Retailer Steinhoff’s share price has almost doubled in the past month as the company reached agreements with the last two claimants who were standing in the way of its final legal settlement, ending an onerous two-year legal process that threatened to sink the company.
With claims that once topped R184bn almost out of the way, the question now is how much value does the debt-laden company — which owns about 50% in Pepkor, one of SA biggest retailers,
has a 78% majority stake in European retailer Pepco and owns Mattress Firm in the US and Fantastic Furniture — hold?
Business focus
With the company facing no further opposition to its
R24bn settlement, which just needs to be rubber-stamped by a court in SA later this month, it can now concentrate on its operations.
All Weather Capital analyst Chris Reddy says the value of Steinhoff is contingent on three things: its successful debt restructuring; the performance of the two main businesses Pepco and Pepkor; and how successful and profitable its intended listing of Mattress Firm is in the US.
Steinhoff’s 2020 annual report reveals lenders have agreed to delay the repayment of the €10bn due at the end of December 2022 until June 2023 with a further extension to December 2023, contingent on the legal settlement.
This could allow it to restructure debt and renegotiate lower interest rates from the 10% it pays, says one foreign investor, Dmitry Kovalchuk, who owns Steinhoff shares.
Debt
The high interest rates have placed pressure on Steinhoff, but if it can lower interest rates to between 5% and 6% and halve debt to about €5bn, Kovalchuk believes it will become a profitable company.
Steinhoff has already been working on reducing debt. In 2021, it listed about 20% of its shares in Pepco on the Warsaw stock exchange, raising $1.1bn to pay down debt, according to Bloomberg. It still owns about 78% of Pepco, which has over 3,000 discount stores in Poland, Romania and Bulgaria and Ireland and is valued at about €5bn.
Steinhoff is working on the proposed listing of Mattress Firm, although how many shares it will sell and at what price has not yet been disclosed.
The listing, which will raise money to pay down debt, will also help investors value Mattress Firm and work out a more accurate value of Steinhoff.
There is also a possible listing on the cards of Fantastic Furniture, its Australian business, says Kovalchuk.
This week, Steinhoff confirmed it had sold 23 of its Lipo furniture stores in Switzerland for an undisclosed sum to an Austrian furniture chain, although this is subject to approval by competition authorities in both countries.
While holding companies often trade at a discount to the value of their parts, Steinhoff has some valuable parts. When the legal settlement is complete, its stake in Pepkor, which was once 68%, will drop to about 50%. Pepkor is a leader in discount retail and is expected to thrive as constrained consumers buy down. At Wednesday’s close it had a market cap of about R84.5bn
Buying down
Steinhoff’s global footprint in discount retail makes it recession proof, says Kovalchuk, as its companies "sell cheap consumer goods everybody needs". It is also diversified with businesses in Eastern and Western Europe, the US, SA and Australia. "The point is they have both regional diversification and a robust supply chain — meaning they experiencing fewer disruptions than other retailers."
Despite the positive sentiment around Steinhoff, Protea
Capital Management analyst Richard Cheesman says most holding companies trade at sizeable discounts to the value of their parts.
"For example, investment company Remgro trades at more than a 20% discount to the value of its underlying businesses. Remgro has good disclosure, a strong balance sheet and has recently implemented a variety of transactions to unlock shareholder value."
But Cheesman says the more debt and opaqueness at a holding company, the larger the discount, usually. "A larger discount could therefore be expected for Steinhoff.
"Positive sentiment from the recent announcements, however, has resulted in a seemingly negligible discount being applied to Steinhoff at this time."
Tax risks
Another risk facing Steinhoff is the status of tax investigations by authorities in different regions. It is unlikely that Steinhoff paid the correct tax when some profits and losses were kept off the books at the height of its fraud.
Steinhoff admits it faces investigations and potential costs in its most recent annual report: "Although the investigations are being managed on a continuous basis, the outcome thereof remains uncertain and could lead to material cash outflows."
Steinhoff also does not know yet what kind of fines it may face for noncompliance.
"The impact of potential tax adjustments, fines, penalties and or refunds is therefore unknown."
Cheesman says: "These tax uncertainties could also justify a larger holding company discount being applied to Steinhoff compared to other investment companies."
Other analysts say that they are watching to see how successful the listing of Mattress Firm is and how well Steinhoff restructures its debt.
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