It could wind up being South Africa’s version of the Enron accounting scandal. Furniture retailer Steinhoff International Holdings captivated investors by growing into a global force, latterly under its billionaire chairman, Christo Wiese. Now it’s drawing attention for all the wrong reasons. Shares in Steinhoff crashed 80% in two days after the company reported accounting irregularities that stretch back to 2016. Wiese has stepped down, Chief Executive Officer Markus Jooste has resigned and the company is looking for leniency from its creditors.
1. Why such interest in Steinhoff?
The company has been a go-to choice for investors seeking a balance between developing and emerging markets. Its share price tripled between early 2012 and end 2016 as it expanded in the US and Europe from a base in South Africa. It owns retail chains including Conforama in France, Poundland in the UK and Mattress Firm in the US, which encompasses the stores formerly known as Sleepy’s. Reflecting the global deal-making, the company has at least 200 subsidiaries and affiliates and is Dutch-registered and listed in Frankfurt and Johannesburg. Wiese and Jooste, meantime, are among the best-known members of a close-knit group of wealthy businessmen who have owned properties in the exclusive winelands around Cape Town.
2. What are the accounting irregularities?
Details remain sketchy. Steinhoff has said the issues relate to the viability of about 6 billion euros ($7 billion) worth of assets on the balance sheet of operations in Europe. Earnings statements for at least fiscal 2017 and 2016 will need to be restated. A decade ago, in a 56-page research report, analysts at JPMorgan Chase asked why Steinhoff’s accounts lacked “pivotal information” about where it was generating revenue and why it appeared to focus on tax breaks rather than the actual business. Susan Gawith, a portfolio manager who’s covered Steinhoff off and on for 18 years, said Steinhoff “reminds many in South Africa of Enron,” the US energy company that went bust in 2001 after the revelation of systematic accounting fraud that kept debts off balance sheets.
3. How badly has the company been wounded?
The stock’s nosedive has wiped 12 billion euros off the company’s value. Bond yields blew out to more than 14% the week the scandal broke. And Moody’s Investors Service slashed the credit rating to junk.
4. What happens next?
Steinhoff is due to meet bankers in London on Tuesday in what will likely be a tempestuous confrontation. At least three of the retailer’s biggest lenders have indicated to the company that they would support rolling over more than 1 billion euros owed on a revolving credit facility, people familiar with the matter said last week. Steinhoff isn’t expected to publish earnings ahead of the meeting, but will instead provide an update on the “ongoing operational and financial situation.” Some of the global lenders include Citigroup, Bank of America, HSBC Holdings and BNP Paribas.
5. What else is Steinhoff doing to resolve the crisis?
Steinhoff has hired PwC to investigate the wrongdoing and appointed Moelis to handle discussions with lenders and AlixPartners to advise on operations. It earmarked assets that could be sold easily, if necessary, and offloaded a stake in South African investment holding company PSG Group, raising about $345 million. Steinhoff Africa Retail, a subsidiary known as STAR, is refinancing loans with its parent company that amount to about R16 billion ($1.3 billion), and has pulled out of a deal to take control of Shoprite Holdings, a food retailer also controlled by Wiese. Three non-executive directors have been tasked with keeping a closer eye on governance. They include Steve Booysen, who was already head of the audit and risk committee.
6. Who is in the spotlight?
Jooste and Wiese have both resigned, saying nothing about what went wrong. Auditor Deloitte, which signed off the 2016 results that now need to be restated, has said it will fully cooperate with investigations.
7. Who is investigating?
South Africa’s Independent Regulatory Board for Auditors has begun a probe into the role of Deloitte’s local unit, while the Financial Services Board started an investigation into Steinhoff, backed by Finance Minister Malusi Gigaba. A number of law firms, backed by wealthy funders, are tryingto persuade investors to join class-action lawsuits, promising not to charge fees unless the case is successful. German and Austrian prosecutors have been investigating possible accounting fraud since 2015.
8. Who has suffered from the fallout?
The biggest loser in dollar terms is Wiese, Steinhoff’s largest shareholder, who has seen his net worth plunge to about $2 billion from more than $5 billion, according to the Bloomberg Billionaires Index. South Africa’s Public Investment Corp., which manages pension funds of government workers, has a 10% stake, which translates to a loss of more than $1 billion. The share prices of related companies have also slumped, including STAR, PSG, Shoprite and Tradehold, another Wiese company. Bondholders now in possession of junk-rated assets include the European Central Bank, which may lose its appetite for corporate bonds as a result, according to Bank of America Merrill Lynch.
© 2017 Bloomberg