Steinhoff update – Why we’re now following Buffett’s Tesco action and dumping the stock

By Alec Hogg

The past few days have provided a solid lesson in the realities of living in a world where information is transferred at warp speed. Especially for those striving to act unemotionally in times of great panic.

In yesterday’s Steinhoff-related note I argued there was insufficient visibility to draw any conclusions. At that point the problem was that we didn’t even know what we didn’t know. There are still many unanswered questions. But we now have sufficient information to act.

A Steinhoff International Holdings NV logo sits on display outside the company’s offices in Stellenbosch, South Africa. Photographer: Waldo Swiegers/Bloomberg

On the upside, there may well be value in the Steinhoff assets. Number crunchers tell us that after deducting the debt, its underlying property and share portfolio is worth around R20 a share. But that’s about where the good news ends. That R20 a share is a “soft” number, filled with caveats.

Leading the legions of negatives is how Steinhoff’s financial web is a mess of epic proportions. Such complexities look fine while cash is flowing from underlying businesses and governance looks solid. But now that they need to be unravelled, it becomes a Gordian Knot of nightmarish complexity.

Futuregrowth’s Andrew Canter – who didn’t have a cent of his company’s R180bn in assets exposed to Steinhoff – unpacks the detail in our interview on Biznews Premium. But in short, Andrew says unravelling this is going to take years. And the only people who will benefit are the lawyers.

Debt market investors know this, which is why those who have better things with which to occupy their time are dumping Steinhoff bonds without any concern for the value.

It is a similar story on the equity markets where Steinhoff shares are being sold for whatever their owners can get for them. While there’s obviously lots of panic selling, Canter reckons part of it is money managers getting the name off their books before the December 31 reporting date.

For much of the recent insights, as has often been the case in recent months, we are once again indebted to the incisive mind (and deep connections) of actuary and financial services entrepreneur Magda Wierzycka.

Overlaying what is publicly available with information from her wide network, Magda came to some startling conclusions. Most important of which is that off-balance sheet companies (ie hidden from public view) were set up to hide losses; that Steinhoff executives collaborated to defraud investors; and that debt was accumulated to paper over growing cracks that are now about to be exposed.

Allegations of a similar nature had been made over the past six months. But each time they were strongly rejected by Steinhoff’s former CEO Markus Jooste. He referred to the independent inputs of the company’s auditors and its lawyers to support his position. He also maintained Steinhoff would be vindicated in a high profile European court case whose findings are due this month.

Recently departed Steinhoff CEO Markus Jooste

Given the consistency of this message, even after the past week’s drama, you had to anticipate a similar response from the company to Magda’s assertions. Instead, this time Steinhoff took the ostrich approach. That refusal to dismiss these allegations, together with Jooste’s suddenly erratic behaviour, tells us everything.

As does my most recent off-the-record engagements with those close to Jooste.

In a final show of loyalty, his closest confidantes bluntly refuse to give me details of what went down. But it’s becoming ever easier to read between the lines. All of them admit they are in a state of deep shock. Almost as though someone they love has passed on.

Nagging thoughts remain, however. Unanswered questions that still baffle the rational mind.

Why, for instance, after years of signing off the accounts, did Deloitte this week suddenly refuse to do so? Have the Gupta-related troubles of KPMG caused the global custodians of the Deloitte brand to demand a closer look? And did they get a fright at what they found?

And then what about the company’s previously solid support of CEO Jooste, highlighted by a recent R5bn share buyback? Remember, this board of directors includes highly respected former bankers Theunie Lategan (FNB) and Steve Booysen (Absa); and erstwhile Sanlam CEO Johan van Zyl.

Trumping that is mystery about the role of multi-billionaire Christo Wiese whom Jooste idolised. Wiese swapped most of the wealth accumulated over a glittering entrepreneurial career for Steinhoff shares in the massive Pepkor merger, and even geared up his Steinhoff bet through highly leveraged debt instruments.

And what about the counsel by Steinhoff’s lawyers who remained confident throughout that the company would see off the challenges from the German tax threat and the company’s former partner in its POCO subsidiary?

Indeed, considering all of that, how is it possible that CEO Jooste acted alone? And if he did, why would he work so hard to transfer the primary listing from the JSE to Frankfurt, where any malfeasance would be more likely uncovered by First World oversight?

Plus why hasn’t Jooste broken cover to offer his side of the story? As things stand, his future could hardly be bleaker. As the Financial Times of London quaintly commented on the matter this morning : “The border between accounting scandal and fraud is marked by the bars of a jail.”

So what to do now? Specifically for the Biznews SA Champions portfolio, which owns Steinhoff shares?

Until yesterday, it was no easy decision. The world’s greatest investor, Warren Buffett, urges us to stay away from companies tainted by controversy. But also to be greedy when everyone else is fearful.

With the information that has emerged in the last 24 hours, and the lack of response from the company, that decision becomes easy. It is very squarely in the tainted category. And certainly no longer qualifies as a SA Champion.

So let’s take a leaf from Buffett’s action on Tesco, where he lost almost $500m after dumping the stock in the wake of an “accounting scandal”. He simply decided that the company was no longer trustworthy and put the episode behind him. We’re doing the same with Steinhoff and selling it out of the portfolio. Today.

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