HOW PEPKOR PUT ITS STEINHOFF HANGOVER BEHIND IT
For four years, Steinhoff has been something of a millstone around Pepkor’s neck. But a razor-sharp focus on business has allowed the company not just to survive, but to thrive — even if analysts are still treating it with caution
For a group that prefers low-key to the spotlight and prides itself on making life easier for the ordinary man, Pepkor has spent a helluva lot of time recently in high-octane legal wrangles. There’s no disguising that Pepkor is a juggernaut. As the largest nongrocery retailer in SA, it clocks up R77.3bn in sales from its low-cost discount stores.
Chances are you’ve bought at least one of the 1-billion items Pepkor sells every year through its 4,493 stores whether from Pep, Ackermans, Incredible Connection, Russells, Bradlows, Timber City, or any one of its 12 other brands.
It’s a winning business model. But for the past four years, Pepkor has been hobbled by its value-destroying entanglement with Markus Jooste’s Steinhoff.
It all dates back to an ill-fated 2014 deal, engineered by Jooste, which saw Steinhoff buy Pepkor from its largest shareholder, Christo Wiese, for R62bn. Wiese swapped his investment into Steinhoff, becoming a 20% shareholder.
Pepkor then listed on the JSE in September 2017 (under the name Steinhoff Africa Retail, or Star), with Steinhoff as its 71% shareholder.
Then December 2017 happened. The bottom fell out when Steinhoff admitted to “accounting irregularities” engineered by Jooste, sparking a 95% drop in its share price.
At Pepkor’s headquarters, in the industrial area of Parow, north of Cape Town, a dark cloud descended.
It’s a time that Pepkor CEO Leon Lourens describes as “traumatic”. And the year after Steinhoff’s collapse was the most challenging period he has endured in his 30-year career, Lourens tells the FM.
“Immediately after [the collapse], we were not trusted, and our reputation also suffered. But fortunately Steinhoff listed us [as Star] just before this happened, and because of that we could sort of isolate ourselves, to an extent,” he says.
Unfortunately, there were limits to how isolated it could be.
For one thing, nobody knew in December 2017 if the fraud extended to the old Steinhoff businesses — such as JD Group — which had been folded into Pepkor.
Investors, wary of how deep the rot went, ran for the hills. On December 6 2017, while Steinhoff plunged 61%, Pepkor took a 22% tumble.
Pepkor also carried part of Steinhoff’s huge debt and, with a landscape-altering fraud, the banks were fully entitled to call in that debt at any moment, sinking the business in the process.
“We had to refinance the business because there was a lot of debt,” says Lourens. “We were guaranteeing some of the debt of Steinhoff. [Fortunately], all the major banks
in SA helped us and we [were able to] refinance it.”
Still, nobody knew how it would play out, or if the Pepkor business would even be standing at the end of it.
Lourens says all he could do was focus on what he could control, and try to keep much of the “corporate noise” away from the executives running the business.
“My call on the leadership of the business was: ‘We’ve got 50,000 people to look after, [so] we’ve got to make sure the business is secure, we’ve got to make sure the refinancing is done,” he says.
There were other complications. Many Pep executives lost millions because, after Steinhoff took over in 2014, they had swapped their Pep shares into Steinhoff stock — and the 95% plunge in value left them seriously out of pocket.
In particular, 70 Pepkor executives had bought shares using a company called BVI 1499, planning to use the dividends from Steinhoff to service the loans.
Says Lourens: “We were all disappointed. People spent their lives working in Pepkor — they built up some wealth and then lost it.”
But you needn’t feel too sorry for those Pepkor managers.
Pepkor bailed them out, as there was a secret R440m guarantee that it had provided to BVI 1499, but not disclosed to shareholders.
Then in January, Steinhoff reached a “settlement” which saw them pay out to investors, who’d lost money because of the fraud, a portion of what they had lost.
“In the end, the settlement has been fair I believe, and the whole experience has to an extent been rewarding,” says Lourens.
But getting to this point exacted a heavy toll. “You’re basically in a situation where every day produces a new challenge,” he says. “Pressure brings out the best, it teaches you the most lessons. I saw it happen to myself and the leadership around me, where we just had to adapt.”
Wiese back in the saddle
So how did Pepkor get through the Steinhoff crisis? Lourens says it was by ensuring the business kept running, the right merchandise was in the right place on the shop floor, and customers kept streaming through the doors and past the tills.
Pepkor didn’t just survive the Steinhoff fallout — it thrived. In fact, some analysts say that, were it not for the strong cash flows from Pep, Steinhoff itself may have crashed.
As Protea Capital Management CEO Jean Pierre Verster told the FM two months ago: “If you’ve got great businesses like [Pepkor] that are able to produce profit growth of more than 10%, your funders may be inclined to give you more time.”
Which is important if you’re Steinhoff, and you have €10bn in debt.
Analysts say it was a razor-sharp focus on the business — providing low-cost clothing and goods — that has allowed Pepkor to surf through the hard times.
Veteran retail analyst Syd Vianello says Pepkor, like Shoprite in food, is run by “hard-arsed businessmen with no frills and fancies”.
For Richard Cheesman, a senior investment analyst at Protea Capital Management, it was Pepkor’s clear proposition and huge footprint that enabled it to survive not just Steinhoff, but Covid too.
“Pepkor is in the right place — similar to Shoprite and Checkers on the food front,” he says. “These are dominant businesses, and as they grow, they are able to take advantage of economies of scale.”
The comparisons between Shoprite and Pepkor are frequent, not least because the two businesses share a common personality: Wiese, who was the lodestone around which both revolved, until his ill-fated dalliance with Jooste.