Steinhoff International Holdings NV fell to a record low of 44 cents on the JSE on Monday morning, taking the group’s market capitalization to less than R2 billion.
The stock fell 75% from R1.70 a few days ago after an announcement of new debt rescheduling efforts reminded shareholders that Steinhoff is essentially insolvent – and running out of time.
The announcement bluntly states that the value of Steinhoff’s assets remains lower than its liabilities and is expected to remain so at the end of June 2023 when Steinhoff has to pay down debt.
In fact, the plan that the underlying companies would do well enough to pull the holding company out of its troubles didn’t pan out.
Steinhoff made several statements to outline a new plan to buy some more time. Unfortunately, the plan will give shareholders a lot less than they were hoping for.
The new proposal gives creditors an 80% economic stake in Steinhoff and offers shareholders only a 20% cut. Additionally, the 20% stake will be housed in an unlisted company, which is unlikely to endear it to investors.
In return, creditors will extend debt maturity dates by three years to June 2026. In certain cases, creditors also offer slightly lower interest rates.
It is likely that creditors will end up getting 100% if shareholders do not approve the proposal and ratify it when appropriate resolutions are presented at a general meeting of shareholders.
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“Given the assessment that the value of the Group’s assets continues to be, and will remain, less than its liabilities as of June 30, 2023, and subject to further due diligence and structuring, the commercial terms of the term extension transaction provide that the individual CPU [contingent payment undertakings] Creditors are entitled to an interest in Steinhoff International Holdings NV (or any successor company or other entity replacing SIHNV as the ultimate parent company of the group),” read the announcement.
“The Term Extension Transaction provides that the Financial Holders will be individually and independently entitled to receive 100% of the voting rights and at least 80% of the beneficial interest in the Group’s post-closing equity.”
Hard to believe that Steinhoff was one of the largest companies on the SA stock exchange and was included in the JSE Top 40 Index — a key benchmark index for tracker funds and other portfolios — before accounting fraud was uncovered in late 2017. There’s more to 2017 than that lost more than 90% of its market value.
Once admired by employees, investors, fund managers and competitors, then-CEO Markus Jooste was ostracized.
Since then, there have been calls for a trial and the imprisonment of everyone involved in the accounting scandal.
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Management cautioned investors in its notes to the interim results for the six months ended March 2022, released on June 9, 2022, that the Group’s current assets exceed its current liabilities and its total liabilities exceed its total assets.
The balance sheet at that point recorded assets of 14.2 billion euros but liabilities of almost 17.1 billion euros. The equity value was given as minus 2.9 billion euros.
So the current share price means shareholders will have to pay R1.92 billion for something with a book value of minus R53 billion — even though management advises that the value in the financial statements reflects historical rather than fair value.
Management also said at the time: “The board does not intend to liquidate the company and the underlying boards continue to plan to recover their assets and settle their debts in the ordinary course of business.
“The completion of all material litigation following the successful implementation of the Dutch SoP [suspension of payments] and the S155 program has enabled management to actively pursue the next step in its strategic plan, which is to restructure the group to reduce debt and funding costs.”
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According to the report, Steinhoff had corporate debts of about 10 billion euros (about 184 billion rand) at the end of March.
“This debt is split into a number of different classes, each with slightly different rights and obligations, and each class is held by a number of different investors – mostly hedge funds or other investors focused on distressed assets. These investors each have their own unique interests.
“Restructuring debt of this volume and complexity remains an extremely challenging task,” management said at the time.
The underlying companies, namely Pepkor in SA, Pepco in Poland and Mattress Firm in the US, are doing well and Pepkor and Pepco have relatively healthy balance sheets. Steinhoff’s consolidated results for the six months ended March 2022 showed that sales increased by 12% to nearly €5.2 billion and operating income increased by 11.7% to €297 million.
A recent trade update noted that revenue continued to rise despite a difficult trading environment characterized by high inflation, subdued consumer spending and ongoing supply chain disruptions.
The problem is the high level of debt at holding level. Steinhoff had to pay 579 million euros (around 10.6 billion rand) in interest while it earned just 297 million euros (5.4 billion rand).
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No coming back
“Steinhoff has too much debt and time is up,” says Tebogo Mokone, portfolio manager at Afrifocus Securities.
“I can’t see them coming back from this one,” he adds, referring to the announcements outlining efforts to extend loan maturities. “We’ll have to wait and see if that succeeds.”
He notes that the underlying assets are performing as well as can be expected in the current economic conditions, but are unlikely to appreciate to an extent that would propel Steinhoff’s stock price much higher.
“It could go even deeper,” says Mokone.
Management indicated in the interim report that the management of both solvency and liquidity risks remains a key concern and area of focus to ensure the Group’s continued financial stability.
It looks like shareholders didn’t pay enough heed to the numbers and management’s warnings about Steinhoff’s precarious financial position.
At the current price, the stock may be nothing more than a risky option for an (unlikely) positive outcome.
This article originally appeared on Moneyweb and has been republished with permission.
Read the original article here.
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