FIFI PETERS: Steinhoff, the global furniture retailer, the centre of an ‘alleged’ accounting fraud scandal – I don’t know if we’re still using that word, ‘alleged’ – has sweetened its settlement offer to claimants. This follows a damning court judgment that thwarted its original settlement plan, calling it ‘legally void’.
But here to discuss the latest developments around Steinhoff and how far the story is from the finish line, I’m joined by Jean Pierre Verster, CEO of Protea Capital. John Pierre, thanks so much for your time. It’s been a long time, actually. How are you doing?
JEAN PIERRE VERSTER: It is. Good evening. Thank you, doing well. Full disclosure – we are still short Steinhoff shares. I’ll be answering any questions from that perspective, but it’s only fair that I say that up front. It’s going well, thank you very much.
FIFI PETERS: Shorting means that you are taking a position that the share price can go lower than the low we have seen in the recent present.
JEAN PIERRE VERSTER: Correct. Our thesis is that effectively there’s too much debt in the Steinhoff company structure. Not only is there too much debt, but that debt attracts an interest rate of 10%, and that rate is extraordinarily high for euro-denominated debt. It means that the debt effectively snowballs and becomes bigger and bigger every year. The only way in which Steinhoff can effectively create some value for shareholders is if its underlying assets grow at a substantially higher rate from one year to the next and the next. Those two main assets, Pepkor in South Africa and Pepco in Poland, to our mind might grow by 10% or even a little bit higher per annum and create value. The starting point is a negative number. There is more debt than assets on the Steinhoff balance sheet. And then throw into the legal troubles, which we’ll get into. That means that we think that even in five years’ time Steinhoff will still have a negative net asset value. That is why we are still short.
FIFI PETERS: On to how much the banks that lent it money are getting that 10% in interest. You do say you think that this is part of the complication to any settlement it has put on the table so far. Let’s talk about the latest deal that’s a lot sweeter than the original one. What do you make of what it does to your actual position on shorting Steinhoff?
JEAN PIERRE VERSTER: It doesn’t have a big impact. It’s actually slightly positive if you are negative the company – if that makes sense. It boosts our thesis of being short. What happened was the company effectively increased its proposal for the market-purchase claimants and their contractual claimants. Those are shareholders of Steinhoff, whether they did the deal directly with Steinhoff in terms of the contract – that could be to the likes of Dr Christo Wiese – or whether it’s just ordinary people who’ve now bandied together in classes to be represented by legal firms, and who bought their shares in the market. They had previously been offered roughly 4-6 cents for every 100 cents that they lost in buying shares that then collapsed. That 4-6 cents is now being boosted by roughly 66%. But if you boost 4-6 cents by 66%, you still get roughly 6.5 to 10 cents for every hundred cents that you lost.
So it’s a big boost, but it’s still a fraction of the value that shareholders lost. And this is value that Steinhoff is proposing they will pay out to these shareholders if these shareholders effectively promise that they won’t sue Steinhoff, if they effectively say that they will do away from the right that they might have to launch legal action against Steinhoff. That will assist them to then finalise the actual big package, which is the debt package, which is a very complex situation in various jurisdictions around the world. That is then the package that ensures that Steinhoff has got breathing room for the next five to 10 years.
So if they don’t settle with the shareholders, there’s a chance that the debt package is not voted through by the courts and the shareholders, and that puts Steinhoff immediately at risk of being liquidated. That will be a lose-lose situation for everyone, except those that are short Steinhoff shares.
FIFI PETERS: Like yourself. But the legal hurdles that you made reference to – it’s a headache that Steinhoff still has, given the latest round in court where things didn’t quite go its way. So what is the probability, in your view, that shareholders are actually going to agree to this new offer, and going to agree to not pursue any further rights they may have against Steinhoff in court in future?
JEAN PIERRE VERSTER: It does sound like three out of the main five shoulder groupings have agreed, and are open to this new offer and will accept it. The big shareholder that at this stage doesn’t seem to have accepted this offer is Hamilton. We don’t know exactly how many shares it speaks for, but it could be up to a quarter of the spine of shoulder base. So effectively there can be a deal if Hamilton is not on board with the deal. It’s still an open question whether Hamilton will accept this proposal or hold out for an even higher proposal. It’s going to be a case of very high poker stakes, you can say, because on the one hand shareholders like Hamilton want as much as they can get out of a settlement, and they know that they are the gatekeepers. If they are unsettled, then the big debt deal, which is called the company voluntary agreement or CVA, cannot be implemented. So they are the gatekeepers.
But, on the other hand, they can squeeze so much out of Steinhoff that the debtholders say, well okay, then we won’t do a CVA. We will immediately apply for Steinhoff’s liquidation and then everyone loses. The shareholders will definitely get nothing, and the debtholders will still get something. Because of those high stakes we don’t know exactly if everyone is going to accept this offer, because some shareholders might feel there’s a little bit more juice that they can squeeze out of the Steinhoff lemon before the debtholders take control.
FIFI PETERS: Jean Pierre, ultimately what does this mean for the ordinary man in the street who had exposure to Steinhoff via their pensions investing in Steinhoff. What do they get out of this deal?
JEAN PIERRE VERSTER: Those that had exposure to Steinhoff are now effectively – either through the people applying themselves to be part of these groups of legal firms, or the asset managers that manage their pension funds having done so on their behalf – these claimants that have now seen an increase in the proposed settlement of the legal claims.
But I’ll reiterate, it’s a fraction of the value. We are talking six to nine cents for every hundred cents of loss. The man in the street might get a little bit of an uplift from an increase in the proposed settlement, but it’s still only a fraction of the loss incurred. That loss will never be made up. It’s effectively lots of money, so whatever happens from here on out Steinhoff is not going to make a major difference to those pensioners and people who held Steinhoff at the time.
But people who buy Steinhoff shares today – that I would say is a very risky endeavour, because if the shareholders and the debtholders can’t get around the table and agree on a settlement, the only a result will be a liquidation of Steinhoff. Then Steinhoff shares will go to zero, and there’s even a chance of that ending another way.
That is a court case that will be launched in September, which is a liquidation application by the previous Tekkie Town sellers who have applied for the liquidation of Steinhoff. There are actually two different ways in which Steinhoff can be liquidated in the short term. But unfortunately for those that were Steinhoff shareholders in the past, I think they need to accept that whatever happens, it’s only going to be a fraction of the value that is going to be recouped through this process – if it goes through.
FIFI PETERS: All right, Jean Pierre. Thanks so much for explaining the dynamics there. A bitter pill to swallow. But maybe getting something is better than getting nothing at all. That was Jean Pierre Verster, CEO at Protea Capital Management.