Thread by @KhamaCA

[THREAD]

On Steinhoff, the things that transpired and eventually led to the loss of billions of rands in pensions and shareholder value.

DISLAIMER:

This thread is a presentation of my understanding of the issues surrounding the current #Steinhoff scandal.

It is not meant to be a presentation of factual evidence but rather an observation based on publically available information.

It is based on the report by the Viceroy Research Group and is made publically available here: viceroyresearch.files.wordpress.com/2017/12/steinh…

The report itself is based on publically available information and is not a presentation of fact but is rather an informative presentation.

As such, anything read here should not be used as a basis of making any financial or similar decision. Any losses incurred from using the information presented here will be the sole fault of the person who uses it.

END DISCLAIMER SECTION.

#Steinhoff is an international organisation founded by one Mr. Bruno Steinhoff. It's business is in the retail sector through acquisitions made, of businesses in such retail sector.

Some of the key people involved in the scandal presented here are:
• Christo Wiese (Chairman)
• Markus Jooste (Former CEO)
• Theodor Schmidt (Former CEO and CFO)
• Bruno Steinhoff (Founder)
• Cedric Schem (Former Emyee)
• Gunnar George (CEO of #Steinhoff subsidiary)

• Jean-Noel Pasquier (Director of Campion Capital)
• George Evans (Director of Campion Capital)
• Johanes Van der Werde (Former CEO and CFO)

For the purposes of making this thread easier to understand:
• "#Steinhoff " refers to the Parent company and all its Subsidiaries and Associates.
• "Campion Capital" means the Parent company and all its Subsidiaries and Associates.

The malpractice that #Steinhoff was engaging in and explored in this thread is:
• How #Steinhoff records bogus INTEREST income
• How #Steinhoff hides losses in companies that are not part of its financial statements
• How #Steinhoff moves assets fraudulently around its network

The malpractice referred to above was achieved by #Steinhoff using the following entities in a hidden and non-complian way:
• GT Global Trademarks
• JD Finance
• Campion Capital
• Capfin
• Pepkor

CAMPION CAPITAL

#Steinhoff is connected to this company in 2 ways:
• Some of the directors at Campion are former #Steinhoff directors who control it still evidently have a close relationship with Bruno Steinhoff, Christo Wiese, others, and the #Steinhoff business.

• Also, #Steinhoff has a 45% ownership of one of Campion's subsidiaries.

GT GLOBAL TRADEMARKS

This was a company that #Steinhoff owned and used to house the trademarks that are used within the group. It was not necessarily a high profit company because it housed trademarks. Trademarks on their own don't generate income and cash.

#Steinhoff got very creative and decided that it would find a way generate income from these trademarks.
Imagine that!🤔 That could help improve the reported income of #Steinhoff and that would bolster the value of the company and will mean big bonuses and salary bumps.

How this was to be achieved was simple but fairly brilliant. #Steinhoff decided to sell the GT Global Trademarks business to Campion Capital.
But instead of selling it for cash, they decided they should provide a loan to Campion and those funds would be used to buy GT.

So now instead of a Trademark business that didn't generate as much income, #Steinhoff had a loan. The thing about loans is that they generate interest and #Steinhoff evidently charged incredibly high interest on the loan that the income covered a large chunk of interest expense

To further illustrate the significance of the loan, that one loan made up more that 80% of the loans #Steinhoff provided.

Also, this loan doesn't appear to have any reliable repayment scheduled so this new INTEREST income would be a long lasting stream of income for #Steinhoff.

This good people is how you manufacturer more profits.

The GT Global Trademarks transaction doesn't even end there. #Steinhoff felt like the interest income was not enough. It wanted more and it would find a way to make more.

In the financial statements of #Steinhoff there is a mysterious income being reported and is said to do with "Promotion of trademarks".

Promotion of Trademarks! Are you kidding me?! What in the heavens is that?!

We know that #Steinhoff sold the trademarks business to a company it is related to (and made no disclosure by the way).
So this "Promotion of trademarks" is actually a management fee and it essentially a fee that #Steinhoff is paying to itself.

Fantastically, #Steinhoff had now secured two new income streams through the GT Global Trademarks transaction and they have nothing to do, really, with the real retail business of #Steinhoff.

If, so far your mind is blown, I suggest you get some water because this is just the beginning. You'd think think this would be as far as #Steinhoff would go. But classically, greed has no bounds.

Remember the loan that went with the above sale transaction being very significant? It's expected that someone would be concerned when they viewed the financial statements of #Steinhof.

When an inquiry was directed at #Steinhoff with regard to the loan it responded that the loan was made to Chines Suppliers 🙉.
Maybe it's true right?
But in 2014 #Steinhoff was taking about 70 days to pay its suppliers. When this happened #Steinhoff was taking about 200 days.

How can that be?! #Steinhoff was owing more for longer to its suppliers as time went by but then it went ahead and gave loans to its suppliers.
How can that make sense, economically?
I owe you, but then I'm borrowing you money?
Why not just pay you your money?

Either this is a manufactured story about #Steinhoff or the management is completely full of LIES and clearly had something to hide.

JD GROUP OF COMPANIES

#Steinhoff went on a shopping spree of companies and was taking loss making companies and making them profitable. It was remarkable.
One of the companies that #Steinhoff acquired was the JD Group.

The JD Group operated a finance company in which it gave loans to customers so they could buy their stock and thus improve sales and profits.

2 years into owning the JD Group, #Steinhoff was absorbing losses from the JD Finance company and needed to fix this situation so that #Steinhoff continues to report good results at year end.

So they decided to sell the JD Finance company to some interested 3rd party and made an announcement of this to the public.
But by 2014 #Steinhoff hadn't sold the JD Finance company for whatever reason and was still absorbing losses.

The #Steinhoff shares must have experienced some nice market price action due to the announcement to sell JD Finance and one might be suspect that some kind of insider trading happened there, especially since JD Finance was never sold to the interested 3rd party.

Nevertheless, #Steinhoff eventually sold the JD Finance company to Campion Capital 😅😂 in 2016.
Remember, the reason for selling it was to remove the losses from the financial statements because they made #Steinhoff look bad.

Remember the transaction where the GT Global Trademarks was sold on loan?
#Steinhoff apparently did the exact same thing. Although this is not publically confirmed, the amount paid for JD Finance closely estimates the other loan assets #Steinhoff reports.

Now instead of another JD Finance loss making company, #Steinhoff had a loan asset that's it generated more INTEREST income.
Great news you would imagine for shareholders and all.

And still after all the above, there's more that #Steinhoff did to book more income for the company look great to shareholders and banks. The fraudulent incomes above were not enough.

CAPFIN LOANS (Trading Name)

Capfin is the trading name of a company registered as Southern View Finance UK ( A Subsidiary of Southern View Finance LTD > Also listed on the JSE as Southern View Finance SA LTD)

We will simply refer to them all as CAPFIN as that's where the issues are.

CAPFIN was incorporated in Bermuda and it was apparently for tax reasons.
It was incorporates as a solution to providing finande easily in the South African retail market.

Christo Wiese (#Steinhoff chairman) through his companies owned about 60% of the CAPFIN business. This made sense because he was the proud owner of Pep and Ackermans and would use CAPFIN to provide credit to Pep and Ackermans customers, and it worked because sales blew up.

CAPFIN was a trying to do what lenders did during the Financial Crisis of 2008. They were giving loans to low income customers who could not prove they could repay the loan. Payslips and the like were eventually not need and loans were just given.

Why? Because this was paying off on the Pep and Ackermans side of things.
The only problem was that this was not sustainable.
CAPFIN tried to hide this by providing for loan defaults in a very small amount.

And they continued to give loans until they were giving loans totaling more than Half A Billion Rand in a single year.
As you would guess, this was the summit of the practice.

#Steinhoff saw an opportunity to further bolster it's incomes and profits.
They decided that they would buy PEPKOR (The Holding company of Pep and Ackermans.)
This sale was scandalous and even drew the attention of the competition tribunal.

Nevertheless the transaction went through and #Steinhoff now owns PEPKOR.
It was a fantastic deal because #Steinhoff was only getting the upside (i.e. skyrocketing sales and profits).
The risky lending was hidden away in CAPFIN where only Wiese was exposed and not #Steinhoff

For CAPFIN things didn't look good anymore and losses were starting to hit as they were writing off loan assets in region of Half A Billion Rand a year.

Because bankruptcy was imminent for CAPFIN it looks like they started trying to get cash outbound South Africa and started paying exorbitant amounts in management fees to its brother company in Mauritius and enjoyed tax advantage there.

Wiese was not in a good position anymore thanks to CAPFIN because he sold PEPKOR to #Steinhoff. #Steinhoff thus needed to remedy this situation. And as we've seen above, #Steinhoff is super creative.

An arrangement was made. But remember #Steinhoff doesn't want losses on its books so it won't buy CAPFIN from Wiese.
Luckily they have dump yard. The dump yard is called Campion Capital.

The loss making and fraudulent CAPFIN was sold to Campion Capital and the sale was also on loan which was more finance income for #Steinhoff and an easy way to move the company because Campion Capital was a dump yard and not really making money.

But before that sale, #Steinhoff made sure that move would be simple and fast and that it got something out of it. So #Steinhoff paid off loans in CAPFIN so that now it owed #Steinhoff and #Steinhoff would generate interest income.

You know that this was all part of the scheme because there's not real economic justification.

Finally, Wiese was compensated in that he now had removed exposure to CAPFIN and had a loan asset which was apparently guaranteed by #Steinhoff.

Now that CAPFIN was in Campion Capital, it was consolidated with JD Finance and they continued to make losses as one entity known as Century Capital.
Since the NCR eventually revoked the license of CAPFIN, it was no longer a viable business.

And Campion Capital would not survive long with the loss making business. So an agreement was facilitated in which Century Capital would be sold to a European subsidiary of #Steinhoff where the losses would be absorbed and Campion would continue to survive.

That would be the first time that #Steinhoff shareholders would get burnt from all this nonsense.

Remember that we saw that #Steinhoff is greedy? What they did when selling Century Capital to the UK business, they bought the DEBT collection part of Century Capital.
This would allow #Steinhoff to record income from recoveries of loans originally given by CAPFIN. More income!

KIKA-LEINER

Ex #Steinhoff directors run a company called Genesis Investment Holding

It had no operation and was not making cash for itself

So #Steinhoff bought shares in Genesis which provided cash for the company to start working

Genesis used the cash to buy KIKA-LEINER for 375m EUROS. 6 months later #Steinhoff bought KIKA-LEINER from Genesis for 475m EUROS

Here it doesn't look like #Steinhoff would stand to befit.
Rather it looks like this was all done to move money to the excutives of Genesis (Former #Steinhoff executives)

The purchase of Genesis by #Steinhoff was eventually used by steinhoff to list #Steinhoff in Germany.

100 EUROS GONE! 😂😂

CONCLUSION

There are plenty other issue that are happening at #Steinhoff such as:
• Understating Depreciation expense charges
• Tax irregularities with #Steinhoff paying artificially low rates
• Limited synergies but group business make money consistently

Given the number if CAs on the board on #Steinhoff who either failed to see all of this or participated, I'm a little ashamed to claim I'd like to be one myself.
The accountancy profession isn't having a great year 😅.

THANKS FOR READING 😇

That's a bit harsh 😅 let's don't slander the profession

will you accept my thread as a professional submission to be used in my attempt at becoming a CA (SA)?