Steinhoff and Jooste’s troubles continue

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FIFI PETERS: [We have] the Steinhoff story right now, where the company announced that the listing of its Mattress Firm business over in the US would not be going ahead as planned. It said that there’s market volatility in the IPO market, the initial public offering market. But Steinhoff said that it would continue exploring all options and paths for the way forward for its Mattress Firm business. An IPO later on could still be on the cards if market conditions become favourable.

We’ve got Jean Pierre Verster, CEO at Protea Capital Management, for more on this story. Jean Pierre, thanks so much for your time.

This announcement, coming a day after the announcement from the JSE regarding Markus Jooste’s fine and barring as a director on the listed companies [platform] – did you see it coming? Are you surprised at all by the pulling of the plug on the IPO?

JEAN PIERRE VERSTER: Good evening, Fifi. Well, I think the first indication that this might happen came in December when Steinhoff announced that their creditors are in such a powerful position now, and given what the equity markets had done until December, they would propose that shareholders either be diluted by 80% or effectively get nothing.

So that was the first indication that the equity market was so difficult, and that Plan A for Steinhoff was to monetise their investment in Pepco listed in Poland, to monetise Pepkor listed on the JSE, and to monetise Mattress Firm in the US by listing it. That’s the IPO that was pulled today. That was Plan A, and that has not worked.

So today’s announcement is not a great surprise in the context of the announcement that was made in December and how equity markets have performed so far in the last 12 months.

FIFI PETERS: They’re talking about the fact that they’ll continue exploring all options and paths on a way forward, trying to find the best deal, as it were. What do you think Plan B is going to look like from here?

JEAN PIERRE VERSTER: Well, Plan B is a plan where the creditors take firm control of Steinhoff. Shareholders will vote sometime in the next few months to either get nothing or to end up with 20% of the business and have their Steinhoff shares delisted – which is an important point.

So you don’t have the protections, for instance, that allowed for the penalty portion to Markus Jooste yesterday, because if the company is not listed, the listing requirements are not applicable.

That means that Plan B is whatever the creditors want to do. So they’ll end up with 80% of the business and Plan B will probably be to sit and wait, to wait for market conditions to improve, to hope that the Pepco price increases, the Pepkor price increases, and that they might get a better valuation on their stake in Mattress Firm to list that in the US, maybe in a year or two or three.

So it’s still very much dependent on [whether] Plan B will work, and it all depends on equity markets performing well in the coming three years or so.

But importantly, Fifi, the benefits of this plan will accrue mostly to creditors, not really to shareholders of Steinhoff.

FIFI PETERS: The stock is down almost 90% in the past year. One would have thought that it had already reached [its] low but clearly not, based on its performance in the past year. So would you suggest buying into this company at this really, really cheap level, or do you hold the consensus view that it’s really uninvestible right now?

JEAN PIERRE VERSTER: Firmly the latter. I think that the only people who are buying Steinhoff now are speculators.

And on the basis of the financial standing of Steinhoff – and the fact that the creditors now have a sword over the head of the shareholders, and the shareholders will be diluted by 80% and will not have the protections of holding shares in a listed company sometime when this is all actioned …

It means that I would not want to be involved as a small minority shareholder in an unlisted business with €100 billion of debt …

… where the creditors are going to do everything in their interests to extract as much value as possible, [leaving] 20% of minority shareholders in a private business in a very difficult situation and with a reasonable chance that they’ll still get nothing at the end of the day.

So no, I would not suggest that Steinhoff shares should be bought at this price.

FIFI PETERS: Do you think it will be in the best interest of corporate governance, accountability and transparency for Steinhoff to get delisted, because then it seems like this mess gets cleared in [private] and we are not really aware of what happens.

JEAN PIERRE VERSTER: Yes. There’s definitely less transparency when a company is not listed on an exchange any longer. So there is that risk.

Given the public interest in Steinhoff and what has happened, we might not get an update every six months when the company comes out with results, as is required if you’re listed. But we’ll still get information probably from legal authorities, from the German authorities, who are now starting their case against Markus Jooste in Germany, hopefully soon. Well, we hope in South Africa as well, whether it’s the National Prosecuting Authority or further actions from other regulators.

But we won’t be able to see those announcements from the company itself every six months, as the company has been forced to do until now. So in that sense, it is a pity that a delisting of Steinhoff, which will probably happen sometime this year, will decrease the transparency and make it more difficult to follow what is going on.

FIFI PETERS: In the event that the IPO, the listing of Mattress Firm, had gone ahead in the US, what would the investment case for this business have been? I was speaking to David Shapiro of Sasfin Securities a little earlier, and he was struggling to see which kind of investors would be buying into this. One would think that usually when you buy a mattress you tend not to buy another for five or even 10 years. In fact, Sealy promises you 20 years’ time. So what business would you be buying into here and what would be the investment appeal?

JEAN PIERRE VERSTER: There are two perspectives. I would first say that it was pulled not only because they saw that there wasn’t an appetite for Mattress Firm shares, but also of the three assets I mentioned – Pepco, Pepkor, and Mattress Firm – Mattress Firm is much smaller. So it’s as if, because the share price of Pepco and Pepkor did not perform well over the past year, it almost doesn’t matter if they get a reasonable valuation for Mattress Firm or not. It doesn’t make a huge dent into the debt of Steinhoff.

From the perspective of investors that might have been interested in Mattress Firm, well, it was a listed business before Steinhoff bought it and delisted it, what, probably around seven, eight years ago. At that point in time, one could see from the financials that it wasn’t necessarily a bad business.

It was cyclical, but it was also being challenged by online sellers of mattresses.

There’s a business called Casper, for instance, in the US that sells mattresses online. And because they are big, they’re bulky, they’re difficult to transport, and that means that they take up a lot of space if you have retail stores. It is a business model that’s under pressure if you are selling mattresses from a store, and the online sellers of something like mattresses have taken market share.

So yes, it’s not the greatest investment proposition for someone who might have considered buying the shares in any case.

FIFI PETERS: Jean Pierre, thanks so much for your analysis on the Steinhoff story. Jean Pierre Verster is CEO at Protea Capital Management.