Wirecard AG is the luckiest company you have never heard of.
It has the good luck of a boxer who is a master of bobbing and weaving in the ring, making it difficult for an opponent to land a punch. Prizefights, though, typically go for all of 10 or 12 three-minute rounds. Yet for 10 years a combination of short sellers, journalists and forensic research consultancies (whose clients often include short sellers) have publicized a long list of concerns about Wirecard’s operations, to little avail.
Why so much drama?
For one, Wirecard has a business model that is pure catnip to critics of every stripe.
Having emerged from a reverse merger of a struggling dot-com era call-center operation, Wirecard shifted to payment processing. But it also owns a bank, has a low-tech prepaid payment card segment and still retains an even lower-tech call-center unit, all headquartered in a small suburb 10 miles from Munich.
Wirecard is a “rollup,” primarily built through the acquisition of smaller companies at a breakneck pace: Since late 2014 it has made 11 acquisitions. Critics argue that rollups use acquired revenue to mask broader troubles with organic growth.
Moreover, Wirecard’s approach to many of these purchases could be charitably called “highly unusual,” such when it has made large prepayments prior to announcing a deal. The Financial Times reported in April 2015 that Wirecard provided different levels of regulatory disclosure about transactions, according to the jurisdiction involved. As the FT noted, a corporate filing in Singapore (where a company purchased by Wirecard was based) revealed that its assumption of 12 million euros in liabilities was really an opaque loan it made to an unspecified recipient after the deal’s completion “for the acquisition of intangible assets from a third party.” (Wirecard CEO Markus Braun told the FT, “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.”)
And Wirecard’s management often discloses its financial results using custom, or “adjusted,” metrics rather than following applicable International Financial Reporting Standards. While this practice is completely legal, it can inflate the appearance of earnings and cash flow figures.
Despite all this, investors are still placing their faith — and money — behind Wirecard because of its prospects for reporting the kind of growth shown in its most recent earnings report, for the quarter that ended Sept. 30.
The slope of the stock chart below would suggest that Wirecard’s critics are against the ropes and taking so many blows that the referee might need to step in.
But lucky doesn’t equal smart for Wirecard’s investors.
After a seven-month investigation, the Southern Investigative Reporting Foundation has obtained thousands of pages of documents that suggest a minimum of 175 million euros — and perhaps as much as 285 million euros — from Wirecard’s 340 million euro purchase of an India-based payment processor in October 2015 did not go to the seller.
Making matters odder still, Wirecard’s own filings show the money left its coffers.
So where did a large chunk of Wirecard’s capital go in one of its fastest growing markets?
In the fall of 2014 corporate finance officials from JM Financial Services, a prominent Mumbai-based investment bank, received a mandate to locate a buyer for Chennai, India-based Hermes I Tickets Private Ltd., a modestly sized e-commerce company that derived 63 percent of its business from selling travel tickets.
The Southern Investigative Reporting Foundation obtained a copy of the pitch book that bankers used to market Hermes Tickets to prospective buyers. For fiscal 2015, Hermes Tickets aimed to generate 22 million euros in sales and about 3.8 million euros in earnings before interest, taxes, depreciation and amortization, or EBITDA (a standard, though imperfect, gauge of a company’s potential profitability).
The asking price was 46.2 million euros, but no buyers emerged for Hermes Tickets that fall or through much of 2015.
On Oct. 27, 2015, a deal was announced and, well, patience paid off: Wirecard purchased Hermes Tickets when it bought the payment businesses of its parent, Great Indian Retail Group, and a 60 percent stake in another subsidiary, Great Indian Technology. The transaction’s price tag was 230 million euros in cash, plus 110 million euros in prospective earnout payments over three years.
If it seems baffling that Wirecard’s deal to pick up Great Indian Retail’s payment businesses ended up totaling 340 million euros when only 13 months earlier Hermes, its primary component, had been shopped around for 80 percent less, that’s because it is. While India is a rapidly expanding economy, Hermes Tickets might have appreciated in value somewhat — but not that much. (Wirecard, for its part, argued that Great Indian Retail’s payment assets grew substantially in value in that 13-month period because of Indian GDP growth and the rapid growth of the digital payment market.)
Even with Wirecard’s history of oddly structured acquisitions, the Great Indian Retail deal sticks out, the more so since a source with Indian venture capital experience looked at Hermes Tickets’ financials in 2014 and described its payments business as being “very small.” So the Southern Investigative Reporting Foundation started to look for documents that might explain just what Wirecard had bought, and more important, where the cash went (a task greatly aided by India’s paperwork-heavy regulatory system.)
While for an American, interpreting India’s reporting format, currency and phrases can be a challenge, the sale of Hermes Tickets in Great Indian Retail’s 2016 annual report is clearly described as the “proceeds from sale of investment in subsidiary” of 2,749,940,988 rupees, or 37,365,539 euros. This is broadly congruent with the September 2014 asking price.
India’s Department of Industrial Policy and Promotion requires a company that receives a direct investment from foreigners (or FDI) to disclose the names of those involved in the transaction as well as the value. As such, the FDI circular offers a way to confirm the sale of Hermes Tickets: From October 2015 to March 2016, a buyer paid about $39 million, roughly 35 million euros, for Hermes Tickets shares.
(Wirecard denied purchasing Hermes Tickets for 37.36 million euros and said that DIPP data only shows investments from foreign entities into India, and as such, does not reflect what it paid in Mauritius.)
Someone examining this transaction might suppose that since Hermes Tickets cost 37.36 million euros, the balance of 192.64 million euros went for the 60 percent stake in Great Indian Technology.
Unfortunately for Wirecard’s shareholders, determining what happened is not that easy.
Great Indian Technology’s primary asset appears to be its ownership of licenses to operate two prepaid payment cards, iCashCard and SmartShop. (Customers pay fees so they can deposit cash at Great Indian Retail-branded kiosks and then use the cards in debit transactions.)
According to the Sept. 25, 2015, notes of Great Indian Technology’s extraordinary general meeting, Wirecard spent a total of 15 million euros on the company — through a 1 million euro cash payment up front and a 14 million euro private placement. Great Indian Technology’s annual report indicates that the company was not very active or profitable; it generated a pretax profit of 21,952 euros for the fiscal year that ended March 31, 2015.
A close read of Wirecard’s discussion of its merger activity in the 2015 annual report reveals that in addition to Great Indian Retail’s payment businesses deal, the company had also acquired Star Global Currency Exchange Private Ltd., an operator of currency-exchange kiosks and shops. (The deal’s press release referred to “StarGlobal” as “a brand,” not a standalone company.)
It’s a curious transaction.
No linkages are apparent between Great Indian Retail and Star Global Currency in public documents. Star Global Currency’s founders, the Balasundaram brothers, do not appear to own shares of Great Indian Retail, and likewise, Great Indian Retail’s founders, the Ramasamy brothers, do not appear to hold stock in Star Global Currency. There are not any listings of related party transactions between the two companies, and Star Global Currency is not referenced in the Hermes Tickets pitch book. Star Global Currency’s website does not even mention Great Indian Retail’s money transfer and currency cards.
What is not in doubt is the math: If Wirecard spent 230 million euros up front, and the combined transaction price for Great Indian Technology (15 million euros) and Hermes Tickets (37.36 million euros) was 52.36 million euros, Star Global Currency should have been worth at least 177.6 million euros.
It was not, however.
Wirecard made a 1.3 million euro investment in Star Global Currency at an implied 2 million euro valuation, according to a March 2016 share transfer form and the FDI circular. Although it was more productive than Great Indian Technology, Star Global Currency booked a small loss on its roughly 32 million euros in gross revenue for the fiscal year that ended March 31, 2016, per its annual report. Nor was the company very big — with just 20 employees, 2.95 million euros in total assets and a book value of 1.71 million euros.
All told, the Southern Investigative Reporting Foundation was able to track 54.36 million euros of the 230 million euros that Wirecard spent on the purchase of Great Indian Retail’s payment businesses, leaving 175.64 million euros unaccounted for.
Stranger still, Wirecard’s cash outflows from investment activity, as disclosed in its filings, clearly indicate that the money for the acquisitions and the 110 million euro incentive payment left its coffers.
So where did the money go? And why isn’t Wirecard alarmed about the missing funds? The answers aren’t immediately apparent.
There is one company, however, that should bear some extra scrutiny: the Emerging Markets Investment Fund 1A, a Mauritius-based fund that has served as an intermediary between the buyers and sellers in all of Wirecard’s India-related transactions.
Star Global Currency’s share transfer filing shows Emerging Markets Investment Fund 1A acting as a conduit, transferring to Wirecard a block of 504,499 shares of Star Destination Management Co. Private Ltd. (Star Global Currency’s parent company). The fund held the shares for 27 days and sold them to Wirecard at cost.
The fund performed the same role — buying stock and then selling the shares to Wirecard shortly afterward — for Hermes Tickets (the FDI circular cites three separate transactions) and Great Indian Technology.
None of Wirecard’s filings discussed Emerging Markets Investment Fund 1A’s role in its India strategy.
Foreign direct investors in Indian companies have used Mauritius-domiciled holding companies to shield their profits from capital gains taxes, but that loophole was largely closed in 2016. Regardless, Emerging Market Investment Fund 1A’s ownership of Great Indian Retail’s subsidiaries’ shares was for a few months at most; to qualify for India’s lower tax rate on long-term capital investments, an investor has to own an asset for a minimum of 36 months.
An email address and a street location listed in the contact information for Emerging Market Investment Fund 1A in Great Indian Technology’s September 2015 private placement letter provide some clues: The email address is associated with another Mauritius-based entity, Emerging India Fund Management, as is the street address.
The website of Emerging India is splashy, and it claims to manage an impressive $1.5 billion through diverse investment strategies, but good luck figuring out who works for the fund or who owns it. The fund is based in Mauritius and uses the address of Trident Trust, an administrator for hundreds of funds that adopt its address for registration purposes. Repeated calls and email messages to Emerging India and Trident Trust were not returned.
Despite Emerging India Fund Management’s claim to have $1.5 billion in assets under management, the Southern Investigative Reporting Foundation could not find any managers of India-based institutional or endowment capital with knowledge of it. There are, however, two private equity transactions that the fund has made — for Orbit Corporate + Leisure Travels, an agency specializing in trade shows and professional conferences, and Goomo, a consumer-focused company with a travel-booking platform that emerged last March from Orbit. The fund, according to the Hindu Business Line report, has invested a total of $180 million in the two ventures.
Wirecard said that other than the Oct. 27, 2015, transaction, it has never had a connection to Emerging India Fund Management and that the fund did not act as a conduit for Great Indian Retail. The company did not address a question about the fund’s ownership.
Several connections exist between the two travel companies and Wirecard.
To start with, one of Orbit’s two listed directors, Ramesh Balasundaram, was Star Global Currency’s co-founder and co-owner. Additionally, the company is described on its shareholder list as “a joint venture with Star Group of Companies,” a reference to Star Global Currency and Star Destination.
Emerging Markets Investment Fund 1A has played a key role, in founding and controlling both Orbit and Goomo, according to Indian corporate filings.
Orbit’s March 31, 2016, shareholder list indicated that Emerging Markets Investment Fund 1A owned 93 percent of its shares. Goomo’s Nov. 11, 2016, Memorandum & Articles of Association listed the Emerging Markets Investment Fund 1A as its primary shareholder and Trident Trust’s Mauritius address as its headquarters; a credit report for Goomo’s Singapore subsidiary recorded the fund as its owner.
A connection between Wirecard and Orbit was spelled out in the Sept. 12, 2015, notes of the extraordinary general meeting for Hermes Tickets’ shareholders, concerning negotiations with Orbit to sell Hermes Tickets’ travel-ticketing business. (Travel ticketing represented 63 percent of the Hermes Tickets’ sales, according to its pitch book.) No further details about that potential sale seem to have cropped up in filings.
Notably, those negotiations occurred at the same time (Sept. 17, 2015) that Great Indian Retail’s owners began to sell shares of Hermes Tickets to Emerging Markets Investment Fund 1A. Just eight days after that, on Sept. 25, Great Indian Technology’s shareholders held their own extraordinary general meeting, where the fund’s 1 million euro share purchase and Wirecard’s 14 million euro private placement were announced.
And there’s an unusual footnote to Wirecard’s purchases of Great Indian Retail’s businesses: Their auditors resign, often.
Hermes Tickets, for example, lost two auditing firms in the space of one week in August 2015, just two months prior to its sale to Wirecard: On Aug. 24 the Kuriachan & Nova firm cited its “preoccupation with other assignments,” and on Aug. 31 the V. Krishnan & Co. firm claimed it was “not being in a position to continue” as the company’s auditor.
At some undisclosed point in the ensuing months V. Krishnan & Co. was rehired, only to resign on June 15, 2016, due to a “preoccupation with other assignments.” All told, three different accounting firms resigned from Hermes between Aug. 24, 2015, and Oct. 17, 2017; V. Krishnan & Co. and Kuriachan & Nova were appointed and resigned twice, a third firm, CNGSN & Associates LLP, was appointed and resigned three times. (Ernst & Young, Wirecard’s auditor, is now the company’s accountant.)
Why does this matter? Auditor resignations — especially of the unexpected variety — are closely scrutinized by investors, who often worry that a company’s accountants have discovered something problematic and are giving up the traditionally lucrative audit fees to shield themselves from litigation risk.
The accounting firms did not respond to emailed questions.
Update: This article has been updated throughout to include Wirecard’s replies to questions posed several weeks ago. The answers are hyperlinked as well at the bottom of the story.