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?
CARSON BLOCK: Look, we’re still short. And I think anybody who’s considering shorting this needs to manage risk and understand that, yeah, who knows? There are much stranger things that have happened in – in the China fraud, China stock world than this transaction closing. So everybody should just be aware of that. You may lose if you short it, but it is not worth anywhere close to the current price.
JOHNSON: To that point, who is Bison Capital? Have you ever heard of them before? Surely you found yourself asking that question all the sudden recently.
CARSON BLOCK: Right. Well there’s some confusion because there’s a US firm named Bison Capital. This Bison Capital does not – is not affiliated with the US firm. And its – its founder, Sho Pasheen (ph), very little is known about him. He started a company called Red Baby in China –
RUHLE: So wait a minute. Could we say that they’re full of bull?
JOHNSON: No. They’re full of Bison, Stephanie. That’s – that would be really (inaudible).
SCHATZKER: Carson, before we let you run, we talked not so long ago that the impact that the research that you do was having on the so-called China fraud industry, as you put it. That by exposing more and more of these frauds, especially the reverse listed ones here in the United States, that industry was drying up. Is that still happening or have the fraudsters so to speak found new ways to perpetrate their scams?
CARSON BLOCK: Well you’ve had this massive bull market in China, TMT. There are companies that are listed that we do suspect are frauds. And maybe this is self-serving to say, but I do think that NQ Mobile will be important in what ultimately happens. Regardless, a few years from now the SEC is going to have a major headache once again dealing with a bunch of China frauds. I think that problem will be substantially worse if NQ is able to get away with it. Because on the China side, the circles that basically create these frauds, they look at NQ and they know it’s a poorly execute fraud. It was pretty obvious. And so if NQ is able to escape this, yeah, I think that really throws the doors open to more fraudulent listings in the next few years.
JOHNSON: Carson, first I should mention we reached out to NQ Mobile and they did not respond with a comment. So we did reach out to them to give them a chance to talk and that invitation stays open. But let me ask. There’s been a lot of talk particularly on this program talking about Bill Ackman and Herbalife, crowded shorts like Tesla which is reporting earnings tonight. And I wonder for your work, it’s something you and I have talked about a lot, but why do you avoid some of the better known short names that are getting a lot of action like Herbalife, like Tesla and so on?
CARSON BLOCK: Well, we’re – it’s – we like things that are complex, that are not well understood. Obviously Herbalife, there’s a lot of work that Ackman has put into it. And perhaps if that’s something where he hadn’t gone public on it, that’s the type of situation we might have been interested in. On the flip side though, he’s apparently spent $50 million researching that. We just don’t have those kinds of resources. So we like to go where – we like to go where there’s a real asymmetry of information. That takes us to emerging markets quite a bit. But it’s – maybe Herbalife is the sort of thing that we would have done, but we’re generally not going to chime in on something where there’s already a public battle.
RUHLE: So Carson, given your expertise in short selling, the fact that you know Bill has spent a huge amount of money doing research and he does have a great track record, have you thought about also going short Herbalife?
CARSON BLOCK: Look, I’ve toyed with the idea. And the more recent thesis or the evolution of the thesis – initially the whole idea that this is a pyramid scheme, it’s – it’s hurting – it’s hurting people, therefore the FTC is going to act, I think that’s difficult. Bill has – look, he’s spent a lot more time in the regulatory world than I have, so he’s much better at reading those tea leaves. But I think it’s – I think it’s interesting now where you’ve seen the company borrow all this money to execute the share buybacks. The insiders are selling. Those are some signs to me that maybe the end is approaching for this.
RUHLE: All right. Carson, really interesting insights. Always great having you here.