Last month the release of the 2019 annual financial statements (AFS) alluded to yet more of the complexity that lies at the heart of the Steinhoff project. A note tucked away on page 224 of the AFS flags the possibility that Wiese, who was the largest shareholder in Steinhoff with 1.06 billion shares at the time of the December 2017 collapse, does not have an undisputed right to the R59 billion claim he lodged against Steinhoff with much fanfare in April 2018.

The brief note makes reference to a previously little-known entity called Conservatorium, which turns out to be involved in no less than four transcontinental court actions targeting Wiese’s claim. The actions have been launched – two in Cape Town and two in Amsterdam – as a direct result of the €1.6 billion loan Wiese used to acquire 314 million Steinhoff shares in 2016. Wiese used a private Amsterdam-registered company called Upington, which he held 89%, to make that share purchase.

The brief note in Steinhoff’s 2019 AFS describes the long list of contingent liabilities and other litigation facing the once-high-flying international retail group.

It states that the Wiese-related claims were instituted by Thibault (another Wiese-controlled unlisted entity) and Upington and launched in April 2018. The larger of the two claims made by Wiese-related companies is for R34.7 billion (£2.1 billion) and is for the restitution of the Pepkor shares that Wiese gave to Steinhoff in exchange for Steinhoff shares.

A second claim for €1.6 billion relates to the September 2016 purchase of the 314 million Steinhoff shares by Upington. When it initiated the action in 2018 Upington said it had a right to this money because it had subscribed for the shares on the basis of financial information that subsequently proved to be fabricated.

Both of these claims are at the centre of the transcontinental legal battle.

The legal challenge by US-registered Conservatorium highlights the risks of using debt to fund equity purchases, which was one of Wiese’s favoured strategies and served him well for most of this career – until Steinhoff. Few outsiders realised just how heavily geared Wiese’s Steinhoff investment was until the large international banks which provided some of his funding disclosed, weeks after the December 2017 announcement about ‘irregular accounting’, that they had suffered hefty losses on their exposure to Wiese.

As we all now know, back in 2016 Wiese, through Upington, secured a €1.6 billion non-recourse margin loan to purchase the 314 million Steinhoff shares. The loan was provided by four (later increased to eight) financial institutions – Nomura, HSBC, Citibank and Goldman Sachs. As security for the loan Wiese pledged, through Upington, 750 million Steinhoff shares (and all claims attached to those shares) to the lenders. The security was protected for the lenders by specific restrictions regarding the transferability of the shares.

(The little over two times cover on the September 2016 purchase price of the shares reveals how attractive Steinhoff must have been to these global financial institutions, so attractive indeed that, according to Wiese’s court papers, the loan was negotiated over just one week in September 2016.)

As a result of the share price crash in December 2017 the lenders suffered a loss of around €1 billion. However, in terms of the security Wiese/Upington had provided, they still had claims on any proceeds paid out to Upington in relation to Upington’s claims against Steinhoff.

These claims were purchased by Conservatorium in June 2019. That was nine months after Wiese had rather dramatically liquidated Upington, with the approval of the Amsterdam court, and without notifying the lenders. During this process Upington ceded the litigation claims it had against Steinhoff to Titan – yet another Wiese-controlled unlisted entity. That controversial move, which is at the heart of Conservatorium’s challenge, means Upington’s initial claim has been assumed by Titan.

Conservatorium has launched the four legal actions in a bid to secure its claim and to ensure any proceeds paid out on either of Wiese’s claims are first used to repay damages suffered by the lenders.

Its actions include proceedings in Amsterdam aimed at setting aside the liquidation of Upington.

As Conservatorium sees it, “The Wiese family is attempting to misappropriate claims relating to the pledged shares by instituting claims rightfully belonging to the lenders’ successor-in-title, the Applicant,” states the US company in its application to the Cape High Court.

“As a result of Steinhoff’s unlawful actions, the lenders have suffered losses of at least €993.5 million. The lenders’ only recourse to recoup these losses is the claims pledged to the lenders appropriated by the Wiese family. This application clarifies that the correct claimant against Steinhoff is, in fact, the lenders who advanced the funds to enable the Wiese family to acquire the shares, to whom the Wiese family pledged all claims relating to the shares as collateral; and not the Wiese family through its prior share ownership in Steinhoff.”

Wiese’s legal team questions Conservatorium’s ownership of the lenders’ claim describing it as “unsubstantiated”.

Note 22.3 to the Steinhoff annual financial statements indicates the Steinhoff board takes the Conservatorium claim seriously. It describes Conservatorium as the “legal successor in title to Upington’s lenders” and states Conservatorium has been granted leave, through Dutch legal proceedings to levy a prejudgment attachment on Upington’s claims against Steinhoff NV and Steinhoff International Holdings Proprietary Limited.

As one analyst noted, “Wiese’s R59 billion legal action was motivated by a determination to get a seat at the table when it came to divvying up whatever value was left in Steinhoff, now it looks as though his seat might be a good bit smaller than he’d hoped.”

Moneyweb