🔒 WEBINAR: In conversation with Magda – Steinhoff axed from SA Champions portfolio

JOHANNESBURG — Almost $12 billion was wiped out in value after Steinhoff CEO Markus Jooste quit his job. And the fallout has been felt by the majority of the active asset management world – with banks across Europe, including the Central Bank, exposed to the saga. One of the more outspoken personalities in South Africa, Sygnia CEO Magda Wierzycka, joins Biznews founder Alec Hogg, looking at where the Steinhoff seams started to split in this interactive webinar. Alec also touches on the SA Champions portfolio hosted on the EasyEquiities platform, with the big news being the dumping of the Steinhoff holding. – Stuart Lowman

Stuart, can you confirm that the presentation is showing?
___STEADY_PAYWALL___

Yes, the presentation is showing Alec, thanks.

Okay, well there’s the guy who, at one point in time, was one of the leading entrepreneurs in SA. I just wanted to show a couple of things. Magda, we can hear you so, if you want to jump in and just discuss it.

This is the Steinhoff share price. Well, let me do the other graph first. This is the share price in the last few days (there we go).

The Steinhoff share price, as you can see, it was going along quite fine up until the 1st December. Then on the 3rd December it started tanking and on the 5th December it really plunged, and you’ve got a similar situation there – we’re going to talk about that in just a moment.

Then the other thing was the volumes. Now, if you look at the volumes on a longer term you can see that the critical day here was the 6th December. That was the Wednesday when the announcement was made that Markus Jooste was leaving the company and that they had found new information, which got everybody in a panic. It doesn’t look terribly untoward in that context. Huge volumes of shares traded on the 6th, 7th, and the 8th, but then look at this. This is just before the shock hit the markets. On the 4th and 5th December.

Now, when you look at that it looks terribly untoward. It looks like somebody knew something that nobody else did. A little bit of insider trading, etc. However, and just stop and look at this graph a little bit. On the left-hand side, you will see that those are the normal volumes in the Steinhoff share, and then suddenly you had that spike, the two days before the big news hit on the 6th December.

This is a very dense graph and I don’t really want to go through each one of them except to highlight two things. From the 24th August onwards, to the 4th December, there were announcements coming out conclusively. For instance, if you look at the first one, ‘legal and external audit firms in Germany have concluded that there’s no evidence of any contravention of any provision of German commercial law,’ and so on. They were confident that the appeal will be dismissed and so on. Then on the 9th October, (I’ve put this in red), ‘Director Thierry Guibert sells shares worth €1.1m – that is R17.6m. Now, he is the French director who came when they did the acquisition in France if you recall, the big French retailer that came into the Steinhoff Group.

Then it did a big share buyback on the 24th October, of R5bn. Ben la Grange, the Group financial director bought shares in a personal capacity, which for him would have been worth a lot of money, R4m, lots for normal people, at R60 a share. Then on the 6th November, Christo Wiese opened a single stock future position of R123m, he’s basically lost R100m of that, at R61.46. Again, they clarified on the 8th December that the reporting was wrong. Again, they were confident that the petition to Enterprise Chamber will be dismissed on the 20th November. Now, these are all statements that were issued to the Stock Exchange news service, to the investment community, and then on the 4th December, this was last Monday, confirmed that the full year results will be released in an unaudited form, not an audited form, and that tells you immediately that something was wrong.

So you see those clever people, who were selling shares on Monday and Tuesday, went on this information. Then on Wednesday, 6th December – they announced the numbers would come out on the 6th December, but they also said on the 4th as recently as Monday last week, ‘no additional information came to light to change the previous views regarding the German investigation, and I wanted to start with that because that really does give us a good insight into the story that’s been told to investors over the last while. The information that the investment community has been getting, and you can see it very clearly that the consequence of all of that, of course, has been very different. So a warm welcome to Magda. She’s here to answer your questions so you can start sending them through now. Let’s just start off with that tale of woe that I’ve put on the screen there. As I said, Magda, very dense but it is a continuous, almost litany of what now looks like denials after denials.

Sygnia Group CEO Magda Wierzycka

It is denials after denials. The rumours and news of legal issues and tax issues around Steinhoff have been circulated for well over a year, and investigations, so that was kind of in the public domain with management denying that there were any problems. The asset management community seemed to have believed and placed enormous amount of faith in what management said. When you look at the actual trading activity so, if you look at the 5th and the 6th, I think that’s speculation. By the 6th December, 40% of Steinhoff shares, between SA and Frankfurt, were lent out so there were huge shorting positions taken out on Steinhoff shares. So people on that news, on the 2nd December, already made a call that things are looking dire and it’s a very strong statement to say that you are unable to release your results. Even if it’s in an unaudited form.

Well, unaudited form means I’m putting up a spreadsheet that I have prepared. It basically means that the auditors are unable to confirm the numbers that I’m presenting. There are many questions to be asked just in that little nugget because an audit typically starts much earlier. We also have kind of interim financials that should have been subject to a lighter version of an audit. It’s not a full audit so one needs to ask some very serious questions of Deloitte and the role that they’ve played in all of this but if the auditors say that they are not willing to sign off on the numbers then that is a very firm indication to most professional investors that things have gone pear-shaped. I think that’s why you see the sudden spike in trading activity and then of course, two things happened.

There are people with true understanding and people with no understanding of trading, people with true understanding would look at something like this and go, ‘okay, we need to short.’ People with little understanding will see a share price, which is the graph you show with the share price almost being like a Ponzi scheme share price, continuously going up. Well, this is a short period of time, just November, but if you look over a longer time horizon and so, as they see that share price going down so rapidly they start taking punts on the fact that however bad the information is, it cannot possibly be as bad as what’s reflected in the share price and in fact, the share price will bounce. So, all through that down cycle you will see sellers and you will see buyers, and you will see people who are still believers in Steinhoff so, they’re doubling up.

I have to be perfectly honest, before I kind of started digging and it’s not in my job description, thank goodness, to analyse companies but on that Wednesday, when I saw the share price take a dip to R50, just before the markets closed, I do have the benefit of owning a stock broking company in the group so I phoned a stock broker and I said, ‘buy some Steinhoff shares in my private capacity.’ Things can’t be as dire and markets tend to overreact to bad news. There will be a bounce in the next day or so, and then that evening I went home and started digging and looking at numbers, and looking at some research reports and literally, at 05h00, I sent an email on Thursday morning to my dealing room saying, ‘the moment the JSE opens sell everything.’ There isn’t going to be a bounce back.

What got you thinking that way?

Alec, I was one of the punters without knowing anything beyond what, and everything they were saying about Steinhoff, and the people involved. I was taking a punt, which is a terrible way of investing by the way, you should never do that. Literally, you invest with no knowledge and you’re investing on a short-term basis on the expectation that the market is overreacting and you’ll be able to exit the position within a short period of time with a slight gain. It’s a trading strategy rather than a portfolio management strategy so I would never recommend it to anyone, unless you’re a professional trader because you’ll typically find yourself on the wrong side of that trade but what got me was having bought some of these shares, I now started seeing the media reports. I went home and I started looking.

I started looking at the websites where you’d typically find financial information and it amazed me how a company of such magnitude had such poor financial disclosure. There was so little information. An enormous amount of very pretty marketing reports, if you look at the results and the formation of the results – an incredible amount of pretty pictures of companies, and colourful graphs and colourful things telling you absolutely nothing. When I started trying to find the numbers, I struggled. Then when I found the numbers they were all in a vastly kind of consolidated form so I couldn’t strip out the divisional numbers. I couldn’t figure out what made money or where the money was being made. You were looking at consolidated, large numbers – €5bn in revenue. €3bn in operating profits but that’s not enough to make investment decisions on.

Then I started Googling and through that Googling process you start coming across legal cases, you start coming across the tax authorities investigation, and then you start coming across commentators – sell side analysts, smaller portfolio managers talking about tax avoidance schemes and tax issues that the company has potential for inflated revenues. I came across this report produced by a small research firm in the US, and there’s a lot of criticism in that report, but really that report read like a horror show of off-balance sheet vehicles, which have been setup and it seems that the sole purpose of these vehicles has been to book over some loans and potentially some liabilities, and to generate or create cashflow onto the income statement of the Steinhoff Group, which would swell-up the income line but there wasn’t an associated cash flow.

Magda, just explain that? Off-balance sheet that means it’s not disclosed in the financial statements that, I suppose, anyone could understand.

That could mean two things. So not disclosing the financial statements so it doesn’t form part of the Group, and yet when you looked at the nature of these vehicles they should actually be consolidated in the financials. For instance, one of those off-balance sheet vehicles all the trademarks were transferred from Steinhoff International, into one of those companies registered in Switzerland. Now Richemont uses a similar tax structure but then the company concerned, which owns these brand names and then leases the brand names back to the mothership, is owned by the mothership. Whereas here, you couldn’t establish the ownership and eventually when the ownership of that particular vehicle was established it turned out to be owned by known associates of Markus Jooste and Christo Wiese.

When I see the term ‘known associates,’ I always immediately think of the #GuptaLeaks so now you look at a company like that, which owns all the trademarks, and you go, ‘how is it that that company does not form part of Steinhoff?’ It is just inexplicable so is something being syphoned off? Is something being hidden? How is that even vaguely allowed? Then the other things about it where this kind of frenzied pace of acquisitions. I’ve bought companies in my business career much smaller than what Steinhoff was buying, and it takes you ages to, firstly, understand the business. To look at synergies, to look at cost cutting initiatives, to actually get to know the management, to figure out what the business actually did because what you discover in a due diligence is usually fairly superficial. It’s only when you own the business that you can truly lift the skirt and see what’s there, and that takes months.

Whereas Steinhoff was just acquiring things, taking on massive amounts of debt and acquiring things at an increasingly rapid pace. So that made me think of a typical Ponzi scheme. Every Ponzi scheme never starts off as a Ponzi scheme, well a few. It usually starts with a mistake that you then try to cover up. So I then started, and I could be wrong in this assumption, but I started thinking along the lines of, okay, you make your first acquisition and you find out that it’s a dog, you take on debt and you find out that the profit line is not sufficient to support the debt, the true profit line – once you’ve stripped extraordinary items and so on. So then you make another acquisition, bigger and faster, in order to potentially fill the hole. If the second acquisition isn’t successful your hole is now bigger so, you buy a third thing, and a fourth thing. When I looked at the pattern of these frenzied acquisitions that’s what I got a sense of someone trying to cover up missing cash.

It’s so easy to look at it differently and the different look would be because of the political situation in SA, some people are desperate to externalise assets at any costs, and we saw that with Christo Wiese’s acquisition of New Look, this is bad but New Look was a R35bn flop. That’s what he paid for it in Brait, and it’s worth nil today, maybe even negative. I hear what you say about the Ponzi scheme but I guess the counterargument would have been, they were desperate to externalise from SA. They thought SA was collapsing, in their view maybe, which you can understand. You might not agree with it but you can understand. Then the other thing was the business model that he had always preached from the early days was vertical integration. We grow the trees, we make the furniture, we sell the furniture through our shops – we get it there through Unitrans.

If you understand the story or if you buy the story, you can kind of believe it. He’s had quite a lot of luck along the way, buying cheap assets along the way. Right in the early days they got a very cheap asset. They got a very good asset in France as well, and so on, and they didn’t go ahead with Darty, you might recall, and with Homebase in the UK as well. So for all of this it wasn’t that easy. In other words, there were a few counter balances that looking back at it now, it looks very clear (in hindsight) but at the time you kind of scratched your head and thought, ‘okay, benefit of the doubt,’ maybe.

Potentially, I’m a great believer in vertical integration and that’s how I’ve always built, I built Sygnia on this concept of vertical integration but vertical integration relies on the fact that you find a working relationship and establish a working relationship between the companies that you are buying and integrating, whether you’re building or buying, and that building up of that relationship between companies, the supply chain management, the synergies, the potential for cost cutting – that takes time. It doesn’t happen at a frenzied pace so there is no vertical integration by simply throwing a whole lot of things into a bucket and hoping that somehow miraculously it works. It takes quite a lot of hands-on management to vertically integrate businesses. There is no sign of a huge amount of hands-on management. Obviously since we have tried to demolish it by speaking to various asset managers, I’ve used the words ‘gross negligence.’ That has made the entire active asset management in SA very nervous of me, and very unpopular but you know what question I can’t get an answer to, and this might surprise you? How many people work for Steinhoff International, the holding company?

At the head office?

At the head office.

Warren Buffett

I think 20. I remember Markus Jooste often saying that he was trying to do the Warren Buffett approach of a small head office that would then negotiate transactions but that everything else was decentralised. That was my understanding of it but I might be wrong.

We spoke to a number of asset managers today and we asked them, ‘have you ever visited the head office?’ They are very keen to tell you about how they’ve kicked the tyres, they’ve visited the operating entities but not a single person we spoke to has actually visited their head office. Hence, they were very vague so you know more than some of the active asset managers that we spoke to in SA today actually had no idea. They knew it was a small team. Now if it’s a small team, who is doing the vertical integration? Who is actually managing the process? Again, I look at Sygnia, which is very much a vertically integrated business. We do everything ourselves. We capture every bit in the value chain but you need a heck of a strong management team to manage that value chain. If you’re telling me that there are 20 people at head office, and a portion of it is that property assessment team that they established. That sounds like a few people in the room buying ginormous businesses so who is doing the due diligence on these businesses that they’re buying?

I asked the same question on numerous occasions and that answer was that the due diligence was done over many-many years with the people. Again, using the Buffett philosophy where he buys the people or the management team, and then he does the acquisition. Part of that argument as well was that’s why Steinhoff pulled out of the two potential deals that it did, which were turning hostile. It also fits quite nicely with the philosophy that they would be borrowing lots of money at low interest rates. To his credit, Markus Jooste made that call a long time before anybody else felt that interest rates would stay this low for a long time. Whatever else he’s done, he made that call some years ago and he said, he doesn’t mind borrowing to the hilt because he thinks interest rates will be very low. So that was kind of his whole strategy. We don’t know where it went wrong and where the Ponzi scheme, as you’ve described it, started. I have other information that it only started now with Mattress Firm in the US. Some people suggest that that’s what happened and it was okay up until that point. Clearly, what’s coming out now is that it would suggest that it has been around for awhile.

Well, the numbers are just ginormous so there is a £6bn hole and again, we spoke to all the asset managers, they point to all the research they’ve done and it’s interesting that a lot of that research is questions posed to management and answers accepted. So there is much less scratching under the bonnet and a lot of reliance on yes, we asked some very tough questions but management always had such good answers and there was a lot of that.

That’s a good point.

Not a single asset manager, and perhaps they’ll come, but not a single asset manager could even those that we employ, who pride themselves as being stock pickers with a forensic accounting bias, can figure out, right now as things stand, where this fraud was committed. So, no one actually knows.

Do you have an idea?

Look I don’t but I think it’s over multiple years. Look, how are frauds committed? The numbers are inflated so what is inflated? There are only three, material numbers. You’ve got the revenue, the liabilities, and you’ve got the profit lines. I think the value of the assets is relatively easy to establish, even if you write down some of the assets to zero because you know what those assets are. So what can you do? You inflate the revenue line, artificially, so you just make up the numbers. You deflate the liabilities line and the expense line, and that you can do through a variety of different things, be it tax avoidance vehicles, be it booking losses into different entities so you’re literally making up the numbers. Then, as a consequence, inflating the profits and then a relatively high P/E is applied to those profits, and I’m not talking about P/E’s of 20 but a P/E of 15 is applied, and that gives you that multiplier effect, which gives you the market cap of the company. So it’s hidden in those numbers undoubtedly, but what is hidden?

And where?

No one knows.

If you had a guy, (Christo Wiese), who’s had lots of experience and in his 70s, and he didn’t pick it up, or if he did pick it up he’s got to be the dumbest guy on earth to take R123m single stock futures position a month before it all imploded but it’s somewhere, we’ll find it – I’m sure it will come out.

It will come out, or he did it to restore confidence. He’s buying these shares but he actually doesn’t have to put up a lot of cash. I don’t know. It could be a sign of either. What I find very hard to believe is that the board of directors, which consists of some very experienced business people and CAs did not pick anything up. I find it very difficult to believe that the AC (Audit Committee) did not pick anything up, and of course, very hard questions have to be asked of the auditors again because clearly, whatever risks and controls they were supposed to apply only kicked in this year. So there are an enormous amount of unknowns in this whole equation.

I’d like to throw something at you there, Magda. A guy who I know quite well who used to lead the audit on our company when we were public. He said that you should have a look at when Steinhoff listed in Frankfurt because the audit would have then moved from Deloitte SA to Deloitte Germany in the first year. He said it’s likely that Deloitte Germany would have really just gone along with what Deloitte SA had told them but in the second year Deloitte Germany would be very much involved. Is that a viable possibility?

You know, I think auditors are auditors. They check their numbers every single year. They compare their numbers to previous year’s numbers so I don’t think that the switch of auditors…In fact, it would be quite the opposite. When you switch auditors, and moving auditors between two different countries, would actually mean that the new team on the audit would apply and double their effort in order to understand the business. As opposed to a team and that’s why they’ve now introduced mandatory audit rotation and certainly, we’ve always had mandatory partner audit rotations because once you become too close to an audit firm there is a risk that they start lacking objectivity. So I can’t believe it’s in the switch of the auditors but there’s some interesting things about what I learnt about Frankfurt listings. So you know that Frankfurt doesn’t have a closed period. In SA, the JSE, we have a closed period where the moment we have information about the financials of the company we are precluded from dealing with the shares until such time as we have released the financials because obviously we could inside trade on the information.

Correct.

So Frankfurt has absolutely no closed periods. The other thing about Frankfurt that we were told today, by one of the asset managers, is that despite the fact that you think of Frankfurt as this ginormous international exchange. It’s an exchange, which has listed a lot of private family vehicles and small caps, and e-liquids so it’s not necessarily the same type of an exchange as the JSE is, or the London Stock Exchange, despite being located in Germany. So it is one of the side line exchanges.

Interesting points and we’ve got a lot of questions so if I can start throwing some of them at you?

Please.

The first one is, how can it be that so-called top businessmen got away with this nonsense without detection by the auditors? My assessment is that Deloitte made a stand only after there were rumblings in the media about the German investigation. Would you agree?

I agree, and hence, a lot of questions have to be asked of the auditors in terms of what quality of an audit was performed on those numbers, and what they actually did for Steinhoff? What was the scope of their appointment? All of that will come out in due course but I think that you will find that if this thing, and every indication is that it is longer in nature than just the last six months. If it is, then they’re liable. Then I’ve got, no doubt, that they carry liability.

Yes well you just have to look at that statement, the SENS announcement on the 24th August. I’ll refer back to it, ‘legal and external audit firms in Germany have concluded no evidence of any contravention.’ So that is what it is. The follow up to that was, as above for KPMG, they only fired the Gupta companies after major rumblings in the media. It’s been quite interesting that this Steinhoff smell, if you like, has been around for awhile as we’ve seen, certainly for the last six months. Whereas the #GuptaLeaks were a lot more explosive, and you certainly played your part in that with KPMG, but I suppose the media’s role in this has to be questioned, both our role here in SA. Why did we not ask more questions here? Why did we believe management in the way that we did? Also, what came out of Germany, it’s a bit like a Hansie Cronje moment in many ways, we didn’t believe it in SA because it was foreigners who were saying things.

Indeed, and look not only foreigners and that’s the interesting thing. I do believe that we’ve got a bit of a cult personality issue in SA. So when you look at these businessmen who have made billions and billions of Rands, you tend to think of them as having this Midas touch and they can do no wrong, even if some of the stuff that they do is quite shady. So for instance, one of the managers, and I don’t want to be sued for defamation and I’m not going to name the manager, and I’m just saying it as hearsay. He said to us today that Christo Wiese is well known for front running shares and potentially, trading on insider information. So one of the managers said to us that they actually observe directors’ dealings quite carefully because he’s always been known to insider trading. That was very cheerful for me to hear but the directors’ dealings are publicly disclosed so, in theory, the manager in following the director’s dealings is not doing anything wrong. The fact that they’re happy to invest in companies run by someone who is known to participate in insider trading activities…Well, it’s back to those ESG factors, when making investment decisions.

If you’ve done that research and that’s your conclusion, and as you say it’s hearsay so we can’t say it’s true or false but if you’ve done that research then surely you should be acting on it. Also, now that you mention it, there was a Sunday Times story a couple of years ago, ahead of the merger with Pepkor, where there were many Steinhoff executives who were mentioned for insider trading, and that just seemed to go away. I guess on the outside, we’ve just assumed that they had a logical explanation but I’m sure those kinds of issues are now going to be reopened again because when trust is broken, isn’t it so, Magda, that you question everything?

You question everything and you believe nothing. I think you can take a lifetime to build a reputation and destroy it in five minutes, and I don’t think you recover from something like this, by the way. Back to that cult personality – I think people in SA have a tendency to look at, and hence it’s a function of this huge wealth disparity in this country, but they have a tendency to look at very rich people and just blindly follow them, and whatever decisions they make. Without potentially scratching beneath the surface and possibly accepting shades of grey in business dealings, by the individuals concerned.

There’s a question here, which follows up quite nicely to say, are there any genuinely, honest businessmen? I suppose we should say ‘businesswomen’ as well, we’ve had a few of those but are there any genuinely honest? Of course, there are aren’t 90% of us honest and only 10% of humanity not?

Well, maybe 90:10 is a little bit positive and optimistic. Look, I think in SA right now, we’re living through these kinds of extraordinary times where over the past 10 years questionable business practices have become beknown. Zuma has effectively institutionalised corporate corruption because remember, for every rigged tender there is a public sector and a private sector participant. He not only institutionalised this but he encouraged it and consequently, you’re now finding the most reputable of companies you would think embroiled in paying because it’s so much easier to pay a bribe and have the legislation changed in your favour than to comply with onerous legislation. It’s so much easier to pay a bribe and win a tender, than go through an honest tendering process.

Zuma and his modus operandi has made this all right with a sense of lack of accountability. So I think people who started bending the envelope a little bit got bolder and bolder in what they were doing. Certainly, when you look at somebody like Markus Jooste, I’m quite sure that if you had questioned him a week ago, he would think of himself not as someone who was crooked and corrupt, but as someone who is clever. I’m quite sure he slept well at night as opposed to agonising over this because I think people convinced themselves that what they’re doing is clever. Maybe it’s shades of grey but it’s clever and that hubris and arrogance just grows.

Another question here, did Alec follow his own advice from his book on investing in the JSE, and if so, how did he come to the conclusion that Steinhoff should be in the Champion’s Portfolio? Well, I made a mistake. Fortunately, it was a small percentage and fortunately, we’re still in front for the year, and I’ll go through that a little bit later in this webinar. From everything I saw, from the published results that were given to us, everything looked like it was a good value investment and the purpose of the SA Champion’s Portfolio is to invest in companies that are based offshore. You don’t really have a huge variety to choose from on the JSE but from what I saw in the balance sheet, and it doesn’t excuse it, but there were many others who felt the same way. In fact, only a month ago the banks in Europe put in €800m behind this company. Even the European Central Bank invested into this company.

Yes, and let’s also quote some statistics, in defence of active asset management. Although I’m a big believer in index tracking but in the defence of active asset managers – a very good active asset manager only gets 65% of his calls right, and that’s statistical studies and that’s a superb asset manager. Unfortunately, you will always invest in some dogs. At any given point in time you’ve got to assume that there is a percentage of decisions that you have made in shares that you are holding that are not going to be the winners of tomorrow and that applies to not only standard, traditional asset management, as well as to private equity portfolios. Where these guys know that if they get two out of five wins, in terms of this 20% return over five years, then they’ve done well. So out of every five things that they invest in they expect that three will be dogs, and two will be winners. So, I wouldn’t kick myself too much.

Thank you. Views on whether Steinhoff will pull out of this mess?

I don’t think so because I think that we are heading to a territory where the banks are stepping in so there won’t be a Steinhoff. Given the amount of debt that the company has on its balance sheet, first of all. Given that Christo Wiese and we’re obviously not privy to his financial affairs and his personal balance sheet, but one needs to assume that he leveraged himself to buy shares, and we know that he has in certain instances. When you borrow money from banks and you do it on the security of shares they usually ask for anything between five to seven times cover. So, really, the owners of Steinhoff right now are the banks. The share price is an option price and the first people through the door will be the banks, and the banks don’t have a long-term vision for a company. They are more likely, and there is obviously nothing certain and again, we just don’t have enough information about what actually happened but to draw completely firm conclusions, and I believe Steinhoff management has a week to come up with those answers for the banks. Usually, they will come in and they will do a fire sale because the only thing they’re interested in is how much money do you owe me, and I need to recover that Rand/Cent amount. Staff, equity owners – the staff and the strategy, we don’t really care if the prospects are good or if certain things could recover over a period of time – we want our money back and we want it now. We are not in the business of taking on risk. No bank, unfortunately, is in the business of taking on risk. I believe that there are some very nervous bankers running around London today, well yesterday I knew of, who have large exposure because it’s mostly European banks. I think the exposure of SA banks is fairly modest but European banks are quite exposed to this. Once they step in and they start selling up assets well then you don’t know what you’re going to get out of that. If I was a betting person, do I think Steinhoff survives as a listed company? No, but that’s my bet.

How complicit is Wiese, is another question here?

So, the question actually is, how complicit is the board of directors? The litmus test for any board of directors, execs, or non-execs, is not about what they knew. The test is, what they should have known as directors. So, if they didn’t know that’s no excuse. That will not stop regulators from holding them liable. Now, do I believe that Christo Wiese was oblivious to everything that went on? Absolutely not but again, I would suspect that he believed that the things that were happening were aggressive. So words such as aggressive tax structuring were happening and he thought it was very clever. Do I think that he personally, would have sat there at midnight cooking up the spreadsheets? Probably not, but I also don’t believe that Markus Jooste was sitting there at midnight, by himself in a room because this is what the market would like you to believe and again, many asset managers who I spoke to literally painted the picture of the only person that knew was Markus Jooste.

So that would imply a guy that in the middle of the night, in the finance department, making up numbers. Now that is just not feasible. That’s not logical and not feasible. We had a bit of a meeting post mortem at Sygnia today and we were trying to go through all the, and Sygnia is a tiny company in comparison, but how many checks and controls we have in place and how impossible it would be for me to interfere with a financial director in place – how utterly impossible it would be for me to interfere without massive collusion by many people in the finances and in the making up of figures in the business. It’s just not possible. There are so many checks and balances that it’s impossible unless I don’t know. If I broke into the finance department at night and started changing everything, and this is what we are told to believe, at the moment so, I find that not particularly credible. I think that in the future it will come out.

There’s a question here from Bowie. He wants to know, where is Markus Jooste?

Recently departed Steinhoff CEO Markus Jooste

I’ve been told that he’s in SA. There’s a lot of rumours around this so, the problem is, and typical financial criminals in SA tend to run for Australia because they won’t extradite to SA because of our jail conditions so it’s a human rights issue. Of course, people who will be after Markus Jooste are not South Africans, it’s the Germans, and Australia will extradite to Germany. Australia is not really a place where you would want to run so I believe he’s in SA at the moment, and that’s what I’ve been told. But I’ve been told many unpleasant things about the fact that he’s not a personality that will easily accept what has happened so some unfortunate things might still happen but again, pure speculation.

There’s a question here from Len, who says that people smelt a rat since 2013. I guess that is true. You spoke about it in our interview on Friday about the minority view and I think it was a very good point that you made there that minorities are often not listened to in the financial markets.

So you know what was interesting as I was reading some research reports produced by some of the large asset management companies going back, and obviously, the moment you speak out as I tend to do then my inbox gets flooded with emails, with people who want to share information, which is great, and please keep sending me information. But it almost appears that up until around two to three years ago, most of the asset management industry was quite mistrustful of Steinhoff. Suddenly, when they listed in Frankfurt their views changed radically. I saw a Coronation report, which talked about the fact that all of the things that made them worried while the company was based in SA, well, the management has now completely addressed it. The change in strategies was absolutely fantastic and now it forms part of their top-10 shares.

So the view of large asset managers seemed to have changed say, three years ago on Steinhoff but there were plenty of minority opinions. Managers who didn’t believe the story, who couldn’t make the numbers tie up. There were sell side analysts, now, sell side analysts worked for stockbroking firms and they offer their research in exchange for brokerage. Those reports were in circulation and those are typically available to all asset management firms, large and small alike. There were enough dissenting voices, I would have thought that if your job is to analyse a company and you’re doing it with rigour. To take those minority opinions into account, in your own analysis and it isn’t obvious to me that that has happened.

There’s another question here who says, it cannot be one man who’s created this fiasco. There must be, by implication, many more than four directors involved. The board, who did not apply their minds or competence, but what about people who executed the accounting entries. Any thoughts or comments?

That’s exactly what I’m saying that there’s not a chance that this is Markus Jooste by himself in the middle of the night. There is a whole team of people implicated in this and I would go as far as to say that absolutely everybody, who worked for Steinhoff International, and it might very well be just a group of 20 people, which is a very scary thought if you actually think of how many companies they bought. Then all of those people were complicit. On that note and that point you made earlier, about Markus Jooste saying, ‘he trusts management – he buys management.’ Well that’s the biggest load of nonsense because that’s equivalent to saying, I do deals on a handshake. When you buy a company, you send in a team. You send in your own team of people, and you send in external teams, of auditors and lawyers to do proper due diligence in some businesses. In a lawyer’s sense and audit firms, they can only do so much so, when you’re buying large companies. To do so because you trust management, and that sounds right there, I would have a massive concern about how those acquisitions were made.

Theo wants to ask, will the directors be charged criminally?

Flag map of Germany

I’m not completely aware of German law but I think so. They certainly are in breach of their fiduciary responsibilities and again, it’s German law and not SA law. In SA, we’re going through our first case, I think it’s a civil case where the directors are being held liable in the African Bank saga. But if there is fraud then that’s a criminal offence, wherever you go. If its mismanagement of a company that’s a different case. There might be civil cases that follow but if there is genuine fraud so their numbers are fake, then that’s a criminal offence. I would assume that certainly, the executive team will be charged criminally and I suspect, the directors are liable. Directors tend to, and particularly non-executive directors tend to underestimate the liability that they carry. So someone very wisely once said to me, ‘never become a trustee and never become a non-executive director,’ because the personal liability that you carry is just too high relative, to what you can possibly know about the affairs of the business.

There’s some very wise words in there. I’ve heard those statements as well and it seems as though that on this board, they had quite a few professional directors who are probably thinking the same way today. Here’s a comment from Deon who says, we’ve had a lot of bad news this year. What is the good news that we can get out of all of this, is there any?

Well look, at the moment all roads, and I’ve kept saying for the past six months, lead to December but really, all roads lead to next week so there might be some very good news coming out of the ANC elective conference. If the right things happen then we can get the country back on track very quickly so I think you need to repeat that question again in about a week’s time. I think that irrespective of what has happened and what has come to light. There are a couple of positives in all of this. It doesn’t mean that the future of SA isn’t rocky, which I think it is but what are the positives? We’ve got a very strong court system. We’ve got free media, and we’ve got unprecedented levels of disclosure happening in SA right now. The #GuptaLeaks were almost this incredible moment where everybody in SA suddenly knew what happened, how it happened, and the media writes about it freely.

National Director of Public Prosecutions Shaun Abrahams. REUTERS/Siphiwe Sibeko

There have been some major wins. Yesterday or Friday, there’s been the NPA, with the fact that the appointment of Shaun Abrahams as head of NPA, has been put aside. Yes, he’s appealing but it’s an appeal that he’s bound to lose. There have been nuggets of good news in SA. I think the fact that we are literally opening all the boils and all the puss is spilling out. Yes, there are no prosecutions happening at the moment but having said that, if the right things happen next week prosecutions will follow and, also watch this space because some of us are working on things, which will be announced later this week, which can give us South Africans a bit of hope.

Benjamin says, Shoprite/Checkers is still listed. Is it a go for our portfolios?

I think it’s a solid business. I don’t think anything has happened with Shoprite/Checkers. Other than obviously, the management has changed but fundamentally, it’s a very solid business and I wouldn’t have any concerns. Look, anything right now associated with Christo Wiese, would have taken a beating and it’s partly because of sentiment and partly because you just don’t know whether any of those assets are attached and sold by banks so that’s the kind of great unknown, and that’s what’s affecting some of the share prices but Shoprite/Checkers is a solid business.

What about STAR (Steinhoff Africa)?

That’s very much ringfenced and again, some solid businesses in that and you can place easy values on those. Having said that, those are the assets that the banks will sell off first so one clearly needs to consider will those assets be sold at market related valuation or will it be a fire sale?

There’s a question here from Ian Ross. He asks, ‘who’s on the board,’ and I’ve quickly pulled it up. The directors are Danie van der Merwe and Ben la Grange, they are the two on the management board. Markus Jooste has been removed from the website. The supervisory board, in other words, what we would know as the board of directors, are Christo Wiese, Len Konar, who’s an ex accounting professor and a professional non-executive director, Steve Booysen, ex CEO of Absa Bank, Claas Daun, who has walked a long road with the Steinhoff team. In fact, he employed Markus Jooste right back with GommaGomma, which was the first business. Thierry Guibert, who was the gentleman who sold €1.1m worth of shares, he was the CEO of Conforama, which was the French company that they bought. Angela Krueger-Steinhoff, who I think is related to Bruno Steinhoff. Marthinus Lategan, former senior executive with the FirstRand Group. Jayendra Naidoo, an activist and businessman. Heather Sonn, who is a highly respected investment banker, who worked in New York and, also with Legae Securities in SA. Bruno Steinhoff, the man from whom the Group gets its name, he started it by taking furniture from the old East Germany to West Germany to sell, before the Berlin Wall fell. Johan van Zyl, the former CEO of Sanlam, and Jacob Wiese, who is the son of Christo Wiese. I hope that clarifies that question for you. Then let’s close off with the last one, does Germany have an extradition treaty with SA? I haven’t been able to check that one out but I guess it is something that might be looked at.

That’s a very good question but I don’t know, which is the answer. Extradition treaties are a funny thing because I was investigating, and you can guess the reasons. I was investigating whether Dubai and SA have extradition treaties in place. The answer is no. One has been negotiated but hasn’t been signed but that doesn’t mean that you can’t extradite. It just means that, and I did a bit of research on this because I actually wrote an article on this. It doesn’t mean that you can’t extradite. You can still apply for extradition even if there isn’t an extradition treaty in place, and the country can elect to either comply or not comply. Typically, if there are criminal charges pending they would comply. Again, I think that if Germany, given the political situation in SA right now, and this entire narrative around white monopoly capital, I think if Germany applied for extradition of anyone from SA to face corruption charges in Germany then that person will be extradited. They might fight it in court but eventually they would be extradited.

Magda, I’m going to let you go now and we’ll just quickly close off with the portfolio but there is one final question from Mary-Jane Morris, who wants to know about Naspers. Is there a risk of this company going pear-shaped?

No, look I think many things can happen to Naspers but you need to understand what Naspers is. At the end of the day, Naspers is all about Tencent, and Tencent is valued – at about two-thirds of its valuation is within Naspers so the share price of Naspers only reflects two-thirds of the value of Tencent. All the other operating businesses in Naspers are actually worth very little. So your worst-case scenario with Naspers, and possibly the best-case scenario with Naspers, there are many divergent views, would be the unbundling of Tencent shares. Provided that one could negotiate the relisting of Tencent shares on the JSE as part of that unbundling but I think there would be a lot of noise around, particularly MultiChoice and clearly, it’s again the noise that we don’t need and it again goes to this concept of corruption has been the institutional way of doing business because obviously, we have now seen MultiChoice implicated in #GuptaLeaks, and in paying of the Guptas via paying for ANN7. So I think there will be quite a lot of negativity and negative noise around Naspers but really, the fortunes of Naspers are not driven by Naspers. They are driven by Tencent in China and as a technology platform that’s just an exponentially growing company and if it wasn’t for the ethical considerations of MultiChoice, I would be a very happy shareholder in Naspers.

Magda, thank you. It’s been brilliant talking with you and for giving up your Monday evening like this to share it with us and for being outspoken, as always, and looking forward to that announcement on Wednesday. You’ve peaked our interest.

It’s big, I promise.

I’ll be on the blower to you for sure, thank you again, Magda, for being with us tonight.

Absolutely, keep well. Bye.

Thank you, bye Magda. Well, I’m going to continue now with the update of the portfolio. Let’s just allow Magda to go. Stuart, from your side, have you let Magda go?

Yes, thanks Alec. I’ve shut down her webcam and we’re all ready to rock ‘n roll.

Perfect, just to make sure that we’re still on our PowerPoint presentation now.

All good.

Okay, just to go back to the rationale of the SA Champion’s Portfolio, I wish I was talking about the Global Portfolio, that’s the one that’s been growing at 39% compound for three years. This one, of course, has not been doing that and Steinhoff has really hurt us. The idea or the rationale of the portfolio is to hedge against the Rand (ZAR), by investing in SA Global Champions. Now, clearly, what we did this year was we’ve made a few changes to try and settle down things. There have been far more changes than I ever would have wanted but it is the way it’s been.

Blue Label, was associated with the concerns that went around Net 1, if you remember that. With the scandal that went there we decided to get out of Blue Label. That had been a smart decision because we bought Naspers way below where it is at the moment. Then we sold Wilson Bayley, after they were stuttering along a little, and we put that into Glencore, which looked like a very good investment and indeed, turned out to be so, we started the portfolio with R100,000 on the 23rd January, and those were the two changes that really worked.

Last month you’ll recall, we got real lucky we sold Brait, at R48.60. It’s now R38.50 so it would have been really awful to have both Brait and Steinhoff in the portfolio, Brait being another Wiese company. The reason we sold that a month ago we had no idea what was going on obviously, at Steinhoff at that stage. Or to put it differently, we believed management at that point. The reason we sold Brait was because of that disastrous investment into New Look when I talked around to people in London the feedback was that New Look, although it was written down to zero by Brait, is probably worth a negative something. Brait’s share price has fallen on concerns that what’s happened at Steinhoff because of the ownership of Brait, where Christo Wiese is the controlling shareholder, will contaminate the Brait share price as well.

We also sold out of Glencore. The reason being that it had a fantastic run and that the whole story about electric cars, which was the reason that we bought into it to begin with appears to have been overdone in the mining sector anyway. At this point they’re investing heavily in coal and other carbon assets so we decided to take our profits and so far, it’s so far so good. Both of those acquisitions then, FirstRand shares, at R52.50. The reason we bought FirstRand was on the Aldermore acquisition in the UK. It’s a big R20bn acquisition. It gives it now a significant international footprint that we could justify inclusion in the SA Champion’s. FirstRand is, in my opinion anyway, by far the best big bank in SA.

Then we topped up on Naspers – the idea being that we would have an overweight position in Naspers and the SWIX Index is sitting at 25% so you need to have quite a big showing there. As Magda explained earlier, the reason for our Naspers shareholding is not necessarily MultiChoice or anything else that’s going on there but it is a huge discount on one of our favourite shares, Tencent in China, and we have Tencent directly in the Global Portfolio, so that’s the reason. You’re buying it at two-thirds in ZAR on the JSE, two-thirds of the Tencent price. It just looks like an obvious investment.

December’s disaster – we took Warren Buffett’s decision. What happened with this when the news broke on Wednesday morning. I started trying to find out what was happening and I hit brick walls everywhere. As far as the company was concerned all it told us was that there had been a disagreement between Markus Jooste’s interpretation of the figures and the auditor’s interpretation, which is not a good sign, of course but how bad was that misinterpretation, if you like? Well, the more I started digging around and I did a lot of work in those two days, on Wednesday and Thursday. I finally got to the conclusion, after talking to lots of people, and reading between the lines that this was really bad stuff. It was certainly contaminated, the company, you cannot by any stretch of the imagination call this an SA champion and we took the Buffett route.

When he came across things he didn’t like at Tesco, which was to do with accounting anomalies as well, he sold out and took an awful hiding. I think it was nearly $500m that he lost on it. In our case, we decided to do the same thing. Once I was confident or sure that this was a reputational nightmare we sold out, and that happened to be at around R6 a share on Friday. The reason we did it on Friday was because there are many investors in the portfolio who are putting in R50 to R100 a month, and they’re putting it in on different days of the month and I did not want anyone to be investing in Steinhoff inadvertently on Monday.

As it happens the share price went up a little bit today but that’s not really the point. As you can see in our portfolio, it’s really small. We took a 92% hammering but thankfully, to Magda’s perceptions or as she put that into context, if you can get 65% right, you’re doing okay. Well, let’s hope that this is our one and only last bad one. There’s the Champion’s Portfolio. Obviously, it’s looking pretty sorry at the moment. Fabulous returns from Discovery and Naspers. Now, Naspers, had we gone straight for 31% from day-one we would have been in a very good position right now. Of course, that wasn’t the case. We’ve been adding to that holding, as we’ve been selling out of other shares, but even so, our average price – we’re showing a 36% gain for Naspers, which being very heavily geared towards Tencent, I’m extremely happy to be in that position.

Discovery has been our star performer as you can see there. Investec Limited – it got contaminated by the Steinhoff fallout. Mediclinic – it got its head up a little bit in the last month, we’ll talk about that in a moment. FirstRand started well enough. MTN still hanging in there, and the 8% that we were putting into Steinhoff we are now in cash so, the portfolio is still up, thank heavens, but of course really looking horrible when it compares to the JSE All Share Index, and that we hope will change in time.

 

Just talking about Investec, you can see this is in the past week. Investec started the week just under R95. It got as low as R83 because of the fear that it had been contaminated by Steinhoff positions had it leant money to Steinhoff. It’s well known that Bernard Kantor, or the MD of Investec and Steinhoff ex CEO, Markus Jooste, have many interests together in the horseracing field. The concerns that the market had was is Investec also badly exposed. As a consequence, an announcement came out today to say that it wasn’t. In fact, the exposure that exists is through its clients who’ve had on margin positions and are holding in the preference shares, which in fact, have held up relatively well anyway, compared with the normal equities or the ordinary shares, and that’s because preference means preferred ordinary shares.

So Investec does seem to have a temporary setback and I’m not too worried about that, it should correct. Similarly, would you believe, FirstRand as well. The good news for FirstRand was the Aldermore acquisition has now been supported by more than, I think it was 99% of the shareholders in the UK. So they’re on their way. That deal is on its way. It’s a very significant one for FirstRand. It’s been done very sensibly. It is its first acquisition in some years in the UK and it will fit very nicely alongside another company that its bought, which is in the second-hand car financing business, and doing very well by the way. So the two of them will be highly profitable and give FirstRand a good base from which they can launch their electronic banking, etc. The concern the market has is that FirstRand is exposed to Steinhoff in some way, hence the share price has come down from over R58 in the last five days, to where you see it now, at R54. Again, we don’t have any clarity on that but one presumes that we’ll know more about that soon.

Moving on to Naspers. There you see, once again, in the last month it surged above R4,000 a share. It’s come back since then. Not on the MultiChoice story but on Tencent. In fact, if you overlay the Tencent, China share price and the Naspers share price the two of them are identical. MultiChoice is one of 120 subsidiaries that Naspers has. The reason, and Magda was explaining this, I thought, pretty well is the reason you buy Naspers shares is that you’re getting a discount of about one-third on the Tencent holding in China so, it’s a cheap way into Tencent.

Then Discovery has had a little bit of a setback recently in the share price but in the last month it’s done very well. You can see it went above R160 a share so this is a company that’s continuing to attract attention and clearly, it’s performed very well for us.

Mediclinic, there’s a nice bounce, as we anticipated it might be. If you recall we were concerned a month ago, as were every other investor in Mediclinic because they were on the brink of making a hostile bid for Spire, a UK based company. Spire didn’t like the bid although, Mediclinic owns 29.9%, and the concern was that the company would pursue it despite Spire not wanting its attentions. The fact was quite the opposite. The CEO of Mediclinic is retiring next year and the board appeared to have decided not to go ahead. Well they did, they decided they are not going ahead with that acquisition. They’ve withdrawn their offer for Spire and you can see the bounce in the share price very healthy indeed. Now, they just need to get the rest of their businesses right but in the long term, it is a FTSE 100 company and you can be confident that the Swiss and the Middle Eastern assets will perform.

Finally, MTN, which has really been bouncing all over the place. It came down a little bit today. It’s at least that bottom of R110 a share, around the R125. I think you’ve got to give Rob Shuter and his team the benefit of the doubt and give them a little bit of time to pull everything together. So, there’s our portfolio. We are, at this point in time, only slightly up. Thanks to Steinhoff, it’s wiped out all of our profits but the reality of it is that it happens in investing and the portfolio is a long-term investment. I’ve got my own money in there so, you’re investing alongside, and I’m quite happy to take a three to five-year view, and with the way it’s structured at the moment, perhaps it is time for us to start considering even greater diversification by finding some exchange traded funds but we’ll be looking at that in the future.

Thanks for joining us tonight, on this special update on the BizNews SA Champion’s Portfolio. It really was fantastic to have Magda Wierzycka, the CEO and founder of Sygnia on giving us her forthright and direct ideas and views on exactly what went on with the whole Steinhoff disaster. It’s not often that we have to talk about these unfortunate things but anyway, the fact was when it happens you need to take the biff on the nose, and I think we’ve done that. Stuart, from your perspective.

Thanks, Alec, no questions this side but thanks for the time. I think you and Magda were fantastic tonight so yes, it’s unfortunate circumstances but it was very well handled, as they say.

Great, well thanks to the BizNews Premium subscriber’s community, we will continue to cover this story every day. I’m actually writing just for Premium at the moment, and there’ll be a daily update with what’s going on with the Steinhoff saga but as what Buffett did with Tesco, we move on. We have the Global Portfolio, Stu, on Wednesday, is that right?

Yes, Wednesday at 12h30, Alec.

Back to lunchtime so, yes, please join us at lunchtime. That’s of course, a much happier story but you can’t win them all and thank you again, for your contribution tonight. We will be back with you at lunchtime, on Wednesday. Cheerio.

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