In a tale of corporate mismanagement and unchecked power, Steinhoff, under the dubious leadership of the late Markus Jooste, signed off several multibillion-rand deals with utter disregard for due diligence.
One such deal, seemingly concocted at a horseracing course, symbolises the reckless abandon that led to the downfall of a company once at the vanguard of the European discount furniture retail market, according to a full report into SA’s biggest corporate scandal.
The report, compiled by PwC, into the demise of Steinhoff, casts light on the board’s failure to rein in Jooste and his cronies, enabling them to run amok. The end result was the collapse of the group’s shares which sent shock waves across the world and wiped out billions of rand in shareholder equity.
The 2016 acquisition of discount footwear retailer Tekkie Town for R3.2bn was rushed through with no financial due diligence, with former Steinhoff executives Michael Engan, Ben la Grange, Piet Ferreira and Philip Robinson admitting to a “desktop exercise”, instead of a proper valuation.
Robinson, Steinhoff’s then head of mergers, told PwC investigators the rushed valuation of Tekkie was the result of Jooste being notified “that a deal has been done in April/May 2016 through a friend from Mr Jooste’s ‘horseracing circle’”, and that Robinson must implement it.
Like Jooste, Tekkie Town’s founder Braam van Huyssteen is a fan of horseracing. The deal between Steinhoff and Tekkie Town Vendors turned sour when the vendors sued the group to get the company back. They later settled out of court with Steinhoff paying R500m to the former Tekkie Town owners, and delivering 29.5-million shares in Pepkor, which owns Pep and Ackermans.
“No formal valuation and diligence was noted,” PwC noted. “The deal process was initiated in February 2016 and was agreed in August 2016 without a formal process ... we noted that in respect of Tekkie Town, a statement was made that no specific external diligence and valuations were performed, due to a three-year profit warranty and Steinhoff International NV ebitda (earnings before interest, tax, depreciation and amortisation) multiples being at a premium to that of Tekkie Town.
“Acquisition multiples are often considered in relation to the acquiring company’s trading multiple as, theoretically, the earnings of the target company can be rerated at the multiple of the holding company, thereby creating value for existing shareholders. Whilst considering the multiples of the target versus the acquirer is one important factor that should be considered, it is one of many, and does not negate the need for a detailed valuation and diligence to be performed.”
One of the arguments advanced by PwC is that the current earnings used in the calculation may not be sustainable, or representative of future performance, which would be uncovered in financial due diligence.
The investigation report, brought to light thanks to a successful court challenge by Arena Holdings’ Financial Mail and amaBhungane Centre for Investigative Journalism on grounds that it was in the public interest, found a pattern of negligence and disregard for due diligence.
Steinhoff’s R63bn purchase of Pepkor in 2014 and the $3.8bn takeover of US-based Mattress Firm two years later are two further examples in the PwC report which found Steinhoff either overpaid, ignored independent assessments, market norms and due diligence.
Pepkor was acquired from Christo Wiese’s Titan and Brait, handing Wiese a substantial stake in an empire built on a facade of stability and the chair of the board.
Ferreira told PwC that only limited due diligence procedures were performed on Pepkor before the acquisition.
Bum deal
“We have not identified any due diligence (legal, financial or otherwise) procedures performed on Pepkor ... on September 4 2018, Dr Wiese confirmed that no due diligence procedures were performed on the sale of Pepkor to Steinhoff ... Dr Wiese also said that the media would love to report that ‘ahh, you did a bum deal because you used your own internal assessment structures’,” Wiese told investigators.
“But that using an independent/external adviser was no guarantee that you would not do a bad deal.” He also said the fact that management were paid incentives on a successful deal was not unlike the incentives for these “so-called advisers” who would be paid “hundreds of millions [of rand] to do a deal”.
The PwC report also flagged the purchase of Mattress Firm in 2016, which valued the Houston-based retailer at $64 a share, a 115% premium to its closing price before the deal.
Evidence gathered by PwC shows Steinhoff willingly overpaid for the deal when a Barclays independent assessment put a value of $30.95 to $49.25a share.
“It is not possible to comment definitively on whether the prices paid in respect of the various acquisitions are high or excessive without performing detailed valuation work to form a basis for these conclusions. However, in respect of Mattress Firm, we note that a premium of 115% to acquire a listed company is at the upper end of a range that is generally seen in the market,” PwC report reads.
“This, combined with the price paid being significantly in excess of the value range put forward by Barclays Capital Inc., which performed a detailed valuation analysis in discharging their obligation to opine on the offer in the public domain, lack of detailed valuation and due diligence work performed by Steinhoff, and significant challenges at Mattress Firm that later became apparent, all support a hypothesis that the price paid in respect of this acquisition may have been above market value.”
Steinhoff, renamed Ibex, was in December ordered to hand over to Arena and the amaBhungane copies of the PwC report into the huge fraud that took place at the company and brought it to its knees, costing investors billions of rand.
This was after the Supreme Court of Appeal confirmed the high court order that Ibex had no legal basis not to release the full report, which the company has kept under wraps since 2019, having only made a summary of the report public.
The Reserve Bank in October seized millions of rand belonging to former Steinhoff executive Stephanus Grobler, who is facing criminal charges. Grobler was arrested a day after Jooste committed suicide nearly a year ago. Steinhoff is also demanding Grobler pay back almost R300m he received in salaries, bonuses and other incentives.
La Grange was last year sentenced to 10 years in prison, five of which were suspended, after pleading guilty to a charge of fraud in the Steinhoff saga. He promised to testify against Grobler, who is scheduled to appear again in court this year.
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