March 30, 2017 | Author: gothamcityresearch | Category: N/A
GOTHAM CITY RESEARCH’S OPINIONS • Aurelius’ shares are worth no more than €8.56 per share, impl...
GOTHAM CITY RESEARCH LLC
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GOTHAM CITY RESEARCH LLC
Aurelius Equity Opportunities SE & Co KGaA: The Next Arques AG or the next Philip Green?
Does a “good home for companies” lead to 15 insolvencies? CHARACTERISTIC
AURELIUS
Presence of large amounts of income 123% of net income from negative goodwill in 2011-2015
Philip Green - BHS 34% of net income in FY2001-2008
Presence of sale and leaseback transactions
YES
YES
Bankruptcies shortly after disposal
YES Yes
YES
Allegations of profiting at the expense of employees/creditors/others
YES
YES
Insufficient capital expenditures
YES
YES
Sale of companies to suspect buyers
YES
YES
Aurelius executives recently sold €169 million of shares (40%+ of their stake) are rats leaving the sinking ship?
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Table of Contents I. II. III. IV. V. VI. VII. VIII. IX. X. XI. XII.
Disclaimer Summary Introduction Aurelius AG and Arques AG: Same Questionable Model, Same Destiny? Are 43% - 100%+ of Aurelius’s reported earnings suspect? Is Dirk Markus Both the CEO and CFO of Aurelius? Does a “good home for companies” lead to 15 insolvencies? Aurelius’ Business: a publicly-traded version of Sir Philip Green? Aurelius’ 9x Total Returns: Profits Before the Bad Stuff? Net Asset Value: is AR4 worth no more than €8.56 per share? Appendix End Notes
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GOTHAM CITY RESEARCH LLC a GOTHAM CITY RESEARCH’S OPINIONS
Aurelius’ shares are worth no more than €8.56 per share, implying at least -88% downside to its current share price. Aurelius may face similar scrutiny as Philip Green did in the UK, who was accused of systematically plundering BHS.
SUMMARY OF FINDINGS
We were unable to reconcile 43% - 100%+ of Aurelius’s reported earnings to the sum of its subsidiaries’ earnings. 2015 contingent liabilities, as calculated by the sum of its parts, seem understated by 46% or more. Aurelius’ income from negative goodwill accounts for over 120% of 2011-2015 earnings. Similarly high levels of negative goodwill preceded a permanent -95%+ collapse in the share price of Arques AG, whose business model seems identical to Aurelius’. Aurelius claims to be a “good home for companies” yet nearly 60% of portfolio companies entered insolvency after Aurelius sold them, per our review. Our estimate of NAV is 80%-90% lower than Aurelius’ unaudited and DCF-based NAV. Aurelius has never received an unqualified audit opinion on its audited financial statements. CEO Dirk Markus, a former Finance executive of Arques is also the CFO of Aurelius, according to Hauck & Aufhauser. Aurelius’ executives sold €169 million of shares in December 2016 (40% or more their stake) at €52.5 per share. The prevailing market price was €59 that day. Aurelius has been accused of illegal conveyance (and found guilty in some cases) in its business dealings (Einhorn case, EDS case). Aurelius “abstains” from providing negative goodwillrelated disclosures “because it believes that they can lead to economic disadvantages.”
Company: Aurelius Equity Opportunities SE & Co KGaA CEO: Dirk Markus Ticker: AR4 Shares Traded on: Freiverkehr in Germany Price target: €8.56/share Share price: €65.10/share Market cap: €2.03B Aurelius’ Unaudited NAV: €1.35B Book value: €458M 52-week high: €67.03 52-week low: €48.96 Shares outstanding: 31.1M Annualized book value growth: 3.5% Annualized share price growth: 41.5% 2016E EBITDA % Growth: -44% Auditor: Warth & Klein Grant Thornton AG IPO Date: June 26, 2006
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INTRODUCTION Upon first glance, Aurelius (“AR4”) seems like a truly exceptional investment company. Since December 31, 2006, Aurelius’s share price has appreciated at more than 2x Berkshire Hathaway’s long-term rate 1:
Aurelius is Better than Warren Buffett? Berkshire Aurelius Hathaway Book value/share 19.0% 3.5% Market value/share 20.8% 41.5% Gotham City Research has found very few investors with the ability to sustain an annualized rate of growth exceeding 20% - let alone 40%. So we were curious: what is the secret to AR4’s rapid rise? Is it sustainable? And why does AR4’s rate of growth in its book value lag far behind its share price’s rate of growth? After all, Berkshire’s book value and share price growth have converged, long-term. The following preliminary findings led us to believe that Aurelius’ share price would converge to its reported Net Asset Value (or lower) implying a 33%-50% decline in the share price:
Aurelius' CEO was an Arques AG executive, whose share price crashed -95% years after he left. Aurelius does not have an independent CFO. Dirk Markus is CEO & CFO according to one broker. 2 None of Aurelius’ audit reports, since going public in 2006, are unqualified. Its NAV is unaudited. 3
We dug deeper and experienced a major research breakthrough when we conducted google searches for “Arques fraud”. Based on what we uncovered, we wondered: is the story of Arques’ rise and fall, a roadmap to Aurelius’ story – past, present, and future? Why did Arques’ shares & profits collapse? Why have neither recovered since 2007? Has Aurelius engaged in the same patterns of behaviors, in recent years, as Arques did immediately before Arques’ earnings and share price crashed? Gotham City Research believes that, yes, Aurelius is engaging in behaviors that resemble Arques’ immediately before the latter’s earnings and share price collapsed. For example:
43% - 100%+ of Aurelius’s 2012-2015 reported earnings seem suspect, based on our inspection. Aurelius’ income from negative goodwill has risen dramatically over the last few years, and now accounts for over 120% of 2011-2015 earnings – levels that Arques reached prior to its collapse. 2015 contingent liabilities, as calculated by the sum of its parts, seem understated by 46% or more. Aurelius claims to be a “good home for companies” yet nearly 60% of subsidiaries entered insolvency after Aurelius sold them (often to suspect buyers). Despite its considerable size, Aurelius has chosen not to register its shares at a regulated stock exchange. Instead, Aurelius shares are merely quoted on the unregulated Freiverkehr, which reminds us of AIM where Quindell was listed and MAB where Gowex was listed.
Gotham City Research believe that Aurelius is, indeed, an exceptional investment company – but for all the wrong reasons. Page 5 of 68
Arques & Aurelius: Same Questionable Model, Same Destiny? The CEO of Aurelius is a former Arques Executive and Arques’ Long Term Share Performance is a Disaster CEO Dirk Markus, a former finance executive of Arques AG, founded Aurelius soon after departing Arques in 2005. It is believed Markus’ newly founded investment company was a knock-off, even competitor, of Arques. Both companies have been accused of suspect – even illegal – business practices. Arques’ shares crashed within a few years after Markus departed. Arques (now renamed Gigaset AG) shares have never recovered1:
Given that both Arques’ and Aurelius’ business models have been plagued by serious accusations of controversial behavior – e.g., squeezing cash out of its acquired companies 2 – we wondered:
Were there warnings signs at Arques prior to the collapse in its shares – for example, suspect accounting and business practices – that immediately preceded the crash in Arques’ stock price? Has Aurelius engaged in the same patterns of behaviors in recent years, as Arques did immediately before Arques’ earnings and share price crashed?
A rapid rise in & high levels of income from negative goodwill, preceded the crash in Arques’ share price In the case of Arques, there were at least the following warning signs that came before its shares collapsed:
100%+ of Arques 2004-2008 earnings derived from “income from negative goodwill” 3, generally a very rare & non-recurring source of income for most companies (it turns out Arques was an outlier among outliers, as it alone seemed to account for 40% of all such transactions among German issuers, according to Corporate Ownership & Control/Volume 12, Issue 2, Winter 2016 – Frequency of and Reasons for Bargain Purchases – Evidence from Germany). The DPR – The German Accounting Supervisory Agency – carried out a review of Arques’ financial statements and determined nine accounting mistakes; BaFin asked Arques to publish DPR’s determinations immediately4. Arques’ CEO Peter Low sold EUR 80 million in shares in early 2007 5. Arques’ earnings and share price both collapsed after negative goodwill peaked in 2007. Page 6 of 68
INCOME FROM NEGATIVE GOODWILL (ARQUES) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Net income € 34,370 € 47,834 € 110,576 € 114,725 -€ 141,622 -€ 153,000 -€ 100,571 € 17,541 -€ 28,572 -€ 36,080 Income from negative goodwill € 29,424 € 38,384 € 92,770 € 214,738 € 112,526 € 11,336 € € 1,888 € € Income from negative goodwill as % of net income 86% 80% 84% 187% over 100% over 100% 0% 11% 0% 0%
EUR '000
Aurelius: Similar Warning Signs? Gotham City Research believes Aurelius currently exhibits the same patterns as Arques did immediately before Arques’ earnings and share price crashed. Take for example, negative goodwill 6:
Aurelius’ income from negative goodwill has grown rapidly in recent years, just as Arques’s did before its shares and earnings collapsed
INCOME FROM RECOGNITION OF NEGATIVE GOODWILL (AURELIUS) 2011 2012 2013 2014 Net income -€ 63,938 € 88,056 -€ 1,699 € 107,591 Income from negative goodwill € 3,214 € 55,965 € 36,742 € 76,817 Income from negative goodwill as % of net income over 100% 64% over 100% 71%
EUR '000
2015 € 154,924 € 176,834 114%
TOTAL € 284,934 € 349,572 123%
Aurelius’ preliminary 2016 EBITDA has declined -44% year over year EBITDA (AURELIUS) EUR mn 2012 2013 2014 2015 2016 EBITDA € 103,192 € 82,756 € 161,371 € 266,056 € 148,400 YoY change -20% 95% 65% -44%
Aurelius’ management sold €169 million of shares recently at a large discount to market 7 - On 12 December 2016, Aurelius posted disclosure updates to its website that showed the management team had sold 8 million shares at EUR 52.5 per share (market price was EUR 59).
How many shares does Aurelius’ management currently own? Due to its quotation on the Freiverkehr – where Aurelius management was previously not required to disclose their share dealings – it is unclear whether or not management sold shares between December 2014 & July 2016. If we assume management sold no shares between December 2014 – July 2016 7: DIRECTORS' SHAREHOLDINGS 2012 2013 2014 2015* Dirk Markus 32.0% 26.5% 19.5% 19.5% Gert Purkert 8.2% 7.9% 5.8% 5.8% TOTAL 40.2% 34.3% 25.3% 25.3% *Assumes no share sales by directors in 2015 and Jan-Jul 2016
2016* 12.6% 2.5% 15.1%
If we assume management sold shares between December 2014 – July 2016, at the same rate they sold shares in 2013-2014, then Aurelius’ management would hold far few shares than widely believed: DIRECTORS' SHAREHOLDINGS 2012 2013 2014 2015* 2016* Dirk Markus 32.0% 26.5% 19.5% 13.0% 6.1% Gert Purkert 8.2% 7.9% 5.8% 3.9% 0.6% TOTAL 40.2% 34.3% 25.3% 17.0% 6.7% *Assumes the same pace of share sales in 2015 as in 2013-2014, 2016
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Germany’s DPR complained about Arques’ accounting. Do Aurelius’ financial statements add up? Recall that Germany’s DPR had reprimanded Arques for its 2004 accounting, and Bafin asked the company to publish DPR’s determinations immediately: The DPR had carried out a review of the 2004 financial statements of Arques Industries AG, listed in the SDAX, after the media had repeatedly reported alleged overvaluations of individual balance sheet items. The DPR complained of nine accounting errors, and BaFin asked the company to publish the errors immediately. – Handbuch Anti-Fraud-Management: Bilanzbetrug erkennen vorbeugen – bekämpfen by Stefan Hofmann Gotham City Research believes that like Arques’, Aurelius’ accounting is suspect. For example, we were unable to reconcile 43%-100%+ of Aurelius’s consolidated earnings to the sum of its subsidiaries’ earnings 8: CONSOLIDATED NET INCOME VS SUM OF SUBSIDIARIES' NET INCOME EUR '000 2012 2013 2014 2015 TOTAL Consolidated € 88,056 -€ 1,699 € 107,591 € 154,924 € 348,872 Sum of subsidiaries' € 44,233 -€ 68,127 € 74,991 -€ 56,345 -€ 5,249 Difference € 43,823 € 66,428 € 32,600 € 211,269 € 354,121
What might explain the accounting irregularities shown above? Possible explanations:
Aurelius’ consolidated earnings are materially incorrect and misleading. Aurelius’ subsidiaries are in fact, loss-making in 2015, and therefore, Aurelius recognizes no income from its subsidiaries’ operating activities in 2015. Furthermore, the sum of its subsidiaries’ P&Ls lead to losses, over the entire 2012-2015 period.
This might explain why Aurelius’ other income, e.g. negative goodwill, accounts for over 100% of its 20122015 consolidated profits. Maybe Aurelius’ operating income = zero (or less than zero). As the accounting irregularities shown above are quite large – exceeding 100% in several instances – Aurelius’ accounting warrants close scrutiny. We raise some of the adverse ‘possible explanations’ above, because we have identified additional accounting irregularities in Aurelius’ and its subsidiaries’ financial statements, as described in the next section.
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Are 43% - 100%+ of Aurelius’s reported earnings suspect? There is No Shortage of Accounting irregularities: Do Aurelius’ reported figures even add up? If Aurelius is currently following the same path as Arques did just before the latters’ shares (and earnings) collapsed, what other Aurelius-related warning signs might be present? For starters, Aurelius’ accounting problems seem even worse than presented in the prior section, for the following reasons:
Aurelius reports EUR 64 million in 2015 contingent liabilities yet the sum of individually reported contingent liabilities exceeds EUR 94 million, per our calculations. This is especially concerning, as Arques’ solvency was threatened by risks arising from contingent liabilities. This validates our suspicion that Aurelius exhibits the same risks as Arques. We have identified at least EUR 25 million of accounting irregularities related to depreciation & amortization. The reported ‘change in cash and cash equivalents’ figure for 2015 differs from the calculated sum of its components, by 5.6%. 9 of Aurelius’ UK subsidiaries’ earnings and equity figures do not match with the corresponding subsidiaries’ Companies House filings. We were unable to reconcile at least EUR 13 million of UK subsidiaries’ earnings and/or equity figures to the corresponding figures provided in Aurelius’ annual report 2015. Aurelius claims that its subsidiaries’ “equity and profit/loss figures are the same figures as those presented in the local financial statements” in footnote 2 of its list of subsidiaries.
Can Aurelius be trusted? Or is Aurelius hiding something? There are plausible explanations for some of the accounting irregularities we identified. For example, some of the more minor accounting errors we identified appear more careless than malicious. See the appendix for information on these minor errors. The question is: why does there appear to be a pattern of accounting irregularities, big and small? After all, Aurelius is Dirk Markus’ company. And Dirk Markus was a member of Arques’ Executive Board until 2005, in charge of Finance (in fact, a Bloomberg news article referred to Dirk Markus as Arques’ CFO) 1. The DPR complained about Arques’ 2004 accounting and we find problems with Aurelius’ accounting today. As they say: “Fool me once, shame on you; fool me twice, shame on me.” Is Aurelius’ accounting understating, hiding, and/or obfuscating the true risks to the business model? Is Aurelius “a hospital for sick businesses where we help to cure them” as CEO Dirk Markus claims, or is Aurelius more like Sir Philip Green, who allegedly “systematically plundered” BHS, as its owner, (and has recently apologized and agreed to pay GBP 363 million)2?
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Aurelius contingent liabilities don’t reconcile, they may be understated by 50% and off balance sheet The Contingent liabilities numbers disclosed in the notes to the financial statements do not reconcile with the calculated sums in 2014 and 2015, although they seem to reconcile in years prior to 2014 3: CONTINGENT LIABILITIES EUR '000 31-Dec-14 Contingent liabilities, as reported € 101,933 Contingent liabilities, as calculated € 105,683 Difference -€ 3,750 Difference as % of reported number -3.7%
31-Dec-15 € 64,318 € 94,268 -€ 29,950 -46.6%
Risks arising from contingent liabilities threatened Arques with insolvency The potential understatement of contingent liabilities is a material risk factor for Aurelius, as has been demonstrated with Arques’ implosion:
In 2007 (and prior years), Arques’ auditor does not mention contingent liabilities as a risk factor to solvency. In 2008, Arques’ auditor mentions that contingent liabilities would be a risk factor to solvency. In 2009, Arques’ auditor mentions that contingent liabilities is a risk factor to solvency.
In 2008 Arques’ auditor introduced the following “if, then” contingent liability-related warning – which was not present in the prior years4: In accordance with our professional obligations, we draw attention to the comments regarding financial obligations made by the company in the section entitled "Report on opportunities and risks" in the Combined Management Report. Attention is drawn to the fact that, should the guarantees and payment assurances issued by ARQUES Industries AG be executed or claimed in close succession and in larger amounts, this would pose a threat to the continued existence of the parent company and the Group. Furthermore, we draw attention to the comments regarding the threat to the continued existence of the tiscon Group that are made in the section entitled "ARQUES Group and subsidiaries" in the Combined Management Report. This would be the case if the restructuring measures that have been initiated are not implemented successfully and the parent company does not provide financial support."
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In Arques’ 2009 AR auditor included a going concern clause 5: In accordance with our professional obligations, we refer to the fact that the company's and the group's ability to continue as a going concern is threatened by risks which are described in the sections entitled "Financial risk" and "Risks arising from contingent liabilities" in the "Report on opportunities and risks," which is contained in the combined management report. This report includes comments to the effect that potential liquidity shortages and the possible claiming of contingent liabilities represent a threat to the continued existence of the parent company and the Group. Furthermore, we refer to the fact that the ability of two subsidiaries to continue as a going concern is threatened by risks which are described in the "Report on opportunities and risks,* which is contained in the combined management report.
Aurelius’ Filings and Subsidiaries’ Filings Do Not Reconcile Given our past success in identifying accounting irregularities in UK financial statements (see our Quindell report), we reviewed Aurelius’ UK subsidiaries’ local filings, and found the following differences between the local filings’ figures and Aurelius’ subsidiary-level figures6: Company CalaChem UK Ltd. Getronics Services UK Ltd. Regain Polymers Ltd. SOLIDUS UK Solutions Ltd. TFHC Ltd.
ACCOUNTING IRREGULARITIES AT UK SUBSIDIARIES As reported by Aurelius As per Companies house Equity, £ P/L, £ Equity, £ P/L, £ £25,530,000 £588,000 £25,530,000 £163,000 £921,393 £927,083 £412,000 £233,000 £4,050,001 -£2,596,423 -£2,009,000 -£2,485,000 £4,409,223 £1,360,524 £927,012 £926,012 £1,000 -£1,590,305 -£1,589,305 -£1,590,305
Difference Equity, £ P/L, £ £0 £425,000 £509,393 £694,083 £6,059,001 -£111,423 £3,482,211 £434,512 £1,590,305 £0
Aurelius’ 2015 annual report was signed by auditors on March 17, 2016. Only 1 UK subsidiary, TFHC, among the 15 we reviewed had its financial statements signed by their respective auditors, by that date7. These accounting irregularities we’ve detected between Aurelius’ UK subsidiaries’ local filings and Aurelius’ annual report validates the accounting irregularities we discussed earlier (as shown below): CONSOLIDATED NET INCOME VS SUM OF SUBSIDIARIES' NET INCOME EUR '000 2012 2013 2014 2015 TOTAL Consolidated € 88,056 -€ 1,699 € 107,591 € 154,924 € 348,872 Sum of subsidiaries' € 44,233 -€ 68,127 € 74,991 -€ 56,345 -€ 5,249 Difference € 43,823 € 66,428 € 32,600 € 211,269 € 354,121
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Over EUR 23 million in Unexplained differences between depreciation & amortization figures sourced from the cash flow statement vs. the notes to the financial statements in Aurelius’ 2011-2015 annual reports:8 RECONCILIATION BETWEEN D&A* FROM CASH FLOW STATEMENT AND FROM FOOTNOTES EUR '000 2011 2012 2013 2014 2015 D&A, as reported € 88,984 € 66,462 € 73,786 € 77,692 € 101,264 D&A, as calculated from footnotes € 94,866 € 75,958 € 73,945 € 77,505 € 92,942 Difference -€ 5,882 -€ 9,496 -€ 159 € 187 € 8,322 Difference as % of reported number -6.2% -12.5% -0.2% 0.2% 9.0% * - depreciation and amortization
The accumulated depreciation and amortization for technical equipment, plant, & machinery as reported in 2015, does not equal the sum of its constituent parts, per our calculations: 9 ACCUMULATED D&A* FOR TECHNICAL EQUIPMENT, PLANT AND MACHINERY EUR '000 31-Dec-15 Accumulated D&A balance, as reported -€ 142,386 Accumulated D&A balance, as calculated -€ 146,059 Difference € 3,673 Difference as % of reported number -2.6% * - depreciation and amortization
The change in cash and cash equivalents, as disclosed in the statement of cash flows, does not equal the calculated amount:10
CHANGE IN CASH AND CASH EQUIVALENTS EUR '000 Change in cash and cash equivalents, as reported Change in cash and cash equivalents, as calculated Difference Difference as % of reported number
31-Dec-15 € 203,562 € 215,015 -€ 11,453 -5.6%
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Is Dirk Markus Both the CEO and CFO of Aurelius? Let’s suppose that Aurelius’ financial statements are materially inaccurate and misleading. Aside from the potential technical signs (as discussed in the prior section), what are some of the softer signs that would signal that something is amiss with Aurelius’ accounting? Gotham City Research believes that Aurelius offers the perfect conditions for suspect accounting – worthy of a novel – for the following reasons:
Aurelius has no independent CFO. In fact, Aurelius has had no independent CFO since 2012. There is reason to believe Dirk is both CEO and CFO of Aurelius. Dirk Markus CEO and CFO(?) lives in London, despite the fact Aurelius & its employees are based in Germany. Aurelius’ auditor does not provide an unqualified audit opinion, which is unusual. Aurelius’ Net Asset Value is unaudited. Aurelius does not measure and evaluate the performance of its investments on a fair value basis. Its NAV is “marked to model”, not “marked to market”. Despite growing both in size and complexity over the last 8 years, Aurelius has not used a top tier auditor since 2009. In 2009-2010, Aurelius changed its auditor from Deloitte and Touche to Susat & Partner (Later to merge with third-tier firm Warth & Klein). Notably, the English version of Aurelius’ 2008 annual report does not include an Auditor’s Report, but the German version does. We have seen similar inconsistent disclosures in the case of Let’s Gowex, where the Spanish filings and English filings offered inconsistent information. Dirk was responsible for finance and restructuring at Arques until 2005. One news source refers to Dirk as “CFO” of Arques. The DPR carried out a review of Arques’ 2004 financial statements – Dirk Markus was still at Arques in 2004 – and determined nine accounting errors; BaFin asked Arques to publish the errors immediately. Aurelius shares are quoted on Germany’s open market exchange, equivalent to the UK’s AIM, Spains’ MAB, and the US pink sheets/OTC, i.e. where there may be insufficient regulatory oversight.
Aurelius’ has not had an Independent Chief Financial Officer since 2010 Aurelius had a CFO up to 2012, named Ulrich Radlmayr. Aurelius has not replaced him since 2012. Rather, the company “divided the responsibility among three executive board members” according to its AR 2012 1: For personal reasons Ulrich Radlmayr did not renew his Executive Board contract that expired on 30 June 2012. His areas of responsibility were divided among the remaining three Executive Board members. Prior to joining Aurelius as CFO, Radlmayr graduated from law school2 and practiced law; it is not clear whether or how he had the right skills or qualifications to oversee financial reporting, accounting, and/or audit of Aurelius (or any company).
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Even more peculiar, Radlmayr was concurrently a partner at a law firm while CFO at Aurelius: 3
Brokerage house Hauck & Aufhauser actually refers to Dirk Markus as Aurelius’ CEO and CFO: 4
Weak – maybe compromised (or non-existent) – internal controls? According to an article titled Holding CEO and CFO Roles Is a Tightrope Act, companies should not have its CEOs hold the role of the CFO at the same time: The CEO & CFO roles are definitely distinct, so holding one would likely make a person ineffective in the other. “The CEO’s job is to drive the business forward,” Reiner says. “They’re either very sales-oriented or operations-oriented, depending on the nature of the business.” Someone with a CEO mindset & responsibilities would likely miss some of the details on the financial side. From a governance perspective, having one person play both roles will also “shortcut” the decision-making process, Reiner says. In addition, internal controls would likely be weaker5. Aurelius uses lower-tier auditors: One would think that without a fully dedicated CFO, that at least Aurelius would spend some money to hire a substantial auditor. Rather, Aurelius uses the 10th largest auditor in Germany, Wart & Klein Grant Thornton. In fact, Aurelius has not used a top-tier auditor since 2009 6:
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TOP-10 AUDITING FIRMS IN GERMANY, 2014 Auditor PwC AG, Frankfurt am Main KPMG AG, Berlin Ernst & Younq GmbH, Stuttqart Deloitte GmbH, München BDO AG, Hamburq Rödl & Partner GbR, Nürnberq Ebner Stolz, Stuttqart Baker Tilly Roelfs Gruppe, Düsseldorf Roever Broenner Susat Mazars GmbH & Co. KG, Hamburg Warth & Klein Grant Thornton AG, Düsseldorf
Rank 1 2 3 4 5 6 7 8 9 10
Aurelius has not had a top-tier auditor since 2009, despite growing in size and complexity since then In 2010 Aurelius changed auditors from Deloitte & Touche GmBH to SUSAT & Partner. Aurelius has not had a top tier auditor since 2009, despite its apparent growth as a company. 2009 2010 2011 2012 2013 2014 2015
AUDITOR Deloitte & Touche GmbH SUSAT & PARTNER OHG Grant Thornton GMBH Warth & Klein Grant Thornton AG Warth & Klein Grant Thornton AG Warth & Klein Grant Thornton AG Warth & Klein Grant Thornton AG
Date and place Munich, March 26, 2010 Munich, March 21, 2011 Munich, March 16, 2012 Munich, March 15, 2013 Munich, March 14, 2014 Munich, March 19, 2015 Munich, March 17, 2016
Signatories Dr. Stanke Aumann Dr. Krusterer Mauermeier Dr. Krusterer Mauermeier Dr. Krusterer Mauermeier Dr. Krusterer Mauermeier Schneider Mauermeier Schneider Mauermeier
The company did not provide an Independent Auditor’s Report in its AR 2009 (English version) The English versions of the AR 2008 and AR 2010 clearly provide an auditor’s report; the AR 2009 in English does not provide an auditor’s report: 7 2008
2009
2010
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Aurelius’ 2009 Annual Report in German (unlike the English version) includes the Auditor’s Report 8
We have seen similar inconsistent disclosures in the case of Let’s Gowex, where the Spanish filings and English filings of the same annual reports offered inconsistent information.
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Aurelius’ Audit Opinion is Qualified Aurelius’ auditors pointed out that Aurelius did not disclose information required by IFRS standards, and therefore issued a qualified – as opposed to the typical unqualified – audit opinion 9: Excerpt from Auditor’s report (page 237 of AR 2015): With the exception of the following qualifications, our audit has not led to any reservations: In the notes to the consolidated financial statements, the disclosures required under IFRS 3.59 ff. and IFRS 8.23 with respect to the nature and financial effects of business combinations are not presented or not shown separately and the material non-cash items of income are not disclosed in the notes to the consolidated financial statements for each reportable segment.
Aurelius refuses to provide disclosures per IFRS 3.59 as it can lead to “economic disadvantages” Aurelius’ auditors pointed out that Aurelius did not disclose information required by IFRS standards, and a footnote from Aurelius’ AR 2015 (page 224) states that Aurelius chooses not to provide disclosures related to “bargain purchases” (i.e. negative goodwill), “because it believes that they can lead to economic disadvantages for future company acquisitions or company sales” 10:
But the disclosures set by IFRS 3.59 seem both non-onerous and particularly important for the purpose of evaluating Aurelius’ financial condition11:
We believe that the specific disclosures required to meet the above requirements are critical to assessing, understanding, and monitoring Aurelius’ financial condition. Without these disclosures, investors are left to simply trust management12:
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Aurelius withholds basic disclosures even as smaller peer Bavaria Industries AG provides clearer ones Aurelius’ disclosures do not seem consistent with other industry operators’ disclosures. For example, in the case of Bavaria Industries AG, Bavaria discloses a very clear EBIT before the dissolution of negative goodwill. Furthermore, Bavaria continues with the disclosure of how much profits are derived from ordinary operations, and how much is derived from extraordinary sources of income: 13
Source: Bavaria Industries AG Annual Report 2015
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Aurelius lists its stock on the “Freiverkehr”: perhaps to avoid regulatory or legal scrutiny? Although Aurelius is large enough to justify listing its shares in regulated exchanges, the company chooses to list its stock on the “Freiverkehr”, that is the “Open Market”. Based on our review of the Freiverkehr, it reminds us of:
The AIM in the UK (where Quindell was listed). MAB in Spain (where Gowex was listed). OTC/Pink in the US (where many stock frauds are listed).
Perhaps more notably, Aurelius actually aimed for this less transparent listing in 2012, when it moved from Frankfurt to the Freiverkehr14. In light of all the problems we’ve identified in this report (and the red flags discussed in this section specifically), we feel that the company may avoid a traditional share listing, so that it can avoid the spotlight.
CEO Dirk Markus lives in London but Aurelius is based in Germany Seeing that Aurelius is more of a people-intensive business versus a capital-intensive one (e.g. industrial companies), this arrangement whereby the Founder/CEO/MaybeCFO Dirk Markus lives in London while Aurelius’ employees are based in Germany, seems like a recipe for a future Harvard Business School case study – and not for good reasons:15
2015:
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Does Aurelius deliberately hide and destroy unfavorable press releases from the past? Gotham City Research discovered Aurelius had a prior website, that was deleted and replaced by the current website. Under the current website, some of the older press releases seem to have been deleted. Thanks to the Wayback Machine, we reviewed the differences between the old Aurelius website and the current version. We highlight the following:
Aurelius only includes news starting from 2008, despite quoting its shares since 2006. We were unable to find Aurelius press releases that pre-date on its current website. Aurelius seems to have removed unflattering press releases. We were unable to locate the following Aurelius press releases on its current website (they are available via the wayback machine archives):16
5.09.2008AURELIUS participates in Arques Industries 11.03.2008Primondo sells Spezialversandhaus Mode & Preis to AURELIUS 10.01.2008Joint press release of Balda AG, KS Plastic Solutions GmbH and AURELIUS AG 30.07.2009AURELIUS expects impairment in French mail-order activities 09.03.2009AURELIUS Completes Acquisition of Blaupunkt 27.02.2009AURELIUS sells Pohland in management buy-out 30.07.2009AURELIUS expects impairment in French mail-order activities 09.03.2009AURELIUS Completes Acquisition of Blaupunkt 27.02.2009AURELIUS sells Pohland in management buy-out 21/09/2010Opinion on the press article in the FTD
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Does a “good home for companies” lead to 15 insolvencies? How do Aurelius and CEO Dirk Markus manage to:
Present itself Aurelius as a “good home for companies” (Berenberg Bank claims that only four portfolio companies have gone out of business)1. Claim: “we run a hospital for sick businesses where we help to cure them.” 2
Even as:
15 out of 26 of Aurelius’ former portfolio companies entered into insolvency soon after Aurelius sold them to suspicious buyers, some whom seem to have direct ties with Aurelius. Aurelius seems to under-invest in its portfolio companies. Aurelius has been accused of siphoning funds out of its portfolio companies. 3
The Aurelius Business model: Does Aurelius make money at the expense of its portfolio companies employees, pensions, etc? Is Aurelius the next Arques or Philip Green BHS? In this section we show why Gotham City Research believes Aurelius is not a “good home for companies”. On one hand Aurelius AG frequently claims to be a “Good Home for Companies” 4:
In fact, citing how effective Aurelius is purported to be, Berenberg Bank, in a research note dated October 2016 claims5: “Aurelius and its team of turnaround specialists are very experienced and have a long-term track record. Since inception of the company, only four portfolio companies have gone out of business” – Berenberg Bank
Insolvency is the rule, not the exception Most of Aurelius’ subsidiaries bankrupt after Aurelius sells them to buyers, many who seem tied to AR4: 6 Solvent Insolvent Total
Number 11 15 26
%% 42% 58% 100%
We don’t believe that a “good home for companies” would lead to such a high percentage of insolvencies. Page 23 of 68
15 out of 26 former Aurelius subsidiaries entered insolvency soon after Aurelius sold them SUBSIDIARY MTP/Grillo Peissenberg DFA-Transport und Logistik Einhorn Mode Manufaktur GHOTEL Group KWE Group La Source Group Pohland Herrenkleidung Richard Scherpe Group Schabmuller Group Schleicher Electronic Wellman International Westfalia Van Conversion Berentzen Group connectis KTD aythea Mode & Preis RTL Shop/Channel21 BCA Blaupunkt Consinto LD Didactic Sit-Up TV CalaChem ISOCHEM Group Reederei Peter Deilmann SECOP HanseYachts Briar Chemicals Getronics Steria Iberica brightONE
fidelis HR Studienkreis Group AKAD University B+P Gerustbau Blaupunkt Brand Management Evolve Polymers Publicitas Scholl Footwear Telvent Global Allied Healthcare MEZ Regain Polymers SOLIDUS TAVEX Europe Transform
Year of acquisition 2006 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2008 2008 2008 2008 2008 2009 2009 2009 2009 2009 2010 2010 2010 2010 2011 2012 2012 2012 2013
Year of deconsolidation 2007 2013 2010 portfolio 2008 2008 2009 2009 2012 2013 2011 2010 2016 2014 2009 2010 2010 2011 2013 2012 portfolio 2012 portfolio portfolio 2014 portfolio portfolio portfolio portfolio portfolio 2016
2013 2013 2014 2014 2014 2014 2014 2014 2014 2015 2015 2015 2015 2015 2015
2016 portfolio portfolio portfolio portfolio 2016 2016 portfolio 2014 portfolio portfolio portfolio portfolio portfolio portfolio
INSOLVENT?
NOTES
YES
Sold to Nettle Group, a suspect buyer Sold to management Sold to management Portfolio, partially cashed-out via leaseback deals Sold to Kresta Group, Austria Insolvent Sold to management Sold to GIK GMBH, a suspect buyer Sold to ZAPI Group Sold to management Sold to Indorama, Thailand Insolvent Sold to the market and anchor investors Part sold to SPIE Group / the rest merged with Getronics Insolvent Sold to a suspect buyer Sold to Michael Oplesch, then re-sold to Thomas Haffa Sold to Webb Group Sold to a suspect buyer Part sold to DATAGROUP AG / the rest merged with Getronics Portfolio Sold to Bryan Green (TNUI Capital) Portfolio Portfolio, sold subsidiary Framochem Sold to Callista Private Equity Portfolio Portfolio Portfolio Portfolio, part sold to SEP 7 Holding, a suspect buyer Merged with Getronics One part of BrightONE merged with Blaupunkt Europe, which later became insolvent. The other 2 parts were sold to T-Systems, and a suspect buyer, respectively. Sold to SD Worx Portfolio Portfolio Portfolio Portfolio, ceased disclosure since 2015 Sold to Plastipak Packaging Inc. Sold to management Portfolio Merged with Getronics Portfolio Portfolio Portfolio Portfolio Sold to former shareholders in 2016 Portfolio
YES
YES YES YES YES YES
YES YES YES YES
YES
YES
YES
YES
Insolvent current portfolio Legend: Green = solvent NOTES (1) Some of the former subsidiaries were insolvent after Aurelius sold them, but may not be insolvent currently. (2) Above in green we were unable to find evidence of insolvency or solvency after Aurelius disposal (2) Years of acquisition and deconsolidation come from Annual reports
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Of the 15 former Aurelius subsidiaries that became insolvent, the following were sold to dubious buyers and/or buyers that appear connected to Aurelius7: Subsidiary Quelle Spain MTP/Grillo Peissenberg Scherpe Group
DISPOSALS OF SUBSIDIARIES Date of disposal Date of insolvency Buyer according to Aurelius Beneficiaries of the buyer Sep-07 H2 2007 British Nettle Group Wolfgang Nessel, Bianca Schachtler Sep-07 Jan-08 British Nettle Group Wolfgang Nessel, Bianca Schachtler Apr-09 Mar-12 financial investor GIK Gmbh Jurgen Szabo
Mode & Preis Sit-Up TV
H2 2010 Jul-12
2011 Mar-14
Blaupunkt
Dec-14
Sep-15
BrightONE/Getronics IDS
Sep-16
not insolvent
not disclosed strategic third party investor financial investor, not disclosed strategic investor SEP
unknown Brian Green, TNUI Capital
Connection to Aurelius Wolfgang Nessel Wolfgang Nessel Bianca Schachtler
unknown
Helmut Gieseler Pascal Berger, Roland Winkler Nicholas Challinor Halford
Rick Chilvers, SEP Holding 7 Ltd.
Sven Stoecker
The above-mentioned buyers/beneficiaries include:
Former and/or current directors of Aurelius’ subsidiaries; Persons and/or entities with other ties to Aurelius; and Dubious entities and persons.
Some of the above mentioned buyers or their beneficiaries seem to be related parties as defined below 8:
Why would Aurelius sell to related or closely connected parties or other dubious buyers? More likely than not, Aurelius sells subsidiaries to such buyers so that Aurelius can technically claim that their portfolio companies did not enter into insolvency under Aurelius’ ownership.
We find additional evidence that Aurelius obfuscates the nature of its business transactions, by examining a more recent transaction, involving Getronics-IDS.
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Aurelius claimed recently to have sold Getronics Group to a “strategic investor” SEP 9: “On October 5, 2016 Getronics Group, a subsidiary of Aurelius, sold its German subsidiary Getronics-IDS to the Strategic Investor SEP as part of its efforts to sharpen its focus. Getronics-IDS generates revenues of around EUR 90 million per year. The parties have agreed to keep silent about the purchase price.” Financial markets participants tend to use the term “strategic investor” to refer to investors that are operating companies – such as a Coca Cola, Bayer, etc. – as opposed to investment companies, such as KKR, Blackstone, etc. SEP does not appear to be a “strategic investor” – in fact, that representation seems quite deceptive:
The exact name of the acquiring entity – which Aurelius did not provide – is SEP Holding 7 Ltd. 10 SEP was incorporated on 12th August 2016 – a little over 1 months before this transaction.11 The company is based in 37 Rhewl Lane, Gobowen, Oswestry, Shropshire, UK, Post Code: SY10 7XA. Based on satellite images, the “office” looks like a rural village
SEP Holding 7 Ltd – Location seems more like a scene from “The Hobbit” than the home of a strategic investor12
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SEP and Aurelius are connected through Rick Chilvers and Sven Stoecker:
The two officers of “strategic investor SEP” are Rick Chilvers and Martin Wildman 13 Sven Stoecker was/is a managing director Aurelius’ subsidiaries 14: Managing director of Getronics IDS Gmbh since Aug 2016 Managing director of brightONE Consulting Gmbh since Jul 2016 Managing director of BrightONE GMBH since Jun 2016 SEP’s Rick Chilver and Sven Stoecker are long-time friends (+16 years) 15
Does Aurelius change the names of its failing/failed entities to obfuscate poorly performing subsidiaries? Aurelius refers to itself as a “good home for companies” even though its subsidiaries bankrupt at a ~60% rate after they are sold. Aurelius sells to suspect buyers, referring to them as “strategic investors.” There is little to no mention of bankruptcies in Aurelius’ filings, a curiosity given that most of its portfolio companies enter insolvency after they are sold. Aurelius may frequently change the name of its poorly performing subsidiaries to conceal failure. Take for example, Blaupunkt Technology 16: EUR
2008 Entity
Equity Profit/loss
Aurelius Enterprises AG
CHANGE OF NAMES BY BLAUPUNKT TECHNOLOGY 2009 2010 2011 2012 2013 2014 ED Enterprises ED Enterprises ED Enterprises Blaupunkt Europe Blaupunkt Blaupunkt AG GmbH GmbH GmbH Europe GmbH Technology GmbH € 17,660,000 € 25,650,986 € 10,617,807 -€ 16,943,667 €0 €0 € 8,473,094 -€ 24,815,196
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Aurelius presents itself as an investment firm, with a “long-term investment horizon” 17:
Aurelius’s claims of “operational focus” & “long-term investment horizon” seem contradicted by its claim of “fast recovery of investment”, implying they recoup 50% of their initial capital within 1 year 18:
Yet Aurelius under-invests in its portfolio companies: Aurelius seems like terrible home for companies Aurelius’ cumulative capital expenditures lag far behind cumulative depreciation & amortization: 19 EUR '000 Capital expenditures Depreciation and amortization + Impairments Capex as % of D&A + Impairments
CAPEX VS DEPRECIATION & AMORTIZATION 2011 2012 2013 € 61,857 € 60,493 € 70,818 € 88,983 € 66,462 € 73,786 70% 91% 96%
2014 € 60,072 € 77,692 77%
2015 € 50,514 € 101,267 50%
TOTAL € 303,754 € 408,190 74%
In fact, if Aurelius were siphoning off cash and other resources from its portfolio companies – resources that were intended to be used to simply maintain the businesses – then the reality would be far worse than presented in the table above. Not only would Aurelius be insufficiently spending money on capital expenditures, it would be removing muscle tissue from the bone – rather than trimming fat – from its portfolio companies.
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Aurelius’ Business: a publicly-traded version of Philip Green? How does Aurelius manage to:
Present itself as a “good home for companies” (Berenberg Bank claims that only four portfolio companies have gone out of business). Claim: “we run a hospital for sick businesses where we help to cure them.” Claim operating profits from portfolio companies as a source of “value creation” Pay dividends, buyback shares, and reward its management team handsomely.
Even as:
15 out of 26 of Aurelius’ former portfolio companies entered insolvency soon after Aurelius sold them to suspicious buyers (some resembling undisclosed related parties). Over 100% of Aurelius’ net profits originates from ‘other income’; other income is typically considered non-operating income. Aurelius’ subsidiaries cumulatively generated 2012-2015 of -€5 million net losses per note 75. Over 100% of Aurelius’ 2015 net profits are non-cash income, and working capital and/or other non-recurring sources of cash account for more than 100% of 2015 cash flow from operations. Aurelius 2015 cash flow from operations generated -€24 million in outflows, before changes in working capital. Aurelius issued EUR 166 million convertible debt even as management quietly received EUR 169 million of proceeds from the sale of least 40% of their stake in Aurelius’ shares.
Based on the above, Gotham City Research believes that asset stripping, NOT reaping nor patiently growing its subsidiaries’ operating profits, is a key value driver of Aurelius’ business, as it was for Sir Philip Green (i.e. his ownership of BHS):1 CHARACTERISTIC
AURELIUS
Presence of large amounts of income 123% of net income from negative goodwill in 2011-2015
Philip Green - BHS 34% of net income in FY2001-2008
Presence of sale and leaseback transactions
YES
YES
Bankruptcies shortly after disposal
Yes
YES
Allegations of profiting at the expense of employees/creditors/others
YES
YES
Insufficient capital expenditures
YES
YES
Sale of companies to suspect buyers
YES
YES
Philip Green’s return on his BHS investment looked good…until it didn’t. Aurelius’ business & its “return multiples” look good as well…before calculating the true risks/liabilities. We first examine Aurelius’ true business model, contrary to how the company presents it; then we will examine the risks. Page 29 of 68
Aurelius presents its business model in the following manner:
Note how Aurelius refers to ‘operating profits from portfolio’ as if it had a stable base of portfolio companies with recurring profits (why else mention “DCF” below) 2
Aurelius claims that operating profits from portfolio is a value driver; however the sum of the subsidiaries’ profits – as disclosed in the notes to Aurelius’ Annual Report – come up as losses! 3 CONSOLIDATED NET INCOME VS SUM OF SUBSIDIARIES' NET INCOME EUR '000 2012 2013 2014 2015 TOTAL Consolidated € 88,056 -€ 1,699 € 107,591 € 154,924 € 348,872 Sum of subsidiaries' € 44,233 -€ 68,127 € 74,991 -€ 56,345 -€ 5,249 Difference € 43,823 € 66,428 € 32,600 € 211,269 € 354,121
If Aurelius’ actually reports losses from its subsidiaries, how does it generate income? Other income accounts for over 100% of net income; other income is not considered operating income How does Aurelius claim to generate operating income from its portfolio companies, when more than 100% of Aurelius’ earnings originate from “other income”?4 EUR '000 Other income Net income Other income as % of net income
OTHER INCOME AS A SHARE OF NET INCOME 2010 2011 2012 2013 € 245,503 € 87,697 € 165,471 € 111,015 € 138,827 -€ 63,938 € 88,056 -€ 1,699 177% over 100% 188% over 100%
2014 € 222,382 € 107,591 207%
2015 TOTAL € 306,870 € 1,138,938 € 154,924 € 423,761 198% 269%
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Contrary to how Aurelius presents its value drivers, other income – according to all definitions we reviewed – is considered income from non-operating activities5: 1. Income derived from transactions not involved in daily operations of a business. 2. Income for a company that comes from anything other than its ordinary operations.
Aurelius’ Other income consists mostly of negative goodwill, deconsolidations, and other income: 6
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Most of other income – income from negative goodwill, deconsolidations, and discontinued operations – are typically considered non-operating and non-recurring in nature.
Income from Negative goodwill has not proven to be a sustainable driver of value, as the Arques and BHS cases show. Arques’ negative goodwill income vanished after 2008, suggesting sustained negative goodwill income might is not a sustainable driver of income for Aurelius: 7 INCOME FROM NEGATIVE GOODWILL (ARQUES) EUR '000 2004-2008 2009-2013 Income from negative goodwill € 487,842 € 13,224
Negative Goodwill is a rare Phenomenon: Arques (and Aurelius) are statistical outliers among outliers We were unable to find any company more similar to Aurelius than Arques. Among listed companies in Germany, Arques accounted for 41% of all negative goodwill transactions, from 2005-2008, according to Corporate Ownership & Control/Volume 12, Issue 2, Winter 2016 – Frequency of and Reasons for Bargain Purchases – Evidence from Germany):8 FREQUENCY OF NEGATIVE GOODWILL TRANSACTIONS IN GERMANY 2005 2006 2007 2008 Arques Industries 0 11 9 4 Others 6 5 14 9 Total number of NGW transactions 6 16 23 13 Arques as a % of total 0% 69% 39% 31%
TOTAL 24 34 58 41%
Seeing that Aurelius’ recent negative goodwill levels, and rapid rise, mirror Arques, we deduce (coupled with Dirk Markus’ involvement with both Arques and Aurelius) therefore, that the Arques case is the correct comparison. Gotham City Research’s thoughts on Aurelius’ Negative goodwill (bargain purchase) The ability to regularly report negative goodwill income implies one of the following or their combination: a) b) c) d)
The management has exceptional ability to find and acquire assets below their fair value; Transactions are not conducted on an arms-lengths basis; Inappropriate valuation of assets and/or liabilities at point of acquisition. Negative goodwill may not account for future risks
In our view if a) were true, sellers to Aurelius at some point would adjust their prices upwards, or new buyers would emerge as such arbitrage opportunity would be eliminated for Aurelius, given that it is a public company and provides a lot of information on its activities. However, looking at the size and dynamics of negative goodwill income in recent years this “arbitrage opportunity” not only has not been closing, but on the contrary – it has been widening, which generally contradicts to the principles of market economy. Also, b) and c) and d) suggest that the negative goodwill accounting masks the hidden buildup of risk. Thus some combination of b) and c) seems more likely. Page 32 of 68
How exactly Does Aurelius Make Money? - CEO Dirk Markus’ View On one hand, you have CEO Dirk Markus who claims Aurelius is like a hospital for sick businesses: 9 We run a hospital for sick businesses where we help to cure them. And like in a real-world hospital once in a while a patient might die. That is normally not the doctor's or our fault but that it’s the prior condition of the patient that causes that.
On the other hand, Aurelius has been accused – and in some cases, found guilty of – illegal or improper business conduct, including illegally withdrawing money, fraud related to non-payment of suppliers, etc. 10 Aurelius has been ruled guilty in the following cases:
Einhorn – Germany’s Supreme Court ruled that Aurelius illegally withdrew funds from Einhorn, a former portfolio company. EDS Group – Aurelius found guilty of tort in French courts for its improper management of the EDS Group
Open cases:
MS Deutschland – Aurelius faces a EUR 50 million claim that the company improperly withdrew cash from the proceeds of a bond issuance. Mode & Preis – The Mannheim state prosecutor has charged M&P’s management with 11 counts of fraud (non-payment of suppliers).
Are these judgments and accusations isolated case? Or are these & similar behaviors – raiding pension funds, siphoning cash, and/or asset stripping from its portfolio companies – a core part of Aurelius’ DNA?
How exactly Does Aurelius Make Money? - Gotham City Research’s view We believe Dirk Markus’ characterization of Aurelius’ business is incorrect for the following reasons:
“once in a while a patient might die” – actually, nearly 60% die (see prior section). “We help to cure them” – If a real-world hospital and doctors were extracting non-vital organs from its patients, then selling them for profit, would they be “helping to cure” its patients? “normally not the doctor's or our fault but that it’s the prior condition of the patient that causes that.” – If a real-world hospital and doctors were extracting non-vital organs from its patients, selling the organs for profit, released its patients, and 60% of its patients shortly thereafter die from organ failure…who would be at fault?
We illustrate what we believe to be a critical (but not only) driver of Aurelius’ business in the next page with a “theoretical example” of how Aurelius makes money.
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How exactly does Aurelius make money? – Theoretical Example 1. Investment firm (“SlaughterCo”) buys a loss-making company (“SheepCo”) for some token amount, EUR 1 million. 2. The old owner of SheepCo leaves EUR 50 million in cash on the balance sheet; the cash is intended to fund SheepCo’s pension fund obligations of EUR 50 million. SlaughterCo books “negative goodwill” income, a non-cash source of income. 3. SlaughterCo extracts EUR 50 million out of SheepCo over 3 years, under the guise of “dividends”, “consulting fees”, “restructuring fees”, etc. SlaughterCo books positive cash flow from these extractions, even as SheepCo’s profits may be non-existent, declining, or even losses. 4. Meanwhile the pension fund obligations remain with SheepCo and SheepCo is on the verge of bankruptcy. 5. Seeing that there are no resources left for SlaughterCo to extract from SheepCo, SlaughterCo sells SheepCo to a friend for EURO 1. 6. SheepCo quietly files for bankruptcy under SlaughterCo’s friend. SlaughterCo can technically claim that SheepCo did not go bankrupt under its ownership. 7. A few years later, UK Parliament launches an investigation into SheepCo’s failure and seeks EUR 50-150 million from SlaughterCo. If Aurelius were to generate cash flow from asset stripping, pension raiding, and/or siphoning its subsidiaries, what would Aurelius’ cash flow statement look like? Aurelius’ 2015 cash flow from operating activities is actually negative before changes in working capital If Aurelius were to generate cash from stripping its subsidiaries, this is exactly what we expect to Aurelius’ cash flow statement should look like:11
2015 Operating cash flow is negative before working capital adjustments; Working capital capital e.g. trade receivables and other liabilities, inventories, and ‘other items of the Statement of Financial Position’ are the sources of cash.
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Aurelius is Unique (unless compared against Arques and Philip Green BHS): While raiding a pension fund or overstating assets is not unheard of in the private equity world, 12
Aurelius appears unusual when compared against other investment firms (except when compared against Arques or Philip Green BHS)13:
Changes in working capital as a share of revenues is much larger for Aurelius, than for peers. CHANGE IN WORKING CAPITAL AS % OF REVENUE 2014 2015 Average Aurelius 2.2% 8.1% 5.1% Looser Holding 1.8% 1.4% 1.6% Gesco -1.3% -2.5% -1.9% Indus Holding -2.2% 0.2% -1.0%
Other income both as a (1) share of Revenue and (2) Net income is much larger for Aurelius than other, more traditional peers.
OTHER INCOME AS % OF REVENUE 2014 2015 Average Aurelius 14.5% 15.2% 14.9% Looser Holding 1.0% 1.0% 1.0% Gesco 1.5% 1.9% 1.7% Indus Holding 1.7% 1.4% 1.6% OTHER INCOME AS % OF NET INCOME 2014 2015 Average Aurelius 206.7% 198.1% 202.4% Looser Holding 56.8% 18.8% 37.8% Gesco 47.0% 51.8% 49.4% Indus Holding 34.6% 29.1% 31.9%
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Aurelius’ Total Returns: Profits before the bad stuff? Anatomy of a Blowup: The returns looked great, ex ante In 2000, Sir Philip Green purchased BHS for GBP 200 million. In subsequent years, Green extracted GBP 580 million out of BHS, in the form of dividends, rental payments and interest on loans1, just as we believe Arques and Aurelius have with their portfolio companies. Philip Green’s returns on his initial investment looked great – nearly 2x return on his investment – ignoring ethical, legal, and risk-related consideration. In early 2015, Philip Green sold BHS for just £1. Within months, BHS filed for bankruptcy. Later in 2015 Members of Parliament opened an investigation into Philip Green. As of early 2017, Philip Green agreed to pay £365 million to settle the investigation. Philip Green’s 2x return on investment, declined to nearly zero. Here is his pro forma payoff diagram: Philip Green's BHS Payoff £100.00 £50.00 £2000
2001 2002
2003 2004 2005 2006 2007 2008 2009 2010 2011
2012 2013
2014 2015 2016 2017
-£50.00 -£100.00 -£150.00 -£200.00 -£250.00 -£300.00 -£350.00 -£400.00
Aurelius’ return profile look great…before the risks are considered or incurred. Aurelius’ shares (including dividends) have generated +41% annualized returns since 2006: 2 Aurelius is Better than Warren Buffett? Berkshire Aurelius Hathaway Book value/share 19.0% 3.5% Market value/share 20.8% 41.5%
Warren Buffett – one of the greatest long term investors in the world – has generated over 20% annualized returns over several decades, through his Berkshire Hathaway vehicle. Notably, Berkshire’s annualized share price growth has been remarkably consistent with its annualized growth in book value per share. In contrast, Aurelius’ annualized book value per share growth rate is only a tiny fraction of its annualized share growth rate. Unsurprisingly, brokerage houses who cover AR4 seem to require “new paradigms” to valuation (e.g., applying a multiple on Aurelius’ cash balance3) to justify Aurelius’ stock price. Page 36 of 68
Aurelius’ Claimed Total Return Multiples: Profits before Costs (?) On one hand, Aurelius boasts of a 9x total return multiple on its portfolio companies’ exits, and implies that the company recoups 50% of any initial outlays of cash within one year: 4
Based on our careful examination of Aurelius’ accounting, its business, its peers, and management comments, Aurelius reminds us of an insurance company that boasts of its revenues – gross written premiums – without mentioning the risk that the insurer needs to pay out to policy holders in the event of some catastrophic event for the policyholders (i.e. an insurable event). Take for example: The “Total return” on Wellman does not reflect the risk of a contingent liability In 2011 Aurelius sold Wellman – Aurelius claims a total return of EUR 29.33 million – or 6.8x total return multiple on ‘peak exposure’ of EUR 4.3 million. Gotham City Research believes that Aurelius’ representation of its ‘total return’ on its Wellman dealings omits EUR 22 million contingent liability that Aurelius is the sole obligator of. These contingent liabilities were initially held by Residuum Beteiligungs GmbH, formerly Wellman-related entities, that became retroactively merged into Aurelius. Despite investors’ and/or brokers beliefs to the contrary, Wellman/Residuum is an example of a past portfolio company whereby Aurelius is the sole obligator of its contingent liabilities. Page 37 of 68
Aurelius sold Wellman to Indorama, and retained some Wellman related entities on their books (renaming them ‘Residuum’):5
In 2012 Residuum was retroactively merged into Aurelius AG. Aurelius AG became “sole obligated party” under the guarantees issues previously by Residuum, as shown below: 6
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Residuum Ltd remained consolidated through 2013 by Aurelius:7
In AR 2015 A still discloses contingent liabilities related to Wellman, sold in 2011: 8
Contingent liabilities matter for reasons beyond the Wellman/Residuum example
Recall the Contingent liabilities accounting irregularities discussed earlier (i.e. they may be understated by 46%)9 CONTINGENT LIABILITIES EUR '000 31-Dec-14 Contingent liabilities, as reported € 101,933 Contingent liabilities, as calculated € 105,683 Difference -€ 3,750 Difference as % of reported number -3.7%
31-Dec-15 € 64,318 € 94,268 -€ 29,950 -46.6%
Arques’ failure and its auditor’s escalating disclosure regarding the risks that contingent liabilities posted on Arques’ going concern from pre 2007 to 2009. From a causation perspective, there is precedent for failure or near-failure as a result of contingent liability risk. There may be other Residuum/Wellman-like situations.
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What investors and/or brokers believe about Aurelius’ liability According to Commerzbank diagram shown below, Aurelius SE Co. KGaA does not have liabilities, guarantees to portfolio companies:10
The Commerzbank research report continues by claims that “the risk is limited EUR 25,000. The Aurelius Group is a holding company with a multi-level structure. The operating subsidiaries are held by intermediate companies below the level of the parent company. This structure effectively contains the risks of the individual operating companies. Aurelius is a public limited liability company regulated under European law managed by the executive board, which would personally act as liable general partner. When acquiring a company, Aurelius establishes a holding company as a special investment vehicle set up as a GmbH in Germany, which minimises the risk for Aurelius if something goes wrong with the acquired company. In the event of a problem, the risk is limited to €25,000 and the only significant loss to Aurelius comes from the loss of what they paid for the company. Since the average purchase price paid by Aurelius is only €10m against an equity position of €537m at year-end 2015, the risk from any one investment is minimal. Some 10% of deals Aurelius makes even include an added cash payment from a vendor who is interested in a professional company turning the distressed company around. The debt in the balance sheet is mostly held at the individual company level and is non-recourse to Aurelius. Aurelius is able to put an acquired company into bankruptcy or liquidation with no impairment to the holding company where most of the cash is held. In order to prevent insolvency of the holding company, Aurelius does not sign a profit-and-loss transfer agreement, or cash-pooling-contract, with its subsidiaries.
The Wellman/Residuum situation described earlier seems to contradict the above claims, as Aurelius sold Wellman, but Residuum – the liability related to Wellman – remains with Aurelius.
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The Philip Green BHS Risk: What happens if the chickens come home to roost? Below, as we show in red, Aurelius has made money from companies that later became Insolvent:11
EDS Group = Quelle Philip Green made money from BHS, the company later became Insolvent, and Philip Green had to pay back nearly all his profits extracted from BHS: 12
Philip Green's BHS Payoff £100.00 £50.00 £2000
2001 2002
2003 2004 2005 2006 2007 2008 2009 2010 2011
2012 2013
2014 2015 2016 2017
-£50.00 -£100.00 -£150.00 -£200.00 -£250.00 -£300.00 -£350.00 -£400.00
Did Aurelius make money at the expense of Scherpe, EDS Group WVC, KTD Aythea, Mode & Preis, Channel21, BCA, Sit-up – and these companies’ employees, creditors, suppliers, and other stakeholders? We ask these questions because, Philip Green was accused of extracting money out of BHS, and BHS encountered problems after Philip Green sold BHS. Philip Green repaid nearly all his BHS profits, many years after he extracted those funds out of BHS. This seems a real risk – more a matter when versus whether – when it comes to Aurelius’ business. Page 41 of 68
Aurelius and evidence of covering its tracks: What does Aurelius have to hide? Gotham City Research discovered Aurelius had a prior website, that was deleted and replaced by the current website. Under the current website, some of the older press releases seem to have been deleted. Thanks to the Wayback Machine, we reviewed the differences between the press releases Aurelius reveals to the world today, and the press releases Aurelius chooses to hide: 13
Judging by the press-release section of the old website, it operated until May 2014. In the new website, Aurelius only includes news starting from 2008. Older news is no longer available on the website. The sale of Grillo to Nettle (dated 19 Sep 2007) and other news stories involving Aurelius’ less successful deals, may interest current shareholders.
In addition to pre-2008 articles being unavailable on Aurelius’ current website, some press releases from 2008-2010 were excluded from the current website as well. Based on what was excluded, it’s hard not to conclude that Aurelius hand selected these to hide. We have listed the press releases we found most prominent, below:
5.09.2008AURELIUS participates in Arques Industries 11.03.2008Primondo sells Spezialversandhaus Mode & Preis to AURELIUS 10.01.2008Joint press release of Balda AG, KS Plastic Solutions GmbH and AURELIUS AG 30.07.2009AURELIUS expects impairment in French mail-order activities 09.03.2009AURELIUS Completes Acquisition of Blaupunkt 27.02.2009AURELIUS sells Pohland in management buy-out 30.07.2009AURELIUS expects impairment in French mail-order activities 09.03.2009AURELIUS Completes Acquisition of Blaupunkt 27.02.2009AURELIUS sells Pohland in management buy-out 21/09/2010Opinion on the press article in the FTD
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Net Asset Value: is AR4 worth no more than €8.56 per share? Aurelius’ Unaudited Net Asset Value: Garbage In, Garbage Out? Gotham City Research believed Aurelius’ negative goodwill-related accounting practices were its most peculiar…until we examined Aurelius’ Net Asset Value (“NAV”). Given that Aurelius’ portfolio companies are described by Dirk Markus as “sick businesses” that they are seeking to cure, and most of Aurelius’ historical subsidiaries entered into insolvency after Aurelius sold them, we believe that a discounted cash flow approach to NAV is inappropriate. Based on our calculations, EUR 11-12 per share is a more realistic estimate of Aurelius’ NAV (see the appendix for more details), not the EUR 43 per share unaudited NAV Aurelius provides. The following considerations lead us to be skeptical of Aurelius’ NAV and shape our approach:
We calculate that the “organic growth” of Aurelius’ NAV components is -4.4% (i.e. the NAV components as of September 2016 that have remained on the portfolio since December 2014 have declined in value by -4.4% since December 2014). We estimate that Aurelius’ NAV has been artificially boosted 33%+ by a reduction (implemented effective the 2015AR) in its discount rate used to calculate NAV from 5.7%-11.9% to 4.2%-9.3%. Discount rate seems low for companies that even Dirk acknowledges are “sick patients”. Venture and distressed companies receive higher discount rates for good reasons. Aurelius provides an NAV that is not audited by its auditor; Aurelius’ unaudited NAV does not conform to fair value reporting requirements. Aurelius’s NAV is almost entirely based on DCFs which seems dubious for valuing distressed/near-bankrupt companies. We think the approach is particularly strange considering Aurelius’ cash flows seem highly dependent on working capital (as discussed earlier). Aurelius does not factor in an illiquidity discount it its NAV components, which in practice would reduce their marked to model values by 20%-30%.
Gotham City Research believes AR4 is worth no more than €8.56 per share for the following reasons:
We believe Aurelius’ business model is not sustainable in the long-term. As a result, we believe shares will follow a path not dissimilar to Arques AG, Philip Green BHS. Therefore, we believe AR4’s share price will converge to its tangible book value per share less contingent liabilities (don’t forget, book value per share has only grown a paltry 4% per annum versus 40%+ per annum in its share price), implying -80-90% downside from currentl levels. The risks discussed earlier in this report –e.g., risk related to Aurelius’ suspect accounting, business model, etc – serve as the basis of our opinion. Change in corporate structure1 – Aurelius recently changed its legal form into a partnership limited by shares; this change allows management to preserve their control even if they elect to sell all their remaining shares (if they have any). As such, we believe AR4 shares merit a corporate governance discount consistent with non-voting right share classes. Page 43 of 68
Gotham City Research Believes Aurelius’ Q3 2016 NAV is closer to €8.5 per share, not €43.4 per share 2
NET ASSET VALUE CALCULATION in EUR Mn Group entities/units Q3 2016 SECOP € 17.5 UK Chemicals € 151.1 € 12.7 IT services € 49.2 GHOTEL Group German Education Business € 0.0 € 0.0 Scholl Footwear ISOCHEM Group € 0.0 € 0.0 Hanse Yachts € 37.8 Solidus LD Didactic € 15.9 Publicitas € 4.9 € 0.0 UK Healthcare B+P Gerüstbau € 20.0 € 0.0 UK Polymers € 0.0 MEZ € 10.6 Reuss-Seifert € 1.7 Conaxess € 3.1 Calumet Working Links € 5.4 Other including net funds) € 254.0 TOTAL € 583.8 Consolidated NAV € 344.7 NAV € 364.3 Shares 31,189,279 NAV PER SHARE € 11.68 MARKET PRICE PER SHARE € 65.10 IMPLIED % DOWNSIDE -82.1%
We provide the assumptions and methodologies used to estimate the above figures in the Appendix. The following sections describe considerations we weighted to calculate NAV.
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Aurelius’ NAV components that have remained in the portfolio since December 2014 -4.4% The NAV components below denoted in white have remained in Aurelius’ portfolio since 2014. We estimate the weighted-average rate of decline of those components, as of September 2016 to be -4.8%: 3 NET ASSET VALUE, EUR MN Group entities/units 31/12/2014 30/09/2016 Change in NAV SECOP € 246.7 € 255.6 3.6% UK Chemicals € 158.4 € 151.1 -4.6% IT Services € 209.4 Getronics € 128.2 GHOTEL Group € 112.0 € 49.2 German Education Business € 72.5 € 68.2 -5.9% fidelis HR € 57.4 Scholl Footwear € 46.1 € 51.8 12.4% B+P Gerüstbau € 33.5 € 29.9 -10.7% Berentzen Group € 23.5 LD Didactic € 32.4 € 15.9 -50.9% brightONE € 34.5 Publicitas € 25.9 € 7.3 -71.8% ISOCHEM Group € 24.6 € 23.6 -4.1% HanseYachts € 27.7 € 32.4 17.0% UK Polymers € 14.5 ECOPlastics € 3.6 SOLIDUS € 56.4 UK Healthcare € 51.2 MEZ € 21.3 Reuss-Seifert € 15.8 Conaxess Trade-Group € 33.1 Calumet Photographic € 4.6 Working Links € 8.0 Other (incl. net cash funds) € 123.6 € 254.0 Total € 1,150.6 € 1,353.3 Value-weighted change in NAV among selected companies -4.8%
The above calculation seems to suggest that Aurelius has not been successful at operationally improving the value of these companies. We believe it may also suggest: a) The portfolio companies themselves were selling off assets (which would undermine claims that portfolio companies are developed); b) Aurelius’s portfolio companies have lost value (among those remaining in the portfolio since 2014); c) Previous NAV was overstated Because the above methodology only applies to the components that meet the duration criterion, the above analysis is not fully conclusive. However, none of the above scenarios seems to validate Aurelius’ long-term viability. Therefore, the whole premise of a DCF-based NAV seems dubious. Page 45 of 68
Reductions in the Discount Rate Artificially boost NAV – Aurelius’ NAV may be boosted 33%+ In Aurelius’ AR 2015, the company reduced the discount rates used to calculate NAV from 5.7%-11.9% to 4.2%-9.3% or by 1.8% on average compared to the end of H1 2015. The reduction in discount rates may have boosted NAV by over 33%: Discount Rate NAV 5.7%-11.9% $ 1,133.65 4.2%-9.3% $ 1,523.16 Increase in NAV 34.4%
We arrive at our 33% boost to NAV by calculating what a change in the above-mentioned discount rates will have on a stream of EUR 100 cash flows, growing at the growth rate Aurelius’ provides for its NAV DCF disclosures: t+0 Cash flows € 100.0 Original discount rate: New discount rate:
t+1 € 100.5 € 92.4 € 94.1
t+2 € 101.0 € 85.3 € 88.6
t+3 € 101.5 € 78.8 € 83.4
Thereafter € 102.0 € 877.1 € 1,256.9
Total € 303.0 € 1,133.7 € 1,523.2
We incorporated Aurelius’ comments about DCF assumptions:4
2014 “The valuation is carried out using a discounted cash flow model taking into account the budgets of the Group companies for the next three years (2015-2017). The growth rates assumed for this detailed planning period have been set uniformly at a conservative 0.5 percent. The weighted average cost of capital (WACC) used for the underlying discounting rates was calculated as of December 2014 on the basis of individual peer groups, totaling between 5.7 and 11.9 percent.”5
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Aurelius’ Net Asset Value (“NAV”) is an unaudited NAV Aurelius elects not to comply with the conditions set out in IFRS10.27; that is, Aurelius elects not to be treated as an “investment entity.” Consequently, Aurelius’ investments are not measured on fair-value basis, viz., its NAV is not audited:6
Aurelius clearly places its Net Asset Value section, in the table of contents of its AR 2015, before the sections that are audited:7
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Aurelius’ auditor specifies which statements they audited (we don’t see “We have audited NAV”): 8
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Aurelius’ NAV calculation is marked-to-model, a 20%-30% Illiquidity discount seems warranted Given that Aurelius’ unaudited NAV is DCF-based, not fair value-based, an illiquidity discount should be applied to simulate what would happen if Aurelius had to liquidate its stakes. Based on Aswath Damodaran’s comments below, it seems Aurelius’ assets may require discounts of at least 30%: 9
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Even More Accounting Irregularities? Minor accounting errors 1.
The minus sigh is missing.
2. Looks like someone accidentally pressed “Z” key on keyboard while typing capital “I” in “Increase”.
3. Minor discrepancies we calculated: CASH FLOW FROM INVESTING ACTIVITIES EUR '000 Cash flow from investing activities, as reported -€ Cash flow from investing activities, as calculated -€ Difference € Difference as % of reported number
2013 47,391 47,491 100 -0.2%
PENSION PLAN ASSETS IN THE UK EUR '000 Pension plan assets, as reported € Pension plan assets, as calculated € Difference -€ Difference as % of reported number
31-Dec-14 215,766 216,766 1,000 -0.5%
ACCUMULATED AMORTIZATION AND IMPAIRMENTS OF INTANGIBLE ASSETS EUR '000 Accumulated depreciation and amortization balance, as reported -€ Accumulated depreciation and amortization balance, as calculated -€ Difference -€ Difference as % of reported number
31-Dec-13 84,788 84,419 369 0.4%
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A breakdown of contingent liabilities
CONTINGENT LIABILITES EUR '000 B+P Gerustbau BCA Berentzen Group brightONE Fidelis HR Framochem Kft. Getronics GIP Development HanseYachts IDS Getronics Isochem Group LD Didactic MEZ Publicitas Scholl Footwear SECOP Wellman International TOTAL
2014 8,254 5,000 6,516 1,311 242 13,125 5,504 0 602 19,500 11,093 5 0 0 200 11,451 22,880 105,683
2015 6,571 5,000 3,199 1,180 0 13,125 19,949 457 984 9,100 3,717 5 22 1,110 19 7,830 22,000 94,268
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Subsidiary level accounting irregularities – CalaChem
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Subsidiary level accounting irregularities – Getronics Services UK Limited
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Subsidiary level accounting irregularities – Getronics Services UK Limited
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Subsidiary level accounting irregularities – Regain Polymers Limited
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Subsidiary level accounting irregularities – Solidus UK Solutions Limited
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Subsidiary level accounting irregularities – TFHC Limited
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Net Asset Value Calculation Gotham City Research believes that valuing Aurelius’ companies on a DCF “going concern” basis seems inappropriate given (I) how many subsidiaries have historically entered insolvency (after Aurelius sells them). And (II) Aurelius’ cash flow seems sourced largely from working capital and/or sale of non current asets. Additionally, the applicable discount rates for start-ups and distressed companies are rightfully very high (multiples higher than the ones Aurelius uses), leading to a risk of “garbage in, garbage out” with DCFs of high risk companies. We nevertheless sought to estimate Aurelius’ unaudited NAV components and calculate what a more realistic, fair-value oriented NAV might look like. Our NAV calculation included the following assumptions: Key Assumptions: 1.
2.
3. 4. 5. 6.
Earnings from local filings – We obtained earnings figures from the local filings. Most filings were for the fiscal year 2015; some were for 2014/2013 (as filing requirements vary by jurisdiction). Based on our evaluation of each subsidiaries’ filing, we made an assessment of what normalized earnings might look like, for the purpose of valuing each subsidiary. Loss-making companies – Companies with a track record of loss making do not merit NAVs beyond token sums. Based on our assessment of the marketplace. If Aurelius seeks “bargain purchases” we assume market participants are as well. Private market-oriented multiples – We arrived at implied deal/value multiple(s) based on Aurelius’ more/most successful exits, and applied this against earnings per local filings. We felt that this approach was appropriate, as companies that truly turn might be recognized in the market place. Liquidity discount –In some cases where we felt it was appropriate, we applied a liquidity discount, in order to simulate realistic market conditions. Sum of the Parts versus Combined NAV Approaches – We (i) estimated NAV based on the individual NAVs of Aurelius’ companies and then (ii) estimated a NAV that treated the sum of the individual companies’ earnings as if it were company. Our NAV is result of this blended approach. Risk-adjustment factor – Given some of the highly controversial allegations (and actions) against Aurelius and/or its portfolio companies, as well as against Arques, Philip Green / BHS, we applied a risk adjustment factor to quantify this effect. We were conservative and assumed the deduction should not exceed contingent liabilities.
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Allegations against Aurelius’ Business Model
1. In its article about Aurelius German newspaper Handelsblatt mentions that according to rumours real business model of Aurelius is squeezing cash out of the acquired companies. 2. Source: http://www.handelsblatt.com/unternehmen/management/aurelius-ein-mann-fuer-dieschwierigen-faelle/3011448.html 3. “If a company no longer has a future, the modern pirates of the economy come into play: Restructuring companies such as Aurelius, Bavaria or Arques are entering, rebuilding and slaughtering. In the end, some companies are left with nothing” Capital magazine (dated August 2009), published an article on A and its peers SOURCE: https://web.archive.org/web/20120123121337/http://www.capital.de/div/100023620.html 4. This article further supports our thesis that Aurelius acts as a liquidator (at least quite often) at the expense of creditors (translation from French). http://www.leparisien.fr/orleans45000/faillite-de-quelle-france-nouvelle-assignation-pour-l-ancien-actionnaire-23-12-20101202241.php
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END NOTES Introduction 1. Berkshire letter to shareholders 2017, Aurelius’ annual reports 2. Report on AURELIUS Equity Opportunities SE & Co. KGaA dated 02 December 16 by Hauck & Aufhauser 3. Aurelius’ ARs 2006-2015 Aurelius AG and Arques AG: Same Questionable Model, Same Destiny? 1. Bloomberg 2. Various sources: a. http://www.wiwo.de/unternehmen/handel/aurelius-traumschiff-insolvenzverwalterverklagt-investor-auf-6-3-millionen-euro/19464452.html b. http://www.leparisien.fr/orleans-45000/500-ex-salaries-de-quelle-vpc-obtiennentreparation-devant-la-justice-01-06-2012-2027737.php c. http://www.badische-zeitung.de/loerrach/versandhandels-story-fand-kein-gutes-ende-39601905.html 3. Arques’ (now: Gigaset) ARs 2004-2008 4. “Handbuch Anti-Fraud-Management: Bilanzbetrug erkennen - vorbeugen – bekämpfen” By Stefan Hofmann 5. Arques’ ARs 2007 6. Aurelius’ ARs 2011-2015 7. Aurelius’ website: a. http://aureliusinvest.com/en/xml/?source=2378&item=1 b. http://aureliusinvest.com/en/xml/?source=2378&item=2 8. Aurelius’ ARs 2012-2015 Are 43% - 100%+ of Aurelius’s reported earnings suspect? 1. “Aurelius Buys 3% of Rival Arques, May Acquire More (Update2)” dated 15 Sep 2008 by Joseph Mapother, Bloomberg 2. https://www.theguardian.com/business/2017/feb/28/philip-green-agrees-pay-363m-bhspension-fund 3. Aurelius’ ARs 2014-2015 4. Arques AR 2008 5. Arques AR 2009 6. Subsidiary-level filings: a. https://beta.companieshouse.gov.uk/company/05369235/filing-history b. https://beta.companieshouse.gov.uk/company/07966594/filing-history c. https://beta.companieshouse.gov.uk/company/07289595/filing-history d. https://beta.companieshouse.gov.uk/company/09423901/filing-history e. https://beta.companieshouse.gov.uk/company/09319909/filing-history Page 63 of 68
7. 8. 9. 10.
Aurelius’ UK subsidiaries’ filings Aurelius’ ARs 2011-2015 Aurelius’ AR 2015 Aurelius’ AR 2015
Is Dirk Markus Both the CEO and CFO of Aurelius? 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.
16.
Aurelius AR 2012 Aurelius’ AR 2008 Aurelius’ AR 2011 Report on AURELIUS Equity Opportunities SE & Co. KGaA dated 02 December 16 by Hauck & Aufhauser http://ww2.cfo.com/leadership/2014/03/holding-ceo-cfo-roles-tightrope-act/ http://www.consultancy.uk/news/2389/top-25-auditing-tax-and-financial-advisors-ingermany Aurelius’ ARs 2008-2010 Aurelius AR 2009 (German) Aurelius AR 2015 Aurelius AR 2015 http://www.frascanada.ca/international-financial-reportingstandards/resources/unaccompanied-ifrss/item45582.pdf https://www.iasplus.com/en/standards/ifrs/ifrs3 Bavaria Industries Group AR 2015 Aurelius’ AR 2012 Various sources: a. Aurelius’s AR 2013, AR 2015 b. https://twitter.com/markusdirk?lang=en c. https://mercuryhomesearch.com/testimonials/dr-dirk-katja-markus-kensington/ Wayback Machine: a. https://web.archive.org/web/20140526091732/http:/www.aureliusinvest.de/pressenews/Pressemitteilungen-2008/AURELIUS-beteiligt-sich-an-Arques-Industries.html b. https://web.archive.org/web/20140526091732/http:/www.aureliusinvest.de/pressenews/Pressemitteilungen-2008/Primondo-verkauft-Spezialversandhaus-Mode-undPreis-an-AURELIUS.html c. https://web.archive.org/web/20140526091732/http:/www.aureliusinvest.de/pressenews/Pressemitteilungen-2008/Gemeinsame-Pressemitteilung-der-Balda-AG-der-KSPlastic-Solutions-GmbH-und-der-AURELIUS-AG.html d. https://web.archive.org/web/20140522053844/http:/www.aureliusinvest.de/pressenews/pressemitteilungen-2009/AURELIUS-erwartet-Wertberichtigungsbedarf-beifranzoesischen-Versandhandelsaktivitaeten.html
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e. https://web.archive.org/web/20140522053844/http:/www.aureliusinvest.de/pressenews/pressemitteilungen-2009/AURELIUS-schliesst-Uebernahme-von-Blaupunktab.html f. https://web.archive.org/web/20140522053844/http:/www.aureliusinvest.de/pressenews/pressemitteilungen-2009/AURELIUS-veraeussert-Pohland-in-Management-Buyout.html g. https://web.archive.org/web/20140522053844/http:/www.aureliusinvest.de/pressenews/pressemitteilungen-2009/AURELIUS-erwartet-Wertberichtigungsbedarf-beifranzoesischen-Versandhandelsaktivitaeten.html h. https://web.archive.org/web/20140522053844/http:/www.aureliusinvest.de/pressenews/pressemitteilungen-2009/AURELIUS-schliesst-Uebernahme-von-Blaupunktab.html i. https://web.archive.org/web/20140522053844/http:/www.aureliusinvest.de/pressenews/pressemitteilungen-2009/AURELIUS-veraeussert-Pohland-in-Management-Buyout.html j. https://web.archive.org/web/20110903100647/http:/www.aureliusinvest.de/pressenews/pressemitteilungen-2010/Stellungnahme-zum-Presseartikel-von-Frau-Maier-inder-Financial-Times-Deutschland-vom-20.-September-2010%3A.html Does a “good home for companies” lead to 15 insolvencies? 1. 2. 3. 4.
“Winners in mid-caps” report dated 7 October 2016 by Berenberg https://www.youtube.com/watch?v=aqVpsHI1M_Q Various articles http://aureliusinvest.com/site/assets/files/1410/aur_companypresentation_january2017_e. pdf 5. “Winners in mid-caps” report dated 7 October 2016 by Berenberg 6. Insolvencies: a. Schleicher Electronics http://www.rae-eckert.de/de/2-aktuelles/aktuelles/624-vorlaeufigeseigenverwaltungsverfahren-schleicher-electronic-gmbh-co-kg-2.html b. BCA https://beta.companieshouse.gov.uk/company/06997902/insolvency c. Sit-Up TV https://www.retail-week.com/topics/marketing/tv-channel-sit-up-falls-intoadministration-despite-passing-cva-last-month/5059530.article d. Redeerei Peter Deilmann http://www.seatrade-cruise.com/news/news-headlines/deutschlands-operatingcompany-files-for-insolvency.html e. Evolve Polymers (former: EcoPlastics) https://beta.companieshouse.gov.uk/company/09343045/insolvency f. Blaupunkt + BrightONE (partially) Page 65 of 68
I.
http://www.haz.de/Nachrichten/Wirtschaft/Niedersachsen/Blaupunkt-stelltInsolvenzantrag II. http://aureliusinvest.com/en/press/press-releases/merger-of-blaupunkteurope-and-brightone-business-unit-sps/ g. Pohland http://www.reuters.com/article/pohland-insolvency-idUSL321340720090303 h. MTP/Grillo Peissenberg https://www.moneyhouse.de/MTP-Holding-GmbH-Peissenberg i. CVC Van Conversion (former: Westfalia Van Conversion): http://www.rvbusiness.com/tag/cvc-camping-van-conversion-gmbh/ j. Mode & Preis http://www.badische-zeitung.de/loerrach/versandhandels-story-fand-kein-gutes-ende-39601905.html k. KTD AR 2009 l. La Source (Quelle) AR 2009 m. Richard Scherpe Group https://www.northdata.de/%5B2010-06-08%5D?id=16973055&type=publication n. Einhorn Mode Manufactur https://www.northdata.de/%5B2010-11-12%5D?id=6543770&type=publication 7. Various sources: a. http://enberlin.blogspot.com/2008/01/quelle-nettle-aureius.html b. https://www.unternehmensregister.de/ureg/result.html;jsessionid=061C318B77A5C2F3 F975B451C0BE92E5.web03-1?submitaction=showDocument&id=1946325 c. https://beta.companieshouse.gov.uk/officers/M1VuSOz1Ig5QdoQ1T9pD-lyIIk/appointments d. https://www.northdata.de/Schachtler%2C+Bianca e. https://www.moneyhouse.ch/de/company/he-ri-ag-4497848791 f. https://www.northdata.de/El%C3%A9gance+Service+GmbH,+Aachen/Amtsgericht+M% C3%BCnchen+HRB+195213 g. https://beta.companieshouse.gov.uk/officers/hS03DtEP0L7qvjSoQigegBcaiSk/appointm ents h. https://www.moneyhouse.de/Sit-Up-Holding-UG-haftungsbeschraenkt-Zweibruecken i. https://beta.companieshouse.gov.uk/officers/Djxe3g2OBOQaAjLDWFylnBEBmIQ/appoi ntments j. https://beta.companieshouse.gov.uk/officers/C1ySNHCxzygn2Vo0eKS_jX_A134/appoint ments k. https://www.northdata.de/%5B2015-01-28%5D?id=721765024&type=publication l. https://beta.companieshouse.gov.uk/officers/ClKEppDYtz82q5Sf7Csm4D2BV78/appoint ments m. https://www.northdata.de/%5B2016-08-09%5D?id=2138625038&type=publication Page 66 of 68
8. 9. 10. 11. 12. 13. 14.
15. 16. 17. 18. 19.
n. https://www.northdata.de/%5B2016-07-22%5D?id=1973305038&type=publication o. https://www.linkedin.com/in/rick-chilvers-49068b3/ Aurelius AR 2015 http://aureliusinvest.com/en/press/press-releases/aurelius-verkauft-getronics-ids-an-denstrategischen-investor-sep/ Local German filings https://beta.companieshouse.gov.uk/company/10328192 Google maps https://beta.companieshouse.gov.uk/company/10328192 Sources: a. https://www.northdata.de/%5B2016-08-09%5D?id=2138625038&type=publication b. https://www.northdata.de/%5B2016-07-22%5D?id=1973305038&type=publication c. https://www.northdata.de/%5B2016-06-17%5D?id=1793515015&type=publication https://www.linkedin.com/in/rick-chilvers-49068b3/ https://www.northdata.de/ED+Enterprise+GmbH,+W%C3%B6rrstadt/Amtsgericht+M%C3% BCnchen+HRB+196102 http://aureliusinvest.se/ Aurelius’ investor presentation dated 16 March 2016 Aurelius ARs 2011-2015
Aurelius’ Business: a publicly-traded version of Sir Philip Green? 1. Sources: a. https://www.publications.parliament.uk/pa/cm201617/cmselect/cmworpen/54/54.pdf b. Aurelius’s ARs 2. Aurelius’ investor presentation dated 16 March 2016 3. Aurelius ARs 2012-2015 4. Aurelius ARs 2010-2015 5. Sources: a. http://www.businessdictionary.com/definition/other-income.html b. http://financial-dictionary.thefreedictionary.com/Other+income 6. Aurelius’ AR 2015 7. Arques’ (now: Gigaset) ARs 2004-2013 8. Corporate Ownership & Control/Volume 12, Issue 2, Winter 2016 9. https://www.youtube.com/watch?v=aqVpsHI1M_Q&authuser=0 10. Various sources: a. http://www.swp.de/metzingen/lokales/metzingen/Einhorn-Insolvenz-BGH-gibtJuergen-Sulz-Recht;art5660,1866982 b. http://www.badische-zeitung.de/loerrach/mode-manager-wegen-betrugs-vor-gericht-112373710.html c. https://www.lesechos.fr/04/06/2012/LesEchos/21197-105-ECH_orleans---500-exsalaries-de-quelle-obtiennent-reparation.htm Page 67 of 68
d. http://www.wiwo.de/unternehmen/handel/aurelius-traumschiff-insolvenzverwalterverklagt-investor-auf-6-3-millionen-euro/19464452.html 11. Aurelius’ AR 2015 12. “Capital Returns” by Edward Chancellor 13. Peers’ filings: a. Aurelius AR 2015 b. Gesco AR 2015 c. Looser Holding AR 2015 d. Indus Holding AR 2015 Aurelius’ 9x Total Returns: Profits Before the Bad Stuff? 1. BHS report 2. Berkshire letter to shareholders 2017, Aurelius’ ARs 3. Sell-side reports: a. Berenberg report on Aurelius dated 3 January 2017 b. Oddo Seydler report on Aurelius dated 24 February 2017 c. Commerzbank report on Aurelius dated 20 May 2016 4. Aurelius’ investor presentation dated 16 March 2016 5. Aurelius’ AR 2011 6. Aurelius’ AR 2012 7. Aurelius’ AR 2013 8. Aurelius’ AR 2015 9. Aurelius’ AR 2015 10. Commerzbank report on Aurelius dated 20 May 2016 11. Aurelius’ investor presentation dated 16 March 2016 12. https://www.ft.com/content/d62e97d0-fdc5-11e6-96f8-3700c5664d30 13. https://web.archive.org/web/20140627144358/http://www.aureliusinvest.de/pressenews/pressemitteilungen-2014.html Net Asset Value: is AR4 worth no more than €8.56 per share? 1. Aurelius filings 2. Aurelius filings and local filings of subsidiaries 3. Various sources: a. Aurelius’ AR 2014 b. http://aureliusinvest.com/en/press/press-releases/aurelius-equity-opportunities-withsolid-operating-performance-in-the-first-nine-months-of-2016/ 4. Aurelius’ AR 2015 5. Aurelius’ AR 2014 6. Aurelius’ AR 2015 7. Aurelius’ AR 2015 8. 9.
Aurelius’ AR 2015 http://people.stern.nyu.edu/adamodar/pdfiles/ovhds/inv2E/PvtFirm.pdf
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