In an interview with Bloomberg’s Erik Schatzker, Stephanie Ruhle, and Cory Johnson Muddy Waters founder Carson Block said they are still short NQ Mobile after buyout. Block said the real value of NQ is ‘south of a dollar’ and said it is ‘pretty odd’ NQ Mobile Inc (ADR) (NYSE:NQ) bid would be real, hard to see ‘bona fide’ bid given what has happened to NQ.
Carson Block also said that he has toyed with the idea of going short Herbalife Ltd. (NYSE:HLF) as signs end may be approaching.
Carson Block: Pretty Odd if Bid for NQ Mobile Is for Real
Carson Block: Real Value of NQ Mobile Is South of a Dollar
Carson Block: Herbalife Shows Signs End May Be Aproaching
STEPHANIE RUHLE, HOST, BLOOMBERG NEWS: Who’s going to answer some of those questions? Our man Carson Block. He is here with thoughts in the latest NQ headlines. He is the founder of Muddy Waters. And our Bloomberg West editor-at-large Cory Johnson loves this story so much that he himself, a former short seller, he needed a front-row seat.
CORY JOHNSON, BLOOMBERG NEWS: Recovering short seller.
RUHLE: Recovering. All right. Carson, big news. Takeover bid. What do you make of it?
CARSON BLOCK, FOUNDER, MUDDY WATERS: Well, on one hand maybe this is a real bid. On the other hand, it’s pretty odd that this bid would be real given that over the past few months a number of bad things have happened to the company that don’t exactly scream buy me. First and foremost, you mention that they’re already three months late in filing their annual report. Yes, they received a clean bill of health from their own investigation, but they admitted to widespread data tampering in order to receive that clean bill of health.
Then the audit chairwoman resigned without warning. And then the company fired its big four auditor, PWC, because PWC had failed to issue an audit opinion. And according to NQ, PWC was requesting some of the data that had been deleted and some other information and actually told the company if we receive that information, we might not be able to rely on management’s representations and we might have to resign. So after all of that happens, it’s – it’s strange if you’re receiving a bona fide bid at this point in time.
JOHNSON: Carson, what do you mean data tampering? Can you explain that?
CARSON BLOCK: Well the company didn’t provide a lot of detail in that. But – so the – what investors need to understand is that when the company conducted this internal investigation, there’s a report that was prepared, but the company did not release the report. Instead the company just put out a press release. And so the press release read that the company found no evidence to support the allegations of fraud, et cetera, et cetera.
But buried toward the end was this little paragraph that said that – that the investigators noted that many devices had substantial amounts of data that were missing and that the investigators did not find management’s explanations with respect to that missing data credible. And the significant thing there is, again, this is put out by the company. So we assume that that language that made it into the press release was the result of a lot of back and forth negotiation with Shearman & Sterling, which is the law firm that oversaw the investigation. So it’s probably a lot worse than what that wording makes it sound like, but we just don’t know because we don’t have the report.
ERIK SCHATZKER, HOST, BLOOMBERG NEWS: Carson, NQ Mobile was trading at something like $25 a share before you come out with your initial report on the company and subsequently said that 90 percent in your opinion of the revenue “doesn’t exist.” Presumably everything has a value. Would you look at NQ Mobile and say that at $9.89, which is the value of the bid from Bison, there is value that’s – that’s appropriate given your feelings about the company, or is it – is it a zero?
CARSON BLOCK: No, that’s way too high. The – the real value of this company is south of a dollar. Whether Bison knows that or not is a different question. But $9.80 a share is way too high for this company.
SCHATZKER: Well look, the financial market is a clearing house for information. Based on what you know and what you believe about NQ Mobile, how does anybody explain a bid for $9.80?
CARSON BLOCK: Well in the China fraud world, there have been a lot of bids for companies that were strongly suspected of being frauds, even those that it had formal investigations launched by the SEC, even some I think that had – had actually been the subject of regulatory actions. And a number of those bids actually closed. The China fraud world is a pretty strange world in many respects. It’s – when you look – when you’re – if you spend real time in China and you look at the widespread destruction of capital there, that’s really the filter through which you have to view a number of these zeros that have been bought out, often financed by state-owned banks.
JOHNSON: To that point, Carson, there – I’m sorry to report there are companies like China Security and Surveillance which had a significant short interest in it. Full disclosure. Back before I had this job a long time ago, that was a name that I was involved in. And that got a takeout bid that none of us could believe and then it got taken out.
CARSON BLOCK: Yeah. Strange – very strange things do happen in this – in this world. And I’m not speaking with reference to any particular transaction. But what you typically see in these buyouts that actually close is you have a corrupt mainland government-owned bank, often the China development bank providing most of the financing. You have had Western private equity as the equity sponsors in many of these buyouts. And look, we suspect that a number of these buyouts where you have had Western PE firms, that top people at those PE firms when they bought these zeros received significant kickbacks from the management.
RUHLE: Are you saying that you think that could be the case now?
CARSON BLOCK: No. I – I don’t know. At this point, this bid does not look typical relative to many of the bids that have actually closed. So your typical bid is made by the chairman or the chairmans leading the consortium, and there are private equity firms that are known to have pockets and there will often be debt financing. This is not – so far it is not a bid in which management’s participating and there’s no discussion of the financing. So it’s atypical in that respect. I really don’t know what to make of this other than, as I said, given all of the facts from the recent months, it would be very strange to see a bona fide bid under these circumstances.
RUHLE: But since you don’t know what to make of it, is there any chance because of this uncertainty you close out your position and say, I can’t play, it’s just too opaque?