Executives, shareholders seek R2bn in damages in latest Pepkor lawsuit

Is it just a pipe dream for shareholders that they’ll realise their claims?

NOMPU SIZIBA: Legal claims which are mounting against embattled retailer Steinhoff threaten the company’s ability to survive. The company has been on an asset-selling spree in a bid to bring down its massive debt levels. It was recently stopped in its tracks from being able to consider offloading its interest in Pepkor subsidiary, Tekkie Town. This, as the previous owners of Tekkie Town applied for an interdict preventing Steinhoff from doing anything with that particular asset. Tekkie Town’s owners are working on getting the asset back from Pepkor, which is still around 70%-owned by Steinhoff International. Meanwhile, a number of Pepkor executives and shareholders are suing Steinhoff for the losses they made following the revelation of accounting irregularities at Steinhoff in late 2017.

To break down the issues for us I have Warren Thompson on the line. He is a senior reporter at Business Day and has become an expert on the Steinhoff story. Warren, we know Steinhoff’s former chairman Christo Wiese has sued Steinhoff for a whopping R59 billion, although he has indicated a willingness to be flexible in negotiations. It seems that others are also looking to collect. Just give us a sense of who else is looking to recover their losses, and what it all amounts to in number terms.

WARREN THOMPSON: Yes, Nompu, you’ve got a whole range of insiders, people I refer to as affiliated with the company in some way or other – either executives or directors. Most well-known are the Tekkie Town shareholders, who sold their business to Steinhoff in 2016 in exchange for Steinhoff shares, led by Tekkie Town founder Braam van Huysteen. They have multiple clams in there. Obviously they want Tekkie Town returned to them because they say it was stolen from them. So they’ve got a claim for approximately R2 billion against Steinhoff. They’ve also got a claim for a bonus or earn-out they say is owed to them for performance of the businesses that they were asked to run as part of the agreement to join Steinhoff.

Read: The Tekkie Town tug-of-war continues

And then what we’ve recently seen, which raises a whole number of questions, is the executives of Pepkor Holdings – Pepkor was Christo Wiese’s business that merged with Steinhoff in early 2015 – they have raised the fact that they swapped Pepkor shares for shares in Steinhoff in conjunction with Christo, and that they are now seeking damages for. That claim amounts to R2 billion. And one of the larger ones is Jayendra Naidoo who, with a consortium that included the Government Employees Pension Fund, borrowed money to buy shares in Steinhoff in 2016. And that claim, which includes money owed for the finance cost of the loan, amounts to about R11 billion.

So you’ve now got a situation where you’ve a couple of executives running businesses on behalf of Steinhoff who now have these massive legal claims against the company – which raises all sorts of conflicts of interest.

NOMPU SIZIBA: Steinhoff has come out to say that it’s liaising with its lawyers, looking at the merits, or otherwise, of the various claims at its door, and it seems its initial stance is to defend the claims.

WARREN THOMPSON: Yes, and the way I understand it is that obviously Steinhoff is facing all sorts of litigation. It’s almost a mandatory step that the company indicates that it will defend claims. We’ve seen that in the case of the Tekkie Town shareholders, as well as Dr Wiese. Steinhoff says it will defend the claims.

But that attitude has softened somewhat, with the chairperson of Steinhoff, Heather Sonn, saying that they will consider valid claims that have been filed. I think in the case of Christo Wiese they don’t consider that some sort of a negotiation to try and settle, because, of course, Christo Wiese was a director of the company when he merged Pepkor with Steinhoff. But certainly in the case of Tekkie Town, where you have a group of executives who sold the business in exchange for shares, the restriction said they couldn’t sell their shares for a period of three years, and when they asked due diligence from Steinhoff, they were told it’s now a public company, please refer to our – at the time, I think – 2014 annual financial statements, as well as the previous fixed statement that Steinhoff had compiled ahead of its listing in Frankfurt.

So, based on what we know now, the annual financial statements were grossly inflated and that certainly lends itself to a very valid claim that they had been misled, based on the documents that Steinhoff had provided them with.

NOMPU SIZIBA: Steinhoff, last week, announced that it’s going to be writing off goodwill and intangible assets to the tune of about R29 billion. In simple terms, just explain what that statement was all about – and presumably this now means that the company is worth even less than was previously thought.

WARREN THOMPSON: Yes, Nompu. I think people might remember that Steinhoff made a big splash when they bought a company called Mattress Firm in the United States in late 2016. I think Christo Wiese even put some of his own assets up as collateral to facilitate the funding of that acquisition. It appeared very rich at the time because Mattress Firm was publicly traded, and I think the price that Steinhoff had agreed to pay for the company was roughly double what you could have bought Mattress Firm for on the New York Stock Exchange before Steinhoff indicated its interest. So that raised all sorts of questions around why they were paying so much.

Mattress Firm, as we subsequently learnt, had all sorts of problems. There was fraud taking place inside the firm; effectively executives were in cahoots with property companies and, if you wanted to go and visit a Mattress Firm at one of its locations in the United States, there were many instances with one Mattress Firm on the side of one street supplemented with another Mattress Firm literally around the corner, and even a third one in the immediate vicinity – which all raised these questions around how much due diligence Steinhoff had undertaken on the company. Nevertheless, they said on Tuesday [April 30] that they are going to impair by a third of €1.8 billion the goodwill that they had attached to Mattress Firm as at the end of September 2017.

So it could well mean the difference between what they paid and the book value of the assets they bought, effectively the goodwill, is just another admission that they paid too much for Mattress Firm, in other words.

NOMPU SIZIBA: We know, like you say, Mattress Firm had a whole heap of problems and it ended up having to file for bankruptcy, but what’s happening with Steinhoff’s underlying retail assets? They have so many. Are they still run well, and still profitable, some of them?

WARREN THOMPSON: Yes. I think a fairly mixed bag, probably because some of those companies, first of all, were able to finance themselves in the aftermath of December 2017, when many banks wanted their funding repaid. They had to be fairly creative and inventive, many of the businesses, to go and find new sources of working capital and debt. But some of those businesses are performing well, though maybe not as much as they would have liked; certainly people are coming into the stores, buying the goods and that’s what has sustained them since December 2017.

Other businesses, like Mattress Firm, have not performed very well. Mattress Firm is probably one of the worst that they’ve had. I think their Austrian retail company, Poco, that’s one that hasn’t performed very well, and I think they will try to dispose of that. And then obviously some of the gems that credit the life of Pepkor in Europe, and obviously Pepkor in South Africa, which is a massive retail chain that sells products to millions of clients every year – so it’s a mixed bag. But thus far it’s been enough to keep them pretty much in roughly the same form as they were in two years ago.

NOMPU SIZIBA: Warren, to the crux of the matter, with the company’s gargantuan debt, its being told its not permitted to sell off certain Pepkor assets, and all the legal claims at its door, when you canvass the experts, what’s the prognosis for this company’s survivability?

WARREN THOMPSON: I think Steinhoff NV, the holding company that’s listed in Frankfurt and on the JSE, is just a holding company, which is a portfolio underneath it of quite a few businesses. I think ultimately what’s going to happen is that the agreement reached with debtors will allow the company to ultimately take a fire sale, sell and restructure itself to the point where clearly the Steinhoff name will go. It’s a toxic brand now. And the remnants of Steinhoff might still have Pepkor Holdings listed on the JSE, operating the Pepkor stores in Africa. There might be at some point a tie-up with Pepkor in Europe, as has been previously planned.

But others, like the Asia Pacific business – that will eventually just be sold off and operate on its own, as will probably a range of other businesses. So you might have the kind of legacy of what Steinhoff was, but I can’t see it going to exist in its current form once they start restructuring the business to pay off the creditors. So it will continue in some form, but certainly I don’t think it will look like anything that we’ve come to know as it existed in the recent past.

NOMPU SIZIBA: Is it just a pipe dream on the part of shareholders that they’ll be able to realise their claims?

WARREN THOMPSON: Yeah – the first people to be paid are the creditors, which includes employees. Obviously if businesses continue to function, employees will naturally be taken care of, and that’s the primary objective now for borders, just to ensure that the company can continue to perform and the businesses that aren’t performing get fixed, and eventually they pick and choose the best way to reorganise the portfolio. So it’s really hard to tell, based on how trading continues at its businesses, how much money investors will see.

Of course, there still is a share price; it hasn’t gone to zero. So the market seems to think that at the end of the day – I think we are trading at about R2 or so – there’ll basically be a little teaspoon of value left in Steinhoff, compared to what it traded at previous to December 2017.

NOMPU SIZIBA: Our thanks to Warren Thompson.

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Agree, Weise was party to the “fraud” and his claim should not be entertained by Steinhoff. He should be charged with Jooste when such happens….. lets hope soon.

Will be an interesting tax situation. They sold Tekkie for what would politely be called an absurd amount. Even if they owned their properties the price was plain madness. like 30y of profits. Anyway a Taxable event, prob CGT, but tax was payable in actual cash. So you got paid, but the value of the widgets you got depreciated crazily. Sorry for you : first sell your Steinhoff / widget to realize the loss, now a capital loss, but from cashflow angle SARS does not pay back a capital gains loss event. Reserve a CGT loss for when you one day sell the Tekkie you maybe got back after 5y in court.

Eish, the present value of the tax paid (easy number as it was paid two years ago) likely exceeds the future value of Tekkie in 2030 after legal fees, if you find another buyer.

End of comments.

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