Steinhoff International’s
shares crashed on Wednesday after it revealed “accounting
irregularities” and its CEO quit, shocking investors who had
backed the rapid reinvention of a South African furniture chain
into an international retail empire.

It put Christo Wiese, its largest shareholder and chairman,
in charge and later sought to give “additional comfort” to
investors worried about its ability to fund its existing
operations, saying it had ‚Äćidentified measures that would give
it around 2 billion euros ($2.4 billion) of additional
liquidity.

Steinhoff said chief executive Markus
Jooste, who oversaw its expansion to one of the world’s largest
household goods retailers over nearly 20 years, had resigned and
PwC would undertake an “independent investigation”.

The company later said its chief financial officer remained
in his position and there was no evidence to suggest he had any
involvement in the matters being investigated.

“It’s a red flag, this is something very serious,” said
Peter Brooke, portfolio manager at Old Mutual Investment Group,
a top 20 shareholder in Steinhoff. It also raised wider
questions about South African corporate governance and would
have a negative impact on the country’s assets, he added.

Steinhoff has been aggressively expanding in developed
markets since moving its primary share listing from Johannesburg
to Frankfurt in 2015, snapping up Britain’s Poundland, U.S-based
Mattress Firm and Australia’s Fantastic.

Steinhoff said Wiese would “embark on a detailed review of
all aspects of the company’s business with a view to maximising
shareholder value”, but its South African shares had slumped 61
percent to close at 15.87 rand, after hitting an eight-year low
of 13.50 rand in earlier trading.

Steinhoff stock closed down 63 percent in Frankfurt, while
its bonds also sold off sharply.

A spokeswoman for Deloitte Accountants B.V., which signed
off Steinhoff’s 2016 results, declined immediate comment.

Steinhoff, which also said it was postponing the release of
its 2017 results until the probe was over, has been under
investigation for suspected accounting irregularities by the
state prosecutor in Oldenburg, Germany since 2015.

The company has said that move related to whether revenues
were booked properly, and whether taxable profit was correctly
declared.

Reuters reported last month that Steinhoff did not tell
investors about almost $1 billion in transactions with a related
company, despite laws that some experts say require it to do
so.

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It is unclear what accounting irregularities the company was
referring to on Wednesday. A spokesman declined further comment
and attempts by Reuters to contact Jooste were not successful.

There were wider repercussions in the Steinhoff group, with
Ben la Grange, chief executive of Steinhoff African Retail
(STAR), which includes control of Shoprite,
also resigning and STAR shares falling more than 30 percent.

Omri Thomas of Abax Investments, the 15th largest investor
in Steinhoff, said because there was no immediate prospect of
any clarity on its results, it was hard to put a value on
Steinhoff and this had prompted the severe share reaction.

TAX RATE QUESTIONS

Analysts have long questioned how Steinhoff managed to
achieve such a low tax rate. Its tax rate has averaged 12
percent over the past five years — half the headline corporate
tax rate in its main markets and less than half the rates paid
by listed competitors including France’s Casino, Germany’s Metro
AG and South Africa’s Woolworths.

Experts say such low tax rates can be the result of complex
corporate structures which stretch accounting rules and such
arrangements are occasionally challenged by courts as unlawful.

“The company recorded a very unusual tax rate of c. 15
percent and also guided that this would be the rate going
forward,” Juergen Kolb, an analyst at Kepler Cheuvreux, said in
a note, adding that if this tax rate was at risk it could also
hit Steinhoff’s cashflow.

Kolb also raised the possibility that as chairman, Wiese’s
role could now come under scrutiny too.

Steinhoff, which employs 130,000 people, did not respond to
requests for information about what, if anything, Wiese knew
about the accounting problems now being investigated.

Investors also told Reuters they are concerned Wiese may be
forced to sell shares he bought last year with borrowed money,
which would depress Steinhoff’s stock further.

Wiese borrowed 1.6 billion euros ($1.9 billion) to buy
additional Steinhoff shares through a family trust in September
2016, pledging 3.2 billion euros of his existing holding as
security to the investment banks that lent the money.

With the share price plunge taking the security below the
value of the loan, Wiese may be required by the financing banks
— Citi, Goldman, HSBC and Nomura – to post more shares as
collateral, or sell part of his holding.

Reuters