TheChek News Flow

Share price has fallen more than 75% in two days, erasing in excess of $10 billion in market capitalization

The more than $2 billion that banks were supposedly holding on behalf of Wirecard AG WDI -35.29% probably doesn’t exist, the German financial-technology company said.

Wirecard Chief Executive Markus Braun abruptly resigned Friday after two Philippine banks thought to be holding the funds said they had never had it.

The share price of the Munich-based company—once seen as one of Europe’s rare tech success stories—has fallen more than 75% in two days, erasing in excess of $10 billion in market capitalization.

Wirecard said early Monday that upon further examination, its management board now believes there is “a prevailing likelihood that the bank trust account balances in the amount of €1.9 billion ($2.1 billion) do not exist.”

The company has withdrawn its results for 2019 and the first quarter of 2020, as well as its financial forecasts.

Wirecard said it is having “constructive discussions” with its lenders about its credit lines and borrowings due at the end of June. It is also assessing financing options with investment bankers from restructuring specialist Houlihan Lokey.

The company is considering cost cuts and the “restructuring, disposal or termination of business units and products segments.” Wirecard added that its information-technology systems are operating normally.

Wirecard runs vital but little-noticed technology that connects online merchants, consumers and the banking system. It has long attracted attention from hedge funds that have questioned its accounting, and some of those funds profited last week from Wirecard’s plunge.

Trio of well-known French businessmen aim to create European leader in content production

Three prominent French media investors are accelerating their efforts to build a European leader in television content production, unveiling two new acquisitions and a partnership with a KKR-backed studio in Germany on Monday.

The trio of telecoms billionaire Xavier Niel, investment banker Matthieu Pigasse and television executive Pierre-Antoine Capton founded their company, called Mediawan, in 2015 as a special-purpose acquisition vehicle listed on the Paris stock market.

Since then Mediawan has bought up 23 companies that produce scripted TV shows such as Call My Agent and Inspector Montalbano. Acquisitions include Groupe AB, a French broadcasting group that produces, distributes and aggregates TV content.

Mediawan reached €338m in sales last year but generated only about €500,000 in net profit, according to its annual report.

The company has benefited from booming demand for scripted TV shows from on-demand services such as Netflix, Amazon, and Hulu, which need large volumes of content to satisfy their growing ranks of global viewers. But the rise of the platforms with their big production budgets has also made it more difficult for smaller independent content creators to keep up, creating an opportunity for companies such as Mediawan to consolidate the sector.

For its next phase of development, Mediawan said it had submitted a binding offer to Lagardère to buy its TV production unit, known as Lagardère Studios, for “up to €100m”. It is present in France, Spain, Finland and the Netherlands and has helped produce shows such as the Paris-based jazz drama The Eddy on Netflix.

Separately, Mediawan has also agreed to buy Good Mood, a Spanish TV producer, for an unspecified price.

In addition to these deals, the trio, who together own 19.75 per cent of Mediawan, unveiled a broader overhaul on Monday to set the stage for the next round of dealmaking. They plan to create a new company called Mediawan Alliance, which will team up with KKR and the French insurer MACSF, owner of around 7.8 per cent of the shares, to launch a tender offer on the remaining 73 per cent that they do not already own.

The tender offer on the Mediawan shares and warrants will be submitted to France’s stock market regulator AMF in early July, the company said. Mediawan shareholders would receive €12 per share if they choose to sell, compared to the Friday closing price of €8.43. Warrant holders would receive €0.65.

The newly formed Mediawan Alliance would also receive a minority stake in KKR’s Leonine, a leading German independent company in content production, distribution and licensing. Leonine has been buying up smaller German TV producers in recent years, executing a similar strategy to Mediawan. Now the French and German companies will team up on “many co-production projects”.

“This is a big bang to create a European champion in content,” said Mr Pigasse in an interview. “We are already the number one in scripted TV content in France and Italy, and now we will be partnering with the leader in Germany, Leonine.”

Mr Niel said: “This series of deals we are announcing will roughly double the size of the company. We are very proud to base this new company in France and create a leader in TV production based here.”

A truly ugly transatlantic trade war is looming

Both the US and EU are being unreasonable, be it over digital taxes, food, gas or cars

The US does not want the rest of the world to tax the monopoly profits of its tech companies. The Germans want to press ahead with a sordid gas pipeline deal with Russia. The EU protects its car industry from foreign competition, but hyperventilates when US President Donald Trump threatens the same for European car imports. These are some of the main signs of a fast approaching transatlantic trade conflict.

Last week, events took a turn for the worse when the US walked out on multilateral talks to agree a global framework for a digital tax. The OECD has been co-ordinating efforts to seek a global consensus on how to tax the effervescent profits of global digital companies. Agreement would have forestalled a trade conflict. But the US walkout makes it more likely.

The US commerce department has already completed an investigation, in December, of France’s digital tax, under Section 301 of the 1974 Trade Act. This concluded that the tax constitutes discrimination against US tech companies. Washington has threatened tariffs on French cheese and champagne in retaliation. Earlier this month, the US commerce department also launched a separate investigation into the digital taxes being considered by, among others, the UK, Italy and Brazil. The conclusion will almost certainly be the same as the report on the French.

Meanwhile, a parallel transatlantic dispute is raging over Nordstream 2, the not-yet-completed Baltic Sea pipeline to deliver Russian gas to western Europe. A bipartisan group of US senators has proposed legislation to expand sanctions to a wider net of companies, under the strangely named Protecting Europe’s Energy Security Clarification Act. (I try to imagine what would happen if the EU were to pass a law to clarify that US policy).

To top it all, Mr Trump is threatening to cut the number of US troops stationed in Germany, in protest over Berlin’s refusal to increase defence spending to previously agreed Nato targets. And then there is the ever-present threat of US car tariffs. All this is coming to a head in the next few months.

Europeans tend to associate the deterioration in the bilateral US-EU relationship with Mr Trump personally. But whatever tariffs, duties or sanctions Mr Trump might impose on Europe, most are likely to survive even if he is not re-elected. And, if he does remain in the White House, it is reasonable to expect the relationship to deteriorate further. So no matter what happens, the damage to the transatlantic alliance will persist. 

If the pandemic had been a truly symmetric global shock, the story of deteriorating trade relations might have taken another turn. Countries would have had a greater incentive to align their policies. But the US may well come out of the slump faster than the EU — just as it did after the global financial crisis. Despite a higher number of cases and coronavirus-related deaths, it has a more robust economy and is less dependent on global supply chains than Europe. 

I think EU countries are right to press ahead with a digital tax. The digital economy is one of the few sectors to have performed well during the pandemic. There is no reason why this profitable sector should not pay its fair share.

Tax avoidance by large companies has also become a big political issue in France, Germany and the UK. Emmanuel Macron would endanger his chances of remaining president in 2022 if he caved in to the interest of US tech giants. London is also planning a digital tax — another obstacle to a UK-US trade deal. Robert Lighthizer, the US trade representative, said last week that the US would not agree to a UK deal without market access for US goods — the infamous chlorinated chicken. But the US position on digital tax is unreasonable.

I am more sympathetic when it comes to cars. The EU discriminates against importers through a 10 per cent tariff and by imposing standards that protect the domestic industry. I think the US is also right to criticise Europe’s dependency on Russian gas and the impact of Nordstream 2 on eastern European countries.

My advice for the EU is to pick the right fight — the one on digital tax — and compromise on others. But that would be a triumph of hope over experience. Germany shows no signs of compromising on Nordstream 2, France will not agree to the elimination of car tariffs, and the US has walked out of talks to achieve fair global taxation regime for digital services.

Everybody is behaving unreasonably. So this is a conflict that will play out. Henry Kissinger famously quipped about the Iraq-Iran war: “It’s a pity they can’t both lose.” I feel the same here.

UK to tighten takeover rules for groups vital to virus response

Alok Sharma says new powers will protect national interest in future health emergencies

The UK government will immediately tighten takeover laws to ensure British businesses critical to tackling the coronavirus pandemic are less susceptible to hostile foreign takeovers owing to the economic downturn.

On Monday, business secretary Alok Sharma will amend legislation to allow the Department for Business, Energy and Industrial Strategy to intervene if companies — such as protective equipment manufacturers and those in the food supply chain — are deemed critical to the UK’s pandemic response but are struggling financially and facing a takeover by foreign powers.

Boris Johnson’s government has pledged to introduce tougher powers to intervene when businesses face being taken over by companies based in countries that are deemed unfriendly to the national interest. There is a particular concern among Tory MPs about the role of China, which has aggressively pursued businesses seen to be crucial to the UK’s strategic interests.

The new measures, to be voted on by MPs on Monday and, if passed, would come into force on Tuesday, are a short-term fix that will allow the government to intervene in mergers and takeovers that have a public interest consideration in tackling a health emergency. This is in addition to the existing areas where public interest can be cited for blocking a takeover, such as national security, media plurality and financial stability.

These changes to the UK’s existing takeover legislation come ahead of a new National Security and Investment (NSI) bill — expected later this summer — that will give the government further and more comprehensive powers to intervene in takeovers, with a particular focus on China.

Under the NSI bill, any transaction with national security concerns — even the purchase of a large shareholding or intellectual property rights — will have to be notified to the takeover authorities. Sellers, for example, will be expected to report when they intend to sell more than 50 per cent of one asset or more than 25 per cent of shares in their company.

Mr Sharma said that the tweaks to the 2002 Enterprise Act would “strike the right balance” between protecting national security while remaining “an attractive place to invest”.

“The UK is open for investment, but not for exploitation,” the business secretary said. “These powers will send an important signal to those seeking to take advantage of those struggling as a result of the pandemic that the UK government is prepared to act where necessary to protect our national security.”

In an article explaining the decision, Mr Sharma said: “This legislation is not anti-investment, but a sensible and proportionate response to the heightened risks posed by the pandemic . . . the change will mean that if an investor targets a firm critical to fighting Covid-19 or a future pandemic, I will be able to intervene.”

Tom Tugendhat, chair of the foreign affairs select committee who has campaigned for a stricter takeover regime, welcomed the change. “It’s an important first step given the crisis, but this isn’t just about public health and it would be good to further as soon as possible,” he said.

The government also announced plans to further scrutinise takeovers for smaller companies specialising in new technologies such as artificial intelligence, advanced materials and cryptographic authentication. These measures will not be introduced immediately and will instead be debated at a later date by parliament.

Plans to further scrutinise takeovers over security concerns were first announced by former prime minister Theresa May. Mr Johnson pledged in December to introduce legislation that would deal with “the buying up of UK technology now by countries that . . . may have ulterior motives.”

Germany’s financial establishment too often views harsh criticism of corporations as an affront

Over the past two years, Wirecard has been a rollercoaster; at least, that was the metaphor widely used in many German newspaper reports, investor forums and analyst presentations. Good news drove up the fintech group’s share price; bad news pushed it down. But last week the funfair stopped abruptly when auditors warned that €1.9bn was missing from Wirecard’s accounts. Many riders on the rollercoaster, not having taken seriously reports which suggested that a large portion of the company’s revenue and profits did not exist, suddenly found themselves without seat belts.

Some fund managers such as Deutsche Bank’s DWS, normally known for being risk averse, watched as their holdings of the stock plummeted in value. Many small investors, usually aggressive defenders of Wirecard on Twitter, fell silent. And the German press, which had mostly observed the critical reporting passively, started using the strongest words to condemn the company.

The case raises a disturbing question for Frankfurt’s financial community. Why did so many institutions fail to take into account what the Financial Times had reported might be going on there? One reason sticks out. Many saw the reports as an “attack” invented, or at least co-sponsored, by shady Anglo-Saxon speculators and “locusts”.

This premodern idea of capital markets — long-term investors are good; short-sellers are bad — is common amid the German public but also among large parts of Frankfurt’s financial community. Over the weekend, Tim Albrecht, manager of DWS’s flagship Deutsche fund, lamented that Anglo-Saxon short-sellers were Wirecard's only winners, and everyone else had lost. But hasn’t the truth also won?

BaFin, Germany’s financial markets watchdog, failed particularly miserably as an institution.

For too long, it found all kinds of bureaucratic excuses to avoid looking into Wirecard seriously. When it finally did, BaFin’s regulators did not target company management but rather the journalists behind the critical reports and also unnamed hedge funds. Conspiracy theorists went ballistic when BaFin suspended Wirecard short selling last year, and then filed a criminal complaint against two British journalists. German corporate culture is still dominated by actors who favour corporations over their shareholders, and thus regard criticism as an affront.

BaFin not only amplified the home bias against Anglo-Saxon short-sellers; it used parts of the German press to attack them. In BaFin’s early days, there was a practice whereby selected information was given to chosen journalists when the institution sought to present itself as a heroic fighter against evil financiers or foreigners intriguing against Germany’s financial great and good. The ghost of this practice lingers in BaFin’s corridors and too many local journalists still take as truth what they hear there.

BaFin bureaucrats were also offended when the first reports were published about potential irregularities at Wirecard. A huge scandal under their noses? Unthinkable. Since many German media lacked either the expertise or means to dive deep into such a global and complicated story, they were delighted when German investment funds or BaFin, or sometimes both, offered them an occasional Wirecard “scoop”. Politicians meanwhile found the whole affair too specialised to pay much attention.

So it basically remained a lopsided fight, until last week. Only a few German journalists, mostly from smaller outlets, supported the critical reporting. No major financial institution publicly questioned Wirecard. Smarter funds meanwhile divested their holdings; dumber ones stayed in. One thing is sure, however. Future journalism students will read the affair as a telling case study. I know I am one teacher who will encourage them to do so.

Wirecard’s €1.9bn never entered Philippine financial system, bank governor says

Fresh doubt cast on German group’s explanation for missing deposits

Wirecard’s explanation for a €1.9bn hole in its balance sheet was further undercut on Sunday when the head of the Philippine central bank said the money never entered the country.

The German fintech group revealed on Thursday that the funds were missing and that its auditor, EY, had not been able to trace the money, supposedly held in escrow accounts at two Asian banks.

On Friday Wirecard’s chief executive Markus Braun resigned after Süddeutsche Zeitung identified the banks involved, and the two Philippines-based institutions said they knew nothing about it.

BDO and BPI both told the Financial Times that Wirecard was not a client, that there was no evidence such accounts ever existed and that documents provided to EY supposedly detailing the balances were forgeries.

The fake documents came to light this month during an extended audit of the German group. Sunday’s statement by the governor of the central bank raises fresh questions over whether the sums Wirecard has described as “missing” ever existed.

“None of the missing [€1.9bn] of German firm Wirecard entered the Philippine financial system,” said Benjamin Diokno, governor of the Bangko Sentral ng Pilipinas, referring to an “initial report”. He added that the banks’ names had been used “in an attempt to cover the perpetrators’ track”.

The Dax-30 company has appointed restructuring specialist Houlihan Lokey to advise it. It was in negotiations with a banking consortium at the weekend over €2bn in credit lines that could be terminated after it missed a Friday deadline for reporting annual results.

The fintech group has spent 18 months battling whistleblower allegations of accounting fraud. The resignation of Mr Braun, the longest-serving chief executive of a Dax-30 company and Wirecard’s largest shareholder, followed a 75 per cent two-day collapse in its share price. He has always denied wrongdoing.

The FT reported in October that profits at units in Dubai and Dublin appeared to have been fraudulently invented.

Wirecard appointed KPMG to conduct a special audit. It told the forensic investigators, as well as its longstanding auditor EY, that cash balances related to the suspect business were held in bank accounts controlled by a trustee.

An April 28 report on KPMG’s work said it did not receive independent bank confirmations to validate €1bn of cash balances, and that the trustee responsible for the accounts had abruptly cut ties to Wirecard late last year.

The report said the accounts were moved to a new trustee and new banks in Asia.

Sunday’s statement by Mr Diokno is the latest setback for Wirecard, whose executives on Friday still hoped it might be possible to recover the money. “Everyone in the company is adamant that the money exists,” a person briefed on the matter told the Financial Times.

Wirecard declined to comment on Sunday.

BPI said it believed the fake certification it was shown by EY was created with the help of a junior employee at one of its branches who had been suspended pending an investigation. 

“It’s really something that caught us by surprise,” said Cezar Consing, BPI president and chief executive. “When EY gave us a copy of that document to verify, we immediately realised it was bogus — it was falsified.” 

He said the document “looks like something somebody just dreamt up”, adding: “It’s basically a piece of paper made to look as if there was money in this account.” 

Nestor Tan, president and chief executive of BDO, said the bank had found no evidence such accounts existed. “We would have known an account of that size regardless of who the owner is,” he said, adding that an amount that large — which he said was a substantial sum for a Filipino bank — “would not be easily hidden or forgotten”.

Wirecard has previously said the Philippine accounts were used to settle payments with crucial third-party partners to which it outsourced payments processing in countries where it lacked its own licence.

Between 2016 and 2018, roughly half of Wirecard’s sales and “the lion’s share of its profits” were attributed to three such business partners, according to KPMG’s report and documents seen by the FT.

The FT reported in March last year that one of those partners was PayEasy Solutions, a Philippine payment processor that did not appear to have filed financial statements in the country for years, and which shared an office with a tour bus company run by a former Wirecard employee.

A six-month KPMG special audit was unable to demonstrate this business was genuine, citing a lack of co-operation from Wirecard’s partners.

Merger would damage UK’s development clout

Subsuming DfID back into the Foreign and Commonwealth Office risks politicising aid

There is a dwindling number of areas in which the UK has real influence, and does genuine good. International aid is one. The Department for International Development, spun out of the Foreign and Commonwealth Office in 1997, has its flaws. But it has both turned the UK into a global force in development and ringfenced aid from political scandals with which it was once entwined. Now, prime minister Boris Johnson plans to merge it back into the FCO, to better align the £13.4bn overseas aid budget with other policy objectives. Far from furthering his vision of “Global Britain”, however, he risks undermining it.

The UK has been in tangles in the past from using the aid budget to further foreign policy and commercial aims — mostly notoriously when Margaret Thatcher’s government in the late 1980s tied funding for Malaysia’s Pergau dam to a weapons deal. Such incidents ultimately led to a cross-party consensus a decade later to hive off development into its own department. The 2002 International Development Act cemented the transformation by making it illegal to use aid for purposes other than poverty reduction.

DfID has become a highly effective actor in development co-operation. It has provided a strong impetus for development in several countries in Africa, where the bulk of its aid goes. It has successfully used a revamped CDC, the UK’s development finance institution, to funnel public money into private-sector investments to build up local companies and jobs, though more could still be done to extend finance to British businesses investing in Africa.

There is scope to improve DfID’s operations, and co-ordination with the government’s foreign policy arm. A budget that dwarfs that of the FCO means DfID has in some places supplanted diplomatic missions as Britain’s highest-profile representative. Mr Johnson is right to raise concerns about the left arm not always knowing what the right is doing, and to say Britain should not throw development money at governments that abuse human rights. Trade and investment could be more effectively integrated with development policy.

These goals are better served, however, through closer cross-departmental co-operation than by subsuming development back into the FCO. Doing so would dilute the focus an independent development department provides, and deprive it of a separate voice in cabinet. Talented civil servants and field staff may leave. The FCO is not structured to be an executive department managing large sums in aid. While the government says it will stick to its legal commitment to spend 0.7 per cent of gross national income on aid, moreover, this will be more difficult to police if DfID is merged into another department.

Government officials insist the proposed merger will not mean a return to “tied” aid. Yet the dangers of development assistance becoming politicised are clear. Indeed, the plan smacks of a government worried that, since Brexit and the erosion of the multilateral order are weakening traditional levers of British influence, it must compensate by exploiting the foreign aid budget. There is danger that development money becomes a fund that can be used in pursuit of trade deals and other commercial and strategic goals.

The consequences could be not just that the UK loses the soft-power benefits of being a force in development, but that its reputation is actively harmed through a return to 1980s-style scandals. The best route to positive influence for Global Britain is to maintain its leading development role — by leaving it in an independent department.