Wanted: bolshie undertaker to clean up Steinhoff mess

Steinhoff is shaping up to be an ideal target for a private equity takeout. The company is on its knees, severely damaged by scandal, and available at a steep discount to its admittedly shaky book value.
A bolshie private equity firm could move on the company with a strategy of realising value out of its vast portfolio of operating assets while injecting the liquidity the company needs to keep the doors open.
On Friday last week Steinhoff finally shed some light on how bad its accounting mess is. The main headline is that the company has taken a €10.9-billion (R176-billion) hit to its book value from writing off the value of assets and restating previous earnings. But even after that write-off, the company has an equity value of €3.8-billion. It is now trading in Frankfurt at a total market capitalisation of €352-million.
If management has got its write-offs even vaguely right – and for now they are just best guesses – then there is a large potential profit to be made by taking over the company and working to realise the value of assets.After Steinhoff’s announcement on Friday, the share price leapt up 6.6%, reflecting some recognition that Steinhoff might not be completely dead, although it is still 98% down from its value before the accounting scandal emerged last December.
There are plenty of private equity players that specialise in distressed companies. The appetite for such a deal may be helped by the fact that there is a shortage of alternative distressed deals on offer.
The fairly strong recent performance of US and European economies means the normal pipeline of companies that find themselves unable to pay their bills has become quite barren.
Companies like Apollo Global Management, Cerberus Capital Management, Centerbridge Partners or Loan Star Funds, all with plenty of experience in distressed situations, could be interested in Steinhoff. And, crucial for anyone taking on the Steinhoff challenge, they have much experience in European distressed debt as well as distressed equity.Steinhoff is in urgent talks with creditors about €9.4-billion worth of debt. According to Bloomberg, the company is trying to negotiate a debt standstill and suspension of interest for two years.
Steinhoff has already been shedding assets in a desperate effort to raise cash to keep financing its business and settle debt. It flogged its Gulfstream jet for $15.5-million, having bought it just a year earlier for $21-million. It also sold PSG shares to realise R12.4-billion after costs, KAP shares to realise R3.7-billion, Steinhoff Africa Retail (STAR) shares to realise R3.75-billion, pref shares in Atterbury Europe for €223.5-million, and has a provisional deal in place to sell Kika-Leiner for €490-million.
Not all of those were sold at a loss to carrying value, though Steinhoff would have started with the most liquid and valuable assets in its efforts to raise cash.
Profit plunge
Even after getting a clear picture of the accounts of the group, any potential buyer would have two main things to worry about: the fundamental operating potential of the businesses, and the liabilities it could face from creditors and others who are suing.
One of those is former chairman Christo Wiese’s R59-billion claim against the group. Given that Wiese had his hand on the tiller when accounting shenanigans were rife, you’d think he’d have little chance. Other shareholders, who could more clearly argue they were taken for a ride when convinced to invest, may have more grounds. It could also have tax liabilities from previous dodgy deals.The operating performance of the business is also concerning. Almost all the group’s operations saw a decline in operating profits in the past six months. Worst is the US business, which increased its losses from €33-million to €94-million. Overall, for the six months to end-March, the operating loss was €381-million compared with a restated loss of €168-million for the comparable period the year before.In part the performance was weak because of the major issues facing the group – understandably, customers weren’t comfortable putting down a deposit to buy a lounge suite when they weren’t confident Steinhoff could ever deliver it.
The operating businesses were also starved of liquidity, with suppliers not happy to take any credit risk in supplying goods to the business. A private equity buyer able to support Steinhoff’s balance sheet could quickly cure those headaches.It would certainly be a high-risk strategy. The numbers remain uncertain – a PriceWaterhouseCoopers investigation is still under way into all of the off-balance-sheet and related party deals that were used to hide losses and liabilities over the years. A review is ongoing of the values of all the group’s property assets, which could also have been inflated.We still don’t know whether the skeletons have been fully outed from closets created by previous management. And the litigation risk remains high. But the value that distressed private equity – often disparaged as vulture funds – adds is to bring the skills to take on very complex and risky messes in order to sort them out. The profits could be in the order of billions.
They are the undertakers of capitalism, and Steinhoff is sorely in need of one.