Markus Jooste is build­ing for life

Financial Mail - Investors Monthly - - Front Page - Markus Jooste CEO: Stein­hoff

Q You’ve gone very quiet on the Frankfurt list­ing since first an­nounc­ing it — when is it likely to hap­pen?

A There are quite a few con­di­tions to it be­cause Trea­sury and cer­tainly we as man­age­ment as well would like to make sure that the South African iden­tity of the company does not dis­ap­pear in the process.

The whole top man­age­ment of the company will con­tinue to be based lo­cally. The company that we list in Frankfurt will be an Aus­trian company which is our hold­ing company out­side SA, but will be regis­tered in SA for tax pur­poses be­cause it’s man­aged from here … so now you have an Aus­trian company that you’re go­ing to list in Frankfurt but with a South African domi­cile. Sort­ing out the prospec­tus, dis­clo­sure and all the le­gal­i­ties that go with this is quite an ask and we’ve had a full team work­ing on this since late June.

The big­gest con­di­tion that the Re­serve Bank im­posed on this was that we would repa­tri­ate €1.2bn to SA and we had to raise that money from non-South African res­i­dents. Now you need a bit of luck in life, nê? You would re­call in June and July the mar­kets were hot and some­thing we learnt many years ago is that you must al­ways raise money when you can, not when you need it, be­cause when you need it they won’t give it to you.

We launched a book­build on July 5 and we raised that whole €1.2bn and brought it back to SA, and I think if we’d left it till Oc­to­ber or Novem­ber, as most of our ad­vis­ers told us to do, it would have been im­pos­si­ble to raise that money.

In Frankfurt you have to re­port quar­terly … Deloitte has worked it out that the ideal date for us to list is the first week of March be­cause then you an­nounce your in­terim [re­sults] to­gether with your list­ing, and then you are in a cy­cle where your first-quar­ter re­sults run into that slip­stream.

The tar­get date that ev­ery­one is now fo­cused and work­ing on is the be­gin­ning of March.

Q So noth­ing to do with wob­bly mar­kets of late?

A We elim­i­nated that by rais­ing the cap­i­tal in July.

Q Was it a bit of a sacrifice for South African share­hold­ers, that they weren’t al­lowed to par­tic­i­pate in the cap­i­tal raise, and got di­luted?

A I think it was great of SA in­sti­tu­tions to have waived their right to par­tic­i­pate in the rights is­sue. Every­body we asked did it.

Q It didn’t take much con­vinc­ing?

A We as man­age­ment did it first. The Stein­hoff fam­ily and all of us waived our rights and then it was a bit of an eas­ier dis­cus­sion with the in­sti­tu­tions.

Q With Stein­hoff now such an in­ter­na­tional company, do you care much about the South African as­sets, JD and KAP? Are they go­ing to be­come in­creas­ingly ir­rel­e­vant in your lives?

A There might be that per­cep­tion. But you must re­mem­ber that those com­pa­nies you’re re­fer­ring to are where we started our ca­reers. Sen­ti­ment must not run a business but we see them as very much part of Stein­hoff.

Tak­ing the share­hold­ing down from 63% to 45% in KAP was twofold: to get a re­tail rat­ing in Frankfurt, it would have com­pli­cated things if you had con­sol­i­dated 80,000 hectares of for­est and the KAP type of as­sets onto the bal­ance sheet.

Q Is it im­por­tant that you’re con­sid­ered to be a re­tailer?

A Your rat­ing will be much higher. But the close re­la­tion­ship with KAP has com­mer­cial rea­sons as well: tim­ber, steel, foam and fab­ric are the four main com­po­nents of vir­tu­ally ev­ery­thing we sell. And the ad­van­tage that KAP gives us is that we will al­ways have first­hand knowl­edge of the base price … hav­ing ac­cess to all that in­for­ma­tion puts our buy­ers and our sourc­ing peo­ple all over the world in a very strong ne­go­ti­at­ing po­si­tion.

JD to­day, if you take the fi­nan­cial ser­vices out, is one of the nicest bal­anced re­tail busi­nesses in the coun­try. It does R40bn turnover and cov­ers all ar­eas of life.

Au­to­mo­tive is also not for­eign to us — in KAP we make ev­ery spring, ev­ery seat, ev­ery leather cover in ev­ery car in this coun­try. You think about a lounge suite and a car seat — it’s ex­actly the same thing.

In our raw ma­te­rial com­pa­nies in Europe, we are the num­ber one sup­plier of sound-damp­en­ing foam to all cars in Europe. So it’s a big part of our strat­egy.

We will hope­fully [close] the JD fi­nan­cial ser­vices sale in the next two weeks.

Q The South African as­sets then are still key to your fu­ture?

A Well, let me put it to you this way: we sit with almost R16bn of cash in SA that is des­ig­nated for in­vest­ments in SA and Africa. We’re go­ing nowhere.

Q Would that be from the El­ler­ines ashes?

A No, that story has passed.

Q What about the Sho­prite fur­ni­ture arm? I’ve heard talk you might be in­ter­ested.

A I think OK through this whole pe­riod has been prob­a­bly the best fur­ni­ture re­tail company in SA. None of the JD, El­ler­ines, Lewis drama got to OK — they’ve done well. Just shows you: it’s al­ways man­age­ment, nê?

We would rather build JD or­gan­i­cally. In Septem­ber we opened our first Big Box dis­count store in the Western Cape and it’s trad­ing phe­nom­e­nally well, so I think our path for the fur­ni­ture side is to rather bring our very suc­cess­ful Euro­pean dis­count con­cepts here. It’s quite amaz­ing that in the first three months, cash sales are 92%.

If you sell for cash but at the right price and the right look, the mar­ket is there.

Q Are there other mar­kets abroad that in­ter­est you? Where would you like to in­crease mar­ket share?

A Our goal over the next three to five years is we would not like to op­er­ate in any coun­try where we don’t have 10% or more mar­ket share. Ger­many is a big pri­or­ity. Our real growth area at the mo­ment is East­ern Europe. With the Kika-Leiner ac­qui­si­tion we got a fan­tas­tic foot­print in Hun­gary, Czech Repub­lic, Slo­vakia, Ser­bia, Croa­tia and Ro­ma­nia. Sud­denly you’ve got new coun­tries where you had no pres­ence, and the beauty there is that you have no com­pe­ti­tion. You mustn’t un­der­es­ti­mate [East­ern Europe]: Poland is a coun­try of 4-mil­lion peo­ple and the av­er­age in­come is dou­ble SA’s.

The China, In­dia phe­nom­e­non is prob­a­bly where big play­ers like us must wait a bit. I don’t think you must go and try to be a pi­o­neer. Our idol in life — Ikea — has gone to China, but it’s cost him a for­tune.

Amer­ica is al­ways in­ter­est­ing for any business if you start to play in the top 10 in the world, but it has also crip­pled many Euro­pean com­pa­nies. The huge chal­lenge of Amer­ica is whether you should try to do a na­tional thing, be­cause of lo­gis­tics. You’ve got three time zones and huge dis­tances, and most suc­cess­ful re­tail­ers are dom­i­nant ei­ther on the west coast, the mid­dle of the coun­try or the east coast.

We bid on a ma­jor Amer­i­can company two years ago; we walked away be­cause the com­pet­ing buy­ers were pre­pared to pay more.

Q You’re quite cap­i­tal flush; gear­ing is down to 12% — is that where you want it?

A I think if you don’t gear you can’t make money, but you must gear re­spon­si­bly. We al­ways had an in­ter­nal covenant that we would never bor­row more than three times Ebitda, and we’ve al­ways stuck to that.

I think if you live in a world where in­ter­est rates are be­tween 2% and 3% — the low­est since the Sec­ond World War — and you as man­age­ment don’t take the op­por­tu­nity to bor­row and buy as­sets and build your business, you’re ac­tu­ally just lazy.

All that I own is in­vested in this company. We’d like to build the business and if you take the last six years, with Con­forama and Kika-Leiner, if we hadn’t done it, we would have been a minute player in SA.

Q Your prop­erty port­fo­lio is worth a huge amount and some an­a­lysts reckon you could un­lock sig­nif­i­cant value. What are your in­ten­tions there?

A You must re­mem­ber in Europe a prop­erty is zoned and li­censed for a spe­cific type of re­tail­ing. You can’t change that. So we learnt very quickly that you had bet­ter own the prop­erty you’re in, be­cause in five years’ time if it be­longs to some old French­man, can you imag­ine, the more suc­cess­ful you are the more rent you’ll pay be­cause you can’t go any­where else.

From a strate­gic point of view it’s ab­so­lutely crit­i­cal, oth­er­wise you’re go­ing to be­come the slave of the land­lord. We’ve got a rent that’s capped for life and gives you an enor­mous ad­van­tage against your com­pe­ti­tion.

So to un­lock value with the prop­erty port­fo­lio — I’m just giv­ing you an ex­am­ple — could be later to put some of th­ese prop­er­ties into a prop­erty trust company with other peo­ple, but re­tain a stake in it so that you can pro­tect the longevity or write a 100-year lease on it, and then sell the yield.

There are ways of get­ting money out of it, but it’s not as if we need cash. When you can buy a prop­erty at a 7% yield in euros, and you bor­row money at 3%, you don’t need to go to fancy business schools to work out that’s no­gal a good business model, nê?

Q Do you think some in­vestors who have a view on Stein­hoff are of an as­set-strip­ping mind-set?

A In­vestors are in a very dif­fer­ent po­si­tion from us. We plant trees ev­ery day that we’re go­ing to har­vest when I’m dead … If we had a short-term view I could stop all the forestry to­mor­row and print R400m or R500m profit a year for the next 29 years, but then it would be gone. That’s not what we’re build­ing.

You build a new store in Bucharest: you’re go­ing to lose money for the next three years on that store be­fore it’s in the game. We started in Spain four years ago, and this year it’s mak­ing the first big prof­its. But if you hadn’t in­vested that money, you wouldn’t have a business.

You’re ei­ther a short-term player who plays for the pavil­ion, or you build some­thing for life.

Stein­hoff em­ploys 100,000 peo­ple … plus all our sup­pli­ers … we must have more than a mil­lion peo­ple who live off us ev­ery day. That’s much more im­por­tant to me than maybe sell­ing a prop­erty for €100m that I paid €50m for.

I’d rather use that prop­erty, bor­row money against it, and build another three prop­er­ties. And that is the phi­los­o­phy of our business.


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