Could we be about to see a massive global retail collapse in the shape of the implosion of the South African global retail conglomerate Steinhoff International – a move, which it happens, would shake sections of the Australian retail sector?
That possibility moved closer after almost 10 billion euros was wiped off the value of Steinhoff International shares his week after the company confirmed its CEO had quit and it was being investigated for accounting irregularities which include inflating its revenues and book value over a number of years.
Steinhoff shares fell another 43% in Frankfurt overnight Thursday after losing 63% overnight Wednesday. At the close on Thursday the company was worth jus 2.59 billion euros.
No only would Steinhoff’s its auditor Deloitte not sign off on its financial statements due to be released on Wedesday, but added that it would present the unaudited results on Wednesday as planned. From there events escalated, resulting in the resignation of CEO Jooste, followed by the resignation of former Steinhoff CFO and current head of Steinhoff Africa Retail (Star), Ben la Grange. Jooste also resigned from the boards of related companies, Star, PSG and Phumelela Gaming.
The shares fell by more than 43% in South Africa as well on Thursday afer a 60% drop on Wednesday, while shares in an associated retailer focused on Africa dropped more than 40% over the two days. Analysts said the value of a bond issued in July of this year lost 40% of its value as well.
In South Africa on Wednesday, Viceroy Research released an explosive report that suggested that, among other things, that Steinhoff has used off-balance sheet vehicles to artificially inflate earnings. A claim which if true suggests that the yet-to-be-released 2017 results might ultimately have to be materially restated.
German prosecutors in the German State of Lower Saxony didn’t help by confirming overnight that they are probing Steinhoff over a range of multi-million euro irregularities, an investigation that will further unsettle the market in its shares.
If the accounting irregularities are proven, the whole Steinhoff edifice could tumble like a pack of cards in a multi-billion euro failure that will ripple across much of southern Africa, the UK, the US, parts of Europe and especially in Australia.
Banks to the Australian retailers such as Best and Less, Snooze, Freedom, Harris Scarfe and Fantastic Furniture must also be worried today about any loans they have with the Steinhoff companies. If the parent collapses or is placed in administration, the futures of these Australian retailers will be clouded.
Complicating matters for the company’s future survival is that the chair and interim CEO Cristo Weise, has pledged 15% of Steinhoff’s issued shares as security for a 1.6 billion euro loan that enabled him to participate in a funding issue by the company last year.
He became a big shareholder in Steinhoff in 2014 when he sold his Pepkor clothing business (which owns Best and Less and Harris Scarfe in Australia). Now much of his holding is in the hands of banks for the loan. As well many banks in South Africa and Europe have lent billions of euros to Steinhoff and associated companies.
Weise must be under incredible financial strain to service he loan and assure his banks of their security. If he is forced to start selling off his other shares to raise cash, Steinhoff’s share price will plunge further. Steinhoff may also seek buyers for some of its assets to raise cash to bolster its balance sheet.
The German investigators are said to be looking at the role of four unnamed Steinhoff executives in their probe. The prosecutors office in the German Sate of Lower Saxony (which is home of the Steinhoff Europe subsidiary), said on Wednesday, according to media reports:
“The suspicion is that inflated revenue numbers made their way into the accounts. This may have led to an inflated book value of the group.” The investigators are probing whether Steinhoff flattered its numbers by selling intangible assets and partnership shares without disclosing that it had close connections to the buyers.
The suspicious sales were in the area of “three-digit million” euros each, according to the prosecutors. “Given the scale of the investigation, its end is not yet in sight,” the Lower Saxony prosecutors office said.