‘Steinhoff is technically insolvent’

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This transcript is a translation from the original interview, which was conducted in Afrikaans and aired on RSG Geldsake, here.

RYK VAN NIEKERK: The Steinhoff share price slumped as much as 44% today after the group announced that its financiers will take control of the company through a restructuring of the group’s debt.

The company today [December 15, 2022] announced that it had reached an agreement with the financiers to defer the debt due for repayment in 2023, to 2026. In terms of the agreement they would receive an 80% stake in Steinhoff.

Should all shareholders however not approve the transaction, they would retain no stake. The financiers will also take over the entire vote and Steinhoff’s Frankfurt and Johannesburg listings will be terminated. Steinhoff’s total debt burden amounts to some €10 billion.

Jean Pierre Verster of Protea Capital Management is on the line. Jean Pierre, a warm welcome to the programme. What on earth is this all about?

JEAN PIERRE VERSTER: Good evening, Ryk. Yes, it may sound complicated but, if I may put it simply, I would say that ordinary Steinhoff shareholders are out of time. What I mean by that is that we know that Steinhoff has a great deal of debt, almost €10 billion, some R184 billion, and the assets they have – comprising chiefly Pepco and Pepkor – those shareholders would have hoped to have seen a steep price rise in the two years, therefore [making] those assets worth more than the indebtedness.

That has not happened, Ryk.

With regard to the debt that was payable by end-June 2023, Steinhoff had to do something to defer payment, there being no money to settle it by end-June 2023. The creditors therefore hold all the aces in these negotiations, and have set short-term punitive terms, leading to ordinary shareholders, if they approve the transaction, retaining only a 20% voting and shareholder right in Steinhoff. If they don’t agree they lose everything, Ryk. Then they will have no shareholding in Steinhoff because Steinhoff has so much debt and in this situation the creditors hold all the cards.

RYK VAN NIEKERK: Does this mean that, for all practical purposes, Steinhoff is insolvent?

JEAN PIERRE VERSTER: Correct. Because the Pepco and Pepkor share prices have not risen sharply in the past year or so, the asset side of Steinhoff’s balance sheet is smaller than the liability side. So technically speaking Steinhoff is insolvent.

There had been a hope that this was not the case, that the asset prices would improve. Owing to Covid and embattled share markets, that did not happen and that is why Steinhoff shareholders are in such a tortured situation and have to choose between losing absolutely everything or retaining a mere 20% share in a company that will not even be listed should this transaction go through.

So it’s a very difficult choice, one between nothing or something, and the expectation is that shareholders will rather choose something should the voting happen.

RYK VAN NIEKERK: Earlier you said that Pepkor and Pepco are Steinhoff’s biggest assets and that they also own the majority in Mattress Firm in the US and Greenlit Brands in Australia. What does this mean for these companies – especially for Pepkor here in South Africa, which is major player in our retail industry?

JEAN PIERRE VERSTER: I think it’s important to note that the underlying companies that have a Steinhoff shareholding are separate companies with their own management teams – and in the case of Pepkor in South Africa and Pepco in Poland, those companies are doing very well. Mattress Firm is also a separate company, which will possibly soon list separately in the US, and Greenlit Brands in Australia has for some time been trying to sell Steinhoff without success.

But these companies will continue operating. There is no risk to them.

All that will happen is that they will at some point get new shareholders, whereas until now it has been Steinhoff itself. This will probably result in a restructuring of Steinhoff itself, which could result in these Steinhoff creditors becoming direct shareholders in some of these underlying companies, including Pepkor.

RYK VAN NIEKERK: Why would Steinhoff follow this route and not simply liquidate?

JEAN PIERRE VERSTER: Liquidation is a messy process, Ryk, and usually in a liquidation everyone loses. So one would rather have an orderly process than a liquidation. In a liquidation shareholders generally lose everything anyway. So what one can almost see here is an orderly- or a managed liquidation, with the creditors who see enough value in the company that it is not a situation where all Steinhoff operations should cease, but that the creditors would rather get their hands on the shareholding that Steinhoff has in very healthy underlying companies such as Pepco and Pepkor.

So in a way it will be a liquidation of Steinhoff. There is even a chance that the Steinhoff NV entity, which is registered in The Netherlands, will cease to exist.

If shareholders hold a 20% interest in a group, that would not necessarily be in Steinhoff, but in a new company to be registered somewhere else.

RYK VAN NIEKERK: How much of the €10 billion debt arises from the settlement agreement that Steinhoff reached with shareholders and paid out to those who lost money in Steinhoff’s 2017 implosion?

JEAN PIERRE VERSTER: A small number, actually, Ryk. The overwhelming majority of the €10 billion is old Steinhoff debt, from before the collapse happened. The legal settlement in progress involves a smaller amount, part of it in Pepkor shares as well, not everything in cash. So the overwhelming majority of the debt and thus the reason for this reorganisation is not the legal issues that Steinhoff endured, but rather the debt that Steinhoff accumulated before their implosion.

RYK VAN NIEKERK: So can one consider it Steinhoff’s sunset? The implosion was in 2017, and the company continued doing business for five years. Is this basically its end?

JEAN PIERRE VERSTER: Yes, largely so.

It has had a five-year twilight, but the sun is now setting on ordinary shareholders.

The creditors will at the end of the day control the assets within Steinhoff; Steinhoff itself as a holding company will probably cease to exist, and current Steinhoff shareholders will end up with either nothing in that situation, or after the restructuring will hold a 20% interest in an unlisted holding company, which sometime in the distant future might hold a little value. But there is also a chance that that holding company’s shares themselves will also end up worthless in the long term.

RYK VAN NIEKERK: So, if the shareholders now choose the 20% option by approving the transaction, to whom would they be able to sell their shares in future?

JEAN PIERRE VERSTER: Shareholders can currently sell their Steinhoff shares on the JSE, or sell them in Frankfurt, and that is why we are seeing shareholders scrambling to sell, and the price dropping sharply. In the future the mechanism will probably be a swap transaction where Steinhoff shareholders will give up their shares and receive a 20% share in some other entity, receiving other shares. Those shares will not be listed – meaning that it will be extremely difficult to buy and sell shares in an unlisted business at that stage.

So Steinhoff shareholders now have a very small window of opportunity to sell their Steinhoff shares, after which it will be extremely difficult to dispose of their shares in this unlisted future holding company.

RYK VAN NIEKERK: Who would buy Steinhoff shares now from existing shareholders who are scrambling, as you say, to sell and get rid of their shares?

JEAN PIERRE VERSTER: Yes, I would say ten to one it would be speculators who think that quite possibly some long-term value could remain in this new holding company; but that is truly speculative, Ryk. There is so much uncertainty and the creditors are so entrenched in their powerful position that it would be foolish for a minority shareholder to be in an unlisted company – making it a somewhat risky speculation for anyone to buy a Steinhoff share at this point.

RYK VAN NIEKERK: Jean Pierre, thank you for your time this evening. That was Jean Pierre Verster of Protea Capital Management.