Distressed Steinhoff ripe for the picking
Steinhoff is shaping up to be an ideal target for a private equity takeout. The company is on its knees, severely damaged by scandal, and available at a steep discount to its admittedly shaky book value. A bolshie private equity firm could move on the company with a strategy of realising value out of its vast portfolio of operating assets while injecting the liquidity the company needs to keep the doors open.
On Friday last week Steinhoff finally shed some light on how bad its accounting mess is. The main headline is that the company has taken a €10.9bn (R176bn) hit to its book value from writing off the value of assets and restating previous earnings.
But even after that write-off, the company has an equity value of €3.8bn. It is now trading in Frankfurt at a total market capitalisation of €352m.
If management has got its write-offs even vaguely right— and for now they are just best guesses — then there is a large potential profit to be made by taking over the company and working to realise the value of assets. After Steinhoff’s Friday announcement, the share price leapt up 6.6%, reflecting some recognition that Steinhoff might not be completely dead, though it is still 98% down from its value before the accounting scandal emerged last December.
There are plenty of private equity players that specialise in distressed companies. The appetite for such a deal may be helped by the fact that there is a shortage of alternative distressed deals on offer. The fairly strong recent performance of US and European economies means the normal pipeline of companies that find themselves unable to pay their bills has become quite barren.
Companies like Apollo Global Management, Cerberus Capital Management, Centerbridge Partners or Lone Star Funds, all with plenty of experience in distressed situations, could be interested in Steinhoff. And, crucial for anyone taking on the Steinhoff challenge, they have much experience in European distressed debt as well as distressed equity.
Steinhoff is in urgent talks with creditors about €9.4bn of debt. According to Bloomberg, the company is trying to negotiate a debt standstill and suspension of interest for two years.
Steinhoff has already been shedding assets in a desperate effort to raise cash to keep financing its business and settle debt. It flogged its Gulfstream jet for $15.5m, having bought it just a year earlier for $21m. It sold PSG shares to realise R12.4bn after costs, KAP shares to realise R3.7bn, Steinhoff Africa Retail (Star) shares to realise R3.75bn and pref shares in Atterbury Europe for €223.5m, and has a provisional deal to sell KikaLeiner for €490m. Not all of those were sold at a loss to carrying value, though Steinhoff would have started with the most liquid and valuable assets in its efforts to raise cash.
Even after getting a clear picture of the accounts of the group, any potential buyer would have two main things to worry about: the fundamental operating potential of the businesses, and the liabilities it could face from creditors and others who are suing. One of those is former chairman Christo Wiese’s R59bn claim against the group. Given that Wiese had his hand on the tiller when accounting shenanigans were rife, you’d think he’d have little chance. Other shareholders, who could more clearly argue they were taken for a ride when convinced to invest, may have more grounds. The company could also have tax liabilities from previous dodgy deals.
The operating performance of the business is also concerning. Almost all the group’s operations saw a decline in operating profits in the last six months. Worst is the US business, which increased its losses from €33m to €94m. Overall, for the six months to end-March, the operating loss was €381m compared with a restated loss of €168m for the year before.
In part the performance was weak because of the major issues facing the group — understandably, customers weren’t comfortable putting down a deposit to buy a lounge suite when they weren’t confident Steinhoff could ever deliver it.
The operating businesses were also starved of liquidity, with suppliers not happy to take any credit risk in supplying goods to the business.
A private equity buyer able to support Steinhoff’s balance sheet could quickly cure those headaches.
It would certainly be a highrisk strategy. The numbers remain uncertain. A PwC investigation is still under way into all of the off-balance-sheet and related-party deals that were used to hide losses and liabilities over the years. A review is ongoing of the values of all the group’s property assets, which could also have been inflated. We still don’t know whether the skeletons have been fully outed from closets created by previous management. And the litigation risk remains high.
But the value that distressed private equity — often disparaged as vulture funds — adds is to bring the skills to take on very complex and risky messes in order to sort them out. The profits could be in billions.
They are the undertakers of capitalism, and Steinhoff is sorely in need of one.
Creditors in the key financing companies in the Steinhoff group have agreed to extend their standstill agreement until July 20, giving the board an additional three weeks to firm up its restructuring plans.
On Friday morning, just hours before the release of the interim results and details of the write-off of 44% of the group’s balance sheet value, the board announced most creditors of Steinhoff Europe and Steinhoff Finance Holdings had agreed to support an urgent request for an extension to its existing support agreement, which was due to expire on June 30.
On Friday the group also reported it had reached agreement with third-party creditors of Steinhoff Finance, Steinhoff Europe and Stripes US Holding on the key commercial terms of the proposed restructuring plan.
The plan is intended to provide stability to the group’s operational management while the board reduces debt and assesses all contingent litigation claims against the group.
WHEN A RESTRUCTURING PLAN IS FINALISED A PORTION OF THE CURRENT INTERESTBEARING LIABILITIES WILL BE RECLASSIFIED
The group’s non-South African debt is €9.5bn, which the board said created a challenging liquidity position.
“The continued sale of assets to fund ongoing liquidity requirements is unsustainable and the group needs to significantly reduce these debt levels,” the board said.
Liquidity pressure was aggravated by breaches of loan covenants, which forced it to recategorise more than €9bn in non-current liabilities as current liabilities. “When a restructuring plan is finalised with financial creditors, a substantial portion of the current interest-bearing liabilities and borrowings will be reclassified to noncurrent interest-bearing liabilities,” the board said on Friday.
Due to the reclassification the group’s current liabilities exceeded its current assets at the end of March. The management board said it believed the group is able to continue as a going concern because there is a reasonable prospect it will reach binding agreements with its financial creditors, and be able to service costs and repayment obligations over the next 12 months and beyond.
While the management believes there are valid defences to each of the litigation claims “it is highly likely that any successful legal proceedings brought against the group would take more than 12 months to finally resolve”, the board said.