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Tekkie Town files suit for R1 billion potential claim for ‘earn out’

Execs are seeking clarification on the terms of a conditional bonus that should be paid out in 2020.

The former shareholders of Tekkie Town have launched another legal claim against Steinhoff International Holdings to recognise the terms of a conditional earn out bonus that would be paid in 2020 and which could amount to as much as R1 billion.

Read: Tekkie Town files for reversal of Steinhoff acquisition

Two of Tekkie Town’s executives and shareholders – founder Braam van Huyysteen and Bernard Mostert – as well as a number of other Tekkie Town executives joined Steinhoff as part of the terms of the acquisition announced in 2016 which saw Steinhoff acquire Tekkie Town for R3.2 billion. Tekkie Town was then transferred into Star (Steinhoff Africa Retail) under the Speciality Fashion and Footwear division when Star listed in September last year. Van Huyysteen is currently the chairman of the Speciality division while Mostert is the CEO. 

The former shareholders of Tekkie Town were prevented from selling their shares in Steinhoff for a period of three years after the acquisition.

The “earn out” as its referred to, essentially operates in the form of a bonus scheme that came into effect at the time Steinhoff concluded the acquisition of Tekkie Town in August 2016. It meant that Steinhoff agreed to pay the former shareholders a bonus based on the performance of Tekkie Town while under the control of Steinhoff.

While the terms were agreed to by Steinhoff’s previous CEO, Markus Jooste, Star CEO Ben la Grange amended them with Van Huyysteen to broaden the scope of the bonus scheme to include the performance of the entire Speciality Fashion and Footwear division.

“Payments due under the bonus scheme would be calculated on the performance of the Speciality division beginning October 1 2017 and running until  September 30 2020,” says spokesman for the previous shareholders of Tekkie Town, Warren Erfmann. “In effect it would equate to 20% of the increase in Ebitda from year 1 (2018) to year 3 (2020) all other things being equal,” says Erfmann (who provided the formula below).

He adds that based on current projections, the bonus could be anywhere between R455 million to R890 million.

Starting year 1
Ebitda* of Speciality for year ending September 2018
Multiplied by Steinhoff price-earnings multiple
Add cash less liabilities on balance sheet
Equals: Total Year 1
 
Ending year 3
Ebitda* of Speciality year for year ending September 2020
Multiplied by Steinhoff price-earnings multiple
Add cash less liabilities on balance sheet
Equals: Total Year 3
 
Bonus Equals: Total Year 3 minus Total Year 1, multiplied by 20%
 
Source: Tekkie Town vendors

Ebitda = Earnings before interest, tax, depreciation and amortisation

According to the agreement (per Erfmann) 75% of the bonus would be paid in cash and would be distributed to the former shareholders and executives of Tekkie Town that joined Steinhoff. The remaining 25% would be distributed to the rest of the executive management team of the Speciality division.

“Part of the reason we are pursuing the claim for the earn out through legal means is because no contingent liability has been raised in Star’s financial statements, including the 2017 pre-listing statement,” says Erfmann. “So, given the well-publicised issues surrounding Steinhoff’s accounts, we want to ensure that this agreement is formally recognised.”

The other issue in Erfmann’s view is the use of Steinhoff’s price-earnings multiple. “We believe it would be fairer to apply the price-earnings multiple of Star, which is significantly less volatile than its parent company as a result of the absence of any concerns over the integrity of its audited financial statements,” says Erfmann.

Steinhoff provided the following response: “Steinhoff is currently in a legal dispute with the Tekkie Town vendors. In light of these proceedings we can unfortunately not provide you with more details at this stage.”

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COMMENTS   7

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1. The formula runs Sep 2018 to Sep 2020 and pivots on future results or unknown unknowables as Rumsfield would call them. How should star raise a liability for a term agreement that is yet to start?

2. I would assume the agreement needs the tekkie team to there front and central running the show throughout. That now seems unlikely.

3. Not content selling their shoe shops at R10 million each these vendors now want even more. Greed seems to be not only infectious but it also causes insanity. For R10m per store I would expect to get the title deed, but the two stores I have seen are maybe 400sqm so pricing works out roughly smilar to the 20 houses in Val de Vie Jooste bought his poppie

circus

When a shareholder (whether bought shares for cash or in exchange of property) sue Steinhoff, which is owned by its share holders, they actually just suing the other shareholders. And when all shareholders are suing Steinhoff (which is what’s currently happening) then it just means that all share holders are suing each others, on the same basis and for the same purpose.

This is more a claim against STAR for protection of rights than a monetary claim against Steinhoff NV.
The previous owners of Tekkie Town seeks to secure the earn-out bonus agreement running up to 2020. Neither the speciality division nor STAR is under threat of the Steinhoff mess.
At worst the parties may settle on a negotiated amendment to the earn-out bonus agreement. Should the previous owners of Tekkie Town however succeed to reclaim ownership of the Tekkie Town business back from STAR, this further claim for earn out bonuses have little change to succeed.

France:

There is one certainty in all of this part of this mess : when you sue your employer for an undefined unearned future bonus you better have another job lined up and be planning to settle this for R20m. If I ran STAR these idiots would have their access credentials deleted this morning.

But, I suppose Markus (and other unseen executives) must rate these particular shoe salesmen highly, having paid R10m per store for 300+ stores for what now after these lekker bonuses amounts to R4,500,000,000.

The bonuses FAR exceed what the shoe salesmen would have been able to extract in cash from the 300 stores in a decade. The tool that wrote this formula should be the first one in firing squad. What is Steinhoff PE now – to infinity and beyond! So if they achieved R1m ebitda (a term that deserves to be banned from financial contracts), they are the richest people in the universe

Circus

The real reason why they want to use the p/e of Star is because they don’t want to be multiplying the EBITDA by zero!

Do they have a warranty or a guarantee in the buy/sell contract that the contract can be reversed should the balance sheet turn out to be “irregular” or incorrect. It was considered to be correct by Deloitte at the time of the contract, the party who is sued he (the other Stainhoff share holders) were not involved in the making nor the auditing of the balance sheet which they base their claim upon, so how come these other share holders are sued or even considered responsible of such balancesheet.
Any compensation is either awarded to all share holders equally or to none.
It doesn’t make sense that money is be taken away from some share holder to be given to other share holders.

SNH will stay listed and survive.

Will never reach R97 again.

But it will survive. I promised to never comment again on here if they go bust.

I am sure France will be happy about this. Although I always did like his/her comments anyway.

Goodluck to the last remaining shareholders. Let’s go!

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