Steinhoff: What we already know and what questions are still open

Steinhoff International has once again published a water level report to let us know how the new management is progressing in stabilizing the controversial group. Much seems to go in the right direction, but for some crucial questions, one can only speculate – here is my updated assessment.

What we know
It was already foreseeable, but now it has been officially confirmed: The operation of the subsidiaries can initially be largely continued unrestricted. Sufficient funds could be raised to pay short-term bills.

The sometimes hectic measures to procure liquidity could cause considerable book losses. On the other hand, Steinhoff has a nice investment portfolio. With the sale of shares in the investment holding company PSG Group , which contributed almost half a billion euros, considerable profits were realized. A good sign is that the other large investment, KAP Industrial Holding , has not yet had to be silver plated. The 39% share today is worth about 700 million euros.

The big open questions
1. How exactly did the game of the cartridge work?

The fact that former CFO Ben la Grange stays on board tells me that everyday bookkeeping was quite correct. It all points to the fact that cheating was not here in the small and small, but rather in the very big.

From what I have read so far, my theory is that the patrons (ultimately the ones responsible) have enriched themselves at the expense of the holding company. They used their Steinhoff share packages to obtain the largest possible personal bank loans. To push the Steinhoff stock price, two tricks were probably used, as I understand it:

First, off-balance sheet companies were established with which the holding company operated undercover operations. In return, overpayments, for example in the form of rents, were used, which benefited the operating result of individual subsidiaries. It gave the wrong impression that Steinhoff was particularly good at increasing the profitability of the acquisitions. Secondly, this helped to justify the high goodwill reported. I can well imagine that the patrons past the chief financial officer to have set these excessive valuations.

For me it is obvious that the cartridge have used their insider knowledge to stock up in the run-up with their own money at the acquisition targets. The higher the takeover premiums, the greater the friction. It would be relatively easy to go underground via investment vehicles in the run-up to the purchase as a co-investor.

Maybe they have overstepped the bow. When the lending banks understood to some extent how the whole thing is going, they have probably panic and not only put the cartridge under pressure, but also the holding.

2. How much equity will remain?

The shareholders’ equity attributable to shareholders in September 2016 was still reported at almost 16 billion euros. The average market expectation is therefore that 14 billion euros are wiped out, whereby a bankruptcy including total loss is assigned a certain probability.

For my part, I am now very confident that bankruptcy can be averted. My worst-case scenario is that goodwill and intangibles must be halved, plus some frictional losses from the turmoil. But then still comfortable 7 billion euros would be left, not counting any gains from the meantime.

3. How profitable are the daughters really?

Another key factor in the valuation of the holding concerns the true profitability of the subsidiaries. In the last annual report, operating profit of €1.8bn was reported, which corresponds to an operating margin of 11% with sales of €16.4bn.

If, as shown above, profit transfers were offset by means of off-balance sheet companies, it can be expected that much less will be reported in the soon to be corrected balance sheet. After interest and taxes would then not much left over, which is why the stock would probably be valued little more than the book value.

4. Do lawsuits against the holding threaten?

Prosecutors, regulators, and shareholders in both Europe and South Africa, and perhaps even the US, are likely to scrutinize the conduct of holding companies. There are many injured and many an observer expects that there will be more trouble for the group here . The group could be shattered by potentially years of unclear processes.

But if the patrons have enriched themselves privately, then they should primarily be held accountable and not the corporation, which is ultimately itself a victim of the machinations. One day, Steinhoff may even be able to reclaim money from the banks involved if the restrictive measures against the holding are, as far as is known, disproportionate.

Every day, individual reports about Steinhoff go through the press without putting everything in the larger context. Often, this does not really help in evaluating the holding company. That’s why I’ve tried again here to create a comprehensive picture and come to the conclusion that investing at rates around 0.50 euro offers a good opportunity-risk ratio. However, like the Steinhoff management, I advise you to exercise caution.