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PSG: Why we didn’t own Steinhoff

It wasn’t the accounting.

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 manager’s held the share in their portfolios and which had avoided it.

Some investors and commentators have argued that any manager who did own the share must be either incompetent or foolish. Conversely, anyone who didn’t must be more astute.

However, PSG Asset Management’s chief investment officer, Greg Hopkins, says that this issue is more complex than it appears. Even though they did not hold Steinhoff in December, PSG has owned the share in the past and wouldn’t criticise anyone who did.

“We are not saying we got this right,” Hopkins says. “Given how the markets work, at some stage in the future I am possibly going to be talking to our investor base about one we got wrong. It wasn’t easy to spot.”

Governance

The reason that PSG had sold out of its position also has nothing to do with concerns around Steinhoff’s accounting, which is where the main issues appear to lie. Manager of the PSG Equity Fund, Shaun le Roux says that they exited because they believed that management had made decisions that were not in the interests of minority shareholders.

“We were concerned about how they were allocating capital,” he explains. “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.”

Shortly after this deal, Steinhoff bought Mattress Firm at a price PSG also felt was far too high.

“They paid close on 40 times earnings, which was double where the share was trading just before they made the offer, and in a market they knew nothing about,” says Le Roux. “To be honest, we felt it was empire building at play.”

PSG however got really concerned when Steinhoff sold Pep back to South African investors for R10 billion less than they had paid for it.

“This we felt was much more about facilitating a consolidation of the chairman’s assets than about creating value for shareholders in the long run,” says Le Roux.

How did this happen?

Le Roux says that a very interesting question that has arisen out of what happened at Steinhoff is how a management team and board of directors that collectively owned R90 billion worth of the company’s stock could have allowed the crisis to happen.

Read: How could they have missed it?

“We don’t have the answers, but we can speculate about when R90 billion of stock ownership is not enough,” says Le Roux. “We think it’s the case when you are prioritising other things above creating value for your shareholders. In the case of Steinhoff there was definitely some empire building on the go, but more importantly there was this move to externalise assets.”

It appears that Wiese in particular, but Steinhoff’s management in general, wanted to move money out of South Africa at any price. This is what led to some very poor deals being made.

What is significant for Le Roux, however, is that it is not only Steinhoff that has been doing this.

“We have been really disappointed with a lot of South African management teams over the last few years,” he says. “We think there are many companies that have gone offshore at a time when the rand was weak and they have bought high.”

The offshore rush

One of the most obvious examples has been the listed property companies that have spent huge amounts of money in Eastern Europe. Le Roux says that PSG remains unconvinced about the investment case for that region, and the results have been “mixed at best”.

The 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,” Le Roux says. “We would love it if that cash went back to shareholders, but it’s mostly gone offshore into the UK, Switzerland, the Middle East, Poland and India. Our assessment of those large deals is that they have been poor capital allocation decisions.”

Most concerning for Le Roux, however, has been the decisions made by local retailers.

Read: Offshore markets: Where dreams die for SA retailers

Woolworths has just impaired David Jones by R7 billion,” he points out. “That has been a very poor deal. But Brait tops that with the purchase of New Look in the UK, which they have now impaired in excess of R35 billion. I don’t think they are going to be the last either. There have been a lot of poor deals in this sector.”

He says that what has concerned PSG is that there have been very few management teams prepared to invest in a counter-cyclical fashion – buying when prices are low. Le Roux feels it would have been far more beneficial to shareholders if these companies had bought back their own stock when prices in the local market were depressed.

“Instead they have prioritised going offshore and waited for confidence in South Africa to improve,” he concludes. “We think you should be buying when sentiment is poor, and by the time confidence has improved we will find share prices a lot higher and shareholders will have benefited.”

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COMMENTS   16

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I’d like to hope a big outfit like PSG could survive a hit like some tanking shares. Now we don’t know…

PSG are so lame. They saw all this shareholder value destruction taking place and were, and still are, happy to serve as steinhoffs sponsor on the JSE. This even after the events that have unfolded since 6 jan. Hypocrites…

PSG Asset Management does not act as a sponsor for anyone on the JSE. It’s a separate business.

Totally agree that the Offshore Rush was caused by fear and panic. You can blame Jacob Zuma for this fair and square…suggest we add it to the list of charges he hopefully will face.

It is clear that Christo Wiese was frantic to get his assets offshore at any cost. Steinhoff was the perfect vehicle to externalize his liquid assets but how would he “hedge” his local fixed assets against the disastrous ANC? So he used gearing to buy more Steinhoff, thereby indirectly moving more assets offshore. Brilliant strategy up to here.

Then everything went pear-shaped. Steinhoff imploded and the Rand strengthened. The strategies he put in place to protect his assets against the Zuma disaster, cost him multiples of whatever damage ANC policies would have caused.

Maybe the lesson for us who are in the process of moving our assets offshore, is to take our time and do our homework. No complicated structures where our capital disappears into a hole of opaque financial statements.

There is no need to be frantic, there will always be another opportunity.

So it is true? Only two things drive the market “fear” and “greed”.

Absolutely agree, the whole drive to wrap up family assets into a couple of offshore vehicles drove Wiese into Steinhoff and Brait. The market has little sympathy for opportunism.
Jooste is by no means innocent, he started playing property (the depth of which is still to be revealed) and forgot his shareholders a few years ago.I think that he got sucked in when Wiese joined the SNH board in 2014.
The share price was €6 in the summer of 2016 before the offshore acquisition spree!
It is a modern tragedy of two strong characters in the mould of Macbeth.

But the wheels came off Steinhoff because of corruprion in the form of Accounting Irregularities.

Where does the Rand, JZ and ANC feature in this empire-building-play gone wrong due to accounting fraud by Management of Steinhoff?

don’t PSG own a sizeable portion of capitech? that’s down 20% – nothing to be proud of

All banks prey on their customers, some just more than others.

That PSG the holding company not PSG Asset Management. And it is Capitec, not Capitech. And they have proved that Viceroy report is hogwash. And the share has increased 10 fold (that is 1000%) over the last decade.

Dear Greg Hopkins

You are a Chief Investment Officer and Fund Manager with a B.Com (UCT), CA(SA), CFA (and I assume some ~20yrs experience) and you say “It wasn’t easy to spot.”. Yet a social worker could spot this!

You can do better.

PSG group frequently does company share buybacks which inflates the share price – Maybe PSG asset management want to comment on that?

They buy back shares when the share is trading at a discount to its NAV. Why exactly is a higher share price bad for investors?

NAV or reasonable PE? Good for the directors with share options or are they just concerned about the welfare of the general investor? Then there is dividend tax relating to the share buyback. So according to your rationale PSG will be buying back shares now because of the hit Capitec shares took (reducing the NAV of the whole group). Or maybe they know something we dont?

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