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Steinheist: The inside story behind the Steinhoff scandal

The Steinhoff crash wiped more than R200-billion off the Johannesburg Stock Exchange, erased more than half the wealth of tycoon Christo Wiese and knocked the pension funds of millions of ordinary South Africans. Here is a chapter from Steinheist.

What not too many people know is that Steinhoff had been itching to climb into the American mattress market for years. In 2012, Steinhoff had its first stab, when it tried to buy Sealy. But it was beaten by Tempur-Pedic International, which offered $229-million. This time, Steinhoff wasn’t going to risk being beaten.

Mattress Firm had begun life in Houston, Texas, in 1986. But, like Steinhoff, it had grown suspiciously quickly in recent years. In 2014, it bought Sleep Train for $425-million, and the next year it bought the third-largest mattress company in the country, Sleepy’s, for $780-million. So, when Steinhoff came brandishing a weighty cheque, Mattress Firm had an unwieldy, bulging portfolio of 3,500 stores. It was way too many. As one person said:

I’ve got two Mattress Firm outlets within a mile of each other. I live in a town of 50,000 people [and I] don’t know anyone who has shopped there.

About three years ago, I told friends and family it had the classic feel of a private equity pump and dump – build the franchise count with cheap banker funding, then find the greater fool to buy the crap.”

Despite the obvious problem with so many stores selling a product that people usually don’t replace for a decade, Steinhoff spent all of five days doing due diligence at Mattress Firm, before deciding to pay double the market price. Critically, had Steinhoff’s team spent a bit longer investigating, they might have stumbled over the reason for the immense surge in Mattress Firm stores: Suspected fraud.

This is laid bare in a jaw-dropping lawsuit that Mattress Firm filed against two of its own executives, dated 30 October 2017, in Harris County in Houston. In that 47-page summons, Mattress Firm accused those two senior executives – Bruce Levy and Ryann Vinson – of taking an epic array of bribes from property developers and brokers that caused the company to sign exorbitant leases it shouldn’t have.

That story begun in 2009, when Levy was hired as vice-president of real estate to lead Mattress Firm’s “national expansion effort”. Soon after, Levy hired Ryan Vinson, who became vice-president for growth and store planning.

The two of them were the final word on where Mattress Firm would open new stores. Brazenly, Levy even referred to himself as Mattress Firm’s “walking real estate committee”. The result:

At a time when many national retailers were closing stores in the United States, Mattress Firm, America’s largest retail seller of mattresses, was rapidly opening them,” the court papers said.

In truth, “rapidly” doesn’t even convey the full picture of the mattress store deluge. In the seven years that Levy and Vinson were in change, Mattress Firm added 1,500 of its 3,400 stores.

You can see why Jooste would have admired their ambition.

The “fixer” who allegedly made the fraud possible was a company called Colliers Atlanta, which was hired as Mattress Firm’s “master broker”, to act as an intermediary between Mattress Firm and property developers who found the sites for new shops. And the key man at Colliers was its vice president, Alexander Deitch.

According to Mattress Firm’s court papers, Deitch and numerous property developers paid “bribes and kickbacks” to Levy and Vinson to get them to open new stores.

The bribes, kickbacks, and fraud… affected hundreds of leases, which caused Mattress Firm to pay significantly above-market rents and to agree to other unfavourable lease terms. The bribes, kickbacks, and fraud further harmed Mattress Firm by causing it to misallocate resources by opening unnecessary stores, thereby harming the sales of existing stores nearby.”

As a result, Levy and Vinson presented “falsely optimistic sales forecasts to Mattress Firm’s management to maximise the stores that would be opened and to justify the above-market rents and longer lease terms that were offered to the [developers]”. In other words, they lied about the sales.

The court papers say that, just hours before he was fired, Levy admitted to receiving “thousands of dollars in cash, an expensive watch, loans, expensive first-class trips to destinations including Europe, Oregon, Dominican Republic and Deer Valley, joint investment opportunities, cases of wine, extravagant meals and subsidised gambling”. Colliers’ Deitch apparently admitted to “loaning” him $120,000 so he could buy luxury cars. And to keep the family sweet, Deitch also gave Levy diamond earrings and a necklace for his wife.

At this point, everyone involved – Levy, Vinson, Deitch – denied Mattress Firm’s allegations. Vinson’s lawyers claimed Mattress Firm had “unclean hands” – essentially, that it knew what was going on. Deitch, in his legal response, said Mattress Firm’s top brass, including CEO Ken Murphy (who resigned in January 2017), knew exactly what was going on, and that it was part of a “brutal and unrelenting competitiveness” to snuff out all competition. He said Steinhoff did its due diligence at the time when “Mattress Firm was most aggressively pursuing its reckless” expansion.

However you look at it, these antics pre-date Steinhoff’s offer. The court papers were only filed in 2017, yet all the same there must have been signs and warnings that Steinhoff overlooked.

In early September 2016, just weeks after Steinhoff tabled its offer, Mattress Firm admitted to shareholders in a report that “two employees of [our] real estate group had conflicts of interest involving business relationships with certain of the company’s real estate vendors”.

Mattress Firm was “conducting a more detailed investigation into its real estate and leasing practices”.

But it added that it had “reason to believe that there may have been improper gifts made to certain of its employees from vendors”.

Had Steinhoff pulled this thread, it would have unravelled the thin covering around Mattress Firm’s rotten leases. At the very least, Steinhoff could have argued for a lower price. Instead, Jooste decided to pay double what the market reckoned the firm was worth.

It sounds difficult to fathom, but within a few months of the purchase, the Mattress Firm transaction had become even less compelling. Things first came to a head in January 2017, when Steinhoff’s square-jawed bruisers met its largest supplier, Tempur Sealy, at a furniture trade show in Las Vegas, and slapped down a new hardline contract.

We won’t be paying you what you’d been getting from us, they told them. You need to slash your prices, or we’ll walk away. Fine, said Tempur Sealy CEO Scott Thompson, sayonara. Thompson was said to be fuming, and within days he’d sent out letters scrapping the partnership.

Tempur Sealy wasn’t going to agree to Steinhoff’s demand for “significant economic concessions”, he said.

John Baugh, an analyst with Stifel Nicolaus, attributed the split to “strong egos”. Other analysts suggested it was just Jooste, who had swaggered into town and wanted to flex his “reputation as a tough negotiator”.

As Baugh put it: “We do not see this as necessarily a helpful event for Steinhoff given Tempur’s brand strength and premium price points in the Tempur-Pedic brand.”

To Jooste, it felt like he had Tempur Sealy over a barrel. But it only seemed that way. Actually, Mattress Firm’s top seller was the Tempur- Pedic mattress, a memory foam product that was responsible for its most profitable sales. In all, more than 40% of Mattress Firm’s sales came from Tempur Sealy mattresses.

Insiders say Jooste reckoned he wasn’t going to be bossed around, since he held all the cards as the biggest buyer of mattresses in the country. So, instead, Mattress Firm began stocking Serta Simmons’s mattresses.

It was hardly a till-jangling success. As the weeks wore on, it became clear that the springs had given up the ghost in Mattress Firm’s sales numbers.

For the six months to June 2017, Mattress Firm’s sales lost about 8%, while it made a bottom-line loss of $133-million. Finally, the fact that there were more places to buy a mattress in the US than to buy a Big Mac burger had come back to bite the industry.

In June 2017, Jooste admitted that there had been “complications” at Mattress Firm. Brian Pyle, an analyst at Old Mutual Investment Group, said people were already expecting pretty nasty figures from Mattress Firm, but investors maybe “didn’t understand how bad it was going to be”.

One of Steinhoff’s directors says Mattress Firm wasn’t just a fraud-ridden disaster in the boardroom, but the company also got it badly wrong in the stores themselves.

For example, they had different brands, Sleepy’s and Sleep Train, which focused on different market segments. But they rebranded everything under Mattress Firm, and lost one of those segments.”

So, whereas before, there had been a Sleepy’s, a Sleep Train and a Mattress Firm on three different street corners facing each other, now there were just three Mattress Firms – making it hopelessly clear how overtraded the industry was.

Jooste was undaunted. Still in 2017, when its new US purchase had begun to hit the skids, he bragged that Mattress Firm “will be a game changer for Steinhoff”.

He wasn’t wrong. But the way that Mattress Firm ended up changing the game for Steinhoff was pretty much the opposite of what he would have wanted.

Fraser Perring, the 44-year old British former social worker, who heads short-selling research group Viceroy, says it was the Mattress Firm deal in August 2016 that tipped them off to the rot inside Steinhoff.

We’d initially looked at Mattress Firm, because we thought it was a candidate for shorting, and then Steinhoff pitched up with this ridiculous deal,” he says.

So we looked at Steinhoff, and saw that they were making all these acquisitions at the time, like Poundland. To buy a company like Poundland, in an environment of inflationary pressures in the UK, was madness,” he says.

He likens Steinhoff’s mad acquisition dash to someone that loses a job, but decides to max out the Mastercard anyway, confident that they’d get a job next month.

They were buying other companies at such a fast rate that no one could properly analyse the underlying business,” he says.

Perring says in every case, Steinhoff pitched these deals as creating “synergies”, that they’d save costs by being part of the same family.

Let’s say you get married – you get ‘synergies’ because you move in together and save costs. If both of you have a job, you should be better off, because you’re sharing costs, like rent,” he says.

But for a company, the only reason you merge is financial: you get economies of scale, future potential benefits, and you can develop brands”.

But at Steinhoff, so few of its deals created real “synergies” that people should have been far more sceptical from the start, says Perring.

Viceroy’s report was almost complete when Jooste resigned, and the stock began to crater. So, hours later, they released their 37-page report.

We were wrong by about a week. We’d calculated that at the current run rate of the German investigation, they’d hit a wall at some stage,” he says.

Like Enron, the details of Steinhoff’s accounting chicanery weren’t hidden.

But nobody bothered checking. “Steinhoff was held out as a prize asset in the South African market. But the reality was, it was just an enrichment programme for certain executives,” he says. DM

Steinheist is published by Tafelberg.

Rob Rose is editor of the Financial Mail. His first book was The Grand Scam: How Barry Tannenbaum Conned South Africa’s Business Elite.

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