Steinhoff’s incredible selling spree

Steinhoff has sold many companies it owned to manage its short-term liquidity and repay its colossal debts.

Steinhoff used to be a top-performing share on the JSE, with former CEO Markus Jooste hailed as a businessman extraordinaire for hitting one financial target after the next.

However, the Steinhoff furniture empire crashed in 2017 after news of major accounting irregularities in the company’s financial statements.

PwC revealed an overstatement of group sales of $7 billion, which caused the share price to plummet.

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

To manage its short-term liquidity, repay its colossal debts, and fund its operations, Steinhoff was forced to dispose of numerous subsidiaries.

Steinhoff refers to these subsidiaries as non-core assets or those that require significant cash commitments.

Since 2017, the company has been successful in improving its liquidity. The below chart depicts three liquidity ratios of Steinhoff from 2017.

• The current ratio is the total current assets divided by the total current liabilities. If the ratio is greater than one, the company can cover all short-term liabilities with its short-term assets.

• The quick ratio measures liquidity. However, it excludes inventory from the current asset term and is a more conservative liquidity measure as inventories are generally viewed as illiquid.

• The cash ratio is the most conservative liquidity measure and only considers cash and marketable securities’ ability to cover short-term liabilities.

From the chart, it is apparent that Steinhoff improved its liquidity levels substantially. It is a good sign to creditors as it shows Steinhoff’s ability to service its short-term debt is improving.

However, it doesn’t mean that Steinhoff has been making enough money from its operating activities to increase its liquidity.

Since 2017, Steinhoff has provided a list of companies it has disposed of or classified as held for sale that would not be included in its continuing operations.

The cash generated from the disposal of many investment assets was the main reason for the increased liquidity.

The list below shows the companies Steinhoff disposed of or classified as held for sale:

• Kika-Leiner OpCos – An Austrian furniture retailer that was loss-making at the time of disposal.

• POCO – A furniture group part of Steinhoff’s European retail management segment.

• Extreme Digital – An online retailer in Hungary.

• Impuls – A German manufacturer of assembled kitchens.

• Puris – A manufacturer of bathroom furniture. 

• Steinpol – A Polish upholstery manufacturer.

• E-llis – A European logistics services company.

• Mattress Firm – US-based mattress company.

• Unitrans – A supply chain solutions company.

• Kika Leiner PropCos – An Austrian and Central European properties portfolio.

• Hemisphere – A European office, retail, and warehouse space properties portfolio.

• Abra – A Polish network of furniture stores.

• Blue Group – A UK-based household goods company.

• Pritex – A UK-based acoustic and thermal acoustic insulation company

• Sherwood Bedding – A US bedding producer.

• Conforama France, Switzerland, Iberia, Italy, and Balkans – A furnishings retail chain company.

• The Building Company – Building material division of Pepkor.

• Greenlit Brands – Manufacturer and retailer of household goods throughout New Zealand and Australia and Asia

• LIPO – A Swiss furniture store

• Properties Africa – Disposal of the remaining African property portfolio.

Disposing of its assets allowed Steinhoff to better control its debt levels. However, it came at the cost of decreasing the company’s footprint and revenue.

As Steinhoff’s subsidiaries decreased, its ability to generate revenue also decreased.

Steinhoff sold so many companies that the revenue from one year to the next changed dramatically.

In accounting terms, it means Steinhoff had to restate all revenue figures for the prior years in each annual statement.

The revenue restatement is needed to show the previous year’s revenue without all the companies it sold and is no longer part of its operations.

By comparing the original revenue figure with the restated revenue figure, investors can determine what impact the asset disposals had on Steinhoff’s revenue.

The chart below shows the difference between the original revenue to the restated revenue. In 2017, for example, the difference was 6.4 billion Euros.

The last word

Steinhoff’s asset disposal plan may continue, but it is uncertain to what lengths the company would need to go to pay off its debts.

What is clear from the company’s financial reports is that the disposals have significantly impacted the company’s revenue-generating capacity.

Steinhoff’s revenue is disappearing along with the companies it is selling.