I had never seen anything like it, it was like an eBay auction but the bidders were playing with hundreds of millions of pounds,” one banker recalled of Steinhoff’s frenetic rapid-fire bidding war in 2016 for French electronics retailer Darty against rival Fnac.
At the time it was considered exciting, if not unusual, behaviour for a retail conglomerate. But now that an accounting scandal has left the South African company’s share price and its reputation in tatters many are asking why the warning signs hadn’t been spotted earlier.
For many shareholders it was the case of following the money and blindly believing in the seemingly never-ending successes of two wealthy men: Markus Jooste and Christo Wiese.
From 2012 to the end of 2016 Steinhoff’s share price trebled as it expanded rampantly outside South Africa by snatching assets in the US and Europe, including Poundland in the UK. The company became a sprawling global £40bn dealmaking giant with over 200 subsidiaries in 30 countries.
Long-time friends Wiese and Jooste were instrumental in reinventing Steinhoff, modelled on Jooste’s respect for the world’s largest furniture company Ikea and its founder Ingvar Kamprad. “We purely followed what he did. Our only problem was we couldn’t build a brand, so our strategy was to buy the number one or two around Ikea in every country,” he told South Africa’s Financial Mail in a glowing article just three months ago.
Stellenbosch, an exclusive area of South Africa
Stellenbosch, an exclusive area of South Africa
Jooste joined Steinhoff when it bought a lounge furniture maker in 1998 where he was a finance director, but he first met Wiese while as a trainee accountant auditing the books for the billionaire’s Pepkor retail business. The man became Jooste’s mentor for the rest of his career.
Both men were members of the so-called “Stellenbosch mafia”, a group of close-knit Afrikaans-speaking businessmen that lived and owned vineyards in the exclusive hills around Cape Town. Jooste has claimed 10 of Steinhoff’s executives are his “best friends”. Both men bottle their own wine. Wiese is passionate about game keeping and has his own reserve in the Kalahari. Jooste, whose father worked for the Post Office, is passionate about racehorses and owns and breeds stallions all over the world.
Wiese started his career by taking on the clothing chain his parents had founded. Based on the idea that cash-strapped families could dress their children for less than one rand, equivalent to 5p, he quickly propelled the family business through audacious acquisitions, building up his fortune and a reputation as a serial dealmaker along the way. He turned Pepkor into a global brand with 3,700 shops worldwide and simultaneously ran Shoprite, the biggest food retailer in Africa.
Wiese is also the biggest shareholder in Brait, the South African investment vehicle that owns a stake in Iceland Foods, Virgin Active and New Look. Shares in Brait have halved in the last year on the back of New Look’s troubled trading and been knocked by Steinhoff’s recent troubles. The firm insists that it has not been caught up in Steinhoff’s accounting scandal and has had no indication that Wiese wants to sell down his stake, despite him selling shares in other holdings.
Wiese was already a major shareholder in Steinhoff when it bought Conforama in France in 2011 for £1bn, the start of its acquisition spree financed by cheap debt. By the time Steinhoff splurged £4bn on the takeover of Pepkor three years later it was already one of Africa’s biggest retailers. The deal doubled Steinhoff’s size overnight and handed Wiese a 17pc slice of the company, and a board seat. “It makes anything in the world possible for us to do as a South African company playing in the global arena. It’s a fairy tale come true,” Jooste said when the Pepkor deal was unveiled. “I’m so scared that I’ll wake up and this was a dream,” he added.
Markus Jooste, chief executive of Steinhoff
Markus Jooste, chief executive of Steinhoff
That dream is now a nightmare for Jooste and Wiese. Wiese has seen his personal fortune tumble from $5bn (£3.7bn) to $2bn and both men have stepped down from Steinhoff as the company has cratered at break-neck speed. Wiese has also had to abandon a $2.6bn deal to sell a stake in Shoprite to Steinhoff to consolidate his holdings.
In August, Wiese dismissed German reports of a probe into Steinhoff’s accounts as rumour mongering. But after auditors at Deloitte refused to sign off its accounts, Steinhoff had to announce in December that it was postponing its results. Since then the shares have tumbled by 90pc with the firm facing investigations by German and South African prosecutors.
It is still locked in talks with lenders amid an urgent liquidity crisis and plans to offload €3bn (£2.7bn) of assets. Earlier this week it admitted that accounting irregularities may stretch beyond 2015. Susan Gawith, portfolio manager at Melville Douglas in Johannesburg, has commented that it “reminds many in South Africa of Enron” – the US company that imploded in 2001 after an accounting scandal.
Steinhoff snatched Poundland after failing to buy Darty and Home Retail Group
Steinhoff snatched Poundland after failing to buy Darty and Home Retail Group
Steinhoff’s aggressive and rapid expansion is now being viewed as helping to mask the problems.
“There was clearly a desire to move capital out of South Africa,” said one long-term adviser to Steinhoff. “I wouldn’t say that there was a lack of discipline, Steinhoff stuck to retail acquisitions. But it was like it had to keep feeding the company with more deals to keep it going. What was clear was that Jooste was seen as absolute in every decision.”
To Adrian Saville, investment manager at Cannon Asset Management in Johannesburg, the early acquisition spree was a worrying sign, particularly as Steinhoff was increasingly using its own shares rather than outside debt, which diluted other investors. “There was a crocodile jaws gap between the cost of capital and the return on investment on its deals,” commented Saville. “The increasingly furious speed of transactions meant it became harder and harder to understand the balance sheet, how it made its money and reached its numbers.”
“They just didn’t make sense,” Saville added.
More than 10 years ago JP Morgan analysts published a 56-page research report questioning why Steinhoff’s accounts lacked “pivotal information” about where it was generating revenue and why it appeared to focus on tax breaks rather than the actual business. The bank stopped covering Steinhoff within a year after failing to get answers from the retail group.