Scale of Steinhoff’s deceit

FAILURE: BALANCE SHEET ALSO REVEALS ITS HIGHLY PRECARIOUS POSITION The retailer’s 2017 restated results paint quite a different picture to latest figures.

When Steinhoff International released its interim results for the six months to March 31 last year, it reported a healthy operating profit of €903 million (about R14.5 billion). The group’s operating margin was 7.5%.

Then chief executive Markus Jooste hailed the group’s great performance.

“This solid revenue and margin performance underscores the resilient model of the group,” said Jooste at the time. “This has been further underpinned by both our product and geographical diversification in what remains a resilient discount market.

“The strong leadership and execution from our operationally focused management teams also continues to deliver good growth.”

However, on Friday Steinhoff restated these 2017 figures when it reported its 2018 results, and what emerged is something astonishingly different.

Revenues for the six months to March 31, 2017, which were originally quoted as €10.2 billion, were restated as €9.9 billion. The operating profit had vanished entirely, and was instead an operating loss of €168 million.

In other words, the retailer had overstated its operating profit for this period by more than €1 billion.

In total, when restating the accounts, the group impaired overstated assets and the reversed non-arms’ length transactions worth €6.1 billion.

However, as these remain unaudited results, these are not definitive amounts. It remains possible that even larger restatements could follow.

As one local asset manager noted: “You have to be very careful not to draw conclusions. It could be even worse.”

Steinhoff’s balance sheet also reveals to what extent its position is highly precarious. Of its total assets of €19.838 billion, €9.359 billion, or 47%, is listed as goodwill or intangible assets.

The group’s total liabilities, however, are €16.045 billion. These exceed its tangible assets by more than 50%.

This negative tangible net asset value remains this high even after an impairment of €1.5 billion to goodwill and a further €144 million to trade names relating to Mattress Firm.

Of further concern to shareholders was the revelation that Steinhoff entered into derivative contracts with two PSG Group investors when it increased its shareholding in that company in 2015. This appears to be new information that had not been previously disclosed.

At the time of the transaction, Steinhoff agreed with a number of PSG shareholders to swap their PSG shares for Steinhoff shares. However, two shareholders entered into derivative agreements through which they retained economic exposure to PSG.

Through these agreements, Steinhoff was liable to pay out the difference in value if PSG shares outperformed Steinhoff shares. If Steinhoff outperformed, then Steinhoff would receive the difference in value.

The amounts concerned were not huge, but nevertheless created a liability for Steinhoff. It settled one contract for €0.7 million and the second for €13 million. This again raised concerns about companies doing deals that create a potential liability for shareholders without those shareholders being aware of them.