Jean Pierre Verster said Steinhoff’s tax structuring, a disagreement with a business partner, and a criminal investigation by the German tax office raised concerns about the company’s prospects.
Verster is the founder and CEO of Protea Capital Management and a former Fairtree portfolio manager who predicted Steinhoff’s collapse and made money for his clients by shorting the share.
He was one of only a few analysts and fund managers who said something was amiss at Steinhoff when others praised the company and advised clients to invest.
Former Steinhoff chairman Christo Wiese, who lost billions because of the Steinhoff collapse, revealed that he was warned about financial issues by financial analyst Craig Butters.
Butters, a former investment manager at Prudential Portfolio Managers, said there were numerous issues around Steinhoff, including red flags and key financial operating concerns.
Butters told Wiese about his concerns about Steinhoff, including that 41% of the company’s profits came from fair value adjustments instead of operations.
Wiese said he respected Butters and was grateful for his views but was not convinced Steinhoff was in trouble.
“After the meeting, I read ten other analyst reports, which gave a completely different view,” Wiese said.
Most analysts continued to back Steinhoff, and the share price continued to rise.
The reason why it was so challenging to see problems at Steinhoff was that you had to combine numerous issues and look past the prevailing narrative.
For example, Steinhoff made many acquisitions, making it difficult to track its financial performance and growth. It typically provided proforma numbers, which are prone to significant adjustments.
It was also challenging to track the debt of the company. Steinhoff’s gross debt was R100 billion, and it was unclear how well it could service this debt through its operations.
Like Butters, Verster saw the problems with Steinhoff and shorted the stock. He explained what convinced him to bet against the company when most others were investing in it.
Verster said there has always been speculation of accounting issues related to Steinhoff’s tax and the company’s aggressive tax structuring.
Before its listing on the Frankfurt Stock Exchange, Steinhoff said one of the biggest risks it faces is tax-related.
The company also mentioned a disagreement with its former business partner, Andreas Seifert, on purchasing French furniture company Conforama.
There was uncertainty about whether Conforama should be consolidated into Steinhoff’s financial statements.
He added that when Steinhoff acquired Conforama, it did not disclose that it had a joint-venture partner.
As part of the deal, there was a contingent liability in terms of needing to either give half of Conforama to the partner or pay it to take full control.
The transaction was always just disclosed as a simple takeover of Conforama. However, the subsequent disclosures showed it was not the case.
There was also a disagreement regarding the German furniture discount chain Poco, which Seifert said related to Steinhoff not competing in Poco territories.
The final red flag was the criminal investigation by the German tax office into Steinhoff’s affairs.
The investigation related to brand royalties, where Steinhoff sold brands to companies in Switzerland and paid royalties to those companies.
In a few cases, Steinhoff bought those companies back, which made them owners of the brand again.
However, they paid low taxes by deducting the royalties in high-tax jurisdictions and only paying tax in a low-tax Swizz jurisdiction.
“Any good analyst who did their homework would have found information which would have made them nervous,” he said.
“If you plugged this information into your model and did an evaluation of Steinhoff, some analysts thought there was scope to short the share,” he said.