Steinhoff’s missing R273m

Out of the embers of yet more litigation involving Pepkor Holdings and its parent company Steinhoff emerges the outline of what may be one of the biggest enrichment schemes yet to emerge from within the scandal-ridden retailer.

Last week, former shareholders of discount footwear retailer Tekkie Town, led by company founder Braam van Huyssteen, filed court papers in the Western Cape High Court. They’re looking to prevent Steinhoff and its subsidiaries from selling Tekkie Town or issuing further shares until their legal bid to have the business returned to them has been resolved.

Those new court papers, together with the FM’s own investigation, reveal how a company that appears not to have been a Steinhoff subsidiary at all borrowed money from Steinhoff to pay the cash portion of Steinhoff’s August 2016 purchase of Tekkie Town. It seems that the shares in Tekkie Town were then transferred through a web of different Steinhoff subsidiaries, during which the value of the business may have been manipulated — and, worse, that R273m may have gone "missing".

Right from the beginning, there were mutterings about the curious way in which the deal was done. What happened is that in late 2015, former Steinhoff CEO Markus Jooste approached Van Huyssteen and his executives about a deal.

Van Huyssteen’s team, along with private equity firm Actis (which owned most of Tekkie Town then) agreed to sell the business to Steinhoff for R3.25bn.

The final sale agreement was the culmination of negotiations that included Steinhoff executives Ben la Grange, "Piet" Ferreira and Philip Robinson, its head of mergers.

But while Actis would get cash for its interest in Tekkie Town, Jooste persuaded Van Huyssteen and his colleagues to swap their shares in Tekkie Town for Steinhoff stock, based on a price of R75.75 a Steinhoff share. In all, they got 43-million Steinhoff shares.

Along with the sale agreement, Steinhoff and the Tekkie Town top brass entered into an "earn-out" deal — a multiyear contract which gave them the opportunity to earn a bonus should Tekkie Town and a cluster of businesses aligned with it do well. These businesses would eventually become the speciality division, Steinhoff Africa Retail (Star), which listed separately on the JSE in September 2017.

Which brings us back to the missing R273m. Was this, perhaps, a commission paid to a related party?

"The plan all along was for us to swap our ownership in Tekkie Town for Steinhoff, with the ability to build a bigger division inside a larger company. [This] would allow us to earn a bonus [over] a number of years according to pre-determined goals," says Bernard Mostert, the CEO of Tekkie Town who would later run the speciality division for Steinhoff.

But, curiously, Steinhoff chose to pay the cash portion to Actis through an unnamed and recently incorporated company simply called "K2016". This shelf company would later be renamed Town Investments. At the time of the deal, K2016 was presented to investors as a Steinhoff subsidiary.

It now appears that Steinhoff may either have lent Town Investments the money to pay for Actis’s shares or, more likely, lent Town Investments 18-million Steinhoff shares to facilitate the sale. Actis was not at risk: the firm would receive R1.5bn in cash (including interest) regardless of what happened to the price of Steinhoff shares between signature and the effective date.

It seemed a bizarre structure with no commercial logic. Either way, in December 2016, all the conditions were met and the sale went through, and Actis got its money.

A few weeks later, in February 2017, the remaining Tekkie Town shareholders, including Van Huyssteen and Mostert, received "restricted" Steinhoff shares as payment. But, as part of the earn-out deal, they could not sell Steinhoff shares for three years — a clause that would come back to hurt them badly when revelations of "accounting irregularities" emerged in December 2017 and the share price haemorrhaged more than 90% of its value.

Then, in a strange sequence of events in February 2017, Steinhoff shifted the entire shareholding of Tekkie Town through its various subsidiaries. First, it was shifted from the Dutch Steinhoff holding company, which was party to the Tekkie Town transaction, to Steinhoff Investment Holdings (SIH). However, the value of Tekkie Town was shifted at R2.983bn — a full R273m less than Steinhoff had paid for the business.

On the same day, Steinhoff Africa Holdings (SAH) bought the shares in Tekkie Town from SIH for exactly the same amount — R2.983bn.

Now, it might seem that because both SIH and SAH are wholly-owned subsidiaries of Steinhoff, this appears to be a simple shuffling of deck chairs with little impact.

But if the company had issued a loan to a third party, Town Investments, to pay for the R3.25bn acquisition, and then received a business worth only R2.983bn, what happened to the difference? Where did it go?

Asked about Tekkie Town’s performance from August 2016 to July 2017, Mostert says the business was on a consistent upward trajectory. If so, there would have been no basis to revalue the business downwards. And because Steinhoff has not yet published its 2017 financial accounts (as it unravels the fraud), it is impossible to tell if the loan to Town Investments has been impaired.

Then, just to make everything a bit more complex, in July 2017 Star entered into an agreement with SAH to buy its shares in Tekkie Town for R3.391bn. That valued Tekkie Town at R408.1m more than SAH had paid for it — and R134.7m more than the original sale to Steinhoff International.

So who is Town Investments and why did it pop into the middle of this deal?

Not much information is available. The company has had some interesting directors, apart from Steinhoff executives Ferreira and Robinson. In June 2017, Steinhoff executive Jan van der Merwe and a French national, Jean-Noel Pasquier, became directors of K2016 — weeks before it changed its name.

Pasquier was identified by Steinhoff CEO Louis du Preez, in a presentation before parliament last month, as being one of four non-Steinhoff executives complicit in "fictitious or irregular transactions" that inflated Steinhoff’s assets by R105bn.

So how is it that an individual not employed by Steinhoff could become a director of its subsidiary?

Steinhoff would not answer the FM’s questions about who owns Town Investments, which still appears to hold 18-million shares in Steinhoff. However, the Actis sale agreement with Steinhoff presents a clue: a one-line clause states that the shareholder of K2016 is a company called Sutherland Investment Partners UK. Documents for this company show that it, in turn, is owned by a Mauritius-domiciled company called Broad Bridge Investments Ltd.

The peculiar structure of the Tekkie Town deal — and subsequent transfer of shares within Steinhoff — suggests R273m is unaccounted for

—  What it means

Last year, Van der Merwe brushed off questions from newspaper Rapport, saying it was not important who Town’s shareholders were, because it was always going to be consolidated in the Steinhoff group.

But Sutherland is a firm already known to Steinhoff: it’s one of its largest shareholders.

In a June 2016 announcement, Steinhoff disclosed the existence of a "voting pool" of shareholders. At the time, it said Sutherland owned 112-million shares in Steinhoff. And it said Sutherland’s founding director was George Alan Evans — another man implicated as one of the people involved in creating the "fictitious transactions" that duped investors.

In a joint investigation with amaBhungane in November 2018, the FM revealed how, in some cases, Evans helped facilitated Jooste’s self-enrichment schemes.

Then, on September 7 2016, Pasquier replaced Evans as a director of Sutherland. The company’s registered office, in Surrey, England, also appears to be a Poundland store — one of the stores belonging to the Steinhoff-owned discount merchandiser.

Which brings us back to the missing R273m. Was this, perhaps, a commission paid to a related party? Until the full PwC report is revealed (the FM has asked for access to the full report), we may never know where it went.