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Steinhoff’s gaping R250bn hole threatens its existence
Corporate crisis: Former Steinhoff chair Christo Wiese’s name is mentioned 72 times in the 2017 annual report, which took 17 months to be completed by Deloitte.
Steinhoff’s delayed 2017 financial accounts released on Wednesday showed alleged fraud that drew comparisons to Enron and raised questions about the viability of what was once the world’s second-largest furniture retailer.
The company’s shares were down almost 8% in Frankfurt at 8.15pm SA time, leaving it with a market valuation of just €490m (about R7.9bn) — from more than €14bn just before the accounting scandal broke in December 2017 — after it said the value of its assets had dropped by about R250bn compared with previously released 2016 numbers.
After the write-downs, the firm was left with a €4.03bn loss, a swing of nearly €5.5bn over the previous period.
“Sadly, in my opinion, there is no value left,” said Peter Armitage, founder of Anchor Capital. “It’s hard to believe it is so big. Remember the world’s biggest fraud was R650bn,” he said in reference to Enron.
Enron was a Houston-based energy trading company that used off balance sheet entities in much the same way as Steinhoff is alleged to have done to hide debt and cover up losses. Two of its senior executives were found guilty of fraud. Kenneth Lay, the founder, died of a heart attack in 2006, weeks before his sentence was to be announced.
Steinhoff, which is worth a fraction of the legal claims it faces, including one of R59bn from former chair Christo Wiese, itself cast doubt in its ability “to continue as a going concern beyond the foreseeable future”. The results will give claimants a better picture of the true state of its finances.
The publication of the 2017 results, which follows the release of an overview of a PwC probe into the company in March, comes 17 months after Steinhoff shocked markets by admitting to accounting irregularities. That came after its previous auditor, Deloitte, refused to sign off on the numbers, sparking a slide in the shares that has wiped off more than R200bn of the company’s value.
Then CEO Markus Jooste resigned, only admitting to having made some “mistakes”. PwC’s 15-month forensic investigation found that a group of executives, aided by others from outside the company, structured deals that artificially boosted profit and the value of its assets.
Steinhoff has declined to publish the full PwC report, instead opting to provide an “overview” of its findings in March that revealed fictitious and irregular transactions of about R106bn.
Under pressure from MPs, Steinhoff CEO Louis du Preez later named eight individuals blamed in the report.
Four of those named were Steinhoff executives, including Jooste; Ben la Grange, the previous CFO; Stehan Grobler, who headed the treasury division; and Dirk Schreiber, CFO of the European division.
BALANCE SHEET
The results published after SA markets closed on Tuesday showed that the balance sheet was €14.6bn smaller than the one published in 2016, which was subsequently withdrawn. Total assets shrunk to €17.5bn from €32.1bn.
The biggest restatements of balance sheet items were to goodwill, intangible assets, and property, plant and equipment, which were reduced by a combined €10.9bn.
Steinhoff expects to publish its 2018 financial statements in June.
Former Steinhoff chair Christo Wiese appears to have been completely blindsided by the crisis at the global retail group.
Despite being named in connection with numerous relatedparty transactions in Steinhoff’s just released 2017 annual report, the retail magnate told parliamentarians at a hearing in January 2018 that the events at Steinhoff hit him like a “bolt out of the blue”.
Wiese was the most frequently mentioned name in the annual report, receiving considerably more mentions than even former CEO Markus Jooste. The annual report, which was released just before midnight on Tuesday, took 17 months to be completed by Deloitte.
On Wednesday Wiese did not immediately respond to requests for comment on the dramatic document.
Wiese’s name is mentioned 72 times in the report, in many instances in relation to complex related-party transactions. The transactions are identified in detail at the end of the 329-page report. They include the November 2017 prepayment by Steinhoff to Wiese for his Shoprite shares as well as trading in a valuable block of Brait shares between 2014 and 2016 by Steinhoff and Upington Investments, a company controlled by Wiese.
By contrast Jooste is mentioned just 48 times.
In April 2018 Wiese, who became the single-largest shareholder in Steinhoff after selling Pepkor to the group in 2015, lodged a R59bn claim against Steinhoff for the value of his Pepkor investment.
One analyst said it was evident from the report that Steinhoff’s most significant asset in terms of generating cash profits is Pepkor.
“The report makes clearer than was previously apparent that the other assets are not making much contribution. This might concern the group’s creditors who recently signed a voluntary debt standstill agreement with Steinhoff,” said the analyst.
The group’s other major assets include France-based furniture retailer Conforama, US group Mattress Firm and the UK’s Poundland.
The much-awaited 2017 annual report is a smorgasbord of convoluted related-party transactions and instances of ineffective corporate governance oversight that presents a damning picture of many of the parties involved in the group’s rise and dramatic fall.
Related-party sales of properties used for hunting, the acquisition of a Conforamaowned Portugal-based property to enable Steinhoff executives to obtain “golden visas” from that country, Jooste’s unauthorised payment of a multimillion-rand bonus to himself and the related party purchase and subsequent sale of a 4.9% stake in Brait are just some of the transactions detailed in the report.
Armand Kersten, head of European relations at Dutch Investor Association VEB, which has launched a class action against Steinhoff on behalf of shareholders, describes the report as unprecedented.
Kersten notes that at the end of the report the auditors state they cannot give an opinion or assurance on the information contained in the report. “I’ve rarely seen an unqualified opinion like this before. It’s one large red flag,” said Kersten.
In one demonstration of corporate governance weakness, Jooste was awarded, on the basis of his own instruction, a €500,000 bonus in 2017. The bonus was not proposed by the remuneration committee nor was it approved by the supervisory board. Shortly after, also on his own instruction, Jooste received an additional €1.57m.
Tyrrel Murray, a Steinhoff spokesperson, told Business Day on Wednesday the release of the report could not have been delayed to accommodate the public holiday in SA as it had to follow the rules of German and European regulators.