Steinhoff: the dream that flew too high
Now retailer has to get down to salvage job of selling prized assets
Within a week, one of the world’s largest retailers has seen its grand ambition of becoming an emerging-market “Ikea” or “Walmart” all but collapse. When trading in the shares began Friday morning, Steinhoff had seen its share value plummet by 40%, trading as low as R5 a share.
Days before, the Christo Wiese-owned Steinhoff was still riding on the crest of a wave, and seemed on the verge of joining the world’s major leagues with a proposed tieup with Africa’s biggest grocer, Shoprite.
Just last week, STAR announced that it had exercised call options for the 23.1% acquisition of shares in Shoprite for R35.5-billion and for a 50.6% voting control in the company. Now Whitey Basson, the former Shoprite CEO, is uncertain about the prospects of the deal. Basson, a longtime ally of Wiese, said on Friday: “I’m really not in the loop about what is currently happening at Steinhoff.
“There were conditions precedent that still had to be resolved by competition authorities. I really don’t even know how far they are with that. I don’t know if it will be stopped in the middle or if it will go through and what the financial position of STAR would be if they have to repay loans, but I have not seen the numbers either.”
All in the air
Basson, who had recently spoken to Wiese, said he was watching what was happening at Steinhoff, and Wiese too was unable to comment as it was “all in the air”.
“I unfortunately (or fortunately) never had any dealings with Steinhoff, so I was limited to my dealings with Shoprite and to my friendship with the chairman and the board and I did not own a lot of Steinhoff shares,” Basson said.
“I was not really involved in the discussions with Steinhoff’s international business on mergers or non-mergers with Shoprite or swopping of major control. My general opinion wasn’t about Steinhoff or anything but it was a situation where I didn’t like conglomerates that much.”
Steinhoff faces the real threat of becoming the biggest bankruptcy in South African corporate history, larger than African Bank’s collapse three years ago, if it is unable to contain the contagion caused by its CEO, Markus Jooste’s departure this week on the back of fraud allegations amounting to billions.
Both its JSE and Frankfurt shares, where it has its primary listing, plummeted after it came to light that Jooste — a member of Stellenbosch’s business royalty — was being investigated by German authorities for rigging the company’s financial statements. The company is now based in the Netherlands.
The fallout has spooked investors and lenders alike, with the company announcing that it would have to sell undisclosed “noncore” assets to release a minimum of ¤1-billion (about R16-billion) of liquidity.
Selling the crown jewels
Moody’s Investors Service slashed the company’s credit rating to junk in the wake of the accounting scandal. Steinhoff has scheduled a meeting with lenders to December 19.
With Steinhoff not clarifying what it deems “non-core”, the market is speculating about a possible sale of one of its crown jewels, Pepkor. The company has said it has received expressions of interest.
“When companies are in trouble they sell the precious jewels just to deal with their situation,” one of Steinhoff’s largest shareholders, who wished to remain anonymous, said in reference to a possible sale of Pepkor, which has more than 4 900 stores worldwide — 3 600 in Africa and 1 300 in eastern Europe and the UK.
Wiese, who has taken over as Steinhoff’s interim CEO, is its largest shareholder with a 23% stake, followed by the Public Investment Corporation (PIC) with about 10% and Coronation Asset Management with 4.77%, according to Bloomberg data.
Ian Cruickshanks, an industry analyst, said in order for the company to raise capital and recover from the loss it would need to either issue shares or sell assets. Since shareholders are unwilling to buy a bad share, “you would have to look at subsidiaries or associated companies who do have value”,
“PEP seems to be in good health, services its sector well and it’s got a good profit record, and unfortunately buyers don’t want to buy anything else, so they don’t have a choice. You can only raise money by selling something that somebody else wants.”
It was only two years ago that Steinhoff made its foray into clothing retail after it had bought Pepkor for R62.8-billion from private equity firm Brait, also owned by Wiese.
Pepkor’s portfolio includes Ackermans, John Craig and Pep Africa.
Attiyah Vawda, an equity analyst at Avior Capital Markets, said Pepkor was more at- tractive than any other asset.
PEP stores, which targets the lower LSM, has margins that are not as high as those of apparel retailers such as Truworths and Woolworths, ranging between 12% and 13%.
Truworths’ margins sit around 17%, TFG, which owns Foschini and Markhams, sits near 18%, while Woolworths’ clothing division sits around 16.5%.
“In that light there may be some room for improvement because they [PEP] operate at a very low end that the gross profit margins are significantly lower,” Vawda said.
“That’s what makes it [Pepkor] an attractive buy; the top line is good in terms of the value, the proposition for Pepkor is very strong. But it does lack a lot on margins as it is lower than your average apparel retailer.”
Investigation welcomed
But as far as who would be willing to buy the company, Vawda said while it sat well with the Mr Price strategy, “if you look at Truworths, they are overly exposed to the premium segment, so that would be a good diversification for the brand”.
“But if you were shareholders, who paid R96.85 for a single share at its peak at the end of March last year, you will have to swallow the hard pill of a stock that crashed to R6 a share on Friday.”
The Financial Services Board plans to investigate possible false reports by Steinhoff.
On the company’s future, Cruickshanks said: “I might say underground, but I don’t know. All efforts will be made to keep the company alive, just look at what is at stake.”