Steinheist. Rob Rose
Wiese would be acting as “executive chairman”, it said, and he would be assisted by Pepkor’s former chief executive, Pieter Erasmus.
As if to somehow mitigate the crushing blow, Steinhoff added that it still had “a number of high quality profitable businesses around the world”. It was parlous consolation.
Wednesday, 6 December 2017
As the stock market opened, the slaughter began. The reaction was carnivorous: Steinhoff’s share price went into freefall, cartwheeling 61% from R45.65 to R17.61 per share. Within 24 hours, R120bn in value had vanished, as traders at the banks flooded their Bloomberg screens with frantic “sell” orders. Most investors, even the veterans who’d been around during the Asian crisis of 1997, had never seen such a rapid loss in value. It is hard to imagine what a R120bn loss looks like: after all, this amount that went up in smoke in hours is roughly double the $4.4bn GDP that Swaziland makes in a year, and four times what Lesotho makes ($2bn).
Paul Theron, the sharp-tongued 51-year-old managing director of asset manager Vestact, remembers the carnage. “There was an immediate sense of horror, that maybe all those stories you’d heard for years about Markus’s shenanigans, which you’d discounted, might actually be true,” he said. “A lot of the guys were panicked, but trying to comfort themselves by saying the share price drop was too severe, and that Steinhoff was still worth R25 to R17 anyway. The truth was, nobody knew what to think.”5
For Theron, a trained engineer who launched South Africa’s first internet-based stockbroker called Tradek in 1996, the revelation undermined what he had hitherto considered a reliable instinct for detecting scoundrels. With a street fighter’s nose for trouble, Theron had once locked horns with an oleaginous rogue called Brett Kebble, who also happened to be the CEO of three large mining companies, years before. His instinct was that Kebble was hopelessly crooked. And he was right. Facing the prospect of his wide-scale larceny being exposed, Kebble hired hitmen to assassinate him on a bridge in Joburg in 2005. But with Jooste, Theron’s instinct may have failed him.
Theron says he’d been one of those who’d bought Jooste’s story, hook, line and sinker. “I was in the camp that believed that they had a world-class team of auditors behind them. I bought Jooste’s story and I was taken in. But then, I suppose, all of us were taken in to some extent,” he says.
Greg Davies, the head of private client trading at the small boutique investment company Cratos Capital, remembers the drumbeat of tension that morning when he got into his office in Joburg’s forested suburb of Dunkeld. “I’ve been in this game for more than two decades, and I’ve never seen anything like it. Everywhere, there was fear, anxiety and shock. It was the sort of emotional ride you have when you find out someone close to you has died. You can’t believe it can be true,” he says.6
The way it works on the stock market is that every day there is an “opening auction” of company shares, which sets the mood for the market. Stockbrokers put in orders for their clients, and make an assessment of the sort of price a stock is likely to trade for. Usually, it’s just a couple of percentage points away from the previous day’s price. But that morning, all bets were off when it came to Steinhoff’s shares.
Davies says: “The computerised trading system gives you an ‘indicated price’ of what you can expect to buy or sell those shares for. That morning, the computers were saying the ‘indicative price’ was 10c. Now, that was totally crazy, because Steinhoff’s share price had ended the previous day at R45. So, it was clear this was serious.”
The price yo-yoed violently, before opening at about R20 – half the level of the previous night, but still many leagues better than the 10c Davies expected. On the trading desks, the phones hadn’t stopped ringing. Stuttering clients were frantically trying to reach their brokers, almost too scared to ask how much they’d lost. Should we sell the rest now? Or wait for it to recover? How can this even be right?
Anchor Capital, a small investment house run by Peter Armitage, a barrel-chested former rugby player who still looks the part, immediately fired off a letter to all his clients. Anchor announced it had taken an “in-principle decision to exit our holdings” as “there are clearly more unknowns than known information”. “Fraud remains a distinct possibility,” he added. Armitage, a man who was famously born in a caravan park (well, the truth is, his family owned the caravan park), says the ordeal was “very painful and traumatic at the time”. “We’d had a fifteen-year history with the Steinhoff guys. I’d been overseas with them and I must have attended twenty results presentations. Afterwards, I’d often sit down with Markus and have a drink and talk about what was happening. So, at the time, in early December, we were actually quite excited about what we thought would happen with the company,”7 he says.
On the day the news broke, Anchor Capital had to make a knee-jerk call. Luckily, for Anchor, its exposure was only about R200m – which wasn’t in the league of the money managers who were in it for billions, like Coronation or Investec – so it was easier to dump the stock. “Over the previous few months, there’d been a number of shocks, like Brexit, so we knew we had to move fast,” says Armitage. “And one thing we do know is that when a CEO resigns with immediate effect before a company’s results are released, that means there’s a big, big problem.”
Many other investors froze. Greg Davies says that among many of the more brash analysts, there was a visceral sense of denial. The whole thing has been blown out of proportion, they said. Just wait, Steinhoff’s share price would soon be back at nearly R50, and the panic sellers would all look silly. “Many of us were laughing at Anchor Capital at the time, reckoning they were overreacting by selling everything. Well, it turns out they were far smarter than we were,” he says.
It was also a salutary lesson in how, despite the dogma that the best investors ought to strip out all emotion when making their decisions, the primordial reaction to seeing your savings vaporise is an instinctively emotional one. “It was unprecedented,” says Davies. “It’s hard to properly describe the shock you feel in that moment. So, I had to call those clients and explain what was happening. Most people had already heard it on the news, but I can tell you, those were tough calls to make.”
As Steinhoff melted away, a number of other companies on the stock exchange also began to bleed. Shares in PSG, the Stellenbosch-based investment company that had given birth to banking group Capitec and schools outfit Curro, tumbled 6.9% (wiping out R4.86bn). Steinhoff Africa Retail (STAR), which had split off from its parent company only three months before to hold Steinhoff’s African assets, plunged 22% (erasing R19.3bn). It was carnage that few stockbrokers had ever seen in their careers. “You have to realise just how rare this was,” says Armitage. “It really was a once-in-a-lifetime investment event. At the time, Steinhoff was in the top ten largest companies on the JSE, and for this to happen, you’d have to have an epic failure at so many levels.”
The inevitable comparison was with Enron, the Houston-based energy company that shot itself to pieces in 2001. Enron is the Olympic Gold of corporate fraud. Fuelled by the lip-smacking ambition of Ken Lay and Jeff Skilling, Enron had grown to become the third-largest electricity wholesaler across the US by the turn of the century. Investors drooled over it, journalists amplified the myth, and its executives were feted as all-conquering heroes who’d hit on a new formula that beat the market. Only, Enron’s accounts were a fiction. It had found a way to magic profit from its assets, and when it came time to reconcile its accounts, it would simply shift debts to another company which it didn’t show to investors. In other words, it lied about its assets. As one banker put it at the time, Enron were “black belts in structured finance”.8 Worse still, Enron’s auditor, Arthur Andersen, helped it deceive the world. When shards of reality began slicing through the myth, Andersen hired a shredding truck from a company called Shred-it to destroy the masses of evidence.
The similarities between Enron and Steinhoff were eerie. Both companies were in the top ten largest companies on their stock exchanges when they imploded. Both were led by bullying, egotistical CEOs whom nobody dared challenge, but who had created indecipherable companies in the shadows designed to present a rosy picture of what was going. And, as Wiese would later say, “both companies had audit problems that slipped past the