🔒 Steinhoff Update: Second shoe drops – 2016 financials “cannot be relied upon”

Thursday 14 December 2017 from Steinhoff International

• The group has informed shareholders that accounting irregularities go back further than the 2017 financial statements. As a result, the audited results for the year to end September 2016 “will need to be restated and can no longer be relied upon.” 

___STEADY_PAYWALL___

COMMENT:

The Steinhoff board’s sincerity in wanting to get to the bottom of the scandal was evident in its appointment of its most respected non-executive directors – Dr Johan van Zyl (ex CEO Sanlam); Dr Steve Booysen (ex CEO Absa) and Heather Sonn – as the subcommittee which will oversee greater independence in the group. The trio have been investigating assets on the Steinhoff Europe balance sheet which appears to be where auditors Deloitte found problems. Van Zyl and co have found issues that stretch back at least into the previous financial year hence the rather blunt statement that the 2016 financials should be disregarded. This is confirmation of market suspicions that what appears to have been accounting fraud goes back some years, This is bad news for Deloitte, which only raised the alarm in 2017. Some observers say this may have been a result of the audit shifting from Deloitte SA to its European colleagues after Steinhoff took its primary listing to Frankfurt.

Monday 11 December from Steinhoff International.

• Ahead of next Tuesday’s (19th) meeting in London with its lenders (major international banks) the group has appointed Moelis & Company as its independent financial advisor; and AlixPartners to assist with “liquidity management and operational measures”. Moelis is a NYSE-listed global investment bank headquartered in New York, with 17 offices worldwide and annual revenues of over $600m. AlixPartners is a New York-headquartered management consultancy which specialises in high profile corporate turnarounds and bankruptcies.
• The group is “asking for and requires” continued support from its funders. Its aim is to ensure existing lending facilities are not pulled so that the group can achieve an “immediate stabilisation” of its finances.
• Steinhoff’s Supervisory Board has appointed a subcommittee of independent non executive directors Johan van Zyl (ex CEO Sanlam); Dr Steve Booysen (ex CEO Absa); and Heather Sonn (ex Merrill Lynch NY, Legae Securities) to “bolster independent governance of the group.”
• The audit committee chaired by Booysen alongside Theunie Lategan (ex FirstRand) and Len Konar (ex-accounting Prof, professional director) is working with auditors Deloitte to finalise and release the audited financial statements.
• After being appointed as forensic investigators last week, PWC has started its investigations.

COMMENT:

This morning’s announcements from the company tell us the next week will be critical. Executive chairman Christo Wiese has enlisted the strong support in two top rated US consultancies to help prepare for the critical meeting next Tuesday in London when Steinhoff’s top team gets together with the international banks that have provided an estimated $21bn in funding. Steinhoff still has many cash-generative underlying businesses. As Futuregrowth’s Andrew Canter unpacked for us last week, although doubtless furious at the misrepresentation, the bankers are unlikely to have the stomach to let it all collapse. But they will also need to buy into a credible turnaround plan. The fresh eyes of PWC, Moelis and AlixPartners are intended to help draft that will give the plan the credibility Steinhoff itself has lost. 

The company is also making efforts to re-establish credibility internally. The creation of the new board subcommittee to address governance is significant. Again, it is aimed at the funders. The members selected, three independent board members, all have international profiles. Also apparent from the statement is that the objections raised by Deloitte (and resisted by departed CEO Markus Jooste) appear to have been accepted by the board. Given the scale of the eruption, these “adjustments” will doubtless make a significant impact on the bottom line.

Monday 11 December from Investec Limited.

• Investec Limited issued a comprehensive statement this morning outlining its exposures to the Steinhoff Group. This is summarised in the table republished below. Its exposure is primarily to subsidiaries of Steinhoff Africa (listed on the JSE as STAR) which operates through 18 brands with almost 5 000 stores, including Pep, Russells, Bradlows, HiFi Corp, Tekkie Town and Incredible Connection. Investec says it does not expect to experience any losses on this exposure. 
• Investec also says its exposure to the troubled Steinhoff International is either immaterial or negligible. 
• The bank does have two material exposures: in derivatives linked to the Steinhoff share price the loss might be zero but could reach a maximum of 3% of operating profit (R237m). Its holdings of Steinhoff convertible bonds have a carrying value of 0.3% of consolidated tier one capital (R200m).    
• An associated company IEP, of which Steinhoff’s former CEO Markus Jooste was a director, has no exposure to the Steinhoff Group. Jooste resigned as a director last week.

COMMENT:

In the wake of the Steinhoff shock it was always likely market talk would switch to the close relationship between Investec MD Bernard Kantor and former Steinhoff CEO Markus Jooste who are partners in numerous horseracing-related ventures. Investec this morning addressed the rumours, spurred on by a share price which dropped 12% in three days, falling from Tuesday’s R94.20 to end the week at R83.11. The share regained its composure to R87 this morning but the company’s market capitalisation is still R7bn down since before the scandal broke.

What the Investec announcement points us towards, however, is the significant losses made by who bet on Steinhoff using derivatives. Investec says it could lose up to R237m on clients’ exposure. Recent SENS reports reinforce the view that those closest to Jooste were unaware of issues which burst so spectacularly into the public arena on Wednesday morning. Most famous of the derivatives bets is the one made by chairman Wiese who, on 6 November, announced through SENS he had acquired 20,000 Steinhoff single stock futures, effectively an exposure to 2m shares, at a price of R61.46. In under a month that has cost him more than R100m. Also, a SENS notice on 4 November shows Steinhoff Group FD Ben la Grange, now working with Wiese to try right the ship, invested R4m in Steinhoff shares at a price of R60.70. Their investments came less than two weeks after the company itself spent R5bn buying back its own shares.