What is the risk to Steinhoff pref shareholders?

Anyone holding Steinhoff preference shares has been unable to do anything with them for more than three months. The JSE suspended trading in the preference share when Steinhoff Investment Holdings failed to submit its annual report before the deadline of February 28 this year.

At the start of November 2017 the preference shares had been changing hands at just under R75.00. However, after Markus Jooste resigned as CEO of Steinhoff International and that company failed to release audited results, the price collapsed as low as R30.00 per share, before recovering to R44.01 at the point that it was suspended.

While this is a 41% drop, it’s a long way from the 98% decline that Steinhoff ordinary shareholders have experienced.

At the end of April 2018, two months after the preference share was suspended, Steinhoff announced that it would not declare a preference share dividend for the six months to the end of December 2017. This decision was however reviewed when the company released interim results at the end of last month. At that point Steinhoff announced that it would be paying a dividend to preference shareholders of 427.41781 cents per share.

The solvency question

While this has given holders of these preference shares some comfort, there are obviously still concerns about whether holders will ever be able to get their capital back. Considering that Steinhoff International is factually insolvent, shareholders would be justified in feeling worried.

However, a vital consideration in their favour is that the preference shares are not issued by Steinhoff International, the company listed in Frankfurt. They are issued by a South African subsidiary – Steinhoff Investment Holdings.

This entity holds all of Steinhoff’s South African assets, including Star. This is the most stable part of the business, which is how it was able to pay out the dividend in the first place.

Read: How could Steinhoff pay out a pref share dividend?

There is also almost no debt on the South African side of Steinhoff’s balance sheet. In other words, the part of the company where the preference share sits is both solvent, and profitable.

That’s the good news for preference shareholders. However, as with everything related to Steinhoff, it does get more complicated.

Stripping the SA assets

Given the state of Steinhoff’s operations outside of South Africa, the possibility has been raised that the only way in which the company may be able to pay back its creditors is by selling its only assets of real value – the South African businesses.

Read: Steinhoff: ‘One guy couldn’t have done it’

Since these are what currently underpin the preference share dividend, what would that mean for shareholders?

The answer appears to be that the assets couldn’t just be sold out from under them. Steinhoff would have to buy back all of the preference shares before it could transfer any proceeds to the parent company.

“As I understand it, if the local assets are sold, the preference shares need to be redeemed before any distribution upwards in the structure can take place,” says Piet Viljoen, executive chairman of RECM.

Andrew Dowse, the manager of the Bridge Diversified Preference Share Fund, agrees.

“In a liquidation event, the group would need to repay the inter-company loans, repay preference shareholders and then return remaining capital to the parent,” he says.

Litigation

This, again, is good news for preference shareholders. However, there is one more complication, which is that the bulk of the litigation brought by Christo Wiese, as well as the claim by G T Ferreira and the Tokara BEE Trust against Steinhoff have not been lodged against Steinhoff International in Amsterdam, but against the South African subsidiary – the company called Steinhoff International Holdings Pty Ltd that was the local listed company before the listing was moved to Frankfurt.

According to Steinhoff itself, this company is now dormant with only loan accounts and guarantees. In the company structure, it however sits beneath Steinhoff Investment Holdings, which makes it likely that if these cases succeed, the South African assets would be on the line to pay the damages.

Dowse has however calculated the value of the claims against the net asset value of the South African businesses, and believes that, even in a worst case scenario, preference shareholders will not be compromised:

• The total value of the claims is approximately R36 billion;
• The market value of Star is approximately R57 billion, making Steinhoff’s 71% worth R40.5 billion;
• KAP is worth R20.5 billion, making Steinhoff’s 26% worth R5.3 billion;
• The IEP portfolio and local property portfolio have no observable market value, but one could expect that they have considerable value inside;
• The liquid listed net assets are therefore worth R45.8 billion, to which one can add the additional unlisted holdings;
• This exceeds the total value of the litigation claims by R9.5 billion;
• The total value of the preference shares is issue is R1.5 billion based on issued capital value at par.

“As you can see there is more than enough net asset value to cover the claims plus buy back the preference shares so I feel comfortable that the preference shares should be secure at this stage,” Dowse says.

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