Advisors, auditors and lawyers score big in Steinhoff mess

An astonishing R3.75 billion – that’s how much Steinhoff International has spent on auditor fees and fees relating to the forensic investigation, advisory and restructure of the business since what is euphemistically referred to by the group as the “December 2017 events”.

The total for the 18 months reported on to end-March 2019 is €238 million.

That equates to a run rate of R11 million per weekday.

The vast majority of this – €199 million – has been spent on advisory fees for services rendered to both the company and its creditors as well as on the forensic investigation and technical accounting support.

The auditor fees (which include audit fees) totalled €16 million for the 2017 financial year, €28 million in the 2018 financial year and €11 million in the first six months of 2019.

Deloitte remains the group’s external auditors, and the firm, as well as its affiliates, have been paid a total of €19 million in fees in the 2017 and 2018 financial years. Deloitte Accountants BV, its auditors, were paid only €1 million and then €4 million for the audits of Steinhoff and its subsidiaries in those two years respectively.

The remainder was paid to other Deloitte firms and their affiliates for the audit and for tax services. Other audit firms were paid a total of €25 million for the two financial years for the audit of the financial statements, other audit services, and tax services.

In its 2018 annual report, Steinhoff explains that: “Audit fees are billed monthly for work performed and expensed in profit or loss. The audit of 2017 was done over the period of 2017, 2018 and 2019 reporting periods and expensed in the applicable reporting period. The majority of the 2018 audit was performed in the 2019 reporting period and will be expensed in the 2019 reporting period when billed.”

The auditor fees are not even 20% of the €238 million in exceptional expenses incurred by the group since former CEO Markus Jooste resigned abruptly on December 5, 2017.

At that point, the supervisory board appointed Werksmans to engage PwC to conduct an independent forensic investigation into “accounting irregularities”. PwC delivered its forensic report – reported to be 3 000 pages in length – to Werksmans in mid-March 2019.

Report kept confidential

The contents of the report remain confidential. Steinhoff provided the market with “an overview” of the report on March 15, 2019.

Also in December 2017, Steinhoff appointed Moelis & Company as “independent financial advisor to support and counsel the group” on discussions with lenders. AlixPartners was appointed as “operational advisor to assist the group on liquidity management and operational measures”. Steinhoff also appointed Linklaters LLP to “advise on restructuring and legal matters”.

In its 2018 annual report – published in June 2019 – the group says that “as a result of the December 2017 events, it has been necessary for Steinhoff to engage a wide range of professional advisors to assist it with its investigative, legal, financial and regulatory requirements as it seeks to stabilise and restructure the group. The scale and complexity of this task has meant that the aggregate advisor costs for the reporting period have been substantial”.

It says the “principle advisor relationships” included:

• Legal advisors in various jurisdictions, with the UK, Austria, Germany and South Africa being the most material;
• Financial restructuring and corporate advisory functions that support the group on discussions and engagements with its creditors;
• Liquidity management and operational measures;
• Forensic investigation; and
• Regulatory and taxation advisory.

“In addition, as part of the restructuring process the group is required to pay the advisor costs of each of the respective creditor groupings”, including:

• Legal advisors;
• Financial structuring advisors; and
• Regulatory and taxation advisory.

In the unaudited half-year report for the six months ended March 31, 2019, published on Friday, Steinhoff says that the costs of the financial restructuring process, “both in terms of financial resource and management time, continue to be substantial, and they have had a significant impact on our reported results for the period”.

“Advisory fees for the reporting period amounted to €82 million. This total included €11 million relating to the forensic investigation and technical accounting support, and €30 million relating to creditor advisor fees.”

The €82 million in expenses is substantial. Consider that earnings before interest, tax, depreciation and amortisation or Ebitda for its entire (remaining) Europe and UK business, comprising Pepkor Europe, Conforama, Lipo, Abra, the UK operations and its European properties unit in the same period was €161 million.

The management board says that “while every effort is made to limit costs, we expect this to remain our reality for some time”.

Hilton Tarrant works at YFM. He can still be contacted at hilton@moneyweb.co.za

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