Embattled Steinhoff proceeds with listing of Pepco Group on Warsaw Stock Exchange

Steinhoff is going ahead with the listing of Pepco Group on the Warsaw Stock Exchange after receiving the go-ahead from its creditors. However, the move may not be enough to stave off lenders and shareholders lining up for payback. Analysts have also questioned the decision to list in Poland rather than a larger market like London or Frankfurt, where Steinhoff itself is listed.

The initial public offering (IPO) of Pepco shares will allow it to repay expensive debt as it continues to reel from the accounting irregularities uncovered in 2017 that nearly brought it to its knees.

Pepco, previously called Pepkor Europe, is a pan-European discount variety retailer. It serves over 50 million customers a month from its more than 3,200 stores in 16 countries across Europe. It owns the Pepco and Dealz brands in Europe and Poundland in the UK, and is one of the biggest contributors to group earnings.

Steinhoff said the IPO would be made to institutional and retail investors, including a public offering in Poland. It chose Warsaw for the listing as Poland is Pepco Group’s biggest market.

“Our proposed listing in Warsaw – home to our Pepco brand since 2004 and the largest operating territory in the group, is a natural step and I look forward to delivering further on our successful growth strategy,” Pepco CEO Andy Bond said.

“We are strongly positioned to deliver significant long-term growth, given our market-leading customer proposition in the most attractive sector of retail, the scale of opportunity ahead of us as we expand across the entirety of Europe and the investment in strengthening the infrastructure of the business over recent years.”  

Independent analyst Syd Vianello said if demand for the IPO was strong, Steinhoff may list up to 25% of Pepco Group’s shares, which would help to reduce debt that is likely to reach between €10.5-billion and €11.5-billion (R182-billion to R200-billion) by the end of September.  

“Remember the interest is being rolled up and is very expensive (over 10% p.a.),” Vianello told Business Maverick. 

“There is also, if I recall correctly, a time frame on the debt and I guess this is around 2023. So the sooner the debt is reduced, the better. 

“Just remember also there are some cash payments to be made under the global settlement process. Steinhoff has no cash at the centre to speak of and the listing may just be part of the process to find the cash for the settlement. If that’s the case, then the settlement of existing debt will be minimal.”

Last July, Steinhoff proposed a €943-million settlement with aggrieved shareholders and also to settle contractual claims from businesses that were sold to Steinhoff in return for shares in the retailer.  

Since then, insurance companies underwriting some of its directors, former directors and other officers have added a further €78-million to the pot for Steinhoff’s market purchase claimants. The insurance deal followed a similar settlement with its former external auditor Deloitte in February – without any admission of liability for the losses incurred by Steinhoff and its stakeholders as a result of the accounting irregularities. 

The big unknown is how much Pepco Group is worth. While it is the most successful business in Steinhoff’s portfolio, Vianello said it didn’t have a listed value yet. His rough calculation put it at around €5-billion on a debt-free basis, although there have been estimates of around €4.5-billion. 

“Perhaps the idea is to get the listing done and give the business time to establish its own value in the market, then sell down the stake further based on rising valuations,” he said. 

Vianello’s same back-of-the-cigarette-box calculation shows a value of no more than €9.5-billion for Steinhoff’s entire portfolio of business, excluding any conglomerate discount and any negative value for head office costs, which reduce profit and therefore need to be valued in a negative light.  

“If I am correct, the value of all the underlying assets will be less than the debt at the centre, suggesting Steinhoff itself has no value,” Vianello said.

“The other longer-term issue is the debt itself because it’s at the centre and can only be serviced from dividends. Given the need to retain some cash in the main operations to fund growth and expansion, there appears [to me] to be a permanent negative cash flow projection at the centre, which lenders won’t accept. Furthermore, the debt needs to be settled sometime.”

The biggest concern, according to Vianello, is that Steinhoff becomes another Ascendis Health, where its lenders end up taking all the assets as payment for their growing debt pile. 

“I feel sorry for the management of Steinhoff; they’ve done a really great job under trying circumstances to sort out the mess and must be commended for this,” he said. 

“But the end result for shareholders may still be nothing, which of course won’t be their fault.” DM/BM