Steinhoff Holding (WKN:A14XB9) shares, which have long been completely neglected compared to the size of the company, are currently being traded more eagerly than the most popular DAX stocks. It's down to the wire. Pessimists paint an end with horrors on the wall and optimists expect the end of horrors soon enough.
After reviewing Tuesday's bank presentation and the latest financial reports, I now have a picture of the situation. In my opinion, there are two main scenarios to reckon with.
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The most important facts about the current situation
Steinhoff consists of two large arms, the South African and the Austrian-based European, which also has the Australia and New Zealand business attached, in addition to the U.S. acquisition Mattress Firm.
The shock news on St. Nicholas Day was followed on 14. December the already feared confirmation that the 2016 numbers need to be corrected. On 19. December was followed by the announced meeting with the banks to discuss the way forward. For this, the management prepared a presentation that gives a little more insight into the situation, although much remains in the dark.
Independent auditors from PwC are now continuing to investigate what exactly went wrong, while at the same time expensive consultants from AlixPartners, Moelis and Linklaters are getting the holding company's and subsidiaries' financials operationally and legally in order. While forensic analysis is ongoing, management may not provide further information on the extent of the accounting irregularities. Still, there are some clues that help us understand the situation better.
What can be inferred from this
I find it interesting, for example, that the chairman of the supervisory board and former major shareholder Christo Wiese and the CEO Markus Jooste had to step down, but the CFO Ben La Grange, who is actually responsible for accounting, is allowed to keep his post. The big man in the background, Bruno Steinhoff, also remains a member of the Supervisory Board.
To me, this suggests that they have been playing a pretty dirty game on their own account. In that case, they not only deceived their fellow board members, but above all their backers, i.e. in particular shareholders, bondholders and banks.
Some of those responsible at the banks involved now seem to be personally offended. Perhaps it was a matter of an important promise that was based on completely false facts. This is not to be trifled with, as was the slogan of Deutsche Bank (WKN:514000) in better times? Right: "Trust is the beginning of everything".
Consequently, the ripcord was pulled, promised credit lines and supplier guarantees were cut back and the financing of the current business was partially stopped. A business as rich in inventory as furniture retailing quickly runs into problems. Now Steinhoff has to drop its pants and everyone is wondering what the bankers will see in the process.
How much is at stake
To the 14. December, loans across all parts of the Group amount to 10.7 billion. euros. Securitized promissory bills and particularly low-interest convertible bonds, which mature after 2020, account for almost half of this amount. The rest consists of normal bank debt, syndicated loans, institutional loans and other borrowed capital.
I would estimate that the volume on which the banks can exert direct pressure is around 4 billion. euros. The holding company now sees that it can organize a good part of it in order to reassure the debt capital providers. The profitable subsidiaries should also contribute to this. After all, it is always emphasized that the operating part of the Group continues to be successful on the market. 903 million in the first half of the year. Euro and at the moment business should be humming thanks to the good economy.
It's a different story on the financial side, where not only is debt depressing, but unscheduled write-downs are looming as well. Particular attention must be paid to goodwill, which was written down to 30 percent. September 2016 to 9.2 billion. euros. They are distributed primarily among the South African subsidiary Pepkor, the French Conforama and the American Mattress Firm.
7.4 billion in intangible assets. Euro. These relate mainly to brand rights. The question I have is whether these were perhaps counted twice in the course of the complicated consolidation under the umbrella of the Dutch holding company, i.e. whether they are actually already included in goodwill? Hard to say, but my guess is that some of the balance sheet adjustments will start with these two items.
Two possible scenarios
With South African Heather Sonn, who has taken over as Chairman of the Supervisory Board and of the newly created independent committee, an experienced top executive has been appointed to the top position. It now has a decisive role to play in restoring the holding company's credibility.
If it succeeds in doing this with the help of its firefighting team, then in a few weeks or months we will be presented with corrected balance sheets in which presumably some of the previously reported equity capital of. euros has been wiped out. I have read of people who firmly expect that it could melt away completely, but I have the impression that at least 8 bn. 2 billion euros, which in comparison with the current figure of just over. euros stock market value (as of 19.12.) of course a lot would be.
However, in response to the alleged dirty play by Jooste and Wiese, the banks may now also be acting dirty. Perhaps they will force a conversion of debt into equity, which would give them a majority stake in Steinhoff in one fell swoop at the expense of long-time shareholders. In that case, the share price would probably remain below one euro for a longer period of time. In keeping with this, Wiese was reportedly ordered to sell 98 million shares of stock.
On the other hand, an insolvency scenario with a protracted hang-up cannot please the banks either. This would cause difficulties in operations with decreasing cash inflows. From there, I see two realistic options: Stagnation as a penny stock in the hands of the banks or a new departure with reduced equity in the style of Volkswagen (WKN:766403) after the emissions scandal.
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Ralf Anders owns shares in Steinhoff Holding. The Motley Fool does not own any of the stocks mentioned above.