Viceroy is pleased to release its research report on Steinhoff International Holdings NV.
Steinhoff (SNH) has long been under scrutiny for seemingly inexplicable factors including:
- A long string of acquisitions of stagnating or deteriorating businesses whose performance seems to miraculously improve post-acquisition, even if only on paper;
- Cash flow trends that do not correspond to EBITDA;
- Investigations into senior executives for tax-evasion, document forgery and fraud; and
- Rampant and dilutive equity raising.
Viceroy’s investigation into Steinhoff has revealed several concerning activities surrounding a number of at least two off-balance sheet, undisclosed related party entities:
- Campion Capital
- Southern View Finance
While the existence of some of these entities has been reported by the media, their activities have not. Viceroy’s analysis suggests Steinhoff uses these off-balance sheet vehicles to artificially inflate earnings:
- Steinhoff has issued expensive loans to, and booked interest revenue against, Campion subsidiaries for the purchase of loss-making Steinhoff subsidiaries. These revenues will never translate to cash.
- Steinhoff has moved two loss-making and predatory consumer loan providers to off-balance sheet entities: JD Consumer Finance and Capfin.
- Steinhoff negotiated the re-purchase of the only profitable portions of JD and Capfin (loan administration and debt collection facilities) while allowing losses to be incurred at off-balance sheet, related-party entities under Campion Capital.
Given these loss-making entities such as Southern View Finance UK, are being round tripped back to Steinhoff, Viceroy believe it is possible that Steinhoff are “repaying” Campion’s outlays through acquisition premiums (i.e. losses are being capitalized through round-trip transactions with related parties).
Viceroy believes that, based on the contents of this report, Steinhoff should consolidate Campion Capital and its subsidiaries given that Steinhoff bears full economic liability for these entities through loan arrangements and exert total control through overlapping management.
Viceroy believes the facts presented in this report will bring Steinhoff’s behavior to the attention of regulatory authorities.