Steinhoff: Proliferation of legal actions pose threat

Steinhoff, together with certain subsidiaries, is facing a proliferation of legal actions including class actions across different jurisdictions. The material uncertainty with respect to this litigation resulted in a disclaimer of audit opinion from the external auditor. The inability to quantify and assess the validity of these legal claims further muddies the ultimate impact on the liquidity of the group.

A litigation working group has been established, comprising CEO Louis du Preez, supervisory director Peter Wakkie, and nominated supervisory directors Paul Copley and David Pauker. The working group, together with the group’s attorneys Werksmans and Linklaters (the litigation committee), will assess the merits of and responses to the legal claims. The litigation committee will also continue to explore ways of resolving and settling open claims.

A number of legal defences have already been filed, and steps have been initiated to recover from individuals and entities where appropriate. Perhaps the 2019 annual report will provide greater clarity.

The German litigation proceedings with the Seifert entities were resolved after the group closed the Poco furniture chain sale for a total consideration of €271 million.

A provision of €357 million (current: €175 million, non-current: €182 million) was raised in respect of the dilapidation of buildings, legal claims, contingent liabilities in respect of business combinations, and other provisions. No detailed breakdown was given, hence it is not possible to identify the provision for legal claims.

It is to be noted that the amount of €357 million represents the present value (at a pre-tax discount rate) of management’s best estimate. Not knowing the discount rate used, nor the period over which it was applied, makes it impossible to gauge the full extent of the provision for legal claims.

Steinhoff is also facing a string of legal claims for which it has not raised a liability. These are many and complex, but for the sake of brevity and to enable one to gain an understanding of the potential liability (and the devastation to the balance sheet had they been raised), I have summarised the legal claims in a table:

Contingent liabilities – no provisions made

* Vendor and shareholders’ claims have not been provided for. The management board, in consultation with its legal advisors, is in the process of quantifying and assessing the validity of all claims received, and potential settlement values. These values could not be reliably ascertained by the date of the annual report.

The financial review states: “The majority of the claims will not have an impact on the 2018 consolidated financial statements …” and further: “However, litigation remains a material uncertainty as to its ultimate impact on the liquidity of the group.”

I am of the view that the present value of these claims may have a significant impact on the continued viability of the group. Then again, the claimants would ultimately be picking at a skeleton.

The group will seek to recover losses and damages suffered. There will be no greater boost to corporate governance than for those who have ignored it to have their day in court.