SA biggest corporate scandal fails to make it into Sunday papers

SA biggest corporate scandal fails to make it into Sunday papers
Published: 10 December 2017 (879 Views)
Amazing that the biggest corporate corruption scandal in the history of recorded South Africa crime, has not made it onto the front pages of the South African Sunday press.

Over the last few years there have been few stocks on the JSE that have divided opinion quite as much as Steinhoff. While there must always be buyers and sellers to make any market, attitudes towards the furniture retailer have been far more polarised than most.

There have always been those who argued that the business was simply too complex to properly understand, and what they did understand they didn't like. On the other end of the spectrum were people who believed strongly in Markus Jooste's deal-making abilities and that Steinhoff was a great company run by an outstanding management team.

It's a story not unlike what the market experienced with African Bank (Abil) only a few years ago. There were those who were convinced that the Abil business model was fatally flawed, and others who believed that Leon Kirkinis was a brilliant CEO who had the unsecured lending market at his feet.

‘The cash just isn't there'

Adrian Saville, the CEO of Cannon Asset Managers, has been, in both instances, in the former camp. He points out that the forensic tools that they use in their investment process had been raising flags over Steinhoff's numbers for some time. This, he says, is a clear parallel with African Bank, as in both cases it appears that "accounting trumped cash flows".

"There are two elements of Steinhoff that have stood out for a long time, and I don't think this is being expert after the fact," Saville says. "Each time they made an acquisition it tended to get bigger and bigger, which often is the nature of a type of sheltering where in order to hide historically rearranged financial furniture, you have to buy bigger and bigger rooms of furniture."

These big acquisitions, he argues camouflaged the shortcomings in the earlier transactions.

"But as the transactions got bigger, the return on invested capital fell increasingly below the cost of capital," Saville explains. "This meant that they were either borrowing money or issuing equity, and inevitably they've been a furious equity issuer to fund transactions that were not particularly good transactions."

This is where the second issue becomes apparent.

"If you can get past the fairly anaemic return on invested capital and satisfy yourself that the accounting number is what it is, it really becomes a glaring anomaly when you go look for the cash flow," says Saville. "The cash just isn't there."

He points out that this is not a new or even particularly uncommon view. Many people have been noting for years that there are these two problems with Steinhoff – that it is acquiring underperforming assets and that there is no cash flow from the business.

"It's not necessarily the case that if you are making bad acquisitions it's fraud, but it is often the case that once you have started to chase your tail the activity becomes increasingly furious," Saville argues. "And the activity they have undertaken has been absolutely frenetic. We had no exposure to Steinhoff in our active mandates for the simple reason that we didn't believe the numbers. And we weren't alone in that observation."

South Africa's Enron

Steinhoff is, however, far bigger than African Bank ever was. Until this week it was one of the top 10 shares in the FTSE/JSE All Share SWIX Index.

This has caused some commentators to compare it to Enron, the US energy company that collapsed into bankruptcy at the start of this century. At it's peak, its stock traded at over $90 per share, and it was a Wall Street darling.

At this point, it might be premature to predict that Steinhoff's current troubles must doom the company to total collapse, but there are striking similarities with what happened at Enron. In both cases the issue is questionable accounting involving off-balance sheet transactions and inflated revenues that made the business appear far more attractive to the market than it actually was.

Where to now?

Steinhoff won't necessarily go the same way as Enron, but if it is to survive things are going to have to change radically.

"I think it's clear that this is a business in deep distress," says Saville. "There are at least three or four issues that have to be worked through."

The first is getting clarity on the real earnings in the business, which has both income statement and balance sheet implications.

"For the income statement, whatever you've been looking at for the last few years is simply the stuff of financial manufacturing," says Saville. "It's going to have to be restated. That will transfer into the balance sheet. They also have to bring the off balance sheet stuff onto the balance sheet."

He adds that there is now no chance of recapitalising the business at its historical multiples. Any recapitalisation will almost certainly require new investors and therefore necessitate a change of ownership.

"The other element is that there are clearly criminal and civil legal actions that could be brought," Saville concludes. "Steinhoff has issued a whole lot of equity on the back of numbers that are manufactured. The board would have been aware of these structures and they were issuing equity and raising debt on the back of numbers that were simply not true. And that's criminal."

- online

Tags: Scandal, Pages, SA,
 0

You May Like These Videos

Comments

There are no comments.

Latest stories

Lupane hospital turns to crowd-funding

by Staff reporter | 22 September 2018 | 24 Views

Cheating exposes affair with minor

by Staff reporter | 22 September 2018 | 36 Views

Married women are jealous of Bev

by Staff reporter | 22 September 2018 | 33 Views

One more arrested over Aug 1 violence

by Staff reporter | 22 September 2018 | 33 Views

Mnangagwa and Chamisa MPs fume over deferred vehicles

by Staff reporter | 22 September 2018 | 34 Views

Mugabe's party has not disbanded

by Staff reporter | 22 September 2018 | 20 Views

Kombi accident death toll rises to 6

by Staff reporter | 22 September 2018 | 25 Views

Mthuli Ncube hints on currency reforms

by Staff reporter | 22 September 2018 | 28 Views

Church slams Zimbabwe gay teacher

by Staff reporter | 22 September 2018 | 27 Views

Dembare reach second round as FC Platinum, Ngezi bow out

by Staff reporter | 22 September 2018 | 24 Views

Man loses 'Toyota Raum' to robbers

by Simbarashe Sithole | 21 September 2018 | 234 Views

International media stampede to interview Mnangagwa

by Staff Reporter | 21 September 2018 | 304 Views

Brutalising vendors must stop

by Jacob Mafume, MDC National Spokesperson | 21 September 2018 | 222 Views

I doubt if Dabengwa really endorsed Mnangagwa - Mthwakazi activist

by Stephen Jakes | 21 September 2018 | 203 Views

Marc Cayeux gives everyone hope after top ten finish in Cape Town

by Agencies | 21 September 2018 | 124 Views

President Mnangagwa debuts at UNGA

by Bevan Musoko | 21 September 2018 | 182 Views

BREAKING: Harare - Johannesburg Intercape bus in accident, 10 people dead

by Staff reporter | 21 September 2018 | 343 Views

Stop unnecessary traveling to cholera affected areas - MIHR

by Stephen Jakes | 21 September 2018 | 136 Views

We need Mthwakazi restoration soon

by Stephen Jakes | 21 September 2018 | 133 Views

Rural development agenda should be on the priority list

by Stephen Jakes | 21 September 2018 | 127 Views

IMF offers to help Zimbabwe clear arrears

by Staff reporter | 21 September 2018 | 249 Views

Mugabe's party rejoins Mnangagwa's Zanu-PF

by Staff reporter | 21 September 2018 | 255 Views

Streak seeks ZC liquidation

by Staff reporter | 21 September 2018 | 161 Views

'Chamisa must not waste time fighting Mnangagwa'

by Staff reporter | 21 September 2018 | 272 Views

Chipanga appeal thrown out

by Staff reporter | 21 September 2018 | 192 Views

New minister cracks the whip

by Staff reporter | 21 September 2018 | 197 Views

Deal decisively with Parly delinquents

by Zvamaida Murwira | 21 September 2018 | 160 Views

Mthuli Ncube faces tough choices

by Lovemore Chikova | 21 September 2018 | 185 Views

Currency reform answer to Zimbabwe's economic woes

by Bongani Ngwenya | 21 September 2018 | 167 Views

Dabengwa ditches Chamisa, endorses Mnangagwa?

by Staff reporter | 21 September 2018 | 174 Views

Sibusiso Moyo alive & well

by Staff reporter | 21 September 2018 | 156 Views

'Mugabe University not a priority'

by Staff reporter | 21 September 2018 | 146 Views

Chamisa battles open rebellion

by Staff reporter | 21 September 2018 | 170 Views

Prophet up for pregnant woman rape

by Staff reporter | 21 September 2018 | 104 Views

Bulawayo pins hopes on devolution

by Staff reporter | 21 September 2018 | 98 Views

Nust shut down

by Staff reporter | 21 September 2018 | 159 Views

Zimbabweans want US or Zim dollar only, not SA Rand

by Staff reporter | 21 September 2018 | 154 Views

Chamisa's MDC Alliance starts merging into single party

by Staff reporter | 21 September 2018 | 103 Views