Executive Insights

9 things you should know about Steinhoff’s appearance in Parliament – and why its shares surged 25%

Business Insider SA

Former Steinhoff CFO Ben La Grange and chairperson Heather Sonn appeared in front of four parliamentary committees at a joint hearing on Wednesday to report on efforts made to stabilise the multinational. 

The pair appeared in front of the portfolio committee on trade and industry, the standing committee on finance, the standing committee on public accounts and the portfolio committee on public service and administration, alongside representatives of the JSE, the Financial Sector Conduct Authority (FSCA), and the Companies and Intellectual Property Commission (CPIC).

Steinhoff share price rose from R2.22 to R3.00 during the course of hearings, closing at R2.75 on Wednesday afternoon - an increase of not much under 25%.

The jump in Steinhoff's share price during parliamentary hearings (screenshot)

Petri Redelinghuys, founder of Herenya Capital Advisors, said the share price increased shortly after 15:00 when Steinhoff commercial director Louis du Preez said European debtors had barred the company from selling assets below market value.

“There is perhaps a belief that even if Steinhoff is broken up, its assets are still worth more than its current market value,” Redelinghuys told Business Insider South Africa.

“Remember Steinhoff has massive assets, not only properties, but businesses all over the world which generate huge amounts of revenue.” 

“Clearly some people have done a few calculations in the background and found that Steinhoff is currently undervalued and decided to buy shares after [Du Preez’s] commitment that assets won’t be sold for less.”

Here are 9 other things you should know about Steinhoff’s appearance in Parliament 

1) Steinhoff’s report was “wishy-washy". 

Despite an earlier assurance from a parliamentary advocate that evidence presented in Parliament will not prejudice any criminal proceedings, chairperson Sonn refused to name the individuals which internal investigations found culpable for accounting irregularities.

She explained that she was to answer questions without jeopardising any criminal proceedings that might follow.

“So please don’t see what I am doing here as an attempt to try and withhold anything,” Sonn said. 

But MP’s said she is treating the hearing as a “PR exercise”. 

“You're not helping and we're worried. You must give us legal arguments for why you won't answer specific questions. You must give us legal arguments why you [can’t] give us names,” combative finance committee chairperson Yunus Carrim told Sonn. 

2) “Threats of [an] imminent collapse of Steinhoff have effectively been averted”. 

Sonn confirmed that an agreement has been reached with Steinhoff’s creditors covering the next three years, ensuring the short-term survival of the corporation. She added that most of the 120,000 employees – down from 130,000 following the disposal of some subsidiaries – are secure in their jobs. She said of Steinhoff’s total employees, 50,000 are in South Africa, and those jobs are not under threat.

3) The former Steinhoff CFO believes he didn’t “deliberately” do anything wrong.

Before outlining the process Steinhoff took to finalise annual statements, CFO La Grange said: “I do not think I did anything deliberately wrong.”

The man who signed off on Steinhoff’s annual statements for four years, said the group previously never re-audited numbers. Instead, the group relied on the various institutions, entities, and individuals under the group to provide it with accurate numbers. Steinhoff was ultimately just responsible for the consolidation of the statements, he said. 

If anything suspicious was picked up, enquiries would be made, edited and resubmitted for the audit process to start again.

La Grange said he only became aware of any wrongdoing days before the crisis erupted, when former CEO Markus Jooste failed to arrive for a meeting. 

4) La Grange feared angry investors would "hit" him.

La Grange said he stepped down as Steinhoff CFO at the beginning of the year to allow the new board to negotiate with investors and lenders for the sake of appearances. But admitted that he experienced immense backlash from members of the public. 

“People were so angry at Steinhoff — if they were to see my face they would want to hit it,” he told MPs. 

La Grange, who remained an advisor for Steinhoff following his resignation, was recently suspended, possibly due to questions over an invoice he sent to the company.

5) Steinhoff made three mistakes which led to its collapse.

La Grange said Steinhoff’s accounting irregularities took place in three ways.

“First of all,” La Grange said, “there were inflated profits.” He said the main source of inflated profits was from an external buying group’s contribution. 

The buying group would combine the volumes of products purchased by different brands and negotiate with suppliers to give additional rebates to the group, which were reflected as profits on the income statement. 

“But the buying group seems to be non-existent and funded with loans from Steinhoff.”

Essentially, Steinhoff paid loans to the buying group, the buying group paid profits to Steinhoff, which is why a profit was reflected in the income statement and a loan was reflected in the balance sheet, La Grange explained. He added that it took PwC eight months to determine this.

Secondly, Steinhoff’s transactions regarding its assets which were acquired at inflated values.

Finally, there were a number of transactions which were influenced by former CEO Markus Jooste.

Another issue was that Steinhoff did not have a single set of auditors for the group, La Grange said. 

For example, there were inflated values of the cash and cash equivalents. Steinhoff Europe had loans receivable backed by warranties, which were reflected as cash and cash equivalents. Le Grange said what should have happened when numbers were consolidated at group level is that the figure should not have been reflected as cash and cash equivalents.

“Having a single set of auditors would have decreased the risk of what happened at Steinhoff.”

6) It is unlikely that Steinhoff’s share price will recover fully.

La Grange, who was praised by the portfolio committee for the frank manner in which he answered questions, said he does not believe Steinhoff’s share price will recover, which means the state’s Public Investment Corporation - one of Steinhoff’s largest shareholders - will not recover its losses.

“Pension funds have lost money up to the share price today,” La Grange said. He also spoke on the group’s financial situation and said that the group may have to restructure its debt once more because the debt needs to be repaid.

“The debt is still there,” he said. “The losses to pension funds are permanent losses, they’re not temporary.”

7) Overstatements of Steinhoff profits happened over years.

"This practice [to overstate profits] commenced a number of years back," La Grange told MPs. No person, auditor, or analyst could pick up any substantial growth simply by looking at the numbers as the increases are incremental over years, he said. 

"It started so long ago, each year it increased a little bit. It's not just a huge jump in profits." 

La Grange, who as CFO got the consolidated information, would only compare reports to previous years - which is why he unable to see a huge jump in profits.

8) The JSE believes Steinhoff has already been punished harshly.

JSE CEO Nicky Newton-King said the R1-million which Steinhoff was fined for not revealing its downgrade by Moody’s Investors Service is a harsh punishment. Especially since the people being punished are the people trying to save the company, and not the people who caused the crisis,  Newton-King said.

9) Four people are being investigated for accounting fraud at Steinhoff.

Solly Keetse, from the Financial Sector Conduct Authority directorate for market abuse, said they are investigating four people for possible criminal prosecution. 

The Companies and Intellectual Property Commission’s Asogaren Chetty reaffirmed that, according to information they’ve received, four people were involved in the forging of profit numbers.

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