Steinhoff – What has been happening?

Steinhoff’s revelation that it had discovered accounting irregularities and that the CEO had resigned with immediate effect came as a bolt from the blue.

There can have been no hint of it before as Steinhoff’s share price has fallen by 90% since before the announcement.

The truth is that we don’t really know what the problem is. Steinhoff has delayed publishing its final results and when it does then perhaps we will get a better idea. At this stage we don’t know whether it is something to do with a particular subsidiary or something at group level.

However, two aspects of the story suggest something at group level. First, Markus Jooste, the man seen as the architect of Steinhoff as it exists today, left with immediate effect. Second, there is evidence of a liquidity crisis. This stems from the fact that, apparently, there’s a loan of some $1.8 billion secured on the value of Steinhoff shares. Steinhoff is reported to be in negotiations with these lenders to stop them trying to sell the shares.

There is also a dispute about Poco, which Steinhoff consolidated last year, but whose ownership is disputed. However, that in itself would not have justified a price collapse like this and it has been common knowledge since last Summer.

This is not one of those cases where a share price fall is corrected after an initial sharp fall, even though that was over 60%. The shares have continued to fall and are now some 90% below their pre-announcement level.

What about the assets?

Already there is talk, which seems to be coming from the company, about possible asset sales. A figure of €6 billion is mentioned.

If the problem really is at the centre, then it has developed too recently for there to have been any significant impact on the operating divisions, because Steinhoff in its present form has only been put together over the last two or three years. The businesses should, therefore, be eminently sellable, even if, as a distressed seller, Steinhoff won’t get what it paid for them.

Steinhoff has three main divisions – household goods, general merchandise and automotive. The automotive business is all in South Africa. Since the last reported year end (ie September 2016) Steinhoff has completed the purchase of Mattress Firm in the US. Note that the data is for 2015/16, it is the publication of the final results for 2016/17 which has been delayed.

Figure 1: Steinhoff sales by product and by region, 2015/16
[graphic: image 1]
Source: company report and accounts/Mintel

Household goods – Furniture retailing

The majority of this division (73%) is based in Europe. Leaving aside Poco, which continues to assert that it is independent, the main businesses are:

Conforama – furniture market leader in France, though the business has a significant electricals business as well. Trades in a number of other countries including Spain and Italy.

Harveys, Bensons Bed in the UK.

Kik Leiner, based in Austria.

Steinhoff is the clear number two in European furniture retailing. It is about half the size of IKEA in Europe more than 4 times the size of the next largest furniture retailer.

Figure 2: Steinhoff: furniture sales in Europe 2016/17
[graphic: image 2]
Note: ERM is mostly Kika Leiner

Data is based on sales for the first 9 months
Source: Steinhoff/Mintel

General merchandise

Poundland in the UK is almost two thirds of this division (by sales),

The rest is the European divisions of Pepkor which trades as Pep& Co in the UK and Pepco in Eastern Europe.

Poundland is a good example of Steinhoff trying to bring its businesses together so that they will benefit from each other. Pep & Co is mainly a clothing discounter, a product category Poundland has generally kept well clear of. But now Poundland is incorporating Pep & Co ranges in its larger stores.

Total general merchandise sales in Europe are probably approaching €3 billion.

Synergies

Otherwise it is hard to see how there are many benefits from putting this disparate collection of businesses together. One gets the uneasy feeling that this acquisition spree is growth for growth’s sake.

But Steinhoff is now a major retailer in Europe. We estimate that it ranks 42nd in Europe, but while that may not sound very high, the list is dominated by the food retailers. With sales of €8.1 billion it is bigger than Wallgreens Boots Alliance and not far short of John Lewis partnership, Dixons Carphone and El Corte Ingles, each of which has sales of around €10 billion.

Where next?

It’s hard to draw firm conclusions until we have a better idea of what the problems are. If the reports of the need to raise cash quickly are correct, then we could see a major sale quite soon. Poundland alone would not be enough. Steinhoff paid £466 million for it in August 2016 and it would not raise that much if it had to be sold quickly. Time could well be what Steinhoff is most short of and if it had to sell too many of its businesses at a discount, then the whole balance sheet could collapse.

But it seems to us that it is Steinhoff itself which is under threat, not the constituent businesses. Perhaps the best analogy is Baugur, the Icelandic conglomerate that was bought low in the 2009 crash. The businesses it owned have mostly been sold off and have continued to trade profitably.

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