Steinhoff - The Switch - Positioning
All,
Please find a major update to our Steinhoff model here.
The risks from fraud are now behind Steinhoff and information disclosed in the context of the Grand settlement has levelled some of the information asymmetries among investors. Also, valuations have come down significantly, which somewhat reshuffles the deck among creditors. As a result, we have been updating what is a complex entity priority model, but we have also come to simplify the results of it so as to look forward through a potential restructuring scenario in a year’s time. As a result, having de-risked earlier this year, we are notionally selling our remaining exposures and buying elsewhere in the structure.
Valuation and Leverage:
- Steinhoff’s remaining assets are attractive and - aside from inflation pressures - growing. Inflation will take its toll on these assets, but arguably much of that has already been reflected in the trading prices of its underlying assets.
- We have proportionate EV currently at approx. €9bn, materially lower than only six months ago, but in line with market sentiment overall (largely public stock) and still a proud 10x proportionate EBITDA.
- Leverage (proportionate) meanwhile stands at just under €11bn, indicating an average value of the debt of 85% (through any future equity). The current equity, which almost came into view a year ago, is again well out of the money.
- SEAG: While an EV is currently hard to come by since the Mattress IPO has been frozen, we have the proportionate sum of the parts trading at approx. 10x proportionate EBITDA. SEAG A2s trade in line with the full value of their recovery in that entity. Treating any recovery from NV as upside, which is mostly exposed to SA.
- SFHG A1s should recover approx. 50% via SIHPL and trade just some 5% above that value, indicating only option value for the remaining recoveries in SFHG and NV. If Steinhoff fail to maintain their corporate integrity, a D/E swap might yet put at risk much of the value accruing to SFHG and as in the SEAG A2 valuation, NV recovery is treated as upside.
- SFHG A2s trade rich. Relative to the other two groups, this group has the most to gain from fundamental upside, but at current valuations the SFHG A2s would only recover equity and not much more than current price indications.
SEAG:
- SEAG creditors are too large for SFHG creditors to refinance entirely. This hands the SEAG A2s - the sizeable fulcrum within SEAG - the initiative.
- Holding three major assets in 75% of Pepco, 45% of (post IPO) Mattress Firm and 100% of Greenly Brands as well as a variety of smaller assets, SEAG is the entity with the most flexibility and optionality for its creditors.
- Unless offered something more attractive, SEAG creditors’ plan A would be to D/E swap and then liquidate over time. We have not taken legal advice, but we would be concerned about Steinhoff’s ability to protect its interest in SEAG under such a scenario.
- In a consensual D/E swap across all of Steinhoff, SEAG creditors could decide to take a haircut at ~55c/€ and pay the remaining 10c/€ at current values for the majority of Steinhoff equity, carrying approx. the same value through 8x proportionate Steinhoff EBITDA. SFHG creditors would receive the same economics as they do now in this scenario. However, if SEAG creditors are reluctant to accept SA value, then SFHG creditors would have to give up more value to prevent a break-up of the group.
SFHG:
- Recoveries to SFHG creditors from this entity itself mostly come from an intracompany loan to SEAG, which ranks p.p. with the SEAG A2s in that entity. Recoveries here amount to some 23 c/€ in this entity and could be at risk from action within SEAG.
- Otherwise optionality within this entity is very limited. It’s a passive receiver of intercompany claims.
- In a consensual restructuring that is to result in a somewhat sustainable capital structure, these claims should also be equitised.
SA and NV:
- The weakness of the Euro has recently raised the relative importance of Pepkor in the structure.
- SFHG A1s would receive approx. 50c/€ from their exposure to SIHPL before the remaining SA value travels up to NV.
- Again, optionality within the SA leg of Steinhoff is limited to a sale of its remaining 51% of Pepkor, which should be subject to capital controls unless the buyer comes in above SA level. That would reduce the universe of interested parties to foreign entities trying to buy a just-about controlling stake in an oversized stock in an emerging market economy. We view the exit from this asset critically and also imagine it to be politically challenged.
- All creditors reunite at NV to participate in the remaining value of Pepkor, which in a restructuring would altogether be equity.
Restructuring Scenario:
- We are actually not certain there will be a restructuring. If the current volatility of earnings and valuations prevents a consensus among creditors, 2023 could see an amend-and-extend again.
- In Europe-First scenario the amount of re-instated debt at SEAG level can regulate a homogeneous junior structure among SEAG and SFHG creditors through the equity that allows for any degree of equitisation above the reinstated level and the SFHG A1 note from SIHPL at an average proportionate LTV of less than 50%.
- Given the margin loan structure of the corporate debt could make cash servicing difficult as taxes will come due for dividends. So if creditors were to rank similarly across new equity and any new debt beneath the SEAG and SIHPL level, then we think it makes no sense to reinstate unnecessary amounts of PIK debt only to eat into one’s own value.
Positioning:
- Following our de-risking earlier this year (which clearly did not go far enough), we are selling our remaining 2% positions in the SFHG bonds. In particular the SFHG A2s are the ones with the most upside, but while that was attractive in 2018, we are concerned that upside will materialise between now and this time next year. These bonds will for the most part be equity when negotiations start and are sitting in the back of the bus. Relatively to the other instruments, we view the SFHG A2s as overvalued right now.
- The SFHG A1s are half A2s and half senior ranking debt on the Pepkor stake. The former we decided is not attractive in the next 15 months and the latter will be difficult to exit. We see the SFHG A1s as undervalued relatively to the A2s and see them with good upside, but like the A2s they are at risk from SEAG creditors swapping for equity at their entity.
- We are buying instead a new 4% position in the SEAG A2s. These are the fulcrum at SEAG and will dictate events, meaning there is a lower likelihood of nasty surprises from negotiation and even a chance they grab value from SEAG creditors. SEAG is the vehicle with the most optionality and still with over 30% upside on current valuation. As such the switch amounts to a de-risking of our position going into what may be the next and perhaps final restructuring.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk