in Steinhoff International’s regulatory filing late on Friday was a section attesting that management still believed the retailer was a going concern.
A formality for most companies, Steinhoff’s confidence that it can keep the lights on is not self-evident.
The acquisitive group’s shares have lost almost all their value and its bonds trade at a steep discount, following a warning of accounting regularities and the resignation of CEO Markus Jooste as its CEO, which triggered a liquidity crisis in December.
The new unaudited figures for the six months to March include a shocking €11bn back-dated restatement of shareholders’ equity, including the disclosure that much of the €3bn of cash it reported a year ago didn’t exist (or shouldn’t have been consolidated) and that its profits were overstated by about €1bn. It reported a €600m net loss.
It’s a bleak picture for Steinhoff’s new management team as it tries to meet obligations on a €10.6bn debt, recover some value for shareholders and reassure customers and suppliers that it’s still a reliable partner.
As is often the case in these types of situations, only Steinhoff’s financial advisers seem to be doing well from its implosion.
Equity investors are naturally furious about what’s happened and some are suing the company. Holders of Steinhoff’s debt are fortunate that those claims won’t be resolved quickly, so any cash penalties will only come due later — possibly allowing some time for the retailer to stagger to its feet again.
The company hasn’t yet made a provision for possible litigation payouts, nor quantified the potential liabilities.
For now, that’s helping to stop Steinhoff from giving up the ghost. But it means that even these unvarnished accounts are a pretty sketchy guide to its true financial condition. The numbers published on Friday are unaudited, so think of them as a best guess. There’s a risk of more irregularities coming to light because of the ongoing probe of various off-balance sheet structures and non-arms length transactions. And that’s not the only problem.
Writing off €11bn of equity sounds like a clearing of the decks, but Steinhoff’s accounts still show a big chunk of goodwill and intangible assets, a legacy of its free-wheeling mergers and acquisitions (M&A) days.
Take Mattress Firm, whose inflated purchase price I have previously explored. The US store chain is losing money and has recognised a €1.5bn goodwill impairment in view of its diminished prospects. That’s pretty shocking given the unit was acquired less than two years ago. But there’s still another €1bn of Mattress Firm goodwill on the Steinhoff books.
In total, the Steinhoff accounts show just $3.8bn of net assets, meaning it can ill afford further impairments. Steinhoff’s market capitalisation is just €363m, which suggests shareholders aren’t optimistic.
A more pressing concern is paying creditors. Steinhoff’s liabilities due within 12 months vastly exceed current assets. Agreeing on a restructuring plan and repayment rescheduling with bondholders should ease those cash pressures somewhat, but not entirely.
Steinhoff’s operations bled €800m of cash over the six months to March because suppliers have tightened payment terms. Don’t expect them to cut Steinhoff any slack. Similarly, it’s difficult to convince a customer to put down a deposit for made-to-order furniture when they might wonder whether the company will still be operating in 12 months’ time.
The retailer has sold some businesses, property and a corporate Gulfstream jet to help fund its obligations but the weak cash generation makes more asset sales quite likely.
It’s no small irony that the task of boosting cash flow is made harder by the expense of hiring forensic accountants (PwC) and consultants (Moelis and AlixPartners) to clean up the mess. Steinhoff spent €39m on professional fees since December and expects that to rise "substantially".
This cost is unavoidable but it will irk Steinhoff investors. They’ll wonder why the external auditor Deloitte felt able to attest that the now discredited accounts were a "true and fair" reflection of its financial position.
Although Deloitte did eventually raise concerns about Steinhoff, as of Friday we know its "true and fair" assessment was off by about €11bn. Another triumph for the bean-counters.