Steinhoff accounting boggles the mind
Nothing in Steinhoff’s accounts was done with simplicity in mind. That is how one finance expert describes Steinhoff’s complicated accounting. In particular, the accounting that underpinned the restructuring of the group’s assets when Steinhoff became a Dutchregistered company and transferred its primary listing to Frankfurt at the end of 2015.
Transfers and redistribution of assets, valued at billions of rand, between similar-named entities within the group appear to be at the core of the complexity, which is expected to take PwC millions of man hours to unravel.
A big part of this restructuring involved the distribution by Steinhoff Investments, a wholly owned subsidiary of Steinhoff International, of its shares in Steinhoff Finance Holdings to the Dutch-registered and German-listed holding firm, Steinhoff International.
Steinhoff told Business Day that Steinhoff International had two South African subsidiaries: Steinhoff International Holdings (SA) and Steinhoff Investment Holdings (SA).
Steinhoff Investments is described by Steinhoff, as “an intermediate holding company with the same nature of business as its parent Steinhoff International Holdings (SIHL) until April 1 2016 and Steinhoff International Holdings (NV) after April 1 2016”.
Steinhoff Investments held the group’s African and European businesses.
Steinhoff said to simplify the structure it decided in 2016 to create separate “clusters” for its European and African businesses. As part of this, Steinhoff Investment distributed its shares in Steinhoff Finance Holdings, which contained the European businesses, to Steinhoff NV, its Dutchregistered holding company.
At the time, Steinhoff Investments was valued at €19.3bn in Steinhoff NV’s consolidated accounts. But in Steinhoff Investment’s accounts the businesses were still valued at historical cost. In the case of Steinhoff Finance Holdings, this historical cost was just R19.9bn.
Steinhoff said last week that at the time of Steinhoff Investment’s distribution to Steinhoff International, it allocated the combined €19.3bn between the European and African businesses. “The proportionate value for Finco was €11.8bn [R198bn]. This meant the distribution created an operating profit of R178bn for Steinhoff Investment.”
All that Steinhoff said was that “an exercise was performed to split the SIHL cost” resulting in a proportionate value for Finco of €11.796bn and “a profit on disposal of the Finco shares for Invest company financial statements of R198bn-R20bn = R178bn”.
Chris Logan, CEO of Opportune Investment, is not satisfied with the explanation. The fact that Finco is getting €11.796bn, or R198bn, of value in 2016 is particularly interesting, says Logan. “[The] value of Steinhoff’s assets outside of Finco, where far greater transparency prevails in the form of Steinhoff’s stakes in Steinhoff Africa Retail [R47bn] and KAP [R6bn] less the relevant debt of R20bn is in the order of R33bn.
“So it looks fair to say with the market cap of the whole of Steinhoff at only R8bn, Finco now has an implied value of some negative R25bn, quite a swing from the R198bn of not so long ago. A negative value on Finco is feasible as the top company Steinhoff International has guaranteed most of the group debt,” says Logan.
Steinhoff said that all the reorganisation of profit and losses are eliminated in consolidation. It also said the Steinhoff Investment’s financials had been withdrawn in January 2018 when all of the group’s accounts were withdrawn. While on consolidation the massive operating profit was of no consequence, there is some concern about how the European assets accounted for so much (€11.8bn) of the total €19.3bn. In the wake of the December 2017 announcement about accounting irregularities, it has become evident that the single most valuable asset in the Steinhoff group is its 71% stake in Steinhoff Africa Retail (Star).
One analyst said Star is attractive because it is not caught up in a web of inexplicable transactions. “Steinhoff is like a rabbit warren, just as you think you understand one deal you realise you need to understand the next one, and the next.”
There may be nothing sinister in this style of accounting, but it should set off some alarm bells. Perhaps the attraction of investing in a Dutch registered company that had its primary listing in Frankfurt dulled the sound of those alarm bells for investors in SA keen to externalise their wealth.
As a standalone transaction, the only investors harmed by Steinhoff Investment’s R178bn distribution were investors who held preference shares in Steinhoff Investment.
The distribution deprived them of security for the investment, making last week’s notice about the suspension of dividends inevitable.
Given the drop in the share price since the December announcement, investors are now assuming there is something sinister about the mind-numbing complexity of Steinhoff’s accounting style.