Companies & Markets

Penny Stock

Ikea rival Steinhoff is falling apart

Tearing up and starting from the beginning. A showroom of Steinhoff. Source: Bloomberg [M]

Source: Bloomberg [M]

From penny stock to blue-chip to penny stock? That seems to be the trajectory of the world’s second-largest furniture group, Steinhoff. Shares in the notoriously opaque German-South African company have gone into a free fall after it announced that new accounting irregularities had come to light, in effect warning investors not to trust its results or its shares.

Yes, that is literally what the company said: “Shareholders and other investors in Steinhoff are advised to exercise caution when dealing in the securities of the group,” read a statement late Tuesday night, following a long board meeting at its headquarters in Stellenbosch, around an hour’s drive from Cape Town. In an update Wednesday, it said that nearly one-fifth of its total €32 billion ($37.7 billion) in assets are now under suspicion. Chief Executive Markus Jooste resigned and handed the reins to Christo Wiese, who was already Steinhoff’s chairman, largest shareholder and one of South Africa’s richest men.

It was the culmination of drama that is fast turning into a full-blown accounting scandal at Steinhoff, a behemoth that employs 130,000 people and has expanded over the past few years into dozens of subsidiaries in 32 countries. And it’s a case that serves to prove, yet again, that no investment is without risk.

Last year, Steinhoff shares were trading at more than €6, giving the group a market value of €24 billion and putting it in line for inclusion in the hallowed DAX index of 30 leading German stocks. Now it’s a penny stock, trading at 78 cents around midday Thursday. Liquidity has also become an issue: Wednesday night Steinhoff said it would sell some nonessential subsidiaries outside of South Africa to raise about €1 billion in funds.

Rumors of irregularities at the company, regarded as Ikea’s biggest rival, have been circulating for years. In December 2015, the company’s listing on the Frankfurt stock exchange was overshadowed by reports that prosecutors had launched a probe, with investigators swooping into the company’s offices in the northern town of Westerstede and confiscating boxes of files.

Just last month, Mr. Jooste told Handelsblatt in a rare interview that external auditors and lawyers had conducted extensive checks and concluded that everything was in order. But late on Tuesday, Steinhoff said “new information has come to light” regarding accounting irregularities. The supervisory board has approached auditing group PWC to perform a new, independent investigation. Annual results, due to have been published on Wednesday, have been delayed, and the results from previous years may have to be recalculated, too.

The state prosecutor’s office in the northern German city of Oldenburg is now investigating suspected “incorrect accounts” that may have overstated the value of the company. Documents seen by Handelsblatt show that Mr. Jooste and three other managers are being targeted. Prosecutors are also investigating a complaint over alleged document forgery, related to a long-simmering dispute with Andreas Seifert, the co-founder and manager of Austrian furniture chain XXXLutz. Mr. Seifert has separately asked a Dutch court to order an investigation into Steinhoff International’s annual accounts, in a dispute over joint venture arrangements between the two companies concerning the retail chains Conforama and Poco. Steinhoff has denied these allegations.

It appears as if Steinhoff did not have a cohesive global strategy.

Erika Sirimanne
Euromonitor International

Steinhoff had long been a rather sleepy company after its founding in Germany in 1964. Mr. Jooste, who studied accounting at Stellenbosch University, was the brains behind the company’s sudden boost. “We’re planting trees now and will reap the harvest in 30 years,” he told Handelsblatt in November, referring to the slew of acquisitions Steinhoff had made over the last decade.

This rapid, acquisition-led growth seemed to be based on solid foundations. Since 2011, operating profit before interest and tax has risen from €530 million to €1.5 billion, and the return on sales stood at a respectable 11 percent — according to figures that have now been called into question. The group generated revenue totaling €15 billion in the first three quarters of this year. Its empire includes German brand Poco, Austrian furniture chain Kika/Leiner and French firm Conforama. Last year it bought US mattress maker Mattress Firm for $3.4 billion, securing 25 percent of the US market in one go.

But analysts have long complained that the structure of the Steinhoff group is too opaque and complex, consisting of dozens of firms and a holding company located in Amsterdam for tax reasons. Erika Sirimanne, an analyst with Euromonitor International, in a research note suggested that this complexity left the company open to mismanagement. “It appears as if Steinhoff did not have a cohesive global strategy,” she said. “This begs the question whether management expertise was spread too thin.”

Steinhoff's interim CEO is Christo Wiese, who was already the chairman, largest shareholder and one of South Africa’s richest men. Source: Reuters

Source: Reuters

Despite the turmoil, a few brave investors continue to have faith in Steinhoff. “I doubt Steinhoff will collapse,” one Johannesburg-based fund manager told the financial news agency Bloomberg. “I would much rather take a chance and buy Steinhoff than Bitcoin.” But recovery will be a tall order indeed. Some analysts charge that Mr. Wiese, Steinhoff’s interim CEO, is part of the same intransparent system that has gotten the company into trouble.

Mr. Wiese, who has an estimated wealth of €5.7 billion, made international headlines in 2009 when British authorities confiscated $1.1 million in cash he was carrying with him on a flight to Luxembourg. There was speculation about a possible money laundering scandal, but he defended himself with the confidence of a billionaire. “That’s just peanuts to me,” he said. That didn’t stop him suing the authorities to recoup the money — plus interest.

Gertrud Hussla covers primarily financial topics and pensions for Handelsblatt out of Düsseldorf. Christopher Cermak and David Crossland contributed and adapted this story for Handelsblatt Global. To contact the author: hussla@handelsblatt.com