Steinhoff deal needs to come under scrutiny

Former Steinhoff CEO Markus Jooste’s statement in parliament last month that the decision to buy Mattress Firm in September 2016 was not, in retrospect, a good one was a bit of an understatement.

The bedding company, which cost $2.4bn and came with $1.4bn debt, has been dogged by bankruptcy rumours.

While Mattress Firm has never been directly linked to the “accounting irregularities” that prompted the December 2017 collapse in the Steinhoff share price, it’s to be hoped that the PwC investigation into those irregularities will touch on this, the last big deal that the global retailer signed off on.

If not PwC, then perhaps one of the class actions launched by shareholders will shed light on why the Steinhoff management and supervisory board agreed unanimously that paying a 115% premium to the Mattress Firm ruling share price was such a good idea.

In their defence, it has to be said that the deal was announced when, despite mounting concern about the high-profile falling out with Jooste’s former partner, many in the investment community still believed he was an excellent deal maker and could extract value from even the most overpriced of assets. Reading analysts’ comments in the context of what happened since December 2017 is a sobering experience.

It’s not only that the Mattress Firm purchase was overpriced but in September 2016 it was in the midst of its own buying spree and had added 1,500 stores in a few short years. The buying didn’t stop with the Steinhoff deal. In May 2017, Mattress Firm spent an undisclosed sum to take control of Sherwood Bedding, whose founding family once owned one of the largest mattress manufacturers in SA.

Blue Label Telecom’s share price has dipped below R5 for the first time in seven years. Despite management’s assertions in August that the market was punishing the company unfairly, things seem to have gone from bad to worse.

In late August, Blue Label joint CEO Brett Levy said 45%held associate company Cell C was doing better than expected on all metrics, including debt. The mobile operator’s debt “is less than what we had budgeted”, Levy said. “The market is impatient or the market doesn’t understand it [Cell C],” he said, referring to Blue Label’s decline on the JSE. But investors are not convinced.

Since August 20, Blue Label’s share price slipped from R8.37 to R5.05 on Thursday afternoon. At the end of August last year, it was at R18.49.

To many in the market, the 2017 Cell C recapitalisation deal could prove to be a poisoned chalice for Blue Label. More than anything else, investors are concerned about the operator’s debt levels. In the six months to June, Cell C’s net debt grew to R7.3bn, from about R6bn in August 2017, as the operator started building its network again.

But Levy says he is not concerned. He said in August that while Blue Label originally expected Cell C would need another R4bn until the end of 2019, “what only needs to be raised in Cell C until it turns cash positive and needs no more money is R2.8bn”.

Time will tell whether the market is indeed being overly pessimistic, or whether Blue Label has overplayed its hand.