LONDON — The Old Firm of Alec Hogg and David Shapiro dig behind the scenes of the JSE’s wealth destruction disaster, looking at the impact of the Steinhoff hero’s spectacular fall. A month ago Markus Jooste was a billionaire whose massive string of thoroughbreds boasted an average of three winners a week on the racetrack. Today his horses are up for sale and he owes the banks a fortune. But much worse for Jooste, because of his actions his idol and mentor Christo Wiese has lost tens of billions of rand. Steinhoff is a story that will be studied by business scientists for years to come. And is the obvious subject for the first episode of 2018 where the Old Firm shares the back story to SA’s biggest business news story of the moment. – Alec Hogg
Well, in April 1997 David Shapiro was the very first guest on South Africa’s very first Nike Business Radio. We called it the SAFM Market Update and for the next 15 years, although our radio station host changed, David remained my regular guest, market watcher, co-host on that show which was South Africa’s leading business show for well, a decade and a half. During this time we became close friends and we build what I believe is a wonderful rapport and last year we resuscitated this on-air relationship with a regular podcast that we call the Old Firm. It was so-named to reflect our long history. In it, we focus on giving you the backstory to the major news of the moment, welcome to Episode 1 of 2018.
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Not surprisingly, today we focus on the R200bn disaster called Steinhoff International. It’s quite personal for David and I, here’s why. Because I remember ten years ago, I had no idea what Steinhoff was about, what their company was about, couldn’t understand why this young guy called Markus Jooste, (well relatively young at the time) was on an acquisition trend. The two of us, I’m sure you well remember, went off to their offices in Wynberg, in Johannesburg or near Sandton.Â
It was Wynberg, Johannesburg yes.
Yes and they were pretty low-key offices which I like and a lot of what happened, what we saw there was small head office, very smart guy, seemingly extremely humble, wasn’t overpaying for anything. Whatever we looked at there seemed to tell us, “Oh, vertically integrated business model”. He was also borrowing heavily when interest rates were low; he took a bet on that. Everything seemed to say, “This guy’s got it, Markus Jooste’s got it”. Well, he ain’t got it anymore, has he?
No.
What happened, Dave, what are you making from all of this, did he just go nuts?
He’s not the first. To put it simply, I think you believe in your own infallibility, you know what I mean; you believe that having done this before. I saw a very similar pattern and funnily enough in virtually the same area with SSI, with Jeff Liebesmann, a super bright person, came out of Kessel Feinstein, which is an auditing firm (Markus was also an auditor) destined for big things, saw an opportunity and began to grow a company and then organic growth is too slow for them and they embark on acquisitive growth and they believe they can do anything, they don’t’ have to do the homework anywhere, they don’t have to do the due diligence. So now, I’m giving the Liebesmann story. Don’t underestimate how clever Jeff was. Then things went wrong.
They went and took over the W&A Group at the time when markets collapsed in 1987, found themselves very heavily indebted with assets that were falling. I think with Markus as well, I loved Markus. I used to find him very entertaining, I could listen to him, I thought he was an exceptionally bright man and his whole model which had been started by Mr Steinhoff back in Germany, you know buying in East Germany and selling into West Germany or forcing in low-cost areas, manufacturing there and selling into high cost, more developed areas and the model was superb. Then I think they just start to get, I would say cocky, you know too sure of themselves and forget the rules, just forget to do the homework.
We still don’t know what’s gone wrong with the business. Information is very thin, we know that we can’t rely on the accounts and we don’t know how far back we’re going to have to go. There was an announcement on the second that we can’t rely on the 17, 16 and 15 accounts, that’s the year end accounts and we may even have to go back further than that. Therefore, no one is quite sure what went wrong and what he did. Underlying operations, we can’t solve. There are some very good operations in the business, but when it comes to the structure, the financing, huge debts against that. I think there are still a lot of troubles ahead.
In their run up to and since Markus Jooste’s shock resignation in Early December, an astonishing R200bn has been wiped off the market value of Steinhoff shares. So, what happens to guys like Jooste? We heard a little earlier from David about Jeff Liebesmann. He’s from W&A and Corpcapital fame and he might provide some clues.
I think with Jeff as well, he was very super quiet, wanted to build up a huge business but was impatient to do so and when the W&A deal came along, Manny Simchowitz who’s – I call him a poker play, a klabberjass player, a bridge player, whatever, very smart man – he could see Jeff was lustful, wanted to do the deal and did it and gave him 24 hours to buy a massive business. You can’t do deals like that and I think it was their own ego that suckered them in and I think Manny played Jeff like a cat playing with a little mouse.
In rugby they talk about white line fever with some teams unable to be patient enough, they just bash against the line when they get close to the try line and they can’t get through. Is there a similar equivalent in business where they’re getting so close to the deal that they don’t actually see the numbers anymore?
Yes, and that’s where Buffett will always tell you something and there’s always time to walk away, there’s always a point at which you walk away, but sometimes there’s just that point where you’ve done so much work and instead of just walking away, say “Enough’s enough, I’ll find another deal”. They don’t, they just go that one too many. What drove Markus? I don’t know. I thought he was onto a really good wicket and then in the last year there seemed to be almost an obsession, a drive to do a deal. If he missed one, he was onto the next one straight away.
Alec, you know what always worries me, is that I always ask the question, “Do they go seek the deal or was the deal brought to them? In other words, do they define their strategy and then try finding businesses that will fit into that strategy or do the investment bankers you know, with fancy accents, whether they’re American or English and you know chaps in fancy suits come across there and you feel that you want to impress them and you end up doing a deal? It seems a good opportunity, but then you fit your strategy around that and that’s what always worries me about Markus towards the end that they just seem to be doing everything.
A little reminder there from David Shapiro about Manny Simchowitz, well, some people in South Africa, Christo Wiese was the modern equivalent of Simchowitz. Well, that’s not a reputation that’s stood the test of time because the irony at Steinhoff, is that he was the biggest loser and he was Jooste’s idol and mentor. Wiese was so confident in Jooste, in his protégé, that when Steinhoff went back to shareholders in September 2016 to raise money to pay for its massive Poundland and Mattress Firm acquisitions, Wiese personally borrowed R24bn, 1,5 billion Euros to inject into the business in return for new shares. Well, as security for this loan, he pledged his existing stake in Steinhoff, which was then worth R48bn. When the share price collapsed, Wiese was sold out of his entire holding, that’s 942m shares, which when he did the transaction, had been worth the combined R71bn. So, how did such a seemingly shrewd operator make such a massive blunder?
How Wiese got involved, I don’t know why Christo got involved, what he saw. Whether he wanted to emulate the Ruperts in externalising his businesses in the same way as the Ruperts had gone from Rothmans to British American Tobacco and then Richemont (not so successfully in Mediclinic). I don’t know whether Christo wanted to do the same thing and saw a vehicle in Steinhoff. He was taken in.
Well, they knew each other very well and Christo Wiese has lost 3.5 billion Euros. I did the numbers the other day. That’s just on the shares that he owned, R50bn. That can build many houses. It’s inconceivable just about. Then you have a look at Markus Jooste himself, from what we know so far he’s lost R1.2bn on behalf of the banks in his racehorse operations (R800m of that is through Sanlam). Yet the share price is still trading and there are still people who are buying Steinhoff shares today, pushing it up to R8, massive trading opportunities. In the old days, David, if you were on the floor, I guess everybody would be shouting out, “Steinhoff, Steinhoff” as they used to shout out the different gold shares.
That’s exactly right.
We’ll get back into that side of the story in just a little while, but there’s been an undeniable impact also on South Africa’s horseracing industry where Jooste was the leading owner for a decade. His dominance is reflected in last season’s league tables where the horses that raced in the silks of his company, Mayfair Speculators, won 167 races; they earned R31m in stakes. That’s virtually four times that of the second place person on the owner’s table.
Ironically as well, Chris van Niekerk, former PG Bison boss, who also happens to be Jooste’s business partner. Jooste’s Klawervlei stud was also South Africa’s champion breeder in the last season. Its stakes earned by horses bred there, of R26m comfortably vesting the 8,5 million of runner-up, Summerhill. So, what will its chief patron’s demise mean for South Africa’s struggling horse racing industry, a sector I know quite well because of my personal involvement in both racing and breeding over many years? David kicked off this part of the conversation.
Certainly, from what I’ve read, he seemed to have very good trainers and many winners, so I’m sure there are people there wanting to also circling and looking for good bargains.
David, the racing story is an absolute tragedy because he was almost single-handedly supporting an industry that has been in turmoil and decline for many years and his injection into that industry, if you take that money out – and you have to now, is going to make a massive impact. If you consider he’s been the country’s leading owner and by some distance for the last decade, he’s won all the big races, he spends all the big money, he is the founder in his little group of Cape thoroughbred sales, the big sales house and he supported it hugely by putting a lot of money into it. He supported many trainers.
I think he had something like 300 horses in training and with the best quality stock. He had the biggest breeding farm, Klawervlei, with a wonderful man called John Costa and his other partner there who is Bernard Kantor from Investec who now have to wonder what did they do, how did they carry on and these are industries, these are businesses that need enormous amounts of capital and there are those who say, “Well, that’s the reason why Markus Jooste went and borrowed all this money from the banks and used his Steinhoff shares as security because he wanted to keep his horse racing endeavours going. If you take him out of the market, there isn’t another one, there’s no whale to come ad replace him, he was that big”.
You see, he had a whole ecosystem around his life, of his lifestyle. It must have affected his personal life as well and you just think of how many other people he might have been supporting, friends, family, you know in businesses, a property business and everything.
Was it similar and really those are the parallels I’m trying to get to, was it similar in your experience with Jeff Liebesmann because he’s probably in a South Africa context, the closest you can get to Markus Jooste, although at this point in time it appears that Markus Jooste was making changes to the accounting within the firm, which were not being disclosed to shareholders? I don’t know if he’s a Kebble yet, if we can say he was a crook of the Kebble nature, but certainly you don’t restate your financial accounts going back to 2014 and even earlier perhaps without something very serious having gone wrong in the business.
I think so. First of all, I don’t think Jeff had anywhere the wealth or the company was anywhere near the size in terms of the market, as Steinhoff. Steinhoff is far bigger company relative to the market, but it was as scandal and what happened with Jeff, and I’m guessing, and I’m going back to 1987, 1988 when the market collapsed. He’d bought W&A, he’d geared it, he bought it from Simchowitz, he had SSI, he took over W&A and he was being very heavily indebted when the share price came down. Of course, what you do is, you have to appease the bankers. You’re not appeasing the shareholders.
The shareholders understand this, but you have to appease bankers and what that forces you to do is inflate valuations, maybe stretch your income statements, your accruals and stock levels and all those, overstate your stock there, you know, overstate your provisions or under provide, those kinds of things, depreciation, all of those kinds of things you can do on a balance sheet to massage it up within that and I think that’s where Jeff went wrong .Jeff’s done very well today. He’s out the country, he’s in Los Angeles and I think doing exceptionally well again.
Keeping a low profile as well and not listing anything.
We don’t know the true story, we don’t know the facts, but I was alluding more to what happened to SSI, the over gearing to purchase W&A and then I always say, “Be honest with the market”. Come back to the market, say, “Listen, we’ve got a problem, this is our problem. We’ve over geared the market’s going such. We’ll get out of it”, but once you get your accountant and you know, accountants are very shrewd people, to start playing with the numbers then there’s no turning back.
So, now that we have an army of forensic auditors from PWC sifting through the Steinhoff financials, the big question is whether Jooste acted alone or like the Ponsi king from New York Bernie Madoff, he had his confidante on an infamous 17th floor. So, I asked David, do you think that Jooste had accomplices?
Oh, absolutely, no doubt, you can’t do this on your own, you know you can’t fool the auditors, you can’t do this without some kind of assistance, so there’s no doubt that there’s a team that was behind Markus that allowed him to do that. They were board tax prepared, accounts prepared, you can’t do it on your own, not at that magnitude. So, I think that’s why I’m surprised that the board didn’t know anything about it, didn’t ask the questions and we have to find those people. They haven’t been disclosed and I would’ve thought that it’s the CFO, the financial officers were close to it because they would’ve prepared the accounts.
But he’s still there, Ben la Grange, he’s still very much involved.
He’s still there, sure.
Danie van der Merwe who’s Markus’s right-hand man, who geared himself up because he believed, as did Christo Wiese, they believed the story. They’ve lost everything and they’re now deeply in debt. Well, Wiese isn’t because he had a non-recourse loan, but the other two have. They couldn’t have been part of the 17th floor, otherwise they’re really stupid and I don’t think those guys are dumb.
No, I think that’s the mystery of that.
Who was it?
It’s the same with Madoff, that we don’t know, I don’t know.
Who were his accomplices?
We don’t know what he’d done, we don’t know where it starts, you know where the falsifications begin and we’re given no clues to it as well. That’s the mystery of this whole –
Could it just be that he would say to them, “But this is so – trust me, I know what I’m doing”, could there be a culture of that, of this charismatic personality that when he tells people that it is so, that they actually – almost like you know, Steve Jobs used to tell his version of an alternate reality and Apple believed it?
It could be.
Could it not be a similar thing there?
It could be. You know you want to believe it, you don’t want to question it because questioning it, you know he can turn on you. You’ve got a very nice job, you have a big office, many share options, making a lot of money, big parking downstairs with a big car parked in that parking, your family are happy, so definitely I think you know, you can’t ignore that.
Anything’s possible.
When you’re in a position like that, and things have been going the right way for you, you don’t want them to end. When you discover something like this, it’s very difficult to challenge it and turn it around because you know what it’s going to mean for you personally.
Do you think he’ll go to jail?
You might play along with the charade. He should, you don’t mess with accounts.
How do you see this whole thing developing given that PricewaterhouseCoopers have not yet been able to even tell us when they are able to tell us how deep the hole is?
We’re going to have restated accounts for many years and I think that’s the difficulty, is whether you can find or extract any value after that. Markus seems to think there’s at least some value in it, but I get very sceptical, I think that once the accounts come out, I think it’s going to be an African bank type situation. You might eventually get something out, but I think whatever value comes out is going to go to the banks. I’ve never seen things come out of what do you call it, Chapter 11 or business rescue in a positive light. I think generally you find it’s very difficult to find buyers and I don’t think globally the kind of businesses that people are going to line up to buy or rush to buy.
On the other hand, though there are some attractive South African businesses that are suddenly available. The Steinhoff subsidiaries are now coming under the hammer pretty soon. From the sketchy information that’s been announced thus far, the South African companies are mostly unaffected with the accounting shenanigans are apparently restricted to the foreign operations. Among Jooste’s long standing competitors in the South African market is Bidvest founder, Brian Joffe, a close friend of David Shapiro’s and a man who’s now giving scope to his entrepreneurial talents in the recently established JSE listed company, Long for Life that’s sitting on well, quite a lot of cash. So, could Mike Joffe and others like him be anticipating a bargain or two given Steinhoff’s poor fortunes?
South African corporates are flush with cash and I wouldn’t know any single out Long for Life itself, I would single out Bidvest themselves, companies like that, that might pick up certain assets that fit within their stable. Remember, Bidvest has McCarthy’s, you have businesses under there that might fit in very nicely, but I think the vultures are circling. Companies like CAP I think will survive and probably Star will survive, but I think some of the other assets that they do own, some of them might have to be sold out and I think the international ones you’re mentioning, definitely.
There have been some bargain hunters too on the share market where Steinhoff shares have been very actively traded in the past month. Every day fortunes are being made and lost. So, what does the man who has been making a living on the JSE for almost half a century make of all this?
Today traders run 80% of the market. The vast amount of the turnover that we see in the price movement is dictated and dominated by traders and we’re not traders. So, I don’t know what gets people in or out, whether it’s these animal spirits, but the thing that worried me, when I saw the announcement on Tuesday, when the announcement came out that the results could not be relied on was exactly what they said, my first instinct was, “Hold on a sec, we don’t know, we don’t know value, we don’t know what he’s done”. Yet from that point on Monday the shares were 450, they now have doubled.
So, “I keeping asking, what do people know?” In other words, what do they know that we don’t know? Why would they take a bet using so much money on a lack of information or do they know something that we don’t, or are they guessing? Has the information leaked? That’s the first question I asked. On what basis, on what strength do they make these kinds of statements? Do they go and do very back of the matchbox calculations and say, “Oh Poundland’s doing well, the Australian operations are doing well, Shoprite had a good Christmas season”? I don’t know. You know my instinct is to stand back and why must I risk other people’s money in something I don’t know, but those are markets, so it just alerts us to something going on, but we don’t know.
Yes, strange times, also here in the UK, Andy Bond who runs Pepkor Europe, which is Poundland and some of the other businesses that Christo Wiese in fact, brought into the group. He’s managed to isolate himself from the rest of the group and he’s raised funding of 180 million Pounds, but that has maybe given people a feeling that they could pull things right, but remember, Andy Bond is a very well-known retailer. He was top of the tree here in his own right, so he would have connections and people would be backing him and believing his credibility rather than necessarily saying, “Oh, Steinhoff’s fine because Bond is managing to bring the UK side together”.
We don’t know what the net equity effect will be, you know what equity owners will come out with, so I’m sure that there are some very good operations underneath there, some superb operations. In fact, I was caught on the Star side, I liked Pepkor, I liked Shoprite and the results were good, but we don’t know how this is all going to unfold because you mentioned though, what you said is dead right, it’s not only the debt that the group has, it’s the personal debt of the individuals that might also cause shares to be sold and put pressure on prices and that. So, there are many unknowns, but that’s what makes markets and that always gives us something to talk about and to speculate on.
So, who are the people that are punting the Steinhoff shares right now and are they playing a smart game?
They might be smart, I think they’re playing a dangerous game. I think it’s a pretty dangerous game and you can see the volatility of the kind of movement, but what I hope is not evident, is that they know something that we don’t. In other words, that there’s a group of people there that are getting information that we’re not getting and the longer this lasts, the more nervous I feel about that, you know, that information does creep into the marketplace that is not given to the general public. I watch all the time, I watch for unusual movement and my eyes are on it, you know when something’s amiss because you ask yourself the question, “Why are they buying?”, simple, “What do they know that we don’t?”
Well, quite a story isn’t it, and we’re only a few pages into a book that is sure to be studied by business scientists for years. Outside of academia, this is also a very real tragedy for investors and even more so for those who worked alongside Steinhoff’s one time hero, Markus Jooste who was a charismatic leader so trusted that his entire executive team borrowed heavily using Steinhoff shares accumulated, sometimes over decades, to double up their debts and they did so recently. Those unfortunates believed they were onto a racing certainty. The obvious lesson is, that when something looks too good to be true, it usually is, so long, until the next time.
