Why PSG didn’t own Steinhoff

HIGH BUYS: EXTERNALISING ASSETS VIA POOR DEALS

Asset manager cites questionable allocation of capital to externalise company’s assets via bad deals.

We were concerned about how they were allocating capital – Shaun le Roux.

Following Markus Jooste’s resignation and the collapse of Steinhoff International’s share price last year, there has been a lot of focus on which asset managers held the share in their portfolios and which avoided it.

PSG Asset Management’s Greg Hopkins says the issue is more complex than it appears.

Governance

The reason PSG sold out of its position has nothing to do with concerns around Steinhoff’s accounting. “We were concerned about how [management] were allocating capital. When Steinhoff bought Pep at what we thought was 43 times earnings, there were only two winners – Christo Wiese and Brait. Steinhoff minority shareholders were not on the right side of that transaction,” says PSG’s Shaun le Roux.

Shortly afterwards, Steinhoff bought Mattress Firm at a price PSG saw as far too high. “They paid close on 40 times earnings … double where the share was trading just before they made the offer, and in a market they knew nothing about,” says Le Roux.

PSG got really concerned when Steinhoff sold Pep back to SA investors for R10 billion less than it paid for it. “This we felt was much more about facilitating a consolidation of the chairperson’s assets than about creating value for shareholders in the long run.”

How did this happen?

Le Roux says it has been asked how Steinhoff’s management team and board of directors, which collectively owned R90 billion worth of its stock, could have allowed the crisis to happen.

“We can speculate about when R90 billion of stock ownership is not enough. We think it’s the case when you are prioritising other things above creating value for your shareholders. There was definitely some empire-building on the go but more importantly’ there was this move to externalise assets.”

It appears Wiese and Steinhoff’s management in general wanted to move money out of SA at any price, leading to some very poor deals. “We think there are many companies that have gone offshore at a time when the rand was weak and they have bought high,” says Le Roux.

Offshore rush

An obvious example was the listed property companies that spent huge amounts in Eastern Europe. Le Roux says PSG remains unconvinced about the investment case for that region and the results have been “mixed at best”. Hospital groups have also been a worry.

“We think these are great businesses, with wide moats, strong pricing power and the ability to generate a lot of cash. We would love it if that cash went back to shareholders, but it’s mostly gone offshore. Our assessment of those large deals is that they have been poor capital allocation decisions.”

He says what has concerned PSG is that very few management teams have been prepared to invest when prices were low. He feels it would have been far more beneficial to shareholders if these companies had bought back their own stock when local market prices were depressed.