Business

Steinhoff crashes to a record low

Steinhoff International Holdings NV fell to a record low of 44 cents on the JSE on Monday morning, reducing the market capitalisation of the group to less than R2 billion.

The share has dropped 75% from R1.70 a few days ago, after an announcement about new efforts to reschedule debt repayments reminded shareholders that Steinhoff is basically insolvent – and has run out of time.

The announcement stated bluntly that the value of Steinhoff’s assets remains lower than its liabilities and is likely to remain so at the end of June 2023, when Steinhoff needs to settle debts.

Effectively, the plan that underlying businesses would perform well enough to trade the holding company out of its troubles did not work out.

Steinhoff issued several statements to outline a new plan to buy a little more time. Unfortunately, the plan will give shareholders much less than they were hoping for.

The plan …

The new proposal will give creditors an economic interest of 80% in Steinhoff and offers shareholders only a 20% cut. In addition, the 20% share will be housed in an unlisted entity, which will do little to endear it to investors.

In return, creditors will extend the maturity dates for debt by three years, to June 2026. In certain cases, creditors are offering slightly lower interest rates too.

It is likely that creditors will end up with 100% if shareholders do not agree to the proposal and ratify it when resolutions to the effect are put to a general meeting of shareholders.

“In light of the assessment that the value of the group’s assets continue to be less than its liabilities and will remain so as at 30 June 2023, and subject to further due diligence and structuring, the commercial terms of the maturity extension transaction provide that the individual CPU [contingent payment undertakings] creditors will be entitled to receive equity in Steinhoff International Holdings NV (or any successor entity or another entity replacing SIHNV as ultimate parent of the group),” according to the announcement.

“The maturity extension transaction proposes that the financial creditors will be entitled, individually and independently, to receive 100% of the voting rights and at least 80% of the economic interest in the post-closing equity of the group.”

Good days

It is hard to believe that Steinhoff used to be one of the biggest companies on the SA bourse and was included in the JSE Top 40 index – an important benchmark index for tracker funds and other portfolios – before the revelation of accounting fraud at the end of 2017 wiped more than 90% off its market value.

Once admired by employees, investors, fund managers and competitors, the then CEO, Markus Jooste, was ostracised.

Calls for court action and the imprisonment of everybody involved in the accounting scandal have been voiced ever since.

Read:

Unfortunately, even Steinhoff’s current market valuation of R1.92 billion seems optimistic.

High debt

Management warned investors in its notes to the interim results for the six months to March 2022, published on 9 June 2022, that the group’s current assets exceed its current liabilities, and its total liabilities exceed its total assets.

The balance sheet at the date recorded assets of €14.2 billion, but liabilities of close to €17.1 billion. The equity value was given as a negative €2.9 billion.

Thus, the current share price means shareholders are required to pay R1.92 billion for something with a book value of minus R53 billion – even if management draws attention to the fact that the value in the financial statements reflects the historical and not their fair value.

Management also said at the time: “The management board does not intend to liquidate the company and the underlying boards still plan to recover their assets and settle their debts in the normal course of business.

“The conclusion of all material litigation, following the successful implementation of the Dutch SoP [suspension of payments] and the S155 Scheme has enabled management to actively pursue the next step of its strategic plan, being the restructure of the group with the view to reducing debt and finance costs.”

Debt

At the end of March, Steinhoff had corporate debt of approximately €10 billion (around R184 billion), according to the report.

“This debt is split into a number of different classes, each with slightly different rights and obligations and each class is held by a number of different investors – predominantly hedge funds or other investors that focus on distressed assets. These investors each have their own unique interests.

“Restructuring debt of this quantity and complexity remains an extremely challenging task,” management said at the time.

The underlying companies, namely Pepkor in SA, Pepco in Poland and Mattress Firm in the US, are performing well and Pepkor and Pepco have fairly healthy balance sheets. Steinhoff’s consolidated results for the six months to March 2022 showed revenues increased by 12% to nearly €5.2 billion and operating profit by 11.7% to €297 million.

A recent trading update noted that revenues continued to increase, despite a difficult trading environment characterised by high inflation, subdued consumer spending and continuing supply chain disruptions.

The problem is the high debt at holding company level. Steinhoff had to pay €579 million (around R10.6 billion) in interest while it earned only €297 million (R5.4 billion).

No coming back

“Steinhoff has too much debt and time has run out,” says Tebogo Mokone, portfolio manager at Afrifocus Securities.

“I cannot see them coming back from this one,” he adds, referring to the announcements outlining the efforts to extend credit maturity dates. “We will have to wait and see if this is successful.”

He notes that the underlying assets are performing as well as can be expected in the current economic conditions, but are unlikely to increase in value to an extent that would push the Steinhoff share price much higher.

“It might even go lower,” says Mokone.

Management noted in the interim report that managing both solvency and liquidity risks remains a primary concern and focus area to ensure the ongoing financial stability of the group.

It looks like shareholders have not paid enough heed to the numbers and management’s warnings about Steinhoff’s delicate financial situation.

At the current price, the share might be no more than a risky option on an (unlikely) positive outcome.


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