No bottom in sight for Steinhoff
Wiese’s resigned, its lenders are closing the funding taps, and its accounts are in chaos. It’s only getting worse ...
This week, Steinhoff confirmed what even its most optimistic investors are beginning to accept: the embattled furniture retailer doesn’t know what it doesn’t know.
On Tuesday, Steinhoff’s new acting CEO Danie van der Merwe gave a revealing presentation to its jittery bankers at an unnamed hotel in London. Only, it read more like a sales pitch for why they shouldn’t pull the plug on its Pepkor, Conforama and Star Retail assets, rather than a lucid explanation of the ominous "accounting irregularities" that had forced CEO Markus Jooste to quit two weeks ago.
There were enough figures in that 58-page presentation to deeply unsettle investors. For a start, Steinhoff now says it is "not possible" to give a date for when it will release its September 2017 accounts, nor its "restated" 2016 financials. Nor can it say if other years’ accounts were cooked, or even provide a sense of the "magnitude of the accounting irregularities".
It seemed to confirm investors’ worst fears, after an already blisteringly bad week, in which chairman Christo Wiese, the totemic figure seen as central to Steinhoff’s fortunes, resigned.
After the banker presentation emerged, Steinhoff’s already-frail stock collapsed again to R4.87/share at the time of going to print, takings its overall fall in market value to R219bn in the past three weeks, an 91% plunge from the R55 at the beginning of this month.
You can imagine the conniption Steinhoff’s admissions caused at its meeting with the bankers, who’re not exactly renowned for their poise under pressure.
Curiously, Steinhoff’s presentation did not make any mention of the shadowy deals involving three Swiss and German companies — Campion Capital, Genesis Investment Holdings and Southern View — at the heart of the mess. Insiders have told the Financial Mail that Deloitte refused to sign the accounts because they feared those companies were secretly run by people close to Steinhoff, who may have helped the furniture retailer overstate its revenues and understate its liabilities.
Still, Steinhoff did reveal enough heart-stopping detail to rattle the bankers. For a start, Steinhoff’s debt has swollen to €10.7bn — more than the €9.1bn at last count. (Of this, €8.6bn sits in Europe, with €1.9bn in SA.)
This becomes a somewhat serious problem because of this admission, elsewhere in the retailer’s presentation: "Credit facilities are increasingly being suspended or withdrawn
by lenders" in some of Steinhoff’s operating companies.
The upside for Steinhoff is that it doesn’t appear to have an immediate solvency problem, as its assets still exceed its liabilities. But the downside, as one analyst points out, is that "they do have a liquidity problem as short-term facilities are being withdrawn. At this rate their prospects are quite dire".
The problem is, the company’s cash-flow projections are also fuzzy because, Steinhoff revealed, it "did not have detailed visibility of individual operating company cash flow forecasts". This, it assured investors, is being fixed.
It’s the sort of accounting chaos that the anonymous research unit Viceroy (which had taken a short position on Steinhoff’s stock some weeks ago) had flagged. Viceroy reckons Steinhoff overstated its 2016 earnings by at least €1.047bn.
Steinhoff’s woes dovetail with those of Wiese, who until last week owned 30% of the retailer’s stock. But his personal collapse in wealth (a fall of R60bn in his personal fortune in three weeks) led to a trader’s nightmare: a margin call.
This is because last year a group of banks including Citigroup and Bank of America lent Wiese €1.6bn to buy more shares in Steinhoff, as the acquisition-hungry firm snapped up Mattress Firm in the US and Poundland in the UK.
At the time, the banks took 628m of Wiese’s 1.29bn Steinhoff shares as collateral, worth €3.2bn at the time of the deal. The collapse of Steinhoff’s share, however, shredded that value to less than a quarter of the loan’s value — leading them to dump 98.5m of Wiese’s shares on the market.
Early this week Wiese dumped shares worth R2.15bn he held in food retailer Shoprite. That was only 10% of the 101m shares he owned in the food retailer (he still holds R20,5bn worth of Shoprite), but it’s an indication of the stress he appears to be under.
Overall, this collapse — the most severe in SA corporate history, eclipsing such disasters as Tigon, Fidentia, Masterbond and LeisureNet — has affected thousands of South Africans whose pensions were invested partly in Steinhoff.
The big asset managers that run those funds, meanwhile, have gone to ground. Coronation and Old Mutual, both among Steinhoff’s top 20 shareholders, have avoided questions from the Financial Mail.
Perhaps it’s understandable, given how poor Steinhoff’s disclosure has been about how serious these "accounting irregularities" actually are.
Sanlam Private Wealth’s Greg Katzenellenbogen says: "It’s extremely poor on the company’s [part]. Never mind the people directly involved and huge amounts of their wealth that has been written off, there are hundreds of thousands of people who are directly and indirectly affected by the collapse in the Steinhoff share price."
Katzenellenbogen believes that Steinhoff’s deafening silence "indicates that many of the directors themselves don’t know the full extent of what has happened".
At least, in the presentation to its bankers, Steinhoff made some crucial concessions on its governance, admitting it needs to "reset" its corporate governance.
This will no doubt be seen as something of a slap in the face for its board — led by supposed governance luminaries such as Len Konar, former Sanlam CEO Johan van Zyl and former Absa CEO Steve Booysen.
As the Steinhoff story unravels, new disturbing details are emerging of the company’s less-than-savoury methods of doing business.
This is the view of Gregory Gomes (52), who now owns a high-end furniture business called Classic Working Life.
Gomes says Steinhoff went out of its way, including years of legal wrangling, to avoid paying him a R2m sales commission — curious behaviour from a company that reported €16.4bn in revenue in its past financial year.
Back in 2008, Gomes was the chief salesman at Grant Andrews’ furniture firm Emergent Office Solutions — which was 51% owned by Steinhoff, and 49% by Andrews.
Then he signed a new "high-risk, high reward" commission deal with Andrews. Emergent then hit the jackpot — a R45m order. "This meant I got a big chunk of the profits and Grant got a small chunk, and when Steinhoff saw this they flipped," says Gomes.
Though Steinhoff was unhappy, it couldn’t do much about it. Eventually, Steinhoff decided it wasn’t worth it — so it closed down Emergent with a single day’s notice.
Gomes says Steinhoff told him it wouldn’t pay out a retrenchment package of about R700,000. "I asked about the outstanding commission due to me, which was in excess of R2m, and they said: ‘Well, we’ll see at the end when we’ve closed the company if there’s anything left’," he says.
Emergent was then liquidated. Gomes says: "Every time I submitted a claim, the liquidator found something wrong with it, or Steinhoff would object to the numbers."
Eventually, three years after Gomes had spent nearly half a million rand in legal fees, Steinhoff agreed to pay him R200,000 "to stop fighting".
Gomes believes Steinhoff’s actions were nothing more than spite — which he feels was confirmed by one of Steinhoff’s lawyers. "I said to him, off the record: ‘Just tell me, is this costing Steinhoff more than what they owe me?’ He said: ‘Far more’."