Steinhoff sinks as investors sue for R185bn in losses
EMBATTLED retailer Steinhoff International sunk deeper into the red as its shares fell on a R185 billion class-action lawsuit from investors who wanted to recoup losses suffered after the retailer wiped off R200bn in the market value in December.
Steinhoff extended its losses on Friday morning, surrendering 13 percent in early trade to R2 from Wednesday’s closing price of R2.34 when the consortium of lawyers approached the South Gauteng High Court with the lawsuit. The stock closed 5.1 percent weaker to R2.22.
The recent application was brought by Johannesburg-based LHL Attorneys, Dutch firm Bynkershoek Dispute Resolution and German firm TILP Litigation. It names as defendants the Dutch incorporated Steinhoff International Holdings NV; its South African predecessor, Steinhoff International Holdings; as well as three banks – Absa, Germany’s Commerzbank and the UK-based Standard Chartered Bank – and the auditors that assisted Steinhoff with its Frankfurt listing, Deloitte and Rödl & Partner.
Mark Hodgson, an analyst at Avior Capital Markets, said the lawsuit filed in South Africa against Steinhoff International legal entities will be complex and it includes various directors, auditors and financial intermediaries as respondents.
“If this lawsuit were to be successful, depending on the amount awarded and no appeal lodged, then it would have the potential to result in bankruptcy for the group,” he said.
“Steinhoff, in terms of lock-up agreements, recently concluded it is likely to be disposing of further group assets in any event,” Hodgson added.
Veronica Vurgarellis, litigation partner at Hogan Lovells, said in the event that the courts ordered payment of an amount that the responsible party was unable to pay, then application could be made for the liquidation of the debtor companies.
“However, sale of assets may be an option, but not the only option,” Vurgarellis said. This was not the first lawsuit that Steinhoff had been facing since its admission of accounting irregularities.
In April, former chairperson Christo Wiese lodged a R59bn claim against Steinhoff related to cash investments made by the Titan Group in the company between 2015 and 2016.
Also, a unit of its local subsidiary, Pepkor Holdings, was at loggerheads with former Tekkie Town executives who resigned in June in respect of an earn-out agreement allegedly reached with Steinhoff International.
Bernard Mostert, a former chief executive of Tekkie Town, said his lawsuit would put the company at real risk of bankruptcy: “There are, of course, already several other claims which are different in nature to this claim. Our claim seeks restitution whereby we are calling for the return of shares in Tekkie Town we sold in exchange for shares we received from Steinhoff and which could not be sold for a period of three years.”
Webber Wentzel, acting on behalf of the consortium of former Tekkie Town executives, estimates that the earn-out would be about R455 million to R890m at the expiry of the scheme in September 2020.
Vurgarellis said the lawsuit was expected to continue for many years.
EIGHT months have passed since the overnight crash of one of the JSE’s biggest darlings, the multinational conglomerate called Steinhoff. In the week of December 4 to 8, 2017, the group saw its decades-long auditors Deloitte refuse to sign off its annual report. Chief executive Markus Jooste resigned and a controversial report by an American short seller called Viceroy was published.
These factors led to the Steinhoff share price falling from more than R50 per share to R6 per share. It subsequently fell to below R2 per share as further bad news came out over the months that followed.
This is a company which listed on the JSE in 1998 at R4 a share and once bragged with a share price of a little more than R96. The resultant value destruction is unparalleled in South Africa. In total it has been estimated that around R300 billion in value has been destroyed. This includes the drop in value that companies associated with Steinhoff and its directors experienced.
The ongoing investigation into what went wrong and who is responsible continues. To date no one has been arrested, despite pension funds in South Africa having seen billions in value destruction.
This includes the government employees pension fund that lost an estimated R20bn. Those are nurses, teachers and policemen and women.
The Hawks have opened a case, but in reality are probably waiting for the PwC forensic audit to be completed before they will take action.
Did you know that there is not a single permanent auditor or chartered accountant working for the Hawks’ specialised commercial crimes unit today?
On the optimistic front, the group that has been likened to a body riddled with bullet holes, is still standing. Just. It has 12 000 shops in 33 countries around the world and there are 130 000 people working for shops linked to the Steinhoff group.
In South Africa alone there are 50 000 people working in a Steinhoff company somewhere, and these jobs remain on the line too.
Two bits of good news
These include shops like Pep, Bradlows, Incredible Connection and HiFi Corporation among others. The fact that the stores are still trading and the Steinhoff share has not yet been suspended by the Frankfurt Stock Exchange must be the two biggest bits of good news for the group.
On the flip side there are many negatives. These include a massive cash flow problem and a seemingly insurmountable mountain of debt. In May the debt was €10.4bn (about R166bn) while the group’s market value was only €584 million (about R9.35bn).
Another bit of bad news are the concerns about the outcomes of the Steinhoff investigation. At the moment the annual reports for a number of years have been recalled and the opinions expressed cancelled. These reports are being restated and may carry lots of bad news for shareholders when they finally come out. The group’s statements for 2015, 2016 and 2017 are all being redone.
This process is paralysing, because banks will not easily lend money to a group whose financial statements are unreliable. The group is negotiating continuously with creditors to hold away the credit wolves.
Meanwhile the news from America is not good, with reports indicating that the company called Mattress Firm that was purchased in 2016, was indeed a big dud.
Steinhoff under Markus Jooste bought Mattress Firm for $64 per share (R898), at a time when the share price was only $29. This was the first real catalytic moment that led to the meltdown of the Steinhoff group.
Overstated for years
It has become clear that assets and income have been massively overstated for years, and in June the group under the chairpersonship of Heather Sonn announced in a statement that it has written off value of assets by €12.4bn (about R198bn). That is an astounding amount. The hope is that this has been the bulk of the matter and that further write-offs will be much smaller if any at all.
What to look out for? The most immediate thing of interest is the third parliamentary hearing into the Steinhoff matter. The first and second hearings were held in January and March this year. The third hearing is expected to be held in Parliament on August 29. Expected at the hearing is the ex-chief financial officer of Steinhoff, Ben la Grange, who at one time was earning in excess of R50m per year. What did he know? What will he say? This will be the first hearing he may attend. He was not present at the prior two hearings, and it will be interesting to hear what La Grange has to say.
On an almost daily basis new information about Steinhoff is making headlines across the country. The latest was the news about a new class action lawsuit being mounted against it and some of the main individuals. The new lawsuit was filed in Johannesburg and follows on similar legal action taken in the Netherlands and Germany. It will be interesting to see where this lawsuit leads if anywhere, and how it may affect the efforts to restructure the group.
The one thing that is becoming clear about the Steinhoff mess is that there will be many reputations ruined before the story has played out. These include international auditors, legal firms, advisory consultancys, billionaires and a multitude of others. At best none of these world renowned entities saw any of this coming. At worst, they did. It is also true that the story remains a minefield of confusion and complexity. Jurisdictionally for example, consider the fact that Steinhoff is a Dutch company, not a South African company, and its primary listing is in fact in Germany, not in Johannesburg.
As to Markus Jooste. Well, he is still living footloose and fancy free in the Winelands. Rumour has it that he has appointed a top advocate already, one who is known for never letting his clients say anything. Will the real answers ever come out? Only time will tell.
In July James-Brent Styan published an exposé of the Steinhoff meltdown called Steinhoff: Inside SA’s Biggest Corporate Crash. The book is available from all bookstores across South Africa and remains at the top of the best-seller lists.