The Great Steinhoff settlement debate – Piet Viljoen and Bernard Mostert

Tekkie Town co-founder and Counterpoint Value Fund manager Piet Viljoen discuss the ins and outs of the Steinhoff settlement saga. Mostert is fighting for the restoration of his business, Tekkie Town, which was sold to Steinhoff in exchange for shares for over R3bn in 2016. Viljoen is of the opinion that Mostert and his business partner Braam Van Huyssteen should’ve been shrewder in negotiations and taken a cash deal. Viljoen emphasises that further due diligence should have been done from the ex-Tekkie Town owners.  The learnings from the hour long discussion, both from an investment and entrepreneurship perspective, are invaluable. An enthralling interview, definitely one not to be missed. – Justin Rowe-Roberts 

Bernard Mostert on the reasons for this discussion: 

I think neither Piet nor I have a desire to to be in a public spat with one another. I think the purpose of this conversation is to teach other people that  will get to the same junctures that we got to (Tekkie Town being bought out by Steinhoff, in a share deal) – what to look for, what to consider and what to rely on, I think that would be useful. Hence the fact that I think this is a great opportunity for us to unpack it.

Piet Viljoen on the reasons for this discussion: 

Yeah, I agree. I think that’s the whole point of this discussion is there are many learnings people can take from this, both from the entrepreneurship – building a business side of things, and also from the investing – in other words, price relative to value, which is something different to building a business. So I think there’s lessons that I hope the viewership can learn from this episode and that they can apply. If we can get that right, I think we will have achieved something very positive.

Bernard Mostert on the decision to sell Tekkie Town into the Steinhoff Group: 

The first thing is the contention of whether we were greedy to accept paper (Steinhoff shares) – that’s the first one. The second was whether we were overpaid. But we must remember that we were not paid at all. So I think that this is something that is very real in our lives. Then the third is – one of the things not known to the broader public at large that motivates transactions like this. So the first point is that I certainly hope that we were not greedy. I don’t believe that we were – two years prior, we had sold about 42% of the company after a really long dating series with a lot of private equity firms. We got about R700m for that and that was cash. Then you ask then why did we do the Steinhoff transaction really only two years later? And what value did we look at? So the first thing and I’m very keen to your hear Piet’s view on this, because to be perfectly honest, we were not aware of what our performance was like versus the market because we operated from George, never really dealt in it etc. If we succeeded in exceeding an EBITDA percentage of 22% in any given year, that kind of very gently and kindly kept Braam (Van Huyssteen) off with my back. So that was my hurdle – above 22% EBITDA percentage. Below 22%, the scrutiny was intense. We never realized that that was actually quite a high mark. And then yesterday, I did a small calculation and I can’t find any other retail companies in our space that come close to that mark. So it worked out at an EBITDA multiple for us at the time of 12 – at the time of the Steinhoff transaction. Of course we relied on the fact that Steinhoff was true value because Steinhoff – supposedly multi-jurisdictional, lots of advisors and specifically an iconic auditor in the form of Deloitte. So did we or anybody else claim that they weren’t aware of the fraud. Did we or anyone else have the ability to pick up that fraud coming from the outside? I would submit we did not have to. We didn’t have the ability to do that because Deloitte themselves says that they couldn’t pick it up – the mysterious R106bn rand, which Steinhoff refers to as legacy accounting problems today. They don’t refer to it as a fraud. I’m happy to refer to it as fraud because they’ve (Steinhoff) has previously referred to it as fraud. Then to go into the rationale for our transaction is that in order to build a Tekkie Town, it would cost us in the vicinity of between R1m and R1.5m in CapEx (capital expenditure) and then to populate that store and give it a footprint and make sure you in the right traffic flow, etc. We worked on a payback period of three years or so. An IRR (internal rate of return) of around 33%. So when Steinhoff crossed our path – and it’s not true that we were close with anybody in Steinhoff – Braam met Markus (Jooste) personally for the first time in the beginning of 2015. Even though they were both in horse racing, Braam never moved in Markus’ circles. And then in their conversations, Markus said we’ve bought Pepkor from Christo (Wiese), Christo’s on board. He is our chairman and in his portfolio of Pepkor businesses, there’s 500 odd stores that they just can’t seem to make work which is identical to your (ie similar to Tekkie Town) space. So why don’t you come, you put your business with ours, there’s R500bn rands worth of losses absorbed and specialty. You turn it around and then we give you a five year employment agreement for five of us and then we restrict anything that you get for three years. So we couldn’t sell the shares. So it was neither here nor there because it wasn’t like we could get the shares and then sell them – we couldn’t sell them. That’s exactly what happened. The only thing is that everybody seemingly missed the fraud and we were last on the bus, so to speak.

On whether Bernard’s statement above changes Piet Viljoen’s views in respect of the Tekkie Town owners being ‘greedy’ by taking Steinhoff shares instead of cash: 

No, not at all. It doesn’t change my views in the slightest. So there’s a couple of issues here. The first thing is that Bernard repeatedly refers to it as a fraud and it has not yet been proven to be a fraud. Neither the South African courts nor the German courts. And remember, there was a fraud called Wirecard in Germany not that long ago, it took them less than six months to indict and find the management guilty of fraud in Germany, which is where Steinhoff was listed. It hasn’t happened yet there either. So it might be a fraud. I’m not saying it’s not a fraud, but it hasn’t yet been proven to be a fraud. It could have been, very simply, a house of cards built on a lot of debt that collapsed in on itself. That is still a possibility. That would include a lot of mistakes made by the CEO, Markus Jooste, in putting together such a house of cards. So that is a possibility. I’m not saying that’s what it is – I’m saying that’s a possibility. So that’s the one aspect. I think the other aspect that Bernard refers to here is that everybody else was owning and buying Steinhoff shares. Deloitte was there and this is the important part – now, I’ve built a business – I’ve been part of building retail businesses. I’ve built a fund management business. I know what it takes to be an entrepreneur and I know what it takes to build a business. It’s hard work. I understand how entrepreneurs feel about their businesses. There’s a lot of emotion attached to it, so I understand that very well. But building a successful business like Bernard and Braam did at Tekkie Town is different to transacting with that business – investing with the proceeds of that business. Because what they effectively did at Tekkie Town is that they sold Tekkie Town and took the proceeds and bought Steinhoff shares. If the extent of their due diligence on their investment in Steinhoff was to believe the auditors and to believe everybody else they were talking about – that is not what an investor does. An investor goes in, reads the annual report, kicks the tires, looks at patterns, looks at things that happen in the company – low tax rates, lots of acquisitions, lots of debt, and then ask questions about those sorts of things and comes up with an investment thesis. That’s what an investor does. And there are many investors that did not invest in Steinhoff because of a lot of question marks about the cash flow, a lot of question marks about the tax rates and a lot of question marks about acquisition strategy that was being implemented. Some investors did not buy Steinhoff shares. So an investor does due diligence on investment and an entrepreneur builds a business. company. Those are two different things. Bernard also says that they had no choice but to take Steinhoff shares. Well, their partner in Tekkie Town at the time – who owned 42% of Tekkie Town, took cash. And I think in any negotiation, you can negotiate different things. Bernard probably would know this better than me. If you don’t want to take shares, you can negotiate that. Maybe you have to give up on the price to get cash. So those are all part of the negotiation that takes place. I don’t think anybody’s ever forced to do anything in the transaction that they don’t want to do and that they are not comfortable with. So those are the two important aspects I want to highlight. First of all, an investor does due diligence on his or her investment, which is Steinhoff. Another thing is, you can’t just believe the auditor and what other people are saying. You have to do it for yourself.

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