It looked like Steinhoff International Holdings NV had reached escape velocity from South Africa’s deepening economic gloom: A furniture retailer emulating Ikea’s model and global ambitions, built by men with their own compelling rags-to-riches stories.

Then the debt-fueled rocket stalled and came crashing down. From her office overlooking Cape Town’s waterfront, Sygnia Investment Management Ltd. Chief Executive Officer Magda Wierzycka watched on her computer screen on Dec. 6 as Steinhoff’s shares began a two-day plunge that cut the price by 80 percent and lopped some 10 billion euros ($11.8 billion) from its market value.

Steinhoff said it couldn’t release its financial results; it was trying to figure out if there was a 6 billion-euro hole in the balance sheet; and CEO Markus Jooste had quit. All of a sudden, investors who’d bet on Jooste and his billionaire Chairman Christo Wiese were rushing to the exits. By the end of last week, Wiese had quit too.

Christo Wiese, billionaire and former chairman of Steinhoff Holdings NV
Christo Wiese, billionaire and former chairman of Steinhoff Holdings NV Waldo Swiegers/Bloomberg

“People were expecting an explanation from Steinhoff,” said Wierzycka, whose company oversees about $14 billion, mostly in pension funds. “Instead we got nothing. In the absence of any real information, you tend to assume the worst."

On Tuesday, its banks will meet with the company to consider whether to keep the retailer afloat or dismantle it and sell it off to get their money back.

Wiese’s stellar reputation is in tatters, his $5 billion fortune down to $2 billion. Surrounded by lawyers and advisers, he sounded exhausted when he answered a call on Dec. 11. “Well, I’m alive,” is all he would say. Jooste didn’t respond to calls or text messages. A Steinhoff spokeswoman didn’t take calls or reply to messages.

Wiese stepped down after Steinhoff said its accounting errors stretch back into 2016. His hold over the company eroded further on Friday when creditors forced the sale of part of his stake. To create breathing space, the embattled retailer will look to raise cash by selling assets and try to persuade banks to refinance its debt. Still, with regulators from South Africa to Germany probing the company and class-action lawyers circling, its struggles are only beginning.

Banks are already unlikely to retrieve some of the 1.5 billion euros they lent Wiese’s own investment firm against Steinhoff shares last year.

Bruno Steinhoff started the company in 1964 in Germany, buying cheap East German furniture and selling it in the West. In 1997, he bought a similar South African company and listed in Johannesburg the following year. Jooste, 56, the gruff son of a postal worker who’d qualified as an accountant and then worked his way up in the world of business, became CEO.

Jooste expanded by buying other companies, the largest deal coming in 2014, when his friend Wiese exchanged his budget clothing brand, Pepkor Ltd., for stock worth $5.7 billion in Steinhoff. He became the largest shareholder and chairman. Wiese, 76, was from a humble background in Upington, a desert outpost eight hours drive from both Johannesburg and Cape Town.

Stellenbosch Mafia

Wiese and Jooste are the face of what South Africans call the Stellenbosch Mafia, the close-knit group of wealthy businessmen who have owned vineyards in the exclusive hills around Cape Town. In an interview with biznews.com last year, Jooste said 10 of the other executives at Steinhoff were his best friends.

He’s also said Swedish giant Ikea, founded by Ingvar Kamprad, was his model.

“We purely follow what he did,” Jooste said in an interview with South Africa’s Financial Mail magazine in October. “Our only problem was we couldn’t build a brand. So our strategy was to buy the number one or two around Ikea in every country.”

Buying Spree

Investors embraced the expansion story, and poured money into Steinhoff; the share price tripled between late 2012 and early 2016. Since the decade began, its international buying spree encompassed French furniture retailer Conforama, British discount chain Poundland Group Plc and Mattress Firm Holding Corp. of the U.S. It tried and failed to acquire French electronics chain Darty Plc last year.

Sygnia’s Wierzycka said investors “hero worshiped” the pair. Susan Gawith, a portfolio manager at Melville Douglas in Johannesburg, who’s covered Steinhoff off and on for 18 years, said most analysts and investors thought following Wiese, South Africa’s richest man at one point, was a safe bet, even if there were “many red flags.” Gawith herself didn’t recommend investing in the company.

‘Warning Signs’

“They believed he was smart and made a lot of money and if you invested in his companies you would do the same,” Gawith said in a phone interview. “Steinhoff reminds many in South Africa of Enron. There were lots of warning signs over the years, but everybody was making too much money to take notice.”

All the way back in 2007, analysts at JPMorgan Chase & Co. spelled out some of those warning signs. In a 56-page research report, they asked why Steinhoff’s accounts lacked “pivotal information” about where it was generating revenue and why it appeared to focus on tax breaks rather than the actual business.

Steinhoff managers complained, but were unable to point out any factual errors, according to Andrew Cuffe, JPMorgan’s head of research in South Africa at the time. In an email copying in JPMorgan clients, one senior Steinhoff executive even accused the analysts of “asking for inside information,” Cuffe said in an interview. Within a year the lender had stopped covering the retailer.

Into the Mud

“That was dragging us into the mud and we didn’t want to play in the mud,” Cuffe said.

Now the group has at least 200 subsidiaries and affiliates, and had exposure to lenders and other creditors of almost 18 billion euros at the end of March, according to data compiled by Bloomberg. In 2015, it registered in the Netherlands and moved its main stock listing to Frankfurt. In the next year alone, it announced deals to buy or go into partnership with six companies in five countries.

The crisis began when Deloitte LLP, after a decade as Steinhoff’s auditor, didn’t sign off on its accounts, forcing Steinhoff to announce that it couldn’t produce audited financial statements. German and Austrian prosecutors had already been investigating possible accounting fraud since 2015.

Initially, Wiese stepped in to run Steinhoff, but the Public Investment Corp., Africa’s biggest fund manager and the administrator of South African government pensions, objected. Wiese’s son Jacob, whom he’d previously put forward as a possible successor, also resigned from the board.

On Dec. 6, a short-selling group called Viceroy Research published a critical report online asserting that Steinhoff was doing deals with entities that were linked to the company and controlled by associates of Jooste to artificially inflate earnings. Viceroy, which describes itself as “a group of individuals that see the world differently,” provides only a gmail address as contact information and declined to comment further.

Wierzycka said that to her mind the report fit with what Steinhoff has said so far.

“It’s very seldom that fraud devours an entire company,” said Wierzycka, whose firm has some exposure to Steinhoff through third parties and index funds. “The ending hasn’t been written yet, but I think it’s all up to the banks. I don’t think that the company survives in its current form.”

—With assistance from Karin Matussek

Bloomberg News