The rise and fall of Steinhoff

Showmax has launched Steinheist, a documentary delving into the biggest corporate scandal in South African history and the man behind it – Markus Jooste.

The documentary has raised interest in Steinhoff, its former CEO Markus Jooste, and the corporate scandal which cost investors billions.

Here is a look at the company’s rise, share price growth, and rapid decline following the discovery of accounting irregularities.

Steinhoff was founded in 1964 by Bruno Steinhoff. Its core operation was to acquire furniture from Eastern Europe and sell it at a premium in Western Europe.

The company enjoyed success using this strategy, which remained fundamental to its future operations.

This strategy also led to Steinhoff acquiring 35% of the South African-based furniture company Gommagomma in 1997.

Steinhoff and Gommagomma merged in 1998, after which Steinhoff’s headquarters was moved to South Africa, taking full advantage of the country’s low production costs.

Following the merger, Steinhoff went on an aggressive acquisition spree to rapidly increase its footprint.

Significant acquisitions include a 92.34% stake in Pepkor for R62.8 billion and an 87.21% shareholding in JD Group following a series of share purchases.

Steinhoff also acquired offshore companies, including US-based Mattress Firm and numerous European businesses.

The acquisitions had a significant impact on the company’s debt and became a concern to many investors.

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

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

Steinhoff hit its targets year after year, and the company showed exceptional results, which calmed fears about its debt.

Jooste convinced investors that Steinhoff was a winning bet, and its share price experienced incredible growth.

If you bought Steinhoff shares at the beginning of 2000 and held it until 2016 – at its peak – you would have achieved an annualised return of 18.85%.

The cracks started to show after German authorities raided Steinhoff’s offices in November 2015 related to a tax investigation prior to its listing on the Frankfurt Stock Exchange.

The stock price took a slight knock after the news but recovered into the 2016 calendar year.

However, in 2017 news broke of major accounting irregularities in Steinhoff’s financial statements. PwC revealed there was an overstatement of group sales of $7 billion.

The share price plummeted, falling from a peak of R95 per share to R1.26 per share.

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.

From 2019, Steinhoff’s total liabilities exceeded its total assets. It makes the company technically insolvent as it can’t cover its liabilities if it liquidates all of its assets.

In 2020, the company’s total interest-bearing debt exceeded its total assets, which signals a desperate debt situation.

However, Steinhoff has been on a debt restructuring programme which aided the group in lowering its total liabilities and debt in the 2021 financial year.

Unfortunately, due to the magnitude of debt, the main focus area in lowering the company’s debt has been to dispose of its subsidiaries and associates.

The Steinhoff empire had to be broken down to repay the debt.

Since 2018, Steinhoff has disclosed a list of discontinued operations, including various subsidiaries and associates held for sale or sold.

Most subsidiaries and associates were European-based. It resulted in a big revenue decrease, especially among its European operations.

Steinhoff’s European operations have become a less prominent contributor to total revenue, with South Africa becoming the group’s largest geographical contributor.

Steinhoff still has a significant debt burden, and its revenue has also suffered since the scandal was uncovered.

It has been able to lower its debt from 2020 to 2021, and its revenue has increased over the period.

It remains to be seen whether Steinhoff would be able to service its debt from its continued operations and if it would need to continue with its disposals.

If it continues to sell its assets, there may be little left of Steinhoff in years to come.