FINANCIAL MANAGEMENT 2 (FMA201S)
GROUP ASSIGNMENT: INVESTIGATION AND INTERPRETATION OF STEINHOFF FINANCIAL CRISIS
GROUP A (FT)
Surname, Initial Student number Signature
Brenner, G 217160166 Hans, A 217159206 Jacobs, D 217294995 Najjar, I 216026628 Sauls, M 217093167 LECTURER: MR WILSON-TROLLIP
05 JUNE 2018
TABLE OF CONTENT
CONTENT PAGE #
Introduction Build-up Contributing factors Rectifying plans Effects on the South African economy Suggestions Conclusion Bibliography and in-text references Addendums Plagiarism report INTRODUCTION
The wholesale, manufacturing and logistics business was founded by Bruno Steinhoff 50 years ago. With his entrepreneurial spirit, Bruno dares to cross many boundaries to find value and quality products in places where very few were prepared to go. The ability to adapt to political, economic and social change remains at the very heart of this business.
1964 – 1974
With an office in a private home, furniture in a small warehouse and a trailer hooked to a car, Bruno became a travelling salesman who drove around Germany presenting furniture to retailers. With initial success and exclusive rights to represent suppliers in Saxony, the company that would later become Steinhoff Europe was registered.
Post-war Germany presented many opportunities as the government supported industrial growth and encouraged cooperation with other European countries. The company later built a new warehouse and office.
The German economy did well and the business thrived. The warehouse was expanded and a direct railway connection was added.
The business diversified early on, adding furniture production to the traditional trading and import business. Deliveries increased from 48 wagons to 274 wagons. Turnover reached 40 Million Deutsche, and by now Mark and the company have employed 105 people.
1974 – 1984
Despite the cold-war, Bruno and his team were determined to grow the business. Transcending national boundaries, language barriers and cultural differences, furniture was sourced from East Germany, Bulgaria, Denmark, Italy, The Netherlands, Romania, Czechoslovakia and even Russia. Furniture demand continued to grow and a second factory for upholstered leather furniture was opened.
Steinhoff furniture was displayed on the international stage at expo’s in England, Holland, Belgium and Switzerland while the company’s sales network included representatives across Germany, Austria and Switzerland.
Despite a general recession in the later part of the decade, the Steinhoff strategy of sourcing furniture from the East to sell into a discount market in the West proved successful. Growth in imports continued leading to yet another extension of the warehouse.
Furniture deliveries reached over 1000 wagons per annum, turnover reached 230 million DEM and the company now employed 320 employees.
1984 – 1994
Investment in infrastructure and technology strengthened the business’s competitive advantage. Steinhoff was now more focused on manufacturing and logistics as well as the efficient management of these supply chain elements translated into direct benefits for his growing customer base. Investments in the business continued; the new administration building, an extra 2000 square metres added to the factory,
20 million DEM investments completed the 45-metre-high building which became a landmark of innovation.
A state-of-the-art warehouse and management system now controlled the receiving, packing, storing, retrieving and dispatching of furniture. Paperless and fully automated, the Steinhoff warehouse and distribution centre were revolutionary at the time and remain relevant today, almost 25 years later.
The fall of the Iron Curtain meant that Europe became a continent without borders. Investment opportunities opened up in a former East Germany. Europe was transformed into a single market where capital goods and services could move freely between countries.
Seven upholstery factories, plus one bedding factory, were bought. Overnight, Steinhoff became one of the largest producers of upholstered furniture destined for Germany. There were now company owned factories in Germany, Poland, The Ukraine and Hungary. The business employed 3000 people and achieved a turnover of 600 million DEM.
1994 – 2004
“In 1998 we decided to put the whole lot together into one company” – Markus JoosteForeign Investment opportunities presented themselves and encouraged by the political change in South Africa, Klaus Dawn orchestrated the partnership between Steinhoff Europe and Gamma Gamma – establishing Steinhoff Furniture, Steinhoff Europe and Steinhoff Africa consolidated with a listing of
Steinhoff International on the Johannesburg Stock Exchange (JSE)
Ten years after the fall of communism and focused on the strategy to remain the lowest cost producer, Steinhoff closed most its German factories relocating them to Poland and Hungary where it could benefit from a lower cost base. An efficient distribution and logistics further strengthened the group’s advantage, allowing the group to effectively manage costs. This ultimately translated into the lower prices of its furniture ranges.
To capitalize even further on the benefit of an efficient distribution network, another logistics hub was set up. The group was now well on its way to achieving its business goal of a 50/50 split between its own manufactured products and wholesale distribution, with 87 factories and 26 distribution and sourcing locations in 10 countries.
2004 – 2014
The next decade was defined by continued development and exponential growth at an international level.
With a solid manufacturing base and initial retailed investments in place, the business expanded its presence in Asia for low-cost sourcing long before its peers did. The Steinhoff import and sourcing division was established in China to support the original sourcing activities into Europe. Upon celebrating his 70th birthday, Bruno retired as executive chairman having successfully transferred the culture, experience and knowledge to the European Supply Chain Business. One era had ended for the group but a new era had begun
The manufacturing, sourcing and logistics business that was founded 50 years ago is now part of a listed group. Its entrenched global presence still benefits greatly from the diversified vertical integration strategy. Steinhoff International adopted many of the principles and values of the original European trading model to manufacture and source furniture and home wear from low-cost countries – and to sell these products to valued consumers.
Failure to notice the early signs led to a financial crisis – the 2008 financial crisis could have been halted by the Federal Reserve and the Bush administration.
In November 2006, the first leading indicator displayed difficulty; an account of new home permits, which decreased by 28 percent in a year, was given by the Commerce Department. Recent indicators of home sales would decline for the next nine months and no one would accept the fact that housing prices would diminish. It had not occurred since the Great Depression and the Federal Reserve Board remained positive. Beige Bookreport reported that the economy was in a powerful position to pull housing out of its slump, drawing attention to strong employment, low inflation and an increase in consumer spending.
In 2006, the Fed did not notice the unhealthy economic situation at hand; that was the inverted yield curve for U.S. Treasuries (an inverted yield curve refers to short-term Treasury note yields being ranked higher than long-term yields. Usual short-term yields are lower. A higher return is acquired by investors for investing their money for a longer duration.) But they will invest in a long-term bond for securitization from a downswing. The yield curve had also been reversed before the recessions of 2000, 1991, and 1981. Economists showed ignorance due to interest rates being lower compared to previous recessions. Most of them were under the impression that housing prices would increase once the Fed lowered the interest rates. They were certain that the economy would show about 2 to 3 percent growth that year, this being due to the fact that the economy had a huge amount of assets to convert into cash to generate growth, growing GDP by 2 percent in 2007. The sheer size of the subprime mortgage market was not given too much needed attention by economy-watchers.
It sparked a ‘perfect storm’ of unfortunate events. Firstly, banks were not concerned about the credit-worthiness of lenders. A re-sale of the mortgages was conducted on the secondary market. People who did not qualify attained loans from unregulated mortgage brokers. Secondly, a large number of homeowners took out interest only loans in order to decrease their monthly instalments. Homeowners were unable to make payments on mortgages, because it was set at higher standard therefore housing prices which fell and could not be sold for a profit.
More recently, the worldwide markets have been shaken as Steinhoff International Holdings NV sees shares take a dive on official investigations concerning “accounting irregularities” and the sudden abdication of its CEO Markus Jooste. Steinhoff, which is listed in Frankfurt and Johannesburg stock exchange, has lost more than 80% of its South African market value in just days as the “accounting crisis” heightens. Shareholders changed their PSG shares in South Africa for a “suddenly Frankfurt-listed Steinhoff” whilst externalising their wealth ensuring that a foreign exchange control approval was not necessary.
According to Fin24.com, the Steinhoff scandal dates back all the way to 2014. After a joint South African-German media investigation, it is revealed in unpublished emails that previous Steinhoff CEO, Markus Jooste, was in contact with German Steinhoff directors about “distorting” financial information in 2014. Off-balance sheet companies were set up to camouflage losses, executives were fattening their pockets by embezzling funds from investors and debt was incurred at a rapid pace. The clues were all there. The most recognised clue was the dishonest move by shareholders in PSG. These emails, which occurred over the 17-22 August 2014 period, were published by the South African site, Moneyweb.
Reuters reported, Steinhoff has additionally been under scrutiny for suspected bookkeeping abnormalities by the state prosecutor in Oldenburg, Germany since 2015. Steinhoff has said this was an assessment case identifying with whether incomes were reserved accurately and taxable profits effectively declared.
The past few months at the head offices of the furniture giant has been hell, as investigations have been ordered and the rectification of the “financial crisis” has been a on-going struggle.
EFFECTS ON SOUTH AFRICAN ECONOMY
The Steinhoff failure has shocked most South Africans – from corporate businesses to government to investors to casual South African citizens. This private sector dilemma is no victimless crime and has affected South Africa and its economy in multiple ways.
The Steinhoff debacle has taken the number one spot as the biggest corporate fraud in South Africa, shedding an unflattering view on the South African corporate elite, while also questioning their wealth attribution and “financial wizardry”. Although the corporate world may have taken a hit, South Africa’s Minister of Finance, MalusiGigaba ensures that the financial crisis which occurred with Steinhoff was “not a true reflection of the business environment in South Africa”. Despite this statement made, the dilemma still impacted South Africa and its economy in a negative way; not only has this caused disruptions within our own corporate world, but also within the foreign sector, potentially scaring off future investors. According to Business Report Online, at a “crisis meeting”, a member from the Johannesburg Stock Exchange stated that the “extreme last thing to do” would be a suspension of trade on the JSE.
At the “crisis meeting” held by the Minister of Finance, he expressed his concern towards pensioners as the Public Servants Association (“the PSA”) stated that it possibly lost R12.5 billion in pubic servants’ pensions when a value of R194 billion was lost by Steinhoff as allegations of possible fraud arose, wiping off millions of citizens’ pension. Pushing for a thorough investigation, the PSA indicated that they will approach court to gain access to Steinhoff’s financial statements. The Public Investment Corporation (“PIC”), which invests on behalf of the public sector is Steinhoff’s second biggest shareholder and potential losses to workers has got the government in concern. Gigaba further stressed the importance of protection for pensioners and stated that corporate governance at firms should be addressed.
Ordinary government employees are one of the biggest victims with regards to the financial crisis – these are people who do not have any say within Steinhoff as investors, but contribute more than R1.2 million through the ‘Government Employees Pension Fund.’ If the worse of the worst occurs, being that Steinhoff goes bankrupt, more than 130 000 jobs, not only in South Africa but world-wide, are at stake.
Many South African investors are poorer today because of Steinhoff’s fall and are requesting answers from financial administrators. But, numerous say, the business was so complicated, with its audited financial statements showing up so reasonable, that it was simple for financial specialists to miss warnings indicating the affirmed multi-billion dollar extortion. Economists such as Dawie Roodt urge South African investors to withdraw their money from the country before the downward spiral which could possibly send the South African economy into another recession
So, how will Steinhoff fix its “big mistakes”?
Steinhoff addressed the media stating that although the company has reached some point of stability in its operating businesses, there is still much that needs to be fixed and significant near-team liquidity is still required in certain business units.
CEO Ben la Grange assumes on ‘the preservation and procurement of liquidity in the group” and ‘finalising 2017 financial accounts’ In addition to this, the group recuperates help from specialist, AlixPartners to help solve finances, as lenders have started restricting access to credit lines, and insurers are cancelling or rendering credit insurance.
Steinhoff has appointed auditors at PriceWaterhouseCoopers to investigate its accounts, with a particular focus on off-balance –sheet transactions and deals, particularly related to central European operations. The Public Investment Corporation (“PIC”) which invests assets on behalf of the government, including state employees that are withdrawing pension, this will also help the company with its progress reports.
A new sub-committee will be led by Johan van Zyl, co-chief executive officer of financial services firm African Rainbow Capital and a Steinhoff non-executive director since May 2016. The directors had a meeting with the bankers, citing a lack of financial information and this may indicate to publish earnings in the interim period.
One of the key factors is to keep all their stakeholders of Steinhoff in the loop – communication is key. Besides the investment community that needs reassurance that their investments are safe, a very important stakeholder group that must not be neglected are their employees. An internal communication drive is imperative. Employees will want the reassurance of whether their investment, money and jobs are safe, how the situation impacts them in the short, medium and long-term.
In the rebuild up of Steinhoff, these working businesses have all the potential to creating a new and better working environment and motivating employees and companies to continue to create more value to all their shareholders and claimants.
The Government Employees Pension Fund and Public Investment Corporation will insist on the appointment of at least two independent non-executive directors to the Steinhoff and Steinhoff Africa Retail (STAR) boards to help get them out the situation they are in at the moment and to uplift the company to where it was in the beginning. And to ensure that it stays profitable from there on with the new board that was selected. They will also have their saying on the concerns about the Steinhoff audit committee, concluding the terms and reference of the investigations independently.
The ‘GEPF’ and ‘PIC’ has came to a solution that will have to rotate auditors ever now and then to overcome fraud and long-serving board members in investee in companies.
Steinhoff as a company had a very bad absence regarding their staff and employees that was busy binding the company in overall witch lend to bad service over the years. Public Investment Corporation was the only one raising the absence of the company.
A possible solution would be for Steinhoff is to undertake bankruptcy-protection talks and moves to have it’s share postponed. While it might be difficult to restore an admission of victory, it would provide Steinhoff with time to ring-fence itself from content as it to share up its financiers.
Steinhoff has not revealed the extent of off-balance-sheet companies and vehicles or the reason for it. If details regarding off-balance—sheet entities is made available, more clarity of the Steinhoff financial crisis will be provided, which will contribute towards solving the problem.
It was revealed that subsidiary Steinhoff Africa Retail will refinance long-term losses that are owed to the main company.
Sell assets such as property (liquidation) :
Steinhoff said in a statement on Thursday that it could liquidate “certain non-core assets” and generate 1 billion euro’s to 1.2 billion dollars. Improved disclosure about what makes up a no-core asset may assist in bringing about trust. The company could give a description of it’s objectives for sales and the expressions of interest it had sustained. Ron Klipin, a portfolio manager at Cratos Wealth in Johannesburg stated that properties for sale could be listed separately from businesses. It was suggested by a market researcher at Euroministor International to close a few stores.
BIBLIOGRAPHY AND IN-TEXT REFERENCES
Danheeand Co. 2017. Steinhoff Timeline-How the scandal has unfolded. ONLINE Available at: https://daehee.com/steinhoff-scandal/. Accessed 1 May 2018.
Fin24. 2017. A Steinhoff guide for dummies. ONLINE Available at: https://www.fin24.com/Companies/Retail/a-steinhoff-guide-for-dummies-20171208. Accessed 1 May 2018.
Steinhoff Accounting Woes Date Back to 2016 as Scandal Grows. (2017). Steinhoff Bonds Tumble on Moody’s Cut to Junk. Online Video. 13 December 2017. Available from: https://www.bloomberg.com/news/articles/2017-12-13/steinhoff-will-restate-its-2016-results-after-accounting-probe. Accessed: 13 April 2018.
IOL News. 2018. Steinhoff to restate financial results after scandal. ONLINE Available at: https://www.iol.co.za/news/south-africa/steinhoff-to-restate-financial-results-after-scandal-12588489. Accessed 13 April 2018.
IOL Business Report. 2017. #Steinhoffscandal: Gigaba holds crisis meeting. ONLINE Available at: https://www.iol.co.za/business-report/companies/steinhoffscandal-gigaba-holds-crisis-meeting-12430582. Accessed 13 April 2018.
Daily Maverick. 2017. The Steinhoff Debacle – the biggest fraud in SA history. ONLINE Available at: https://www.dailymaverick.co.za/opinionista/2017-12-13-the-steinhoff-debacle-the-biggest-fraud-in-sa-history/#.WxGWfjSFOM8. Accessed 2 May 2018.
Youtube – 24HNews. (2017). The steinhoff debacle – the biggest fraud in sa history. Online Video. 13 December 2017. Available from: https://www.youtube.com/watch?v=Xv7Iqj9WqfE. Accessed: 2 May 2018
SABC Digital News. (2017). Unpacking Steinhoff scandal. Online Video. 7 December 2017. Available from: https://www.youtube.com/watch?v=6w4SylWNJFM. Accessed: 2 May 2018.
CNBC Africa. (2017). Behind the Steinhoff struggle. Online Video. 10 December 2017. Available from: https://www.youtube.com/watch?v=cKxAJsnbpr8. Accessed: 2 May 2018