PSG: Why we didn’t own Steinhoff

Following Markus Jooste’s resignation and the collapse of Steinhoff International’s share price last year, there has been a lot of focus on which asset manager’s held the share in their portfolios and which had avoided it.

Some investors and commentators have argued that any manager who did own the share must be either incompetent or foolish. Conversely, anyone who didn’t must be more astute.

However, PSG Asset Management’s chief investment officer, Greg Hopkins, says that this issue is more complex than it appears. Even though they did not hold Steinhoff in December, PSG has owned the share in the past and wouldn’t criticise anyone who did.

“We are not saying we got this right,” Hopkins says. “Given how the markets work, at some stage in the future I am possibly going to be talking to our investor base about one we got wrong. It wasn’t easy to spot.”

Governance

The reason that PSG had sold out of its position also has nothing to do with concerns around Steinhoff’s accounting, which is where the main issues appear to lie. Manager of the PSG Equity Fund, Shaun le Roux says that they exited because they believed that management had made decisions that were not in the interests of minority shareholders.

“We were concerned about how they were allocating capital,” he explains. “When Steinhoff bought Pep at what we thought was 43 times earnings, there were only two winners – Christo Wiese and Brait. Steinhoff minority shareholders were not on the right side of that transaction.”

Shortly after this deal, Steinhoff bought Mattress Firm at a price PSG also felt was far too high.

“They paid close on 40 times earnings, which was double where the share was trading just before they made the offer, and in a market they knew nothing about,” says Le Roux. “To be honest, we felt it was empire building at play.”

PSG however got really concerned when Steinhoff sold Pep back to South African investors for R10 billion less than they had paid for it.

“This we felt was much more about facilitating a consolidation of the chairman’s assets than about creating value for shareholders in the long run,” says Le Roux.

How did this happen?

Le Roux says that a very interesting question that has arisen out of what happened at Steinhoff is how a management team and board of directors that collectively owned R90 billion worth of the company’s stock could have allowed the crisis to happen.

“We don’t have the answers, but we can speculate about when R90 billion of stock ownership is not enough,” says Le Roux. “We think it’s the case when you are prioritising other things above creating value for your shareholders. In the case of Steinhoff there was definitely some empire building on the go, but more importantly there was this move to externalise assets.”

It appears that Wiese in particular, but Steinhoff’s management in general, wanted to move money out of South Africa at any price. This is what led to some very poor deals being made.

What is significant for Le Roux, however, is that it is not only Steinhoff that has been doing this.

“We have been really disappointed with a lot of South African management teams over the last few years,” he says. “We think there are many companies that have gone offshore at a time when the rand was weak and they have bought high.”

The offshore rush

One of the most obvious examples has been the listed property companies that have spent huge amounts of money in Eastern Europe. Le Roux says that PSG remains unconvinced about the investment case for that region, and the results have been “mixed at best”.

The hospital groups have also been a worry.

“We think these are great businesses, with wide moats, strong pricing power, and the ability to generate a lot of cash,” Le Roux says. “We would love it if that cash went back to shareholders, but it’s mostly gone offshore into the UK, Switzerland, the Middle East, Poland and India. Our assessment of those large deals is that they have been poor capital allocation decisions.”

Most concerning for Le Roux, however, has been the decisions made by local retailers.

“Woolworths has just impaired David Jones by R7 billion,” he points out. “That has been a very poor deal. But Brait tops that with the purchase of New Look in the UK, which they have now impaired in excess of R35 billion. I don’t think they are going to be the last either. There have been a lot of poor deals in this sector.”

He says that what has concerned PSG is that there have been very few management teams prepared to invest in a counter-cyclical fashion – buying when prices are low. Le Roux feels it would have been far more beneficial to shareholders if these companies had bought back their own stock when prices in the local market were depressed.

“Instead they have prioritised going offshore and waited for confidence in South Africa to improve,” he concludes. “We think you should be buying when sentiment is poor, and by the time confidence has improved we will find share prices a lot higher and shareholders will have benefited.”

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