Nicola Mawson

Through a complicated process in which the Steinhoff holding company sold and otherwise moved brands around through various entities, it was able to artificially generate profit to close the gap between what it actually earned and its anticipated bottom line.

A PwC investigation into the company, which runs into thousands of pages, showed that a company set up to ostensibly hold several brands, or trademarks, was not actually an entity in which Steinhoff held a minority stake.

Business Report secured a copy of this probe through a Promotion of Access to Information Act application.

The workings of the buying and selling of the trademarks was deliberately complex to make it nigh impossible to work out the financial relationship between the entities involved and their ownership.

PwC stated that: “The detailed findings contained in this section of the report show a complex set of transactions that occurred during the period 2001 to 2017 that include the incorporation, sale and purchase of entities, brands, the financing of these transactions as well as the use of various entities within and outside of the Steinhoff Group to achieve a position which would not have been possible had the brands been retained within the Steinhoff Group throughout the full period.”

The key mechanism, at the top level, to move these brands around was apparently the creation of GT Global Trademarks with the objective of housing the Steinhoff Group related brands.

PwC stated that, based on the analysis of certain information, it seems the actual objective of creating GT Global Trademarks was to record the Steinhoff Group related brands at a value higher than allowed under accounting standard IFRS for internally generated brands.

“The sale of these brands by the Steinhoff Group also allowed Steinhoff entities to recognise profit, as internally generated brands would have been recorded with no or little value in the accounting records of the Steinhoff Group before the sale,” it said.

Effectively, the brands were worth nothing prior to their sale, at which point they accrued artificial value when housed in different units. The complicated structure evolved from the creation of an entity called GT Global Trademarks with the objective of housing the Steinhoff Group related brands.

GT Global Trademarks was fully owned by GT Branding Holding which, in turn, was 45% owned by Steinhoff. As a result, it was recorded as being independent of Steinhoff. Yet, the majority 55% stake was owned by Fulcrum Investment Partners, which was apparently a closely related entity.

GT Global Trademarks held the Steinhoff manufacturing brands and earned royalty income on the use of these brands from Steinhoff. These brands included Trend Design, Linea Italia, and Dieter Knoll Collection among others.

PwC noted that there was an “apparent ‘side letter’ agreement between Steinhoff and GT Global Trademarks whereby Steinhoff would earn 90% of the profits of GT Global Trademarks when GT Global Trademarks sells their brands”.

This translated into Steinhoff earning 90% of the profits from a company in which it had an indirect 45% stake.

Allegations and statements taken from interviews PwC conducted indicated that the reasoning between selling and buying back the brands between approximately 2001 (when discussions to form a brand holding company started) and 2017 was to “inflate the asset value of the internally generated brands of Steinhoff,” PwC stated.

This, it said, resulted in the brands being used “in many instances to fill the gap between the budgeted and actual profit”.

This was especially the case in 2014 when former, disgraced, and now deceased CEO Markus Jooste asked then chief financial officer for Steinhoff Europe, Dirk Schreiber, how profit could be “created”. “Schreiber’s suggestion in this regard was that the brands should be sold,” said PwC.

The Financial Sector Conduct Authority found that Schreiber was involved in fraud. He cooperated with the Authority and escaped an administrative penalty.

BUSINESS REPORT

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PwC investigation: How Steinhoff used complex brand sales to inflate profits