Goodbye Steinhoff

[Nat Quinn]

Steinhoff International’s 60 years in business will end after an Amsterdam District Court has ruled to delist and liquidate the company.

Steinhoff International was founded in 1964 by Bruno Steinhoff in Westerstede, Germany, with a simple business model.

It bought furniture at a low price in Eastern Europe and sold it at a premium in Western Europe, which proved very profitable.

Steinhoff moved its headquarters to South Africa in 1998 after merging with Gommagomma, a local furniture company run by Markus Jooste, who later became the CEO of Steinhoff.

It went on an acquisition spree and became a retailing powerhouse with prominent brands like Pepkor, JD Group, and the US-based Mattress Firm in its stable.

Steinhoff appeared to perform well with growing revenue and turning every acquisition into a financial success. It was a favourite among JSE investors.

However, a few analysts rang the alarm bells about rising debt, with many large acquisitions starting to increase the company’s liabilities.

When asked about the group’s debt in a 2013 interview, Jooste said Steinhoff viewed debt differently from the rating agencies because the cost of financing was so low.

He added that there is no need to worry if a company has the right debt covenants and manages to meet them.

In 2017, news broke of major accounting irregularities in Steinhoff’s financial statements. PwC revealed a $7 billion overstatement of group sales.

The share price plummeted from a peak of R95 per share to R1.26 per share. Shareholders lost billions.

Steinhoff’s debt became a major issue, and in the restated 2017 annual report, the company’s total liabilities and debt increased dramatically. Its overstated assets were also significantly lowered.

For the first time in 2019, Steinhoff’s total liabilities exceeded its total assets, making the group technically insolvent.

Technical insolvency is a situation where the group could not cover all of its liabilities if it sold all of its assets at their book values.

Steinhoff’s debt developed into a desperate situation, and the group entered a debt restructuring program in 2021.

At its core, this structure was an asset disposal program where the companies that were purchased and created the debt were being sold to repay the debt.

Despite these efforts, Steinhoff has not been able to make a meaningful dent in its debt.

The 2022 annual report indicated that the group paid off EUR1.040 billion in debt while the accrued interest on the group’s debt was EUR1.049 billion.

Steinhoff got into a desperate situation, with most of its debt, EUR10.431 billion, becoming payable in July 2023.

There was no way that the group could repay its debt, and Steinhoff announced that it would restructure the company to settle its debts.

An Amsterdam District Court ruled in favour of a proposed debt restructuring plan that would see Steinhoff cease to exist.

This restructuring aimed to, among other things, extend the group’s external services debt to at least June of 2026.

During this period, Steinhoff will be delisted from both the JSE and the Frankfurt stock exchange.

Steinhoff will then fall under an unlisted entity called New Topco. After the maturity extension of Steinhoff’s debt, the assets within Steinhoff will then be liquidated.

The assets within the Steinhoff group will be sold, and 100% of the proceeds will be used to repay Steinhoff creditors.

Steinhoff 1-year share price

All Steinhoff shareholders will lose their shares and not receive any payment or distribution for the shares they hold. However, they will be entitled to contingent value rights (CVRs).

These contracts give shareholders the right to distributions from New Topco after settling all creditors’ debts.

These contracts have a maturity term and will expire within a certain period leaving investors with nothing if there are no surplus proceeds after all creditors have been repaid.

It is highly unlikely that shareholders will receive any payment for the shares they held. Unsurprisingly, the Steinhoff share price plummeted to a few cents.

Analysis Group compiled a report to determine Steinhoff’s liquidation value, stating that when liquidated, total proceeds from Steinhoff would be between €5.2 billion and €7 billion.

This is significantly less than Steinhoff’s total debt at the time of the report of around €10.4 billion.

Simply put, Steinhoff will be delisted and sold for spare parts, with the money going to creditors. Shareholders are unlikely to see a cent.

In an announcement, Steinhoff stated that the CVRs are the only realistic basis on which shareholders may be able to benefit in the case that the assessed liquidation values are incorrect.

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