It was one of the best performing companies in Africa and investors loved it. No other retailer has been able to do what Steinhoff did. In just three years, Steinhoff grew from a humble South African furniture retailer, with some European assets, into a global giant. It has more than 12,000 stores in 30 countries over five continents, employing 130,000.
It was the fruit of an acquisition spree that began with the purchase of pan-African Pepkor Holdings for $5.7 billion. Then came Poundland in the UK for $925 million, Fantastic Holdings in Australia at $275 million and Mattress Firm in the US at $2.4 billion. Steinhoff earned itself a spot on the top 50 global shares to watch in 2017 by Bloomberg Intelligence.
By the end of 2017, it all turned into a nightmare.
In 2017, Steinhoff International reported a 13% rise in half-year operating profit and a 48% jump in revenue as recent acquisitions sustained sales in 2017. Not even an investigation could derail the Steinhoff train.
“Excluding the recent strategic acquisitions, the company’s retail business achieved total organic revenue of 7.2 billion euros amidst volatile markets and currencies, translating to 9% organic growth,” Steinhoff said in a statement in June.
A mere five months later, it all came crashing down and the share price told the tale.
On Tuesday December 5, Steinhoff’s share price opened at R45.65 on the JSE and by Friday December 8, it had fallen to a R7.77; down about 80% in just three days.
The match that lit the fuse was the abrupt resignation of its multi-millionaire CEO Markus Jooste, on December 5; followed by its auditor, Deloitte, that refused to sign off financial statements, and the head of Steinhoff Africa Retail (Star), Ben la Grange, also calling it quits.
The fraud allegations, that began about two years before, had come back to haunt them.
The fuel for the fire was a report by Viceroy Research, a US-based investment company that has forensic accountants who probe into suspicious financial results. According to Viceroy Research, Steinhoff made some of its money through off-balance-sheet entities inflating earnings and obscuring losses.
The biggest red flag was its acquisition of poor and struggling companies whose performance appeared to quickly improve after acquisition.
Among them, according to Viceroy, are Campion Capital, controlled by Jooste’s associate George Alan Evans; Southern View Finance UK, controlled by billionaire and FORBES AFRICA cover Christo Wiese; and Genesis Investment Holdings, controlled by former Steinhoff CEO/CFO Siegmar Schmidt.
“Steinhoff has issued expensive loans to and booked interest revenue against Campion subsidiaries for the purchase of loss-making Steinhoff subsidiaries. These revenues will never translate to cash… Steinhoff has also moved two loss-making and predatory consumer loan providers to off-balance-sheet entities: JD Consumer Finance and Capfin,” says Viceroy.
“Given these loss-making entities, such as Southern View Finance UK, are being round tripped (a form of barter that involves a company selling an unused asset to another company, while at the same time agreeing to buy back the same or similar assets at about the same price) back to Steinhoff, Viceroy believes it is possible that Steinhoff are ‘repaying’ Campion’s outlays through acquisition premiums (i.e. losses are being capitalized through round-trip transactions with related parties).”
READ MORE: Did Steinhoff’s board structure contribute to the scandal?
Byron Lotter, Portfolio Manager at Vestact Asset Management, agrees.
“They were creating off-balance-sheet entities and putting underperforming assets into those entities. For example, it seems like when they bought JD Group, they managed to find a buyer for the R10 billion debt book that came along with JD Group. It seems like that buyer was one of these off-balance-sheet entities that Steinhoff itself owned,” he says.
Markus Jooste (Photo by Gallo Images/ Sunday Times/Raymond Preston)
There are also allegations of tax manipulation cash flow trends that do not correspond to EBITDA, investigations into senior executives for tax-evasion, document forgery and fraud, and rampant and dilutive equity raising. It caused the Steinhoff stock to tank.
One of the allegations is from the 2016 annual report, where Jooste writes that the tax rate will remain around 15% and, according to Zwelakhe Mnguni, a Chief Investment Officer at Benguela Global Fund Managers, if you are a company that operates in a 28% jurisdiction, it’s impossible to maintain a 15% tax rate on an annual basis.
“You are not investing in capital expenditure which would have allowed you to get tax deductions which lowers your tax, so how do you get 15%? The net asset value of the business was also in the negative… there are a lot of things we don’t know and somebody somewhere knows the hole is bigger,” says Mnguni.
Steinhoff’s complex balance sheet blinded many investors with inflated earnings. There were many signs over the years but people missed them. Some analysts asked why Steinhoff’s accounts lacked important information about where it was generating revenue and why it appeared to focus on tax breaks rather than the actual business.
READ MORE: Steinhoff scandal points to major gaps in stopping unethical behaviour
Very few people saw this coming. David Shapiro, Deputy Chairman at Sasfin Securities, is one of them.
“What we were seeing with former CEO Markus Jooste was that he will go for one company, miss it, and the next day he goes for another and that’s how he ended up with Mattress Firm, Poundland and other smaller businesses in Europe and an acquisition in Australia,” he says.
Shapiro says he stayed away from Steinhoff because he could never get to grips with what the company was doing.
“It was a moving giant making it never stable enough to make a comparison. I told myself I’m holding back from investing until I understand what the business is. I also found out that they were very opportunistic. They would do a deal then form a structure against it. The strategy kept changing.”
Retail analyst Syd Vianello concurs.
He says Steinhoff’s European operating companies have operating margins that appear to be realistic but the income they are declaring from the internal and external supply chain look “a bit on the high side”.
“I don’t know to what extent they could have been manipulated. The income on the properties also appear to be a little on the high side but there are properties which are rented out to third parties, therefore there is a level of income from the properties,” says Vianello.
“The figures I think are questionable are the interest income that they get from these loans they have been making appear manipulated. The American operations like Mattress Firm, I don’t think are making money at all.”
Vianello says Steinhoff will need more money to service debt. Steinhoff has debt worth about $13 billion on its balance sheet.
“My personal opinion is that the banks are going to demand that they sell Mattress Firm. My gut feel is that the management there will try to do a management buyout (a transaction where a company’s management team purchases the assets and operations of the business they manage) backed by some venture capitalists,” he says.
It would possibly mean Steinhoff wouldn’t get money they put into Mattress Firm back – a devastating loss.
Steinhoff is already scouring for liquidity to keep itself alive. It has sold its 2006 Gulfstream G550 private jet and has also sold a stake in South African investment holding company PSG Group, raising about $345 million.
The big question is how did Deloitte, an auditing firm that has been in operation since 1845, sign off on Steinhoff’s 2016 results?
According to Lotter, one of the reasons may be that Jooste was a powerful bully who many were afraid of.
“He was very smart and managed to convince a lot of people that what he was doing was within the law,” he says.
READ MORE: Anger At The Corporate Slippery Slope
Jooste and Wiese are part of South Africa’s so-called Stellenbosch Mafia – a group of billionaires who own winelands and control markets.
The Independent Regulatory Board for Auditors (IRBA) says, for this, it is investigating Deloitte South Africa.
Deloitte has refused to comment on the matter stating confidentiality obligations and the ongoing investigations as a reason.
The JSE, Africa’s biggest stock exchange, headquartered in Sandton, also appears to have missed the accounting irregularities at Steinhoff.
Even after the cat was out of the bag, the JSE did not suspend Steinhoff’s trade. It says it would be unfair to investors for them to do so as the Frankfurt Stock Exchange has not suspended trading in Steinhoff International shares and would place investors trading on the JSE at a disadvantage to those who are able to trade the Steinhoff International share in Frankfurt.
“We believe that under the circumstances where Steinhoff International has disclosed as much price sensitive information as it is able to, it would be detrimental to the interest of investors to prevent them from trading Steinhoff International shares on the JSE,” says the exchange.
It, however, was detrimental to many investors and hit many more people in the street.
The Public Investment Corporation (PIC) – which manages pensions of government employees – is one of the biggest investors in Steinhoff. It has already lost billions in retirement savings. At the time of going to press, the PIC’s 8.56% stake was just R3.6 billion ($290 million) compared to R20 billion ($1.6 billion) a week before scandal broke.
“The specific mandate of the FSB in this area, according to the FMA (Financial Markets Act) is to investigate cases of insider trading, price manipulation, and false reporting. This engagement with the JSE will determine what case, if any, the FSB ought to look into,” says Tembisa Marele, Communications Specialist at the FSB.
Christoff Wiese (Photo by Jay Caboz)
The billionaire who lost the most is Wiese. Between the night of December 5 and the afternoon on December 6, he had lost $2.1 billion. His total net worth has dropped from $5.5 billion, one the FORBES’ 2017 African billionaires list, to $1.1 billion on this year’s.
“This is the most dramatic that I can remember. There was a guy in Brazil who was worth $30 billion and then eventually had a negative net worth but it took a longer time for that to happen. This is the fastest drop I have ever seen in the two decades I have been looking at billionaires at FORBES,” says FORBES Assistant Managing Editor, Kerry Dolan.
Lotter says its doubtful Wiese knew what was happening.
“I’m of the opinion that Wiese didn’t know. Who in their right mind would go and build what he built with Pepkor and Shoprite and then go and put it all in a company where the CEO was cooking the books. He is a smart guy and he wouldn’t purposefully do that,” says Lotter.
Everyone is waiting to see what Wiese and Jooste are going to do next. Whoever dared invest in a share?