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Acquisition Binge to Negative Territory

John Polkinghorne
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Veritas Investments and CBL Corporation have been in the headlines recently for all the wrong reasons – but if you want to find the stickiest webs of intrigue, you need to look overseas.

The saga of retailer Steinhoff International is a dramatic tale of financial mismanagement on a global scale.

Steinhoff International began in Germany in the 1960s as a furniture retailer. The head office shifted to South Africa in 1998, but most of the retail operations continued to be in Europe. Today, Steinhoff has a retail presence in most parts of the world, including Freedom Furniture and Postie Plus here in New Zealand. It’s important to note that these businesses don’t have anything to do with the events outlined below.

This time last year, things were looking pretty good for Steinhoff International.

The company was valued at €19 billion based on its share price. Steinhoff had been on an acquisition binge, picking up furniture and apparel retailers around the world.

This included Mattress Firm in the US, Fantastic Furniture in Australia, and Pepkor (which included Postie Plus here in New Zealand).

The rosy picture fell apart very quickly in December 2017. Steinhoff’s financial year end was 30 September 2017, so it was meant to release its annual report in early December. On 4th December, Steinhoff made an announcement saying that the report would be “released albeit in unaudited form” on 6th December, with the audited version expected to be published in January. That’s an unusual statement for a public company, although they tried to make it sound ordinary.

The annual report was never released, audited or otherwise. On 6th December, the company announced “accounting irregularities requiring further investigation”, and the immediate resignation of the CEO, Markus Jooste. Steinhoff shares lost 80% of their value almost overnight, and as at July 2018 they’ve lost more than 90% of their value – a company worth €19 billion a year ago is now worth less than €1 billion.

As the investigation went on, Steinhoff announced that previous years’ annual reports and financials could no longer be relied on – the “irregularities” stretched back over a number of years. Markus Jooste seems to sit squarely at the centre of it all, probably with other accomplices, and the web of intrigue seems to stretch back at least to 2002.

“Related party transactions”, where Steinhoff bought or sold assets controlled by Jooste, often at values that had little to do with actual underlying value, were common. He seems to have started small, and ramped up in size and frequency as the years went on. According to Bloomberg, the problems were “concentrated in the central European business and resulted in an overstatement of assets, revenue, and profit figures, stretching back for years”. As one example, Steinhoff’s accounts valued their property portfolio at €2.2 billion, but a recent valuation by CBRE puts it at €1.1 billion instead.

Overall, Steinhoff has made asset writedowns of €12.4 billion so far, wiping out most of the company's equity as at July 2018. The company has still not released results for the 2017 financial year, audited or otherwise, and the results for previous years can no longer be trusted.

Steinhoff is a big, diversified, complicated business, and it’s pretty clear that some parts of it actually have value, and some of it doesn’t.

For example, Steinhoff International owns a €3 billion stake in JSX-listed retailer STAR Group, but Steinhoff itself is only valued at €1 billion. Similarly, most of the Asia Pacific businesses probably have value. That leaves the European business in negative value territory.

So what can we learn from this dramatic story?

1.  The idea of the charismatic retail CEO – which Markus Jooste certainly was – is no guarantee of success. Most con artists have a similar personality profile.

2.  Directors and executives have a responsibility to act in the duties of their company and to be transparent in their dealings. New Zealand does pretty well here, certainly compared to some other countries.

3.  Complex corporate structures, related parties and tax havens all make it hard to get a true picture of how a company is performing. Again, most New Zealand retailers have simple and transparent structures and governance.

4.  When a company makes an acquisition at an inflated price, it can lead to large losses down the track. The “goodwill” recognised in the accounts can be impaired very quickly. We’ve seen this in a number of NZ businesses, with Veritas being one example. Cashflow is king, profit is almost as important, and businesses need to be valued based on whether they can deliver those things into the future. 

Paper Plus Concept Store

Paper Plus Concept Store

Paper Plus recently opened a concept store in Christchurch, designed by RCG. The store features multiple ‘experiential zones’, including spaces to personalise products and test the latest range of stationery, games and toys. It also includes a community calendar to show local events, and a mini-library where customers can exchange books with other community members.

Sam Shosanya, Paper Plus Group CEO, said the project is their way to innovate and sharpen their focus on the unique selling points which distinguish on-premise shopping from online stores.

“This is an exciting time to be in bricks and mortar retail,” Shosanya said. “The game is changing, and Paper Plus is evolving to deliver experiences which customers find welcoming and which encourage them to spend more time in- store.”

The Paper Plus Group has 115 stores nationwide. With help from RCG, Paper Plus have created a ‘kit of parts’ for store redesigns, allowing store owners to cost-effectively convert their spaces into customised concept stores.

In the Press

Local Media highlights from the past week...

 

Auckland's built heritage: campaigner slams 'facadism', council defends development

An Auckland heritage building consultant says the city is fast losing much of its history because only the outside of many structures is being retained but the council has defended its position on developments.

Allan Matson said it was wrong that a new spate of "facadism" had emerged this month with plans to demolish all but the facade of the Arthur Yates Building at 13 Albert St and everything except the outside of the Macdonald Halligan Motors building at 51 Albert St.

(Source: NZ Herald)

 

US$300m internet cable linking Northland to the world is open

A 15,000km long fibre optic cable that landed at Mangawhai Heads in February is open for business, vastly improving the region's and country's digital capacity.

The Hawaiki Cable, which links New Zealand from Mangawhai, Northland, to Australia, the Pacific and United States, began operating on Friday.

(Source; NZ Herald)

 

Three quarters of the people who have applied for a KiwiBuild home are from Auckland

Three-quarters of all people who have registered interest in a KiwiBuild home come from Auckland, according to new figures from the Ministry of Business, Innovation and Employment (MBIE).

As of Tuesday, 35,500 Kiwis have registered their interest for a KiwiBuild home with close to 23,000 being from Auckland.

(Source: Interest)

 

How accessible will the new Kiwibuild homes be?

A disability advocate is urging the government to make accessibility a central part of the Kiwibuild programme. Alex Braae reports. 

The government’s flagship Kiwibuild policy has always intended to lead the way on housing, in the creation of good quality, affordable homes that first home buyers can spend years or even decades in. But advocates are concerned that the policy will leave the disabled community behind.

(Source: SpinOff)

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