Tuesday, 6 December 2016

Wirecard (WDI GR) ... 'Skin in the Game'?

Tuesday 6th December 2016

No sooner had I finished writing the post below, than I was alerted to yet another range of alarming concerns being raised regarding Wirecard (WDI GR). Whereas originally, there was the:

FT (here, here, here, here, here, herehere, here, here, and here),
J Capital Research,
then Zatarra Research & Investigations

THIS time, an unnamed author has meticulously pieced together a whole range of information. It is fascinating stuff.

This follows on from the engrossing article published a few weeks back in Reuters:
How a British town became a hub for online porn and poker

As for me, I have written on Wirecard before (see here), focusing on its acquisition of the Indian, GI Retail business.

This post will likely be another of a series of further posts looking at Wirecard.

In the spirit of openness, I am short Wirecard. Wirecard is my biggest short position since Globo (GBO LN). In fact, my confidence has persuaded me to make it my biggest short ever. Time will tell if this is mere swagger. However, my money is where my mouth is which is not altogether clear for others, and so on that subject I present these observations below ...

Director Purchases

I've written on Director purchases before: see here - Director purchases and sometimes lazy longs.

By and large, investors like management with stakes in the companies they run. The thinking goes, that with 'skin in the game', any weakness in the share price is felt not just by the investors but also by management. Hence, interests are closer aligned, and there's few better signals to get an investor's fists pumping than seeing a Director dip his/her hand in their pocket to hoover up some stock. 

Usually this simple reasoning is valid. Usually. 

Aside from the example of Connaught in the link above, more recent examples of where this reasoning has gone wrong include:
  • Rob Terry, the former Chairman of Quindell (now Watchstone Group Plc WTG LN) and his use of the services of Equities First Holdings (EFH); and 
  • Konstantinos Papadimitrako, the former CEO to the fraud, Globo Plc (see concerns raised here). 
In Rob Terry's case, he initially led market participants to believe that he'd pledged some of his Quindell stock as collateral to an outfit called Equities First Holdings (EFH) in exchange for cash that he then intended to use to buy further Quindell shares. Most of Quindell's shareholders rejoiced at this gearing up. However, in the event, while Mr Terry bought a few shares, he bought nowhere near as much in value as the cash amount he received when pledging his stock for the loan. Mr Terry then withdrew from any further dealings with EFH, kept the majority of the cash from the pledging of his stock, and as soon as he stepped down from Quindell's board, he sold a load more stock into the market. 

In the example of Papadimitrako, he merely dumped as much of his c. 18% stake in Globo as was possible in the months leading up to Globo's bankruptcy. This selling was concealed from Globo's hapless shareholders as Papadimitrako simply didn't report his selling until the days after he came clean on the falsification of Globo's financials. All told, Papadimitrako probably pocketed at least £12 Million through selling stock and not declaring it until it was too late. 

There are other examples, but in each case of the three given above, Connaught, Quindell, and Globo, despite flags being raised well in advance of each company's downfall, longs were seemingly always comforted by the management's 'skin in the game'.

Purchases by Wirecard's Management

According to Bloomberg, through his German company, MB Beteiligungsgesellschaft mbH (MB B), Markus Braun, Wirecard's CEO, is Wirecard's third largest shareholder. Bloomberg shows that MB B holds 7% of Wirecard's stock at the latest count, not far behind the institutions, Jupiter Investment Management and Alken Asset Management; the No. 1 and No. 2 shareholders respectively. The other major holdings can be seen in the table below: 

Major holdings in Wirecard AG
Source: Bloomberg
Bloomberg also has a feature which shows the timing of Markus Braun's sales and purchases through his German company, MB B. The data goes back to at least mid 2008. Red is sales, green represents purchases. This can be seen in graphical form below:

Sales and purchases by MB Beteiligungsgesellschaft mbH (MB B - Markus Braun's German company)
Source: Bloomberg
The timing, volume and closing price on the date of transaction of those MB B sales and purchases is shown by Bloomberg in tabular form below:

Sales and purchases by MB Beteiligungsgesellschaft mbH (MB B - Markus Braun's German company)
Source: Bloomberg
This information makes for some interesting number crunching. Word of warning, I'm assuming Bloomberg data is an accurate source and also that I've not made any inadvertent errors in my maths, so please do double check with your own Panasonic scientific calculators. 

Ok. Here goes ...

The Number Crunching

On my maths using Bloomberg's data, since July 2008, Markus Braun has purchased 1,365,000 shares in Wirecard through his German company, MB B. 

Again on my maths using Bloomberg's data, since July 2008, Markus Braun has sold 1,414,050 shares in Wirecard through his German company MB B. 

However, with the exception of the 50,000 shares and a further 150,000 shares, which MB B acquired in 2008, the remaining 1,165,000 were purchased after MB B sold 1,414,050 shares in 2012.

At the closing prices listed by Bloomberg in the table above (which does not necessarily mean the actual prices realized but might be a ball park figure):
  • The purchases in 2008 would have cost MB B, c. €1 Million. This is by no means small change. 
  • The subsequent sales in 2012 would have brought to MB B, proceeds of c. €24.2 Million. A material win. 
  • The subsequent purchases from 2015 onward, would have cost MB B, c. €45.4 Million. A significant outlay. 
Now, of course there is some rounding error here and there is no guarantee that sales and purchase proceeds and costs would be made exactly at the closing prices listed above. But ball park figure wise, it would seem possible that MB B has hauled in c. €24.2 Million in share sale proceeds and spent c. €46.4 Million in purchasing shares in Wirecard. A net expenditure of c. €22.1 Million on Wirecard stock by MB B since 2008. Wirecard's shareholders must surely be pumping their fists at the results of that number crunching. 

So what is the source of that net c. €22.1 Million spent on Wirecard shares?

Perhaps Markus Braun is very well paid? 

According to Wirecard's 2015 annual report, Markus Braun received total remuneration payments (including benefits) of c. €2.4 Million (2014: c. €1.8 Million). 

According to Bloomberg's data and on the same basis as used above, MB B spent c. €26.6 Million on Wirecard share purchases in 2016, and c. €18.8 Million on Wirecard share purchases in 2015. 

So even though MB B hauled in c. €24.2 Million in proceeds from share sales in 2012, it would appear that MB B's net purchases of c. €22.1 Million dwarfs Markus Braun's annual pay. 

Perhaps there's another source?

It would seem that the annual balance sheets for Markus Braun's German company, MB Beteiligungsgesellschaft mbH (MB B) are filed at the German Company Register: www.bundesanzeiger.de

Unfortunately, the most recently available balance sheet for MB B is as of 31 December 2014. Nonetheless, this bears what some may find to be interesting information. Here is that balance sheet in German - and then a google translation (which I have assumed is accurate) into English - below:

Balance sheet of MB Beteiligungsgesellschaft mbH to 31 December 2014
Source: www.bundesanzeiger.de

Balance sheet of MB Beteiligungsgesellschaft mbH to 31 December 2014 - Google translation into English
Source: www.bundesanzeiger.de
According to the MB B filings, as of 31 December 2014, the company held:

  • c. €31.9 Million in financial assets, up from c. €7.0 Million in 2013. It may be worth noting that after the sale of 1,414,050 shares in 2012, that according to data on Bloomberg, the first of MB B's share re-purchases didn't occur until May 2015. This entry may possibly represent MB B's other holdings of Wirecard stock at the time, although one would have thought the market value to be higher than c. €31.9 Million.  
  • c. €28.9 Million in receivables and other assets, up from c. €22.7 Million in 2013. 
  • c. €0.7 Million in cash and cash equivalents, down from c. €7.3 Million in 2013. 
  • c. €25.1 Million in liabilities, up from c. €31 Thousand in 2013. 

Further down the balance sheet of MB B, there are some notes corresponding to the balance sheet items. Here are the notes in German - and then a Google translation into English (which I have assumed is accurate) - below:

Notes to the balance sheet of MB Beteiligungsgesellschaft mbH to 31 December 2014
Source: www.bundesanzeiger.de
Notes to the balance sheet of MB Beteiligungsgesellschaft mbH to 31 December 2014 - Google translation into English
Source: www.bundesanzeiger.de
As shown above, these notes appear to show that as of 31 December 2014, MB B held receivables due from its shareholders, which presumably is Markus Braun, of c. €28.4 Million.

The notes also appear to re-highlight that MB B had c. €25.1 Million in liabilities.

Unfortunately there is no further information on the balance sheet items so it is not possible to conclude:
  1. Why Markus Braun appeared to owe MB B c. €28.4 Million in 2014, nor what it related to?
  2. If the c. €25.1 Million was a debt item, and if so, WHO had MB B borrowed the c. €25.1 Million from and was any security provided had it been a debt?
Although there is scant detail, one explanation - from the notes to the balance sheet - may be that MB B borrowed c. €25.1 Million from an unknown party and has sent some or all of the monies and more to Markus Braun. There are of course alternative explanations as to the funding of Markus Braun's share purchases. For example, he may simply be incredibly rich or there may be tax advantages to this arrangement. But whether this answers why Markus Braun possibly owes MB B the monies he did in 2014 and who MB B possibly borrowed from in 2014 is unclear.

And another thing
As far as I can tell, Markus Braun is not a member of the Board of Management or Supervisory Board of Wirecard Bank. In light of the above, I found that interesting.  

Wirecard Bank - Board of Management and Supervisory Board
Source: www.bundesanzeiger.de
Wirecard Bank - Board of Management and Supervisory Board - Google translation into English
Source: www.bundesanzeiger.de
I am short Wirecard.

Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog. 

Monday, 21 November 2016

Vodafone (VOD) ... time to turn on a dime?

Monday 21st November 2016

Apropos of just looking at its share price chart (see what I mean below), I noticed that Vodafone (VOD LN, mkt cap £54Bn) has a habit of turning on a dime. Valuation wise, this company has always been something of a mystery to me. Its P/E is not for the faint-hearted, while the EV/EBITDA is not as scary, and consensus forecasts would have it offer an attractive - albeit not well covered - income yield. 

Valuation aside, I notice that in the last five or so occasions where it has approached oversold and the 200p/shr level, it's swiftly turned around and rallied around 10% over the course of the following month. It's currently at 203p/shr and at its most oversold for over a year. Whether this means it will repeat history I do not know. However, I saw January 2017 225p calls, providing 60 days to expiration, at 0.75 pence per lot. This seemed to me to be an attractive price to pay in the light of its historical performance. So in a modest size, I bought them.    

Vodafone share price since Sep 2015
Source: Bloomberg
Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog. 

Monday, 19 September 2016

Mitie (MTO) ... yet another "one-off"

Monday 19th September 2016

Palm to forehead (Thwack!) time for holders of Mitie (MTO, mkt cap £742m) this morning. 

The group has announced a profit warning where: 
"Operating profit for the full year is now expected to be materially below management's previous expectations as a result of a continuation of the pressures experienced in the first half and further one-off costs of organisational change associated with our cost efficiency programmes, which are expected to total up to £10m in the year."
"further one-off costs" ... hmm. Doesn't the fact that they are labelled "further" kind of suggest they may no longer be "one-off"?

In fact, Mitie has a long history of so-called "one-off" or "re-structuring" associated costs. On my maths, these "other items" together with restructuring, acquisition related and exit costs, have cumulatively totaled c. £216m since 2011. Make that c. £226m as of this morning's update. 

However, I fear there will be yet, further, "one-off" costs to come. I continue to believe that Mitie's P&L has been writing profits its balance sheet can't cash. 

Mitie's amounts recoverable on contracts and other trade receivables classed as non-current assets, continued to pile up in the last accounts. Now standing at near £90m from £0 in 2010. 

Mitie amounts recoverable on contracts and other trade receivables classed as non-current assets, £m
Source: Mitie annual reports
Mitie share price
Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog. 

Monday, 25 July 2016

Rocket Internet (RKET GY) ... And So It Goes

Monday 25th July 2016

Groupon (GRPN US, mkt cap $2.2bn) acquired CityDeal Europe GmbH in May 2010. CityDeal was owned and founded by Oliver Samwer, Marc Samwer, and Alexander Samwer; the Samwer brothers. They are also the founders of Rocket Internet (RKET GY, mkt cap €2.9bn). CityDeal was effectively a replica of Groupon, although principally focused on the German market.
We began our international operations in May 2010 with the acquisition of CityDeal Europe GmbH, or CityDeal, which was founded by Oliver Samwer and Marc Samwer. Since the CityDeal acquisition, Messrs. Samwer have served as consultants and been extensively involved in the development and operations of our International segment. 
Source: Groupon 2012 10-K filing 
GRPN's 2012 10-K filing suggests that it paid up to $204 million for CityDeal in May 2010, five months after the business was launched in January 2010. Yes months!
Acquisition‑Related
In May 2010, we acquired CityDeal, a European‑based collective buying power business launched in January 2010 that provided daily deals and online marketing services substantially similar to the Company. As part of the overall consideration paid, we were obligated to issue additional shares of our common stock in December 2010 due to the achievement of financial and performance earn-out targets. We recorded a liability on our consolidated balance sheet as of the original acquisition date for this consideration and subsequently remeasured the liability on a periodic basis until final settlement. As a result of this remeasurement, we recorded a total charge of $204.2 million in acquisition‑related expenses in 2010, which was partially offset by other nominal acquisition‑related items.
Source: Groupon 2012 10-K filing
GRPN has been something of a disappointment. Having floated at around $20 a share in late 2011, its share price is now some 82% lower at $3.76/shr. Whether the CityDeal acquisition created value or destroyed value for GRPN is uncertain. What is more clear cut is the destruction brought about by the other business which the Samwer brothers sold to GRPN; E-Commerce King Limited.

E-Commerce King Limited


According to GRPN's 2012 10-K filing, in January 2011, GRPN acquired 40% of the ordinary share capital of E-Commerce King Limited in exchange for $4.0 Million.
Equity Investment in E-Commerce King Limited
In January 2011, the Company acquired 40.0% of the ordinary shares of E-Commerce King Limited (“E-Commerce”), a company organized under the laws of the British Virgin Islands, in exchange for $4.0 million. The Company entered into the joint venture along with Rocket Asia GmbH & Co. KG (“Rocket Asia”), an entity controlled by former CityDeal shareholders Oliver Samwer, Marc Samwer and Alexander Samwer (the “Samwers”). Rocket Asia acquired 10.0% of the ordinary shares in E-Commerce. E-Commerce subsequently established a wholly-owned foreign enterprise that created a domestic operating company headquartered in Beijing, China (“GaoPeng.com”), which operates a group-buying site offering discounts for products and services to individual consumers and businesses via internet websites and social and interactive media. GaoPeng.com began offering daily deals in March 2011 in Beijing and Shanghai with expansion to other major cities in China to follow.
Source: Groupon 2012 10-K filing
This would suggest a $10 Million valuation for the entire issued ordinary share capital. GRPN's stake in E-Commerce King, was with a joint venture with Rocket Asia GmbH & Co. KG, which was controlled by the Samwer brothers. Rocket Asia acquired 10% of the ordinary share capital in E-Commerce King.

GRPN went on to highlight that around six months later, GRPN acquired a further stake in E-Commerce King, purchasing its increased stake in E-Commerce King from the Samwer brothers', Rocket Asia, for $45.2 Million. GRPN also injected a further $26.7 Million into the E-Commerce business during the same year.
On July 31, 2011, the Company entered into an agreement to purchase additional interests in E-Commerce for a purchase price of $45.2 million from Rocket Asia consisting of 2,908,856 shares of non-voting common stock. See Note 15 “ Related Parties ”. The investment increased the Company's ownership from 40.0% to 49.0%. In addition, the Company made various cash investments for an aggregate amount of $26.7  million in the year ended December 31, 2011. At the same time, the remaining investors made additional proportionate investments that resulted in no change to the Company's ownership percentage in E-Commerce.
Source: Groupon 2012 10-K filing
GRPN's stake rose from 40% to 49%, suggesting that the $45.2 Million purchase valued E-Commerce King at c. $502 Million. That's an impressive 50x increase in valuation in a matter of six months. Although somehow the remaining investors made proportionate investments which resulted in no change to GRPN's ownership percentage in E-Commerce King.

Incidentally, E-Commerce King appears to have racked up losses of $26.5 Million during its first year of trading.
The Company recorded its share of the loss of E-Commerce in the amount of $26.5 million within “Equity-method investment activity, net of tax” in the consolidated statement of operations for the year ended December 31, 2011.
Source: Groupon 2012 10-K filing
A few observations:

  • Incredible uplift in valuations in short order. 
  • As astonishing losses in short order. 
  • The Samwer brothers didn't stick around. 

Skip forward a year


During 2011 and 2012, GRPN made additional cash investments into E-Commerce King of $32.9 Million, increasing its stake to 49.8% along the way. Then in June 2012, E-Commerce King was absorbed by Life Media Limited (F-tuan). In return for GRPN's 49.8% stake in E-Commerce King and a further $25 Million in cash, GRPN received a 19% interest in F-tuan.
In June 2012, Life Media Limited ("F-tuan"), an exempted company incorporated under the laws of the Cayman Islands with operations in China, acquired E-Commerce. In exchange for its 49.8% interest in E-Commerce and an additional $25.0 million of cash consideration, the Company received a 19% interest in F-tuan in the form of common and Series E preferred shares. The Company paid $5.0 million of the cash consideration on June 25, 2012 and the remaining amount was paid on July 2, 2012.
Source: Groupon 2013 10-K filing
However, GRPN's stake in E-Commerce King was seemingly valued at $128.1 Million when it was transferred to the new entity, F-tuan. Then this value was impaired by $50.6 Million to $77.5 Million by December 31, 2012. This was c. 85% lower than the heady times when it bought an additional 9% for $45.2 Million from the Samwer brothers at an implied valuation of c. $502 Million, just 18 months earlier.  
Cost Method Investment in Life Media Limited (F-tuan)
The investment in F-tuan is accounted for using the cost method of accounting because the Company does not have the ability to exercise significant influence. Accordingly, the investment is adjusted only for other-than-temporary declines in fair value, certain distributions and additional investments. The $77.5 million carrying amount of the investment represents the $128.1 million fair value on the date the Company obtained it less the $50.6 million impairment discussed below. The estimated fair value of the investment as of December 31, 2012 was $77.5 million.
Source: Groupon 2013 10-K filing

Skip forward another year


By 2013, GRPN's full investment in F-tuan was written down to ZERO!
Investments in E-Commerce and Life Media (F-Tuan)
In June 2012, Life Media Limited ("F-tuan"), an entity with operations in China, acquired the Company's 49.8% interest in E-Commerce King Limited ("E-Commerce"), an entity with operations in China. In exchange for its interest in E-Commerce and an additional $25.0 million of cash consideration, the Company received a 19.1% interest in F-tuan in the form of common and Series E preferred shares. The Company recognized a non-operating gain of $56.0 million as a result of the transaction, which is included within "Other expense, net" on the consolidated statement of operations for the year ended December 31, 2012. The gain represented the excess of the fair value of the Company's investments in F-tuan over the carrying value of its E-Commerce investment as of the date of the transaction and the $25.0 million of cash consideration.
 
In August 2013, the Company entered into an exchange transaction with F-tuan whereby it received newly issued shares of Series F preferred stock in exchange for all shares of F-tuan common stock previously held by the Company and $8.0 million of cash consideration, which was paid in two installments of $6.5 million and $1.5 million in August and October 2013, respectively. The transaction was recorded at cost. The Company’s investments in F-tuan following this transaction are in the form of Series E and Series F preferred shares. Those preferred shares rank pari passu with certain other classes of F-tuan’s outstanding preferred stock and have an aggregate liquidation preference of $85.5 million. The Company’s voting interest in F-tuan remained 19.1% after the transaction. 
The Company's investments in the Series E and Series F preferred shares of F-tuan are classified as available-for-sale securities because the investee's Memorandum of Association provides for redemption of the preferred shares at the Company's option beginning in October 2017. The Company's investment in the common shares of F-tuan, which were held prior to the August 2013 exchange transaction, was accounted for using the cost method of accounting because the Company did not have the ability to exercise significant influence over the operating and financial policies of the investee. As discussed below, the Company's investments in F-tuan were written down to zero through an other-than-temporary impairment charge as of December 31, 2013, and continue to have an estimated fair value of zero as of December 31, 2014.
Source: Groupon 2014 10-K filing
That's some ride from a $10 Million valuation in January 2011, to an implied $502 Million valuation six months later, and all the way back down to ZERO within a few years.

This is precisely what I expect will happen to almost if not all of Rocket's "proven winners". And for that reason I am short Rocket.

Now ... how about those Kinnevik write downs, huh?
Hint: FT Alphaville Markets Live: Friday, 22nd July, 2016

Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog.