The once mighty Steinhoff International looks like it has finally run out of rope to turn around its fortunes as it faces a credit default and possible liquidation after its shareholders voted against a crucial restructuring plan.
In 2017 the company made headlines for accounting fraud in what is said to be South Africa’s biggest corporate fraud, with its executives facing criminal charges.
And despite strenuous efforts by a new executive team to keep the troubled retailer as a going concern, at Steinhoff’s annual general meeting (AGM) late on Wednesday, shareholders voted against the debt-restructuring deal.
Steinhoff needed shareholder support to back a deal to give creditors 80% of its equity, leaving existing shareholders with only 20% of the equity value. This as the retailer owes its creditors €10 billion (about R200bn), which is due in June that it now cannot pay.
Steinhoff owns 44.5% of Pepkor and 75% of European discount retailer Pepco and stakes in US Mattress Firm and Greenlit brands, an Australian furniture seller. The group’s debts exceed its assets by €3.5bn.
“As things stand, we are on the same page as the Steinhoff creditors in that it is difficult to see the value of the company’s assets exceeding its liabilities,” said Protea Capital Management senior analyst Richard Cheesman.
Cheesman said, “The creditors said that they wanted 80% of Steinhoff’s equity value, otherwise they would not extend the debt maturities again. If the debt maturities were not extended, then the debt will become due, and Steinhoff would be required to settle the debt. Since the company does not have anywhere near that kind of cash resources available, it will default,” he said.
According to Cheesman, through that process, the creditors would be able to effectively take control of the company. The company will then most likely be liquidated or dissolved to enable it to settle as much of the debt as it can.
Cheesman said Pepkor, Pepco, and Mattress Firm were not commanding a high enough rating to be worth more than its liabilities. This is as the financial markets at the moment had not been supportive. Steinhoff was going to list Mattress Firm, but this was put on hold with interest rates going up and the war in Ukraine, which had made the stock market more turbulent.
“What the creditors seemed to be saying was that they wanted something in exchange for them being willing to extend the maturity of the debt by another year, and that was most of the potential upside that would have accrued to shareholders.
“The current value is negative, but there is some optionality value e.g. if Pepkor, Pepco, and Mattress Firm were sold at substantially higher prices then there would be some value in the equity. However, if not enough value was achieved for those assets to fully settle the debt then the equity value would have still been zero anyway,” he said.
Cheesman said at the AGM, Steinhoff shareholders voted against all the resolutions.
“Not a single resolution got passed. Shareholders made a statement, although it may be a bit meaningless because having not approved the restructuring, it seems likely that the creditors will enforce their rights and liquidate or dissolve companies, which will result in shareholders getting nothing,” Cheesman said.
He said if Steinhoff wasn’t able to pay the debt when it became due, there would be some provisions and enforcement actions available to the creditors to get value from the company’s assets such as Mattress Firm, Pepkor, and Pepco.
“The company will be forced to either sell those assets and then return the proceeds to the creditors, or it may be able to settle the creditors by giving them those assets. There may be some negotiation around the process.”
Cheesman said debt did not just go away, and the creditors would most likely not get a full realisation of the value of the debt. However, the creditors would get the vast majority of the value of the debt back.
“Most of the creditors are distressed debt investors, they bought the debt at very low prices,” he said.
The interest on the debt had also been running at around 10% per annum, and the outstanding amount had compounded over the years, so the distressed debt investors would get a very good return from winding up Steinhoff.
However, the underlying companies Mattress Firm, Pepco, and Pepkor would not be affected.
“The shares of those companies could either be sold or be distributed to the creditors in which case the creditors will either keep the shares or sell the share. So there might be changes in the ownership of the shares of those underlying companies,” he said.
Cheesman said it was disappointing that the former Steinhoff CEO Markus Jooste had avoided facing justice after all these years.
“The company has been playing its cards close to its chest, and it has not given the market or shareholders much information about the legal proceedings. It is disappointing that no one has been held accountable for what happened at the company,” he said.
On social media, retail analyst Syd Vianello (@Siddels1000) tweeted, “Steinhoff proposed restructuring was rejected. I guess that’s the end - the financiers exercise their pledges, take all the assets, and shareholders get nothing. Not that the latter was ever going to get anything. Technically SNH is bankrupt”.
Steinhoff hasn’t always been in financial distress, it was once the toast of the town, valued at billions of rands and a must-have in fund managers’ portfolios.
But when the multibillion-rand accounting fraud was unveiled. That led to the share price crashing, and lawsuits ensued of shareholders who complained that they were tricked into buying worthless shares.
Over the past five years, the company has been avoiding bankruptcy. Last year, the company reached a R24bn settlement with creditors.
Yesterday its market value was R1.3bn with is share price now a penny stock closing the day at 30 cents.