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The Steinhoff story – revisiting the humble roots of today’s R260bn giant

Billionaire Markus Jooste: Owns Legal Eagle, the best handicapped horse in the 2015 Vodacom Durban July.
Billionaire Markus Jooste: Owns Legal Eagle, the best handicapped horse in the 2015 Vodacom Durban July.

A friend called today to chat about Steinhoff CEO Markus Jooste. His interest involves the billionaire’s entry in the Vodacom Durban July, South Africa’s premier horse race, which will be run in a fortnight. But it got me delving into my computer’s hard drive where I came across this bit of history. Written after a 2006 visit to Steinhoff’s then head office in Wynberg, Johannesburg (it has since moved to Stellenbosch) it chronicles the early years of what is now a R260bn global giant. A lovely reminder of the group’s humble roots – and how luck plays such a big part in every business success story. – Alec Hogg  

From the Archives – March 2006

By Alec Hogg

The head office tells us a lot about the company which inhabits it. So I was all eyes when visiting the home of JSE-listed Steinhoff International, one of the world’s biggest furniture manufacturers.

Steinhoff didn’t disappoint. First, its HQ is in Wynberg, Johannesburg’s worst named suburb. This is no leafy, vine covered enclave with a mountain view. Wynberg Gauteng is wall-to-wall factories. Low-rent compensates for the absence of small luxuries.

Next, the head office’s ground floor and basement are devoted entirely to marketing Steinhoff products. Visitors are encouraged to stroll through the showrooms with dozens of couches, chairs, beds and other furniture arranged as you’d find them in homes.

Both of which are encouraging for shareholders. This is a business with a capital B. Then, as you might expect from a group founded by two Germans, Teutonic efficiency seeps through the place.

When arriving at the executive floor (the single lift is only there for disabled visitors) you’re greeted by neatness which comes standard with plenty of open space. And the inner sanctum is just that. There might be a handful of bigger boardroom tables somewhere in SA, but definitely none as polished.

My visit to Steinhoff was triggered by the invitation a few months ago to David Shapiro and myself from CEO Markus Jooste. We had expressed on-air bemusement at the group’s decision to buy 26% of electronic equipment distributor Amalgamated Appliances, wondering what the strategy could be.

Jooste was visiting part of the far flung empire when we visited last Friday. But he was well deputised by Piet Ferreira, a career investment banker with Nedbank with an amazing memory for numbers and dates. Ferreira recently joined his former client.

He heads a small team of well-travelled professionals who form the corporate services team, “the glue which holds everything together” as he describes it.

The roots of the now R40bn a year business go back 1964. Enterprising West German Bruno Steinhoff saw the opportunity of importing cheap furniture made on the red side of the iron curtain for sale to his better heeled countrymen.

Weeks of sleeping in his car and negotiating prices with local commissars who controlled the factories paid off. Steinhoff was soon trucking back loads of chairs and tables developed in East Germany and in a couple of decades has built a flourishing marketing and distribution business.

Those early years also established the culture and philosophy that survives to this day. In a nutshell, Steinhoff is in the business of arbitrage. It makes furniture primarily in low cost areas of the world for sale into wealthier markets.

The East German forays positioned Steinhoff’s company for the quantum leap every growing business needs. This came in 1989, shortly after the collapse of the Berlin Wall, when he acquired, for small money, his East German suppliers.

Although these antiquated furniture factories absorbed enormous capital through upgrading, they provided the launching pad of a cheap manufacturing base and a way into the vertical integration which is still the group’s core competency today.

The other German behind Steinhoff group is Claas Daun, a tax attorney who used to keep watch over “intensive care” businesses for a bank. He liked the look of a textile company that the bank decided to put under, so made an offer for the assets. This started a process which led to the successfully rehabilitation of many problem companies – including a handful in South Africa.

Daun’s first serious foray into SA came in 1993 when he bought the troubled JSE-listed Victoria Lewis. In 1995, Daun introduced his firm friend Steinhoff – they lived 40km apart in northern Germany – to SA, a country he had grown passionate about. And, perhaps more importantly, his youthful CEO, trained chartered accountant Markus Jooste.

Two years later, Daun and Jooste bid unsuccessfully for Afcol, the dominant local furniture manufacturer which was being offloaded by its refocusing parent SA Breweries. As it turned out, their offer was only a few cents below the winning R19,25 a share paid by competitor Pat Cornick.

In 1998, at Jooste’s instigation, Daun’s SA assets and Steinhoff’s European interests were merged (30:70) and listed (at 400c) on the JSE. A few months later, what was still very much a bit player was catapulted into the big league when successfully acquiring the troubled Pat Cornick – and all those Afcol assets – for one fifth of the price that SAB had sold them at.

Anyone can buy assets. Price is often the only difference between a great business and an accident waiting to happen. Buying their foundation factories at the bottom, as Steinhoff did in both East Germany and SA, established the low cost base which since provided an unbeatable advantage.

The story since the Pat Cornick deal has been about adding of what Ferreira calls “bolt-on acquisitions”. And doing so through a disciplined process. Steinhoff likes to first secure a significant minority stake with board representation, positioning it for “on the job due diligence”.

If Jooste and Co like what they see – as has been the case with logistics group Unitrans and wood operation PG Bison – Steinhoff will later make an offer to acquire control or outright ownership.

There was a slight deviation on this theme with its recent purchase of another troubled business, London Stock Exchange-listed furniture and bedding retailer Homestyle.

As Steinhoff’s UK factories had been significant suppliers to a Homestyle subsidiary for some years, Jooste and his team knew the business well and realised its unique problems related to capital starvation rather than operational issues.

So they felt confident enough to make the required £87m investment to secure control, buying its Homestyle stake for 55 pence a share last year. The stock now trades at 138p, translating into an astonishing R1,4bn book profit on the transaction.

Locally, the more normal route of buying a minority stake has been followed with the recent investments in Amap and KAP. Both, says Ferreira, could be ideal “bolt on acquisitions.”

Amap’s products are sold to the same clients Steinhoff currently services, so distribution savings are massive. KAP, the conglomeration of Daun’s SA industrial interests, is big in leather through its Kolossus Holdings subsidiary which ran in to trouble as a JSE listed entity. And as leather is a key input for Steinhoff-made furniture…….

Last week Steinhoff reported that its headline earnings would rise between 25 and 30% during the six months to end December. And that, remember, is being achieved by a mainly export and offshore-focused business during a period of rand strength.

Already one of the JSE’s Top 40 companies, the furniture manufacturer has a strong balance sheet, entrepreneurial management and market positioning that appeals to investors of all persuasions.

If the company is able to perform this well now, it could do sensationally should the rand lose its composure. Which, given the fickle nature of global affection for emerging markets like SA, is always a possibility. Steinhoff shares offer some of the best insurance you’ll find against that risk.

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