Where are all the Stein­hoff cheer­lead­ers now?

In an ex­tract from Rob Rose’s book, Stein­heist, he ar­gues that there ap­pears to have been an epic fail­ure on the part of the ‘ex­perts’ who are paid to tell you which com­pa­nies to avoid

Daily Dispatch - - Opinion -

While there were gen­uine scep­tics in the years be­fore Stein­hoff’s col­lapse, there were an equal num­ber of “ex­perts” who would rat­tle on about the com­pany’s “ex­cit­ing prospects”. Rather like finding white South Africans to­day who will ad­mit to sup­port­ing apartheid, lo­cat­ing those cheer­lead­ing an­a­lysts to­day isn’t es­pe­cially easy.

There are also oth­ers who, shame­lessly, will boast how they “spot­ted Stein­hoff” years ago. Ev­ery­one is an ex­pert about what hap­pened yesterday. The fact is that on De­cem­ber 4, the day be­fore Jooste re­signed and the share price col­lapsed off a cliff, there were 17 an­a­lysts who cov­ered Stein­hoff, 11 of whom rec­om­mended that in­vestors “buy” the share, six who rec­om­mended they “hold”, and ex­actly zero who called it a “sell”.

On the face of it, this ap­pears to be an epic fail­ure on the part of the “ex­perts” who are paid to tell you which com­pa­nies to avoid.

But­ters says he be­lieves this is partly struc­tural: stock­bro­kers are typ­i­cally housed in large banks or fi­nance firms, which, on the other side of the Chi­nese wall, make a liv­ing from ei­ther ad­vis­ing com­pa­nies on deals or pro­vid­ing them with the fi­nance.

“There’s an im­plicit pres­sure on an­a­lysts to be pos­i­tive be­cause then those in­vest­ment banks will be looked on favourably. At a com­pany like Stein­hoff, all the in­vest­ment banks were fall­ing over them­selves to win a slice of its busi­ness for all the ac­qui­si­tions it was do­ing.” And the fees that the in­vest­ment bank charged Stein­hoff for struc­tur­ing deals in Europe were gar­gan­tuan. Page through the prospec­tus Stein­hoff is­sued be­fore do­ing its 2011 deal to buy Con­forama, and you’ll see it paid R150m in “ex­penses” – R40.3m of which went to Cit­i­group, R40.4m to HSBC, and R42m to the Royal Bank of Scot­land. In 2014, when Stein­hoff bought Pep­kor, it paid R40m to var­i­ous ad­vis­ers, in­clud­ing R30m col­lec­tively to var­i­ous banks, in­clud­ing In­vestec, Deutsche Bank, Cit­i­group and Bar­clays.

Two things you’ll no­tice. Firstly, all these banks that buzzed around Jooste and scooped up the honey also have a stock­broking arm, which is meant to pro­vide “in­de­pen­dent ad­vice” on com­pa­nies. Sec­ondly, the bro­kers who were crit­i­cal of Stein­hoff seem to have cost their banks valu­able in­vest­ment bank­ing busi­ness. Take JP Mor­gan again: de­spite be­ing rated as the top global in­vest­ment bank, it didn’t get a share of Stein­hoff’s deal­mak­ing fees for years af­ter the Sean Holmes fiasco.

If loy­alty was the one char­ac­ter­is­tic that Jooste prized above all else, then any dis­play of dis­loy­alty would elicit the sort of grudge you’d ex­pect to find more com­monly in a Si­cil­ian crime fam­ily. That ill will, he’d strug­gle to forgive.

Barry Nor­ris is the founder of the Lon­don­based Arg­onaut Cap­i­tal, which be­gan doubt­ing the Stein­hoff story in about March 2017. At the time, Arg­onaut be­gan “short­ing” the share – es­sen­tially, bet­ting the price would fall. Nor­ris says he be­lieves most an­a­lysts “missed” the Stein­hoff is­sues be­cause of the sort of struc­tural ten­sions that oth­ers hint at. “The an­a­lysts at these bro­kers, at­tached to the big in­vest­ment banks, aren’t re­ally there to pro­vide ad­vice to fund man­agers. Rather, they’re there to help banks make money on big trans­ac­tions. It’s rare for them to make a scep­ti­cal call be­cause, firstly, they could get sued, and, sec­ondly, they risk los­ing busi­ness,” he says. And there was plenty of money in that, since Stein­hoff was raising a lot of cap­i­tal to plug the holes in its bal­ance sheet, not to men­tion the al­most weekly takeover of­fers. “All the in­vest­ment banks wanted to make fees on do­ing that busi­ness.”

Fraser Per­ring, who heads a re­search out­fit named Viceroy which pub­lished a dev­as­tat­ing re­port on Stein­hoff two days af­ter the re­tailer col­lapsed, agrees.

Per­ring, an ex-so­cial worker from the UK, says the an­a­lysts who work for the big banks are of­ten put un­der pres­sure to keep good re­la­tion­ships with the com­pa­nies they cover. “There were plenty of an­a­lysts who cov­ered Stein­hoff yet it took us – me, a so­cial worker and two ex­cep­tion­ally tal­ented kids from Aus­tralia (Gabriel Bernarde and Ai­dan Lau, both 24,) – to pull to­gether what had hap­pened at Stein­hoff,’’ he says.

With pre­cious lit­tle scep­ti­cal re­search out in the mar­ket, large in­vestors poured far too much money into Stein­hoff. In par­tic­u­lar, Per­ring reck­ons the gov­ern­ment-owned Pub­lic In­vest­ment Cor­po­ra­tion (PIC), which in­vests the pen­sions of civil ser­vants, had no busi­ness in­vest­ing in Stein­hoff. “What was the PIC do­ing in­vest­ing pen­sion money in this piece of sh**? Did it just take 42 brandies and three meals for them to agree to in­vest money in Stein­hoff?”

By the time Stein­hoff ex­ploded in De­cem­ber 2017, the PIC owned 8.5% of Stein­hoff. This wiped about R16bn from gov­ern­ment em­ploy­ees’ pen­sions. Other an­a­lysts speak of an “un­spo­ken pres­sure” to be pos­i­tive about Stein­hoff. One told of how, when he was pre­par­ing to dis­cuss Stein­hoff’s takeover of JD Group, and just how bad this was for share­hold­ers, dur­ing a road­show, he was told “not to put out a neg­a­tive rec­om­men­da­tion on a Stein­hoff deal dur­ing a pre­sen­ta­tion”.

What re­mains a re­mark­able fea­ture of the Stein­hoff story is that de­spite all this scep­ti­cism on the part of some of the largest in­vest­ment houses in the world, Stein­hoff ship con­tin­ued to steam along as if these ice­bergs didn’t ex­ist. “At one stage, about half the in­sti­tu­tions in the coun­try wouldn’t touch Stein­hoff,” says An­drew Cuffe.

“About half the an­a­lysts cover­ing the re­tail com­pa­nies also thought it was dodgy. This changed. By the time it all went south, I think just about ev­ery in­sti­tu­tion was ex­posed to Stein­hoff to some ex­tent.”

The fact is, banks con­tin­ued to lend to Stein­hoff, and switched-on in­vestors like Christo Wiese put money into the com­pany, de­spite the red flags. The ques­tion is: why?

There is one po­ten­tial an­swer, best summed up by a no­tion that first gained trac­tion thanks to Adam Swei­dan, chief in­vest­ment of­fi­cer of the Lon­don-based al­ter­na­tive in­vest­ment firm Au­rum Fund Man­age­ment. Speak­ing in Aus­tralia in 2014, Swei­dan re­ferred to “a herd of black ele­phants gath­er­ing” to de­scribe events like fresh wa­ter pol­lu­tion and global warm­ing.

“When they hit, we’ll claim they were black swans which no one could have pre­dicted, but, in fact, they are black ele­phants, very vis­i­ble right now.”

This “black ele­phant”, in other words, is a com­bi­na­tion of the ele­phant in the room that ev­ery­one knows about but doesn’t want to dis­cuss and the “black swan” event that is sup­pos­edly un­fore­seen but has the po­ten­tial to cause un­told dev­as­ta­tion. An­drew Cuffe be­lieves this aptly de­scribes the un­spo­ken knowns about Stein­hoff, dat­ing back a decade. “In the in­vest­ment com­mu­nity, Stein­hoff re­ally was the ele­phant in the room. And in the end, when Stein­hoff col­lapsed, we all know what sort of black swan im­pact that had on our mar­ket.”

● Stein­heist, by Rob Rose, pub­lished by Tafel­berg, re­tails for R295.

Pic­ture: © SUM­MER­HILl

FALL: Stein­hoff CEO Markus Jooste, far right, was de­scribed as a man of in­tegrity by a busi­ness­man who has known him for 30 years. Jooste owned horses across the world.

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