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Steinhoff hits junk as R282bn in value is lost

Dec 10 2017 06:00
Justin Brown

Johannesburg - Deloitte says the questions it raised with Steinhoff during its audit of the furniture and household goods retailer’s latest financial statements can only be obtained through an independent probe.

“In performing its audit of Steinhoff, Deloitte has raised a series of questions to obtain information that would assist in finalising its audit opinion,” Deloitte Africa CEO Lwazi Bam told City Press.

Bam did not divulge what those questions were.

“Deloitte is not in a position to finalise its audit of the 2017 consolidated financial statements of Steinhoff as it requires further information and answers in order to do so, and awaits the findings or outcomes of the investigation by PwC,” he said.

Investor fear has caused Steinhoff and another seven companies associated with billionaire Christo Wiese to lose as much as R282 billion in market value this week.

This was prompted by concerns over accounting irregularities and possible fraud at the furniture and household goods retailer.

The troubles at Steinhoff have rattled the company’s 130 000 employees, who fear losing their jobs. And the local trade unions that represent them have expressed concern over the effect that the crash in the stock price will have on their pensions.

This week, Steinhoff announced that new information had come to light relating to “accounting irregularities, requiring further investigation”.

The admission caught the attention of politicians, trade unions, anti-corruption and financial watchdogs, as well as auditing bodies.

Ratings agency Moody’s reacted by downgrading Steinhoff by four notches from the last rung of investment grade to four notches into “junk” status.

Steinhoff started out in South Africa in the 1990s, and aggressively expanded to other parts of the world, especially Europe.

The company lost as much as R210 billion and saw its share price fall by as much as 91% this week from the share’s opening level on Monday.

Wiese, Steinhoff’s largest shareholder, owned a 23% stake in Steinhoff and would have lost as much as R49 billion in value as a result of the share price plunge.

Unearthing skeletons - Viceroy puts Steinhoff through the shredder

This week, a company called Viceroy – which specialises in investment research dedicated to identifying short opportunities in global public markets – released a scathing 37-page document, ripping Steinhoff apart.

The report bears the following lengthy title: Viceroy unearths Steinhoff’s skeletons – off-balance sheet related party entities inflating earnings, obscuring losses.

In its report, the research company states: “Steinhoff has long been under scrutiny for seemingly inexplicable factors, including:

. A long string of acquisitions of stagnating or deteriorating businesses whose performance seems to miraculously improve post acquisition, even if only on paper;

. Cash flow trends that do not correspond with its operating profits;

. Investigations into senior executives for tax evasion, documentary forgery and fraud; and

. Rampant and dilutive equity raising.

Viceroy said its investigation into Steinhoff had revealed several concerning activities regarding at least two off-balance sheet, undisclosed, related-party entities: Campion Capital and Southern View Finance.

“Viceroy believes that the facts presented in this report will bring Steinhoff’s behaviour to the attention of regulatory authorities,” it said.

“Steinhoff’s financials show significant difficulty converting its earnings into cash flow.

"The course of this discrepancy appears to be a combination of off-balance sheet vehicles inflating earnings and accounting shenanigans.”

“Our research suggests that at least a vast majority of ‘loans and investments’ issued by Steinhoff are used to fund an off-balance sheet entity’s purchase of lossmaking Steinhoff subsidiaries. These off-balance sheet entities are used to obscure losses, inflate earnings and, on one occasion, round trip a predatory loan issuer.

“Their existence brings into question the real nature of Steinhoff’s earning power.”

Viceroy also raised issues over Steinhoff’s “suspiciously low depreciation charges”, “suspiciously low tax rate” and “working capital severely mismanaged”.

“We found that their acquired businesses are struggling, but net income has been artificially propped up by a massive web of undisclosed related-party transactions.

“Viceroy believes incestuous managerial transactions, lack of transparency and entirely non-independent governance make Steinhoff borderline uninvestable.

"Investors should demand more information from management on transaction background and demand independent proxies be appointed to the board,” Viceroy concluded.

A Steinhoff spokesperson said via an email reply that the company was not in a position to provide any additional information other than that available to the public via the Stock Exchange News Service.

The Public Investment Corporation (PIC), which invests money on behalf of government workers and pensioners, and private sector fund manager Coronation are both major Steinhoff shareholders.

Coronation owned 5% of Steinhoff shares in September last year. Its share price fell by as much as 10% this week on the back of this week’s revelations about the Steinhoff scandal.

Louise Pelser, spokesperson for Coronation, did not respond to questions sent by City Press regarding the company’s stake in Steinhoff, held on behalf of the asset manager’s clients.

The PIC has a 10% stake in Steinhoff.

Deon Botha, spokesperson for PIC, said: “Allegations of accounting irregularities by Steinhoff ... that have exposed the company to possible criminal investigations, are serious concerns for the PIC.”

The Government Employees’ Pension Fund (GEPF) said it owned 10% of Steinhoff via the PIC, adding that this stake represented 1% of its total assets.

“The impact of the movement in the share price on the GEPF is significant, but manageable,” the GEPF said.

Deloitte is Steinhoff’s external auditor, but the company said it had approached rival PwC to perform an independent probe.

In an odd case of history repeating itself as far as links to failed or scandal-ravaged companies go, the PIC and Coronation were the two top shareholders at African Bank, while Deloitte was the auditor of the bank when it failed in August 2014.

At the time of the collapse of African Bank, Coronation apologised to investors and said it had learnt a “sobering lesson”.

Markus Jooste, CEO of Steinhoff, tendered his resignation this week and Wiese was then appointed executive chairman on an interim basis.

In August, the German monthly business publication, Manager Magazin, reported that Jooste was among employees being investigated by German prosecutors in a 2015 case related to possible accounting fraud.

In November 2015, German authorities searched Steinhoff offices in that country.

On Friday morning, in an apparent reaction to the Steinhoff scandal, building contractors were instructed to vacate the site of Jooste’s new luxury beachside home in Hermanus in the Western Cape.

Lourens Theron, director of contracting company, told HuffPost SA that his company, along with all the other subcontractors employed, received the stop order “without explanation” and were told to get off the site.

In another shock for investors, Steinhoff raised uncertainty over the validity and recoverability of certain non-South African assets worth 6 billion (R96 billion).

To firm up its financial position, Steinhoff said it could sell off non-core assets worth 1 billion – adding that Steinhoff Africa Retail would refinance its long-term liabilities owing to the company, which would add 2 billion in liquidity.

Expressing concern over the Steinhoff debacle, Finance Minister Malusi Gigaba said he supported the decision by the Financial Services Board to institute an independent probe into possible false and misleading reports.

The JSE has also launched a probe into the extent of the accounting irregularities at Steinhoff.

“Considering the recent call for corporate South Africa to provide accurate reporting of its financials, the minister will also have discussions with other appropriate regulators, such as the Independent Regulatory Board for Auditors, to assess any likely lapses in financial and auditing reporting.”

The Black Business Council said this week that it condemned in the strongest terms the alleged unethical and corrupt behaviour of Steinhoff and its executive directors.

Andre Kriel, general secretary of the SA Clothing and Textile Workers’ Union (Sactwu), said the union was deeply concerned about the implications of the Steinhoff share crash for its members.

“Sactwu has thousands of members who work in companies ultimately owned by Steinhoff.

"These include companies such as Pepclo, Dunns, Shoe City, Pep Stores and Ackermans [under Steinhoff] and Deslee Mattex and Feltex [under KAP Industrial Holdings, in which Steinhoff International is a major shareholder],” Kriel said.

Dennis George, general secretary of the Federated Unions of SA, said the “Steinhoff disaster” proved that “there is rampant corruption and maladministration across the public service and the private sector”.

“There is an absolute need for stringent ethical governance that all companies in the JSE need to comply with.

"Regular monitoring of good governance in business in South Africa needs to be made a priority, given the ongoing reports of corruption in multiple companies this year,” he added.

Labour federation Cosatu said it was “deeply alarmed and angered by the grave allegations of corruption against the company, Steinhoff”.

“The federation demands swift and decisive action to ascertain what transpired, and for all the implicated parties to be held accountable.

"All those implicated in corruption and unethical behaviour should be prosecuted and sent to prison,” it said.

“We want the criminals responsible to be prosecuted and their assets seized. These so-called irregularities are nothing but naked corruption and they are proof that the South African private sector is rotten to the core.

“Cosatu is now even more committed to implementing its central executive committee resolution of rolling out a solid and decisive campaign to take control of the workers’ retirement savings, starting with the PIC.”

After downgrading Steinhoff to junk status this week, Moody’s put Steinhoff’s credit rating on review for a further downgrade, saying:

“Given the allegations of accounting irregularities that were raised and rebutted in August 2017, and again in November 2017, it calls into question the quality of oversight and governance at Steinhoff.

“Steinhoff’s credit profile comprises complex corporate legal structure and financial reporting considerations.

"This is a feature of rapid expansion by the company through acquisitions. This complicates the assessment of trend lines for credit metrics.

“Should further details of accounting irregularities put additional pressure on Steinhoff’s financial condition, this could lead to further downward pressure on the ratings.”

Bloomberg reported that the Moody’s downgrade caused Steinhoff bond yields on its 800 million bonds, due in January 2025, to rise by 129 basis points to 11.05%.

David Maynier, the DA’s shadow minister of finance, said this week’s events at Steinhoff might be “one of the biggest corporate scandals ever in South Africa”.

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