The extent of Steinhoff’s economic slaughter


Ayanda Mdluli

Steinhoff’s butchery of the South African economy was a carefully constructed and engineered collapse that came as a result of a series of off the “balance sheet” aggressive deals that raised the suspicions of some market analysts before the company crashed.

The fact that Markus Jooste was forced to resign is indicative of the criminal element that is associated with the scandal and once investigations have been concluded, the embattled CEO may face jail time in multiple countries which have a different set of laws and regulations. In a nutshell, some leading analysts contend that Jooste cooked the books and he must fall on his sword.

Putting things into perspective, the ripple effects of Steinhoff’s fall out have major implications. As government’s total exposure to the mess currently stands at more than R26 billion, many more pensioners, investors and tax payers are likely to be left destitute from the corruption. The government also has to deal with a shrunken tax base as a result, which means that more people who lost their money with Steinhoff may have to rely on government for a pensioner’s stipend putting more pressure on government’s abilities to help grow the economy.

The Steinhoff saga on the South African economy is a financial holocaust. No one at the company has come out to provide information. Even fund managers and analysts have been left gobsmacked. Companies such as Foord Asset Management, the Public Investment Corporation and Coronation Fund Managers are some of SA’s largest investors in Steinhoff. Some of the industry bodies have stated that they will write a report to the Public Protector requesting her to initiate a comprehensive enquiry into asset management companies sub contracted by the PIC to assess if they are also not involved in acts of economic terrorism.

The progressive Professionals Forum (PPF) has since stated that it will open a docket of inquiry for criminal charges at the Stellenbosch police station.  Against Steinhoff and its directors including Markus Jooste following alleged fraudulent transactions and a default confession from Jooste.

Zinhle Cele, the deputy secretary general of the PPF said: “What is a major concern is that the allegations and revelations which have caused Steinhoff’s share price to drop are not only funds of private citizens but funds of civil servants, in particular poor blacks who are in majority of in the public sector and other civil servants whose pension funds are managed by the PIC which has invested millions in Steinhoff equities.”

Faces behind the carnage

She said the PPF is calling on government to approach the Hawks Division of Serious Commercial Crime Offenses to investigate the 6 charted accountants on the Steinhoff board of Directors and to report the matter to the Independent Regulatory Board of Auditors and engage in appropriate processes to declare these directors’ delinquent.

Information from research institution – Viceroy indicates that Steinhoff has been under scrutiny for seemingly inexplicable factors. It states that the company has been involved in a long string of acquisitions of stagnating or deteriorating businesses whose performance seems to miraculously improve post acquisition, even only on paper. The company’s cash flow trends also do not correspond to EBITDA and engages in rampant dilutive equity raising. In addition, Viceroy claims that that Steinhoff has been involved in several concerning activities surrounding a number of at least two off balance sheet, undisclosed related party entities such as champion capital and Southern View Finance.

“Steinhoff uses these off-balance sheet vehicles to artificially inflate earnings,” says the institution.

Executives at Steinhoff who are implicated in the corruption scandal are; Markus Jooste (CEO), Christo Weise (Chairman), Sigmar Theodre Schmidt (CFO), Bruno Steinhoff (Founder of Steinhoff international), Gunnar George, Jean Noel Pasquier and Cedric Schem who all have interests in Steinhoff’s subsidiaries and off balance sheet vehicles.

Commenting on behalf of PPF, Cele said: “We also call on the minister of finance to investigate the possible violation of financial regulatory provisions by the PIC, South African Reserve Bank and the auditors, Deloitte that audited Steinhoff financial reports for 2015/2016 statements to be investigated and reported to their council / association and IRBA. Failure to sanction an investigation by the minister of finance will leave us no option but to report him to the public Protector for dereliction of duty,” she said.

A view from the inside

Africa News 24-7 caught up with an industry insider at one of SA’s leading asset management firms to paint the picture of the extent of the alleged corporate corruption shenanigans that have rocked the global furniture retailer.

The analyst, who spoke to us on condition of anonymity as he is not the official spokesperson of his management firm explained that in accounting practices, there are assets in your balance sheet, but you can have off balance sheet assets. Jooste, according to the analyst was involved in off balance sheet assets and transactions that he did not disclose. Ford Assets management which is very big shareholder in Steinhoff is the most exposed after the PIC, Coronation, Liberty, Sanlam, Old Mutual and Allan Gray.

Equity analysts have been lambasted for not seeing the signs, however, he says that this is not true. “We were always sceptical of Steinhoff because they made these many acquisitions where the numbers just did not gel. We were not aware that there was funny stuff happening in the company. They bought Pepkor which is a fantastic business that generates significant amounts of cash flow is important and many analysts got comfortable after Steinhoff bought Pepkor.  

Also, Christo Weise’s economic interest in Shoprite is remarkably less than his voting interest. In order to understand this, one needs to look at Weise’s deal with Shoprite of which he has a controlling stake. He needed to monetize his voting control and Steinhoff was prepared to pay R4 billion for that.

“Everyone has always suspected that he is doing deals that are not gelling with the business. He got retail businesses which are cash generative in Europe, the US and developed markets. You might have your suspicions but they still generate cash which quashes any doubts. We all work with the same numbers which although they may not have looked solid, underneath there were real businesses such as Pepkor. We also need to ask the pertinent question of how can you can have a 12% to 15% tax rate in jurisdictions that have 25% to 23% tax rates.”

The analyst went to state that these issues were raised with Steinhoff executives which were often side stepped by the company.

 The Steinhoff scenario was also characterised by a series of positive and negative connotations. On the one side, Steinhoff was cleaning out smaller business in developed markets and gaining significant market share. On the other side, Jooste was very aggressive in restructuring tax which came to bite him in the end.

“He did too many deals and what has happened has a criminal element to it otherwise he would not have resigned. To put it in simple terms, it means he cooked up the books. We still do not know how exactly, but he did. However, we cannot write them off completely, because if the company releases a statement tomorrow, depending on what they say, their share price might go up 100%,” he said.