STAR commences Steinhoff divorce proceedings – seeks to rename itself ‘Pepkor’

JOHANNESBURG — It’s probably a case of ‘good news, bad news’ when one reads the following note penned by Steinhoff Africa Retail (STAR) chair Jayendra Naidoo. The good news is that STAR has tried to move quickly on disconnecting itself from the Steinhoff meltdown by taking certain steps such as reorganising its debt and even cutting Steinhoff out almost completely, even with the likes of support services. STAR will also change its name back to Pepkor. But STAR’s decision to bring forward performance pay incentives for management may raise many an eyebrow. Nevertheless, this note provides more insight into the Steinhoff blowout and its continued impact almost six months after Markus Jooste dramatically stepped down. – Gareth van Zyl

By Jayendra Naidoo*

Good afternoon and a warm welcome to each and everyone of you.

I am honoured and privileged to be here again today and to be able to provide a context to the results that will shortly be presented here.

Steinhoff Africa Retail (STAR) has had an eventful 6 months since we last gathered here on 4 Dec 2017 to hear the presentation on STAR’s 2017 annual financial results.

STAR had formally come into existence just prior to listing on the JSE last year on 20 September. The new board of STAR had it’s first ever board meeting on 30 November 2017. Just a few days later, dramatic and value destroying events at Steinhoff began to unfold at an unprecedented pace. Instead of heading off on holiday like most other people, the STAR Board and management were instead thrown into a crisis with many unexpected challenges including:

  1. Loss or reduction of certain credit insurance facilities resulting in working capital constraints.
  2. Concerns about the integrity of its 2017 financial statements.
  3. Risk of losing key management due to the total wiping out of the value of their incentives and long term Pepkor investments which had been involuntarily converted to Steinhoff shares.
  4. Possible conflicts of interest with the major shareholder resulting in governance related pressures.

In the space of 6 weeks, including the Xmas/New Year break, recognising the enormous risk to the future of STAR from this situation, the STAR board held 10 board meetings to deal with various matters, to understand the risks and to attempt to take concrete steps to mitigate the risks that STAR faced.

Amongst the first steps taken was to appoint Leon Lourens as the new STAR CEO. Leon has been very solid under pressure, dealing with many things he has not been accustomed to dealing with, and has kept STAR on a steady course.

The entire board and management have worked very hard during this period. The situation has demanded much time and effort, and placed great strain on everyone involved and their families. I wish to acknowledge this effort and to thank each person involved for their sacrifices.

A pedestrian pushes a baby stroller past a PEP retail store, operated by Pepkor, a unit of Steinhoff International Holdings NV, in Johannesburg. Photographer: Waldo Swiegers/Bloomberg

It has been a journey through a dark passage and has of necessity required much management attention to be shifted away from the core operational and trading activities to dealing with the huge number of corporate level issues that have arisen.

Though the path has not been smooth, I am very pleased to report that STAR has come through it all safely. I firmly believe STAR is now well placed for a promising future.

Key issues addressed and outcomes produced during this period include:

  1. The STAR audited results were interrogated further by the auditors, in great detail, and thereafter confirmed by the auditors and duly published;
  2. The risk arising from the demise of the management incentives was acknowledged and a supplementary cash retention scheme introduced. As a result management performance incentives have been restored and payments by STAR which would have occurred under the original scheme have been brought forward one year to 2018;
  3. In creating STAR, Steinhoff had assembled a collection of very good assets with significant liabilities of approximately R16bn. As it was clear that STAR could no longer depend on Steinhoff to provide working capital or other facilities, STAR decided to establish its financial independence, to obtain fresh banking facilities and to refinance all the Steinhoff shareholder loans. As STAR set out to do this we quickly discovered that STAR entities had been linked as co-guarantors of certain of Steinhoff debts which amounted to an additional approximately R23bn (which could potentially rise to R30bn). This was a major risk to STAR. It has taken a tremendous effort but, as you are now aware, STAR has recently succeeded to raise R18bn from SA banks and financial institutions, and has fully repaid the Steinhoff shareholder loans. Furthermore STAR has been released from all co-guarantees related to the financing of the Steinhoff shareholder loans. I wish to congratulate Riaan Hanekom and his team for their work to make this possible. The refinancing is a watershed moment for STAR and allows STAR to independently capitalise on future business opportunities and chart its own course forward;
  4. The multiple auditor scenario, which was a legacy inherited by STAR, was initially accepted by STAR as a transitional measure. By mutual agreement, and earlier than originally envisaged, STAR has managed to achieve best practice and has reduced its auditors to one major audit firm, with only a small subsidiary still left under a different auditor;
  5. At its inception, STAR was provided with a wide range of support services by Steinhoff, including company secretarial and other advisory services. These have all been terminated. Except for a few specific projects which will be completed in a few months, STAR has taken total responsibility for all its own services requirements further consolidating its independence;
  6. The role of the Board in advancing the interests of all shareholders, independent of the interest of the major shareholder, has been a matter of great interest to minority shareholders in particular. In addition, creating a strong board with a good balance of skills and expertise, is also required to support management and optimise value creation. The Board continues to work to recruit the best people. Apart from the recent appointment of Fagmeedah Petersen-Cook to the STAR board, I am pleased to advise that Pieter Erasmus, the former Pepkor Group CEO, has been appointed a non-executive director of STAR and will formally commence that role from 1 October 2018. Pieter built Pepkor into a formidable global franchise and is widely recognised as a world class retail leader. He will add invaluable expertise to the STAR Board and management. Johann Cilliers, who is currently a STAR board member and serves as the chair of the audit committee, and who was central to the development of Pepco in Central and Eastern Europe, has been appointed as lead Independent with immediate effect. These appointments will strengthen the Board. Further independent non-executive board members are still to be added until the Board has achieved the goal of having a majority of independents among the non executive Board members.
  7. The board is satisfied that the company half year interim results, which will shortly be presented here, is a very credible operational performance under trying circumstances. As the corporate matters are dealt with and attention is refocused to operational and trading activities we expect the results for the second half to fully meet expectations.
  8. A major issue that the Board has only recently become aware of, and which it has consequently chosen to fully provide for in the interim results, is regarding loans and guarantees provided to the special purpose vehicle, Business Venture Investments. BVI shareholders are members of management of the old Pepkor. BVI has owned Pepkor shares since 2011. At the time of the acquisition of Pepkor by Steinhoff in 2015, the value of the Pepkor shares owned by this entity was approximately R2,5bn. Total debt owed by BVI to third party funders at that time amounted to less than 20% of the value of BVI. As a result of the acquisition of Pepkor by Steinhoff, BVI was compelled to convert its holding into Steinhoff shares. The board understands that the old Pepkor had, since the beginning of BVI in 2011, provided an amount in loans to certain individuals who were shareholders of the entity, as well as a guarantee to a third party bank in respect of loans to BVI. These liabilities were carried over into Steinhoff and thereafter into STAR. Until last December STAR’s position was very well secured by the value of the Steinhoff shares owned by BVI. Tragically for BVI, the collapse of the Steinhoff share price which has affected all Steinhoff shareholders, has also eroded the value of BVI. The Board has chosen to account for the third party debt now fully and prudently. Notwithstanding the provision that has been made, the Board of STAR will continue to make every effort to minimise the potential loss. We have set up an ad hoc committee consisting of the Chairman and three independent directors to oversee a thorough independent legal due diligence into the guarantees provided and the company’s liabilities, and to consider and report to the board the best options to deal with the situation.
  9. Potential claims against STAR in respect of Tekkie Town have also been published in the media. While no legal actions have yet been launched against STAR, we have investigated the possible claims and are advised by our legal representatives that there is little chance of any successful claim against STAR. Braam van Huyssteen, founder of Tekkie Town and member of the STAR exco has recently terminated his employment at STAR. Consequently he has been removed as director and chairman of the board of Speciality (which includes Tekkie Town and other fashion brands). Leon Lourens will shortly be nominated by STAR as Chairman of the Board of Directors of Speciality.
  10. STAR has step by step been building a solid foundation for the future. We will continue to deepen the autonomy and independence of STAR, while fully respecting the rights of all shareholders. We will continue on the path of high and profitable growth. STAR has inherited many strengths from its predecessor companies, most notably Pepkor. In considering the way forward, I am pleased to advise that the Board has unanimously decided to rename the company Pepkor Holdings and will now seek shareholder approval and the completion of all formalities in this regard. As such, this is likely to be the last time we meet under the banner of STAR.
  11. Beyond the change of name, we see the period ahead as one which is filled with great opportunities and plan to continue to move forward step by step.

I hope to see you all at the next presentation at the end of the year, and I now hand over to Leon and Riaan.

  • Jayendra Naidoo is Chairman of Steinhoff African Retail.