EDITORIAL: Brait’s inevitable unwinding
Christo Wiese was at the core of the Steinhoff-Brait connection
That Steinhoff’s implosion would make the “restructuring” of Brait inevitable has a certain irony. Steinhoff, after all, was the making of Brait, or at least the propulsion of Brait from mediocre private equity player to big-time investment holding company.
In the process it made multimillionaires of Brait’s investment team.
Now, what looks to be the inevitable unwinding, or substantially slimming down, of Brait will make little money for anyone other than the merchant bankers and advisers who win the fight for a slice of the “restructuring” action.
At the core of the valuable connection between Steinhoff and Brait was Christo Wiese and Pepkor, the enormously successful retail group the billionaire built up over decades. In late 2014 Brait sold its 37% stake in Pepkor to Steinhoff for R26.4bn.
It had acquired the stake just three years earlier, from a number of parties including one of its own equity funds, for just R4.9bn. The same transaction saw Wiese, a nonexecutive director of Steinhoff at the time, sell his 52.5% stake in Pepkor to Steinhoff. It was the beginning of what appeared to be a promising and profitable relationship between Wiese and Steinhoff’s former CEO Markus Jooste.
Wiese exchanged his Pepkor shares for 609.1-million Steinhoff shares, equivalent to a 19.9% stake in the enlarged Steinhoff group. Brait was paid R15.1bn in cash and 20-million Steinhoff shares, which it sold within the year for R15bn.
Even at the time the more than five-fold increase in the valuation of Pepkor from 2011-2014 raised eyebrows, even though Pepkor had been trading well and the sector was enjoying a strong re-rating, helped by interest from overseas investors.
The existence of a “fair and reasonable” opinion from KPMG will do little to address the sceptics. The audit firm’s four-page document was replete with the usual waivers and limiting conditions.
Remarkably KPMG came up with a valuation range for Pepkor that topped the deal’s own R68bn; it determined a valuation of R64.6bn-R73.9bn. If Wiese does pursue his court battle for the return of the Pepkor shares, the valuation attributed to this deal will be closely interrogated.
Meanwhile, spurred on by its evident prowess as a deal-maker and its now-huge cash resources, Brait went on a spending spree. In April 2015 it paid around R12bn for an 80% stake in Virgin Active and followed up with the acquisition of 90% of New Look in May, justifying the staggering R14.4bn price tag on the grounds it was no different to world leaders Zara and H&M. Investors loved it. Helped by a weakening rand and the introduction of less conservative accounting policies (for valuing its assets) the Brait share price surged to a high of R174 in 2016.
And then things began to unwind.
New Look has been written down to zero and while Premier Foods and Virgin Active are attractive enough, Brait as a whole is becoming difficult to justify. And, it seems, Wiese who controls 46% of Brait might have more urgent needs for whatever cash he can realise.
The problem for Brait — as with so much of Steinhoff, indeed as with so much of the corporate world — is that there is nothing in place to act as a restraint on executives who get swept away by an exaggerated belief in their own talents.
The advisers, to what might now be described as the most expensive misstep in SA corporate history, were paid R40m to assure all concerned that selling Pepkor to Steinhoff at a hefty premium was a great deal. No doubt comforted by expert opinions, the institutional shareholders were happy to go along for the ride.
The self-belief of corporate executives makes them susceptible to the Joostes of this world. They, and their investors, inevitably rank-and-file savers, are not served by experts hell-bent on promoting their own interests.
When the final chapter is eventually written on the Steinhoff scandal it will hopefully include an account of all the advisers who enabled the destruction of R200bn of value.