Adler - Consequences
All,
Please find our unchanged analysis here.
The “draft summary" from KPMG is a political tool to allow everyone to get their ducks in a row before official publication. Yesterday’s statement seems only to confirm what everybody except the most aggressive short-sellers knows already: the value is there, but there have been transactions in the past that have been too close for comfort. Adler Group S.A. is a Luxembourg company, as have been a number of its counterparts, and disclosure under Luxembourg law is not the same as under German law, which applies to its assets and the exchange its shares are traded on.
Value revisions:
- Predictably the CBRE valuations have been confirmed.
- The valuations of its (mostly Consus) developments are subject to some revisions, but those revisions apparently do not trigger any covenant breaches. That is an important point because the company only had 6.5% of LTV covenant headroom for instance, which would suggest a maximum write-off of €1bn and probably less than that, judging by the formulation: “not endanger financial instrument covenants". For reference, we have been calculating €640m.
Related Party Transactions:
- Allegations primarily targeted”
- Gerresheim: The sale to the brother in las of an “advisor” to one of its largest shareholders has since been unwound and is part and parcel of a deal with LEG. So there is little news to be expected here. While the transaction probably should have been disclosed as related party,
- Ado Reverse Take-Over: What motivated ADO to acquire Adler and use its cheap funding to refinance Consus? I think we know. Excellent idea.
- Consus: The €750m valuation increase in the acquisition from Aggregate.
Consequences:
- If KPMG now agree that the asset value is substantially there, then the biggest remaining risk is that wrongdoing in the context of above “related party” transactions could not only give rise to a claim by the company against its directors but also expose Adler Real Estate S.A. to a damages claim from its shareholders. We’ve written about this before.
- Unlike in such cases as Wirecard or Steinhoff, KPMG imply that there is no gigantic hole in the accounts. That after a year of covid related disruptions and ensuing changes in the real estate market an auditor comes to a more conservative conclusion should be of no particular surprise. And after all, what is a self-respecting Special Auditor to do, but to find some fault somewhere.
- So the question is if shareholders would succeed to blame their €1.5bn MV loss on discolour failures and “misrepresentations” that amount to substantially less than that (no misrepresentation alleged by KPMG so far).
- Defense lawyers could easily argue that the unwind of the Gerresheimer transaction did not move the needle for the shares. So it can’t have been responsible for the MV loss in the first place. Further, one could easily argue that the Ado transaction has greatly benefited shareholders (at the expense of bondholders). Caner / Aggregate are shareholders after all...
- So the case for shareholders claiming for damages looks considerably thinner than at Steinhoff for instance.
- The company aims to publish its group accounts a month after the KPMG report. The language around this statement suggests a good chance that management, Auditor, and Special Auditor can agree on most aspects.
- All in all, the consequences could be limited to a few hundred million in write-offs and some noisy law suites against (and from) its former directors and other parties. That would free huge upside.
The Guillotine:
- The report may claim a few more heads between now and March 25th, when the “final version" is due.
- The departures of former Aggregate Financial Services executives from Corestate will likely have had to do with the impending outcome of this review.
- Not to raise any allegations, but we’d be surprised if Vonovia had foreclosed on its Aggregate loan blindly. There must have been a sense that this report would not sink Adler into deep distress.
- Quite possibly therefore shares are set to rise with every scalp they claim - as they have done in the past.
Positioning:
- We remain exposed with a position in the Consus bond, Adler shares, and Aggregate holdco bonds.
- In light of the news being primarily constructive on value at Adler and confirming the need to assess its related party transactions more thoroughly, we are contemplating a shift of more of our Aggregate position into Adler to benefit from what we believe should be a stabilisation of that stock.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003