As activist short sellers go, Gotham City is not one of the most prolific. Daniel Yu’s firm published on just one new company in 2016 and two in 2015. Trading following its successful unmasking of Quindell has been lucrative, however, with all of its subsequent calls seeing declines in their stock price. Last week, Gotham City announced it was short a German private equity company, Aurelius Equity Opportunities. Shares are already down almost a quarter. As well as being interesting in and of itself, there are two areas in which the situation could have wider ramifications. First, it is just the fifth company to face an activist short in Germany since Activist Insight’s records began. Whether the country’s advisers are fast learners will be up for debate. Second, as a cross-border private equity firm, the company is subject to multiple accounting practices that it says obscure a clear financial picture. Much as it might lambaste Gotham City for “intellectual mistakes,” Aurelius might find its shareholders start to demand the reconciliation themselves.
From Gotham Research below.
- 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 goodwill-related disclosures “because it believes that they can lead to economic disadvantages.”