Prosecutors probe for ‘inflated revenue’ at deal-hungry Steinhoff
Shares plunge as chief executive resigns and results are delayed
German prosecutors say they are investigating whether Steinhoff International inflated its revenue and book value, one day after the global home retailer announced that its longtime chief executive had quit.
Shares in the South African-headquartered, Frankfurt-listed company plunged more than 60 per cent on Wednesday to €1.10 after it delayed its financial results and disclosed it had hired PwC to probe “accounting irregularities”.
The immediate departure of Markus Jooste, who has led the company since 2000, comes after he used a string of acquisitions to build the group into an international powerhouse with 40 brands in 30 countries.
Steinhoff’s board said on Wednesday evening that it was giving “further consideration to the ... validity and recoverability” of €6bn worth of the company’s non-South African assets, and expected to unlock about €3bn in liquidity through asset sales and a refinancing of a South African subsidiary.
Chairman Christo Wiese, one of South Africa’s richest men, took over as interim executive chairman on Wednesday. Ben La Grange remains as chief financial officer; Steinhoff said there was “no evidence to suggest that [he] had any involvement in the matters under investigation”.
Prosecutors in the federal state of Lower Saxony, home of the Steinhoff Europe subsidiary, said on Wednesday: “The suspicion is that inflated revenue numbers made their way into the accounts. This may have led to an inflated book value of the group.”
The investigators are probing whether Steinhoff flattered its numbers by selling intangible assets and partnership shares without disclosing that it had close connections to the buyers. The suspicious sales were in “three-digit million” euros territory each, according to the prosecutors.
“Given the scale of the investigation, its end is not yet in sight,” the office said.
Last year, Steinhoff absorbed the US’s Mattress Firm and Britain’s Poundland in deals that were collectively worth more than £3bn, but early this year it had to call off efforts to merge with South African grocer Shoprite.
The departure of Mr Jooste, who trained as an accountant, comes four months after the prosecutor’s office publicly confirmed it was investigating four current and former Steinhoff executives on suspicion of giving incorrect representations in accounts.
On Tuesday night Steinhoff announced it was hiring PwC and delaying the release of its financial statements until “it is in a position to do so”. It also raised the possibility that it might have to restate financial statements from past years.
Markit, the data provider, said 40 per cent of Steinhoff’s Johannesburg-listed shares were out on loan before Tuesday’s announcement, indicating that a large number of investors were short selling the stock — in effect betting the price will fall. More than a quarter of Steinhoff’s Frankfurt-listed shares were also out on loan, Markit said.
Mr Wiese has been a major shareholder in Steinhoff since 2014, when the German company bought his Pepkor Group clothing chain in a deal that saw the larger company diversify away from its core business of selling discount furniture in Europe.
Last year the billionaire’s family investment vehicle borrowed €1.6bn from banks in order to buy 314m shares in a capital raising by Steinhoff to refinance loans that funded its acquisitions of Poundland and Mattress Firm. The vehicle pledged 628m shares, or 15 per cent of Steinhoff’s share capital at the time, as collateral for the loan, according to a regulatory filing.
Steinhoff said that Pieter Erasmus, former chief executive of Pepkor, would join Mr Wiese to help manage Steinhoff’s global retail interests.
Its board said it wished “to reassure shareholders that Steinhoff has a number of high quality profitable businesses around the world”. It also advised investors “to exercise caution” when dealing in its securities.
The IRBA, the South African accounting regulator, said it was “watching” the developments at Steinhoff closely but that it would be “premature to get involved” at this stage. The body can only investigate an audit firm — not a company — and only gets involved if there is evidence that misconduct by that firm has taken place.
Deloitte was appointed external auditor in 2015 and audited its accounts in 2015 and 2016, according to Steinhoff’s annual reports. It declined to comment citing client confidentiality obligations.
However, the auditor stated in the company’s 2016 report: “Our audit has been performed with a high, but not absolute, level of assurance, which means we may not have detected all errors and fraud.”
Mr Jooste could not be reached for comment.