Is Steinhoff back from the dead?

In late 2017, Steinhoff copped to accounting irregularities losing R200bn in value within days. Just over four years on, the share is still down 93%. But, miraculously, the retailer seems to be staging a Lazarus-like return, partly thanks to gritty determination and partly due to some chips falling its way

In early January 2018, Steinhoffs commercial director Louis du Preez was on a charm offensive in London, trying to convince the retailers bankers not to pull the plug. It was a desperate time. Weeks before, Steinhoff had admitted to "accounting irregularities" on the same day that its CEO, Markus Jooste, had offered his resignation to the board (remotely, of course, while sitting a few kilometres away on the Lanzerac wine farm).

It sparked a bloodletting. The share price tanked, wiping out R200bn in value within days, since nobody had any clue how deep the rot went. Asset-strippers began totting up what they could salvage from what they assumed would be a mercy kill.

Steinhoffs funders were even more sceptical. At one point in that January meeting, one of the bankers, clearly believing the retailer was set for the knackers yard, looked at Du Preez and said: "I give your company till the end of February." Du Preez, as steely a person as youd expect from someone who cut his teeth as a corporate lawyer at Werksmans, wasnt about to flinch.

A few weeks later, in February, he dialled into a creditors call, and that banker was mildly surprised. "Youre still here? I thought you guys would have folded," she told him.

Fast-forward to May 2018, and another creditors meeting. By now, the banker was incredulous. "This is ridiculous you should have been out of here a long time ago," she told Du Preez. The scepticism was, of course entirely valid. Nearly a year later, in

March 2019, forensic auditors from PwC would conclude that Steinhoffs accounts were about as trustworthy as an ANC anticorruption pledge.

As it turned out, Steinhoff had reported R106bn in "fictitious and/or irregular transactions" over nearly a decade. Its assets were overvalued by more than $12bn, and it had brazenly diddled so many investors that it would have made Bernie Madoff seem like a blushing amateur.

That was just the fraud. There was also the small matter of crippling debt (now 9.8bn) it had to repay with cash flows that were suddenly radically smaller than anyone suspected. And because Steinhoff was a pariah, that money attracted interest at a crushing 10% a year. Soon enough, R136bn in legal claims flooded in from just about anyone whod ever had the misfortune to borrow a teaspoon from Jooste from pension fund managers whose clients had lost billions, to deal-makers whod sold assets to Steinhoff in exchange for shares.

In January 2019, with the prospects at their bleakest, Du Preez stepped into the role of Steinhoff CEO perhaps one of the hardest jobs going, with the possible exception of Gwede Mantashes PR manager. Werent there times he wanted to throw in the towel? "My wife will say Im too hardegat to be a quitter," he tells the FM.

"Look, Ill be the first to admit it was difficult. My moods would go up and down and there were moments when Id ask: Is this really worth it?; What are we trying to protect here? But we had to stay the course, to try to fix this. "Perhaps now, after three years of "very little sleep", Du Preez will finally consider that it has been worth it after all.

Last week, he achieved something few other CEOs of fraud-ridden firms had ever done: he orchestrated a "settlement" of all the legal claims against Steinhoff for its fictional accounting, paying out about 20c for every rand claimed. In other words, the R136bn of legal claims are now done and dusted, settled for R31.5bn. This gives the retailer perhaps for the first time since December 6, 2017 some kind of a shot at a future.

Says Du Preez: "Why did this thing survive? Why did the funders agree to roll over our debt many times, even though they didnt have to? I think the answer is theres still real value in this business. It would have been an absolute shame if wed been liquidated, and the excellent businesses we had here were to go into free fall."

He is correct that while Steinhoffs accounts had more holes than the EFFs economic policy, the company does still own a number of high-class businesses that ultimately pump out enough cash to save the retailer from the grave. The glittering jewel in the crown is Pepkor Holdings, which Steinhoff bought in 2014, when Pepkors largest shareholder Christo Wiese (unluckily for him) inserted it into Steinhoff in exchange for shares in Joostes company. It was, as Wiese points out, a R59bn mistake.

Pepkor today is a cash-printing machine. Its 5,470 stores in 10 African countries include Pep, Ackermans, Tekkie Town, Russells, HiFi Corp, Incredible Connection and Timbercity. And this month, it bought 70% of Brazilian clothing retailer Avenida.

Steinhoff still owns 58.9% of Pepkor, a stake valued at about R47bn. In Europe, Steinhoff owns 78.8% of the Pepco Group which pretty much replicates the Pep model, selling discounted clothing and merchandise in 3,500 stores in 17 countries. Pepco listed on the Warsaw Stock Exchange last year, and Steinhoffs stake is worth around R70bn.

Also in the stable is Greenlit Brands in Australia, but perhaps the unlikeliest winner is Mattress Firm. In 2016, shortly before the crash, Steinhoff paid way over the bar for the US company, at a time when mattress stores were a dime a dozen.

For a while, it looked as if Mattress Firm would be the straw to break Steinhoffs back, when it filed for chapter 11 bankruptcy in 2018. But it has since roared back so much so, in fact, that for the year to September, it made a 237m profit, from a loss the previous year.

Make no mistake, Steinhoff remains brittle. At last count, the groups total liabilities stood at 18.3bn exceeding its total assets by 3.2bn. Which is hardly the epitome of rude corporate health. And yet, counter to almost every expectation and certainly that of the bankers who first encountered Du Preez after the crash Steinhoff may just survive.

Jean Pierre Verster, CEO of Protea Capital Management, says its almost unprecedented for a company to have navigated its way through a fraud of this magnitude. But, he says, this was only possible because a number of chips fell the right way for Du Preez.

"First, were in an abnormally low interest rate environment. So even though Steinhoff may be rated as junk, it only has to pay interest of 10%. Of course, thats high but if youve got great businesses like Pepco and Pepkor that are able to produce profit growth of more than 10%, your funders may be inclined to give you more time," he says.

So, Du Preez got lucky to some extent. But any company faced with an existential fraud needs a little luck to go its way.

"to gauge if the current direction is the new normal for Steinhoff Evaluate the turnaround strategy that Steinhoff was attempting to implement, including in your discussion, the related challenges faced by Steinhoff. 20 marks