Steinhoff listing shrugs off tax woes

The shares of furniture retailer Steinhoff may have tumbled 7.5% on Friday following the news that one of its subsidiaries was being investigated for tax evasion in Germany, but the share listed on the Frankfurt Stock Exchange on Monday morning with barely a murmur of Friday’s drama.

The company has a market capitalisation of €19 billion, making it the largest prime standard listing in Germany this year. The share listed at €5.31 and traded in that range most of the day.

The listing arose as the result of a Scheme of Arrangement whereby Steinhoff N.V. (formerly Genesis International Holdings) acquired the entire issued ordinary share capital of JSE-listed Steinhoff International Holdings for a consideration of one fully paid Steinhoff N.V. ordinary share, for each Steinhoff ordinary share held.

The listing of Steinhoff shares on the main board of the JSE terminated at the commencement of trading in Johannesburg on Monday.

“Given that the majority of Steinhoff’s revenues are generated outside South Africa, a listing on a major European stock exchange more accurately reflects the geographic location of our revenues, customers and store locations,” says CEO Markus Jooste.

Steinhoff owns French retailer Conforama and German discount chain Poco, among others. With the recent acquisition of Pepkor it aims to to be one of the top five discount retailers in the world.

In Johannesburg, where Steinhoff now has a secondary listing under the share code SNH, the share traded at around R79. On Friday the share fell from R84.64 to the R77.00 mark.

Jooste shook off the tax worries. “Today is a very exciting day in Steinhoff’s history. Listing on the FSE, together with an inward listing on the JSE, will raise the international profile of the group.”

While the tax issues may spook the normally cautious and conservative German investors, Wayne McCurrie, senior portfolio manager at Momentum Asset Management, does not think this is cause for too much concern. “For many years investors and analysts have known about the apparently low tax rate, and management has been asked about this many times. Looking at recent valuations it appears that the current share price is taking a far higher tax rate into account (after last week’s fall). So I would argue that the bad news has been discounted.”

Of course this assumes no transgressions have been made, he says. If a transgression is found and retrospective action taken, the share could be negatively affected.

The Germans were not the first to be suspicious. The South African Revenue Service publicly questioned the company’s use of tax shelters to avoid tax back in 2010. “Steinhoff has always had a low tax rate (12% average over the past 10 years),” says Anthony Rocchi, a portfolio manager with Resxsolom Invest. According to the 2010 annual report “the company operates in a number of countries in which the statutory tax rate is lower than in South Africa. The group owns and manages most of its brands in Switzerland, where the taxation applicable to intellectual property holding companies ranges between 8% and 12%. The group benefits from various taxation dispensations in selected eastern European countries where it operates”.

“The raid of a German subsidiary by their tax authorities fuels skepticism,” says Rocchi.

However in these [tax] cases a long time normally transpires before any resolution occurs. If incorrect practices are uncovered, the penalty is usually not “retroactive” and future treatment is agreed upon. “I think after MTN and Standard Bank we are hyper sensitive to any ‘inspection’ by some statutory body,” McCurrie says.

Steinhoff plans to continue expanding into new markets. Its acquisition of South Africa’s discount clothing and footwear retailer, Pepkor, in 2015 provides expansion opportunities in Africa and Europe. Steinhoff’s existing infrastructure and footprint allows it to accelerate its expansion into Europe.

Today, Steinhoff employs more than 90 000 people and has a presence in 30 countries worldwide.

“This listing will enhance Steinhoff’s ability to access global capital markets, to further support the expansion of our European operations and growth opportunities available in international markets,” says Jooste.

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