Steinhoff convertible bonds

What is up with Steinhoff, what was that yesterday? The company announced a convertible bond offering. When you buy debt from a business and convert it to equity, that is what a convertible bond is. It does two things, one, it dilutes you the shareholder, it also gives you as the shareholder less obligations to the bond holders. In effect, the party holding the convertible bond will be paid a regular coupon payments (interest), in this case with Steinhoff it is 1.25 percent.

Which you may well say is an awesome outcome for the company, managing to raise 1.116 billion Euros (at an exchange rate of 13.90 Rand to the Euro) for 6 years. Steinhoff has the option to redeem the outstanding bonds (pay them out the principal and accrued interest) by September 1 2019 if the parity value of the Bonds translated into Euro at the prevailing exchange rate exceeds EUR 130,000 for a specified period. Understood all of that?

As they point out, the initial conversion price represents a 35 percent premium to the volume weighted average price (WVAP) of the ordinary price on the JSE, in other words 103.46 (and some change) Rands a share. That part is easily understandable, the price at which it becomes attractive for the convertible bond holders to convert debt to equity is around 140 Rand a Steinhoff share, that is my best guess. The bonds will convert (if chosen) to around 150 million Steinhoff shares, which as the announcement points out is 4.1 percent of the issued share capital.

Also, whilst Steinhoff were at it, below the announcement of the issuance (convertible debt is to be issued in Austria), they explain what the funds will be used for. Further share repurchases to manage and counter dilution, as well as for general corporate purposes. I am still trying to wrap my head around that.

Most exciting however is the potential listing of Steinhoff on the "Prime Standard of the Frankfurt Stock Exchange" accompanied by an inward listing on the JSE. This will take place in the fourth quarter of this year. And this part is also interesting: "It is anticipated that a Dutch incorporated holding company will acquire all of the issued shares in Steinhoff in exchange for shares in the Dutch holding company, by way of a scheme of arrangement pursuant to the South African Companies Act, 2008."

OK? So all the shares here on the JSE will then be owned by a Dutch Holding company, not too dissimilar to the setup that Reinet has, their listing is in Luxembourg. You will then have one share in the Dutch holding company for each one here, think along those lines, at least in percentages. None of this is new news, it is an evolution of the company, the brilliance of that management team and execution. Having done some hard charging, Steinhoff have ended up with principally a European business. As such the inward listing on the JSE and principal listing on the Frankfurt Stock Exchange is justified.

And before all of that happens, Steinhoff are expected to report numbers in September, there should be a decrease in earnings as a result of all the massive deal related activities that have seen the number of shares in issue increase substantially. There are now 3.667 billion shares in issue, there was half that in 2013. Such has been the pace of deal making, acquiring JD Group (second time lucky) and Pepkor. Pursuing a strategy that has certainly worked well for them, the number of shares in issue in June 2005 was less than one-third of what it is now. That is not for the purists, this company is certainly run by some hard charging and very hungry individuals, Markus Jooste (53), Danie van der Merwe (56), Frikkie Nel (55) and Piet Ferreira (59) are up for it. After all, 50 is the new 30, right?

If you do not own any of these shares, you should. They are likely to report earnings per share marginally lower than last year, the Frankfurt listing could see a potential re-rating of the stock, and the dividend policy from here might change a little as the business "matures" in the coming three to five years. September, we wait for that sports lovers.