Picture: Daniel Born
Picture: Daniel Born

Steinhoff Africa Retail (Star) will be advised by the end of August how much it may need to pay to settle a controversial management-incentive plan devised by a company formerly owned by billionaire Christo Wiese.

The operator of clothing chains including Pep and Ackermans disappointed investors in May when it booked R500m in charges related to the arrangement, a hangover from when the company was still part of scandal-hit retailer Steinhoff International.

The plan was put together in 2011 by Wiese’s Pepkor Holdings, which was bought by Steinhoff in 2015 and now makes up the bulk of Steinhoff Africa.

Star hired law firm Bowmans to investigate to what extent the retailer is liable for the deal, which allowed 44 Pepkor managers to take out loans to invest in the business that were guaranteed by the company. It expects to receive the findings in six weeks’ time at the latest, according to chairman Jayendra Naidoo.

Mitigate risks "So far, we’re just saying there’s a risk and we’ve taken a provision," Naidoo said by phone. "Our stance is clear: to recover the loans and find a sensible way to mitigate the risks. We are mindful of the fact that not everybody is in a position to afford to pay those loans." The potential write-down is among the latest challenges for Star in what’s been an eventful first 10 months as a listed company. The stock plunged when Steinhoff, which holds a 71% stake, reported a hole in its accounts in December, even though Star’s own financials were given the all-clear. More recently, investor confidence has been eroded by an unseemly spat between Star management and the founders of Tekkie Town, which Steinhoff bought two years ago.

Star shares have weakened 34% since the Steinhoff financial crisis erupted on December 5, giving it a market value of R57bn.

Pepkor’s incentive plan was conceived because, as a closely held business, its executives couldn’t buy shares on the open market and therefore couldn’t participate in the growth of the retailer. To resolve the matter, a company called Business Ventures Investments was formed in which managers could invest, and that in turn bought a stake in Pepkor.

Some managers bought into BVI with their own money, while others took loans from Pepkor’s finance arm and Rand Merchant Bank (RMB). The RMB debt was guaranteed by Pepkor.

‘First prize’ Wiese stands by the thinking behind the plan even though he is no longer involved with Star.

"For me, first prize is to have top executives exposed as much as possible to the fortunes of the company," Wiese said by phone. "It makes me relaxed that my management and my shareholders are on the same side of the fence. We swim together, we sink together.’ When Steinhoff bought Pepkor it also acquired the clothing retailer’s liabilities, including the management-incentives loan guarantee. The Pepkor shares that BVI had accumulated were converted into Steinhoff shares, which subsequently crashed when the accounting scandal erupted. That meant some managers would not be able to use the stock to pay back the loans, triggering the guarantees now held by Star.

The structure of the deal amounts to "gambling with shareholder money," said Theo Botha, a Star investor and corporate-governance activist. Furthermore, stockholders were not informed of the risk in a timely manner, he added.

Why the BVI guarantee was not disclosed sooner and why the Steinhoff shares were not converted into Star stock are "fair questions" that are being looked into, Naidoo said. He added that since December, Star had been trying to clear the bigger problems created by its close link to Steinhoff, such as refinancing loans owed to the parent in order to be financially independent, and only recently started looking at secondary issues.

"There was very little disclosure, if any," Botha said. "Why should we pick up this bill on a new company? The executive management must bail themselves out."