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The most important passage in Steinhoff International Holdings NV\u2019s regulatory filing late Friday, was a section attesting that management still believes the retailer is a going concern.<\/p>\n
A formality for most companies, Steinhoff\u2019s confidence that it can keep the lights on isn\u2019t self-evident. The acquisitive South African group\u2019s shares have lost almost all their value and its bonds trade at a steep discount following a warning of accounting regularities and the resignation of its chief executive, which triggered a liquidity crisis in December.<\/p>\n
The new unaudited figures for the six months to March include a shocking 11 billion euros ($12.8 billion) back-dated restatement of shareholders\u2019 equity, including the disclosure that much of the 3 billion euros of cash it reported a year ago didn\u2019t exist (or shouldn\u2019t have been consolidated) and that its profits were overstated by about one billion euros.<\/p>\n
It reported a 600 million euro net loss.<\/p>\n
It\u2019s a bleak picture for Steinhoff\u2019s new management team as it tries to meet obligations on a 10.6 billion euro debt, recover some value for shareholders and reassure customers and suppliers that it\u2019s still a reliable partner. As is often the case in these types of situations, only Steinhoff\u2019s financial advisors seem to be doing well from its implosion.<\/p>\n
Equity investors are naturally furious about what\u2019s happened and some are suing the company. Holders of Steinhoff\u2019s debt are fortunate that those claims won\u2019t be resolved quickly, so any cash penalties will only come due later \u2013 possibly allowing some time for the retailer to stagger to its feet again.<\/p>\n
The company hasn\u2019t yet made a provision for possible litigation payouts, nor quantified the potential liabilities.<\/p>\n
For now, that\u2019s helping to stop Steinhoff from giving up the ghost. But it means that even these unvarnished accounts are a pretty sketchy guide to its true financial condition.<\/p>\n
The numbers published Friday are unaudited, so think of them as a best guess. There\u2019s a risk of more irregularities coming to light because of the ongoing probe of various off-balance sheet structures and non-arms length transactions. And that\u2019s not the only problem.<\/p>\n
Writing off 11 billion euros of equity sounds like a clearing of the decks, but Steinhoff\u2019s accounts still show a a big chunk of goodwill and intangible assets, a legacy of its free-wheeling M&A days.<\/p>\n
Take Mattress Firm, whose inflated purchase price I explored here. The US store chain is losing money and has recognized a 1.5 billion euro goodwill impairment in view of its diminished prospects.<\/p>\n
That\u2019s pretty shocking given the unit was acquired less than two years ago. But there\u2019s still another one billion euros of Mattress Firm goodwill on the Steinhoff books.<\/p>\n
In total, the Steinhoff accounts show just 3.8 billion of net assets, meaning it can ill afford further impairments. Steinhoff\u2019s market capitalization is just 363 million euros, which suggests shareholders aren\u2019t optimistic.<\/p>\n
A more pressing concern is paying creditors. Steinhoff\u2019s liabilities due within 12 months vastly exceed current assets. Agreeing a restructuring plan and repayment rescheduling with bondholders should ease those cash pressures somewhat, but not entirely.<\/p>\n
Steinhoff’s operations bled 800 million euros of cash over the six months to March because suppliers have tightened payment terms. Don\u2019t expect them to cut Steinhoff any slack. Similarly, it\u2019s difficult to convince a customer to put down a deposit for made-to-order furniture when they might wonder whether the company will still be operating in 12 months\u2019 time.<\/p>\n
The retailer has sold some businesses, property and a corporate Gulfstream jet to help fund its obligations but the weak cash generation makes more asset sales quite likely.<\/p>\n
It\u2019s no small irony that the task of boosting cash flow is made harder by the expense of hiring forensic accountants (PwC) and consultants (Moelis and AlixPartners) to clean up the mess. Steinhoff spent 39 million euros on professional fees since December and expects that to rise \u201csubstantially.\u201d<\/p>\n
This cost is unavoidable but it will irk Steinhoff investors. They\u2019ll wonder why the external auditor Deloitte LLP felt able to attest the now discredited accounts as a \u201ctrue and fair\u201d reflection of its financial position. Although Deloitte did eventually raise concerns about Steinhoff, as of Friday we know its \u201ctrue and fair\u201d assessment was off by about 11 billion euros. Another triumph for the bean-counters.<\/p>\n