The House of Wirecard
Dan McCrum | Apr 27 09:30 | 16 comments | Share
Wirecard is a little known German tech stock worth €5bn, and a puzzle. It offers payment services, owns a Munich bank, and transacts millions of online credit card payments behind the scenes at familiar websites. It grows at breakneck pace, but buys obscure payment companies around the world which keep the growth going.
The company says it was founded in 1999, but it went bust after the dotcom crash. The real beginning was 2002, when chief executive Markus Braun took over and injected cash. Three years later Wirecard joined the stockmarket through the reverse takeover of a defunct call-center business. Allegations of balance sheet inconsistencies were made in 2008. The accuser subsequently landed in jail, and the stock has since been a rocket, rising eightfold.
Enthusiastic investors have given Wirecard half a billion euros to spend, and the company used much of it to buy customers, so-called portfolios of relationships, piling almost all the cash its business has produced since 2009 into these customer relationships.
The puzzle is an accumulation of questions: why does the company pay big sums upfront, months before deals complete? Why are key parts of transactions not fully transparent? Why spend millions on struggling Asian businesses? Why do accounts filed in Singapore not match totals reported in Germany? What are €670m of intangibles on the balance sheet really worth?
Cash up-front
Consider the pre-payments. Before October 2010 Wirecard had announced smaller deals, and it has done so since, but that month the company made no mention of a €13m “pre-payment”. The sum was only recorded in notes to the annual report, and again in a table published two years later reclassifying €13m as “customer relationships”.
The company told us the prepayment was part of a deal announced 14 months later, in December 2011, to buy Singapore payments group Systems@Work. The pre-payment was not disclosed at the time, for a transaction described as comprising €34m in cash, €13m in future “earn-out” payments, and the assumption of €12m of liabilities.
Wirecard says pre-payments secure the exclusive right to negotiate, and they are a feature of its Asian deals. For the December 2012 purchase of Trans Infotech, a provider of payment services for banks in Vietnam, Cambodia and Laos, it paid €17m of the €21m price in advance. Buying PT Aprisma Indonesia for €73m (including assumed debt, but before €15m of earn-outs) last year, Wirecard paid €26m months before closing.
“I don’t know of any clients who would pay a substantial amount of the purchase price at signing, or to get exclusivity. That’s not a feature I saw in Asian deals”, said one veteran M&A lawyer who declined to speak on the record. “It is not completely unheard of for a company to ask for a 5 per cent deposit, which ends up becoming a break fee, but it’s kind of rare for buyers who are well known to agree to it.”
Mr Braun said “we don’t see this really as a pre-payment or a down-payment”. He said money either goes into escrow, or the company takes assets to keep if a full deal falls through. “Its just a very smart way to structure M&A”.
Gary McLean, Corporate Partner at Allen & Overy, said that sometimes in Asian deals full payment might be placed in escrow, to show the money is fully available, or to appear as an attractive purchaser versus other buyers. “More often you would get between 5 per cent to 20 per cent in escrow, as a tangible token of good faith and evidence of creditworthiness”. However he said it would be unusual for a large listed company to do so, but particularly rare to give sellers use of cash before the buyer takes control of the target assets. “That’s relatively unusual, because the creditworthiness of the listed buyer should not be a concern if it is an escrow payment, and if you allow use of the purchase consideration itself in the interim period it is akin to a loan”.
A portfolio here, a portfolio there
The structure of some Wirecard transactions is also unusual, with purchases of portfolios of customer relationships disclosed only in Singapore corporate filings. For instance, the €12m of Systems@Work debt was a loan from Wirecard made after the deal was announced “for the acquisition of intangible assets from a third party”, according to the local accounts.
No debt was mentioned in the announcement of the €21m Trans Infotech deal. Yet Singapore filings show on the day it was announced Trans Infotech used the proceeds of a promissory note to buy “a portfolio of customer relationships with certain merchants” for €16.7m. Perhaps unusual for a Singapore business, the consideration was in euros.
Mr Braun says “At such owner led companies… sometimes you have to buy out third party shareholders, or you have to take over assets of sister companies. This is then part of the purchase price”. Wirecard said the loan to Systems@Work was agreed before the deal was announced, and the structure of the Trans Infotech deal reflected an “owner driver heterogenous group”.
Customer lists and intangible values
When Wirecard buys a company, it must record the investment on its balance sheet. Most of the value is typically ascribed to “customer relationships” an accounting convention to reflect the value of repeat customer business, an alternative to the intangible catchall “goodwill”. In one sense it’s an accountant’s shrug, to note where money went.
Yet Wirecard treats customer relationships as real assets. It has a transaction based business model, so says buying customers is a way to sell more payment services. In 2006 it paid €18m for a portfolio of customer relationships, then gave another €17m to the unnamed sellers a year later, saying profits were larger than expected. Occasional purchases of a similar size continued: it told the Financial Times a €15m pre-payment at the time of the Trans Infotech deal was for the purchase of customer relationships from a “sales partner”, completed a year later.
The growth in such customer relationships has been considerable, from €49m in 2009, when the company started to buy-up Asian payments companies to €340m at the end of last year. Investment in these customers, would have accounted for almost all of the cash generated by Wirecard’s operations over the period, however the company raised €139m from shareholders in 2012, and a further €357m at the start of last year.
The unusual nature of the deals and the swift rise in intangible assets invites scrutiny. “I’d look at something that doesn’t seem to fit”, said Stella Fearnley, professor in accounting at Bournemouth University, who advised how to check financial statements: “when you get down to it, you are looking for fake assets or unrecorded liabilities. Everything on a balance sheet, if it isn’t cash, should be generating cash.”
Singapore filings suggest some of the businesses acquired were in poor shape. Trans Infotech PTE ltd lost money in 2012, liabilities exceeded assets and auditors warned it might not remain a going concern. Further losses followed in 2013, and credit extended to customers “past due” more than doubled, to S$4m. Singapore auditors also warned PaymentLink was a going concern risk the year before it was acquired by Wirecard.
Mr Braun says previous arrangements at companies he buys mean “a subsidiary or one part of the company is not showing its full strength, this is exactly why we do such structuring. The first day we take them on, they are all highly profitable”. Wirecard said PaymentLink was profitable, with some business fields terminated and others strengthened. “Especially some inter-co agreements in the past caused negative results, which were also terminated before closing.”
Which set of accounts?
There appear to be discrepancies between different sets of accounts. Singapore filings for Systems@Work, those for a Wirecard subsidiary filed at the German Federal Gazette, and the consolidated group accounts all stated different values for Systems@Work net assets and profits. The company said the different totals reflect different accounting standards and the day of consolidation.
According to Wirecard financial statements, 2012 sales for Trans Infotech PTE ltd were €9m. Accounts filed in Singapore describe sales of only €3m. The company said the €9m figure reflected contributions from “further sister companies (not subsidiaries)” purchased as part of the transaction.
There are some apparent discrepancies in Wirecard’s consolidated accounts as well, when comparing cash flows with movements in balance sheet totals.
For instance, in 2012 and 2013 the balance sheet and cash flow figures related to a c€36m increase in “sales partner financing” do not correspond. It is only over two years that they almost tally. Wirecard said “a loan was given out in 2012 and it was cash relevant in the next period”.
In the first quarter of 2014 the value of customer relationships on the balance sheet rose €68m, a period when the consolidation of PT Aprisma Indonesia boosted the figure by €59m (a lower amount than the €67m value described in the 2013 annual report). The company said additional earn out payments on transactions which had already closed were responsible for the rest of the rise in the value of customer relationships. Some might consider it unusual for the the payment of “earn outs” to result in new assets recognised on a balance sheet, given the payments relate to assets a company already owns.
Facing the critics
Wirecard has faced critical scrutiny before. In 2008 a senior officer of a German investor association alleged balance sheet inconsistencies. He later resigned, was investigated in connection with price manipulation and trading ahead of publication in several stocks, including Wirecard, and received a fine and prison term.
Mr Braun, whose personal stake in Wirecard is worth about €270m, said any public company must face such critics. Ernst & Young was hired to investigate the 2007 annual report and statements concerning an acquisition made that that year, giving Wirecard a clean bill of health. The annual report for 2009 was also audited twice, by both Wirecard’s small Munich accounting firm and Ernst & Young. E&Y has since taken over as group auditor.
“The big mistake was [critics] thought the customer relationships we have on our balance sheet were not related to the main transactions but additional transactions”, said Mr Braun.
To the suggestion the accumulation of questions may indicate problems with the nature of Wirecard’s growth, and that the accounts give an unclear picture of the business, he pointed to 17 analysts covering the company, and its high profile auditor and advisors. He said, “its bullshit, why should I do this, I am a shareholder of this company for 12 years, I have been running this company for 12 years, why should I take this risk?”
Related Links:
Systems@Work PTE ltd annual filings for 2011 and 2012
Trans Infotech Pte Ltd annual filing for 2012
Payment Link PTE Ltd annual filing for 2012
TrustPay International annual filing for 2012
This entry was posted by Dan McCrum on Monday April 27th, 2015 09:30. Tagged with Fun with company filings, House of Wirecard, Wirecard.
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