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Steinhoff skeletons emerge

Allegations of round tripping, inflating earnings and obscuring losses contained in report.

“The directors are confidant that they will be able to defend these actions successfully and that the potential impact on the group will not be material.”

These words, issued by Steinhoff in August in response to an article in German publication Manager Magazin and designed to soothe investor fears ring rather hollow today. The article suggested that CEO Markus Jooste, among others, was suspected of being party to accounting fraud and other financial irregularities.

If recent events are anything to go by, Steinhoff appears to be one giant pyramid scheme and this is just the tip of the iceberg. On Tuesday this week the company announced its auditor Deloitte would not sign off on its financial statements, but added that it would present the unaudited results on Wednesday as planned. From there events escalated, resulting in the resignation of  Jooste, followed by the resignation of former Steinhoff CFO and current head of Steinhoff Africa Retail (Star), Ben la Grange. Jooste also resigned from the boards of Star, PSG and Phumelela Gaming.

Steinhoff  also announced that that new information had come to light relating to accounting irregularities that warranted further investigation. PwC has been retained to investigate, delaying the presentation of the results indefinitely.

Rumours of accounting shenanigans have been swirling around the company for years, but many investors dismissed these, believing that while the giant furniture retailer and manufacturer might sail ‘a bit close to the wind’, it was generally on the right side of the law. 

However other Steinhoff habits have made some investors – including JP Verster at Fairtree Capital, Terence Craig at Element Investment Management and Reuben Beelders at Gryphon nervous about the stock.

These included the constant acquisition of poor or deteriorating businesses whose performance seemed to miraculously improve post-acquisition, even if only on paper; cash flow trends that did not correspond to Ebitda; rampant and dilutive equity raising and a tax rate that is materially lower than European competitors. All of these are red flags.

Then on Wednesday Viceroy Research added fuel to the fire with the release of an explosive report that suggests that, among other things, the firm has used off-balance sheet vehicles to artificially inflate earnings. So much so that it suggests that the yet-to-be-released 2017 results might ultimately have to be materially restated. It provides three earnings scenarios – low, medium and high. See below:

Source: Viceroy report into Steinhoff

Viceroy is a US-based investment company that choses to maintain a low profile. It’s a team of three that ‘thinks differently’ and spends an inordinate amount of time looking into questionable accounting practices “that shouldn’t happen but often do”. They challenge anyone to poke holes in the report they have compiled on Steinhoff. All of the information is publically available – it just takes a team of forensic accountants to dig into the detail and join the dots, they say.

The first red flag was the dizzying rate of acquisition over the last decade. Typically, the businesses are in the furniture sector with unremarkable or deteriorating financials. They include Mattress Firm Holdings, Conforama, Poundland Group, kika-Leiner and Pepkor.

Steinhoff spans five continents, over 30 countries and consists of dozens of non-integrated brands. No other retailer has successfully managed this level of operational and managerial complexity, the report says. While revenue has grown, the financials show a company that is having difficulty converting this to earnings and cash flow. 

Three off-balance sheet, undisclosed related party entities – Campion Capital, Southern View Finance and Genesis Capital caught the attention of Viceroy. These are all controlled by former Steinhoff executive officers and associates and there is not much disclosure around these vehicles. Viceroy alleges that these off-balance sheet entities are used to obscure losses, inflate earnings (by booking book interest revenue on loans to these entities that are unlikely to be repaid) and on one occasion, round-trip a predatory loan issuer.

Their existence brings into question the real nature of Steinhoff’s earnings power and they warrant a closer look.

Campion Capital is controlled by George Alan Evans and Siegmar Schmidt. Evans was CEO of Steinhoff’s special purpose entity, Kluh Investments, which was used to acquire forestry assets in the early 2000s (and which was the subject of a tax investigation). Schmidt is the former CEO and CFO of Steinhoff. He left in 2013 and founded Genesis Investment Holdings.

Southern View Finance was primarily involved with Steinhoff’s subsidiary Pepkor and its Capfin consumer loans facility. Through a series of transactions, some financed by Steinhoff, revenues and financial benefits were siphoned away from the Steinhoff entity and toward Southern View Finance’s ultimate owners, companies heavily invested by Christo Wiese, now executive chairman of Steinhoff. Through a “corporate dialysis” process, Steinhoff eventually acquired the consumer finance entity’s profitable segments from Campion Capital without any of its delinquent loan book or running losses, according to Viceroy.

Genesis Investment Holdings is the company through which Steinhoff reverse-listed on the Frankfurt Stock Exchange. Steinhoff financed Genesis’ acquisition of kika-Leiner for €352 million only to buy its property portfolio for €452 million six months later.

Steinhoff does not book these loans as related party transactions even though Campion Capital is a related party entity. Viceroy alleges that Steinhoff has issued expensive loans to and booked interest revenue against Campion subsidiaries for the purchase of loss-making Steinhoff subsidiaries. These revenues will never translate to cash.

It also believes that the management of Genesis was enriched at Steinhoff’ shareholders’ expense.

Further, Steinhoff has moved two loss-making and predatory consumer loan providers to off-balance sheet entities: JD Consumer Finance and Capfin. Steinhoff then negotiated the repurchase of the only profitable portions of JD and Capfin (loan administration and debt collection facilities) while allowing losses to be incurred at off-balance sheet, related party entities under Campion Capital.

Given that these loss-making entities, such as Southern View Finance UK, are being round tripped back to Steinhoff, Viceroy believes it is possible that Steinhoff is ‘repaying’ Campion’s outlays through acquisition premiums (ie losses are being capitalised through round-trip transactions with related parties).

Viceroy believes that, based on the contents of its report, Steinhoff should consolidate Campion Capital and its subsidiaries given that Steinhoff bears full economic liability for these entities through loan arrangements and exerts total control through overlapping management.

Read more on Steinhoff:

The extent of Steinhoff’s value destruction

Collateral damage: Who owns Steinhoff?

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COMMENTS   27

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Wow! This is our own little Enron!
Steinhoff is right up there with Enron, Worldcom, Tyco, Freddie Mac, AIG, Lehman and Bernie Madoff. What started out as a little funny bookkeeping with the Boland Bank acquisition, grew into a standard business model and operating manual.

If you keep on “sailing close to the wind” for too long, you will eventually get blown over.

Once got a call from my sydney broker to buy into Tyco. Said no. 6 months later it went belly up & phoned the broker. She didn’t even offer an apology – just said the figures they were supplied were wrong. Neat way of getting your recommendation rubbed out. Doesn’t help the investment public who end up holding the ashes. Anyway hopefully the court cases will take ages & cost messrs wiese etc most of their remaining fortunes & lengthy prison sentences – a la Enron

never ever buy a broker recommended stock, no 1 in history has ever made money from a broker recommended stock.

I doubt that the culprits will serve any jail time. Exit strategies have already been planned and it would not be surprising if they escape to Australia just like Messrs Tannenbaum, Bobroff etc.
Would the authorities please place a red alert at all exit ports so that we don’t have a repeat of another Qantas business class escapee.

You should’ve included Belvedere/Cosgrove/Kellermann in that list…

Very good article Sasha

Reading all the recent activities of the group, I can see why Viceroy took an interest.

I have asked this question many times before – Why is it that there is always a whiff of irregularity / impropriety in the air around Wiese?

Wonder how much of this cancer is part of Checkers. I mean giving the former CEO an obscene amount of money opun his retirement!!!

always look to cashflow supporting financial numbers!

Thing is, Steinhoff was always busy doing something to make an external forensic review difficult:
Change year ends
Change reporting currencies
Buy big thing for double what the US thinks it is worth
Buy another big thing
Discontinue certain operations
Reverse acquisition listing
Change capital structure
Issue new shares while buying back other shares as treasury stock
Borrow a mountain of money
Buy out joint venture partners
Sell divisions and assets to related parties
All of above in two reporting years. No wonder the typical analysts got a headache and decided to go with the nice easy explanation in the press release.

Early warning was stuffing every committee with friends and family with no discernible thought given to for example actual industry credibility. Global retailer with more (south african) lawyers and accountants than a bank.

Big issues for me:
1. Why on earth did PIC have nearly 10% of Shoprite???
2. How can PwC be the independent auditor??? Deloitte raised this flag, so Steinhoff responds by firing them and bringing in Wiese’s tame firm to investigate Wiese’s lifetime buddy and business partner in terms of a mandate under Wiese’s control… PwC global should decline this appointment under risk assessment.

Very informative. One characteristics shared by all Ponzi-schemes is the opacity of the investments. Nobody can verify the profits or track the trading because the information is not readily available, if available at all.

“Oh, what a tangled web we weave…when first we practice to deceive.” ― Walter Scott

There is one thing no management team can hide, that is the track left by the share price over time. The analysts who studies the movement of the share price itself, will have enough early warning signals to realize that there are safer opportunities elsewhere.

IS YOUR WRITTING REALLY BASED ON FACT OR IS IT A EMOTIONAL REACTION?

Both!
I am angry that we small shareholders tolerate this. I am more angry that non executives like Steve Booysen(ABSA) and Johan van Zyl(SANLAM) and Theunie Lategan( FNB) and are also so utterly clueless to be “taken”-unable to read and understand a balance sheet. What do they do at board meetings? Moan about Mr Zuma? He seems like a small time shoplifter compared to this gang? These non executives must resign, go to jail and preferably shoot themselves in shame!!

And I am most angry that most of the fund management industry are so utterly clueless that they get paid and supported by small investors to do absolutely nothing except charge fees

What is really disturbing is how inept and incompetent South African and other share analysts are. Despite their so called analysis this mess evidences that they were absolutely clueless. All the big names were so asleep they lost people billions.

One has to ask does an investor get any value for money from these pack of arrogant overpaid and incompetent fools?

The CEOs of the large investment firms should fall with that Jooste fellow-thats tight -YES MR DAVE FOORD for one-get off your yacht and resign-Steinhoff was your 4th largest holding in your equity fund-SANLAM-10th largest holding. OLD MUTUAL 4th larget Why were you so asleep that you could not see that the books are cooked?

Fools -GO!! OUT!! RESIGN!!

Hi Sam,
You seem to have misdirected anger issues .Are you perhaps referring to the same Dave Foord who has ONLY taken R18 145.30 that we invested with what was then Foord and Meintjes and turned it into R 3 572 085.05 (as at 01/11/2017 ).
All dividends were reinvested but NO extra money was invested by us.
In excess of 400 funds had Steinhoff in there portfolio so why the focus on Dave ?
Dave ,stay on your yacht and continue to create wealth for my wife ,myself ,my kids and my Trust .
Next thing you will be squealing about high TERS ,performance fees blah blah.
Sorry,but maybe you should go back under your rock.

Forgot to mention that the R18 145,30 was invested on 01/01/1990 just before my first kid was born.
Time in the market ,not timing the market. Heard that before ?
The power of compounding ?Heard that before ?
Guess what ,its staying there for another 10 years .
We can then chat again

When does the JSE step in and suspend the shares of all companies involved Checkers. Kap , Steinhoff and all the other rats and mice in the conglomerate

Hope the executives and non-executives all get jail time. 20 years plus.

Non-executives to get jail time too? How can you say all of the staff were complicit?

Good article.

Guys I lost a lot! I have the same feeling after Donald’s run out in 99. It’s terrible.

So disappointed especially in Wiese I don’t have words.

It’s now Zuma + Guptas + us..

How much is alot? I had exactly the same feeling after RLF found “accounting errors”.

No recourse for us common equity owners.

Does Christo Wiese know about these malpractices? The same Christo Wiese who was caught by the British Authorities with £7,000,000.00 in a suitcase, in Heathrow Airport, on his way to Switzerland? The same Christo Wiese who hails from Upington, South Africa, and is now the Chairman and acting CEO of Steinhoff? Was he really in the dark about these activities? Was this operating method as good as Theft or Fraud – criminal transgressions? Oh boy. Let’s see if white-collar crime does pay.

Comment by Wiese in 2016: “Steinhoff market value can double in 5 years”. He is privy to the individual parts of Steinhoff. For public, Steinhoff is obscure, and difficult to assess from year to year. I would like to think that Wiese has integrity, and that the underlying companies are doing well on balance. The resignation with immediate effect by Jooste sounds like another way of saying he was fired. Am baffled Steinhoff has not said in simple terms what the accounting irregularity is. They are costing shareholders big time by so oddball discretion.

Concentrate on the Sanlam connection. There is a reason why JvZ was recently appointed the the Board!

“Steinhoff also announced that that new information had come to light relating to accounting irregularities.”
Lying BASTARDS
This should read – ” Steinhoff has been caught cheating but the directors don’t care because we have made a fortune out of you suckers”
PS rude letter to follow!

Who sold 2.5 million Steinhoff at 4.55pm Monday afternoon? A lot of people knew about this.

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