Statement by Muddy Waters on response of Ströer to Muddy Waters report


DGAP-Media / 28.04.2016 / 17:21

Disclaimer: Muddy Waters Capital LLC ("Muddy Waters") is an investment
advisor to a private fund. Muddy Waters has analyzed the German listed
stock corporation Ströer SE Co. & KGaA (together with its predecessor legal
entities, "Ströer") and is hereby publishing the outcome and the
conclusions of our analysis.  The fund Muddy Waters manages is short in
Ströer and for this reason there might be a conflict of interest.  The
below response is based on publicly available information and represents
Muddy Waters's conclusions.  For brevity purposes, the below response is to
selected portions of Ströer's responses to our initial 21 April 2016
report.  We do not concede to Ströer any of the points we made in the
initial report.



San Francisco, CA, USA / Cologne, Germany, April 28, 2016 - Muddy Waters
Capital LLC ("Muddy Waters"), a leading activist investment firm, has taken
notice of the response of Ströer SE Co. & KGaA (ISIN DE0007493991; together
with its predecessor legal entities, "Ströer") on Muddy Waters' recent
report and has today published its reply. The full document can be found on
www.muddywatersresearch.com.

We are unimpressed with Ströer's response to our initial report.  There
seems to be a cottage industry that has grown up around responding to
criticism from short activists.  Accordingly, Ströer leaves major issues
unaddressed, which we presume is because it has no good answers.  Further,
certain of its response were highly misleading.

This full response to Ströer is 10 pages long, plus a 14-page appendix. The
text including the appendix can be found at
www.muddywatersresearch.com/research/. Below please find the response
without appendix and footnotes. The response covers the following topics:

1. Historic Organic Growth Remains Overstated
2. Whether Ströer Reports Q1 Organic Growth that Exceeds Guidance is
Irrelevant
3. Müller Misleads in Response to a Question on Self Dealing
4. Ströer's Operational EBITDA Justification Does Not Hold Water
5. Ströer's Response Strengthens Our Conviction that the Cash Flow
Statement is Prepared Erroneously (and Misleadingly)
6. Ströer Appears to Contradict Itself on freeXmedia, and Strengthened Our
Conviction this was an Improper Transaction
7. Müller Appears to have told an Untruth
8. "Project Zero" and Alleged Ballroom Material Misstatements
9. Ströer Confirmed that Public Video is Unusually Profitable; Yet it
Offered No Explanation as to Why
10. Müller and Ströer's Moaning is Disingenuous
11. Dirk Ströer's Relationship to Sambara Stiftung / Müller's Failure to
Address His Irregular Series of Share Transactions
12. Dirk Ströer's Bizarre "Temporary Retirement"
13. Former CIA Behavioral Analyst and Polygrapher Found Numerous Indicia of
Deception in Ströer's Call and Written Response



1. Historic Organic Growth Remains Greatly Overstated

Ströer's attempt to rebut our organic growth calculations is nonsensical. 
The company appears to have no counter argument.  We assume that if we
erred, Ströer would have published an organic growth reconciliation. 
Instead, management seems to want to gloss over the problem of its lack of
organic growth by providing details that might be too technical for the
average investor (even professional) to follow.  We call upon Ströer to
publish 2014 and 2015 reconciliations for organic growth for both its
Digital Segment and overall.

Ströer wrongly claims that we didn't give credit to the company for ~EUR12
million in FX movements in 2014. In fact, we gave the company credit for a
total of EUR15.1 million in FX movements.  This is shown in our
reconciliation on Page 7 of the report.

Ströer's comment about our not giving credit for the JVs is irrelevant and
misleading.  The consolidated JVs contributed revenue of EUR12.5 million in
2014, and EUR14.0 million in 2015.  The EUR1.5 million revenue growth in
the consolidated JVs equals 0.21% of reported 2014 revenue.  This obviously
does not come close to bridging the gap between Ströer's declared organic
growth and our calculation.

We have seen a sell side report that erroneously claims to reconcile to
Ströer's organic growth calculations.  We show the reconciliation from this
report in Appendix B available in the full response at
www.muddywatersresearch.com/research/, and we explain the material errors
in it.  We therefore remain unaware of anybody who can reconcile Ströer's
organic growth claims.

In addition to the forgoing issues, we continue to firmly believe that the
adjustments to Ströer's calculation methodology we discussed in pp. 7 - 11
of our report are prudent and warranted.


2. Whether Ströer Reports Q1 Organic Growth that Exceeds Guidance is
Irrelevant

It now seems absurd to discuss the company's expectations for organic
growth, given that it seems wholly incapable of (or uninterested in)
calculating organic growth accurately.  Ströer might as well report Q1
organic growth of 1,000%.


3. Müller Misleads in Response to a Question on Self Dealing

As shown in the following exchange, Udo Müller was asked a straight forward
question about whether Ströer had bought other assets from Media Ventures. 
His answer seems straight forward as well.  However, as seems typical with
Ströer management, this was a misleading answer.  In February 2015, Ströer
acquired 65% of a company called Evidero GmbH.  Media Ventures had invested
in Evidero in March 2014.

Below is an excerpt from the transcript:

Marcus Diebel JP Morgan Chase & Co, Research Division

"Yes. Given the allegations regarding freeXmedia and maybe to avoid
allegations in the future, is there a scenario that Ströer Media buys
further assets potentially from Media Ventures going forward? And has there
been another potential issue in the past with Ströer Media buying assets
from Media Ventures?"

Udo Müller Co-Founder, Chairman of Management Board and Chief Executive
Officer

"No. This was the only assets literally that's acquired from Media
Ventures."


Müller's response was technically correct, although in our opinion it
veered far from being forthright.  Media Ventures transferred its stake in
Evidero to one of the co-founders, Thimo Wittich, in November 2014.  Ströer
bought its stake from Mr. Wittich in February 2015.

We would expect Mr. Müller to deny that the price Media Ventures received
from Wittich was influenced by the price Wittich expected to receive from
Ströer.  We just don't think we would believe him.

Below is a link that shows Media Ventures' past investment in Evidero (in
the full response available on www.muddywatersresearch.com/research/ this
is also evidenced by a screenshot):
https://www.mediaventures.de/eb/evidero/


4. Ströer's Operational EBITDA Justification Does Not Hold Water

The company did not discuss the fact that its Operational EBITDA has
benefitted each year from increasing amounts of non-segment expenses, and
from purportedly exceptional expenses.

The company stated that the ~EUR7 million in concession refunds that it
booked into Operational EBITDA in 2014 is rightly classified because "As
this kind of compensation payment arises regularly and in a planned fashion
given the structure of our advertising concessions, we do not classify them
as extraordinary items." Where are examples of other significant concession
refunds?  We haven't seen any in recent years.  We therefore think this
statement is disingenuous.


5. Ströer's Response Strengthens Our Conviction that the Cash Flow
Statement is Prepared Erroneously (and Misleadingly)

The company's response here is jaw-dropping.  The company states that its
borrowings are short-term, and therefore net presentation is appropriate. 
While the company correctly states the accounting standard for short-term
borrowings, it fails to acknowledge that a) the bulk of its borrowings are
shown as non-current borrowings on its balance sheet, and these appear to
be borrowings from its revolver, b) revolvers, unless extremely short-term
in nature, are classified as long-term (so the company's classification on
its balance sheet is correct), and c) the reference to the three-month
Euribor is a refence to the interest rate it pays - not to the tenor. 
(This is a very, very misleading statement.)

Ströer classifies the bulk of its borrowings as non-current borrowings. 
For example, in Q2 2015, non-current financial liabilities increased by
EUR37 million, while current financial liabilities increased by only EUR18
million. The cash received from borrowings according to the cash flow
statement was EUR46 million.  If we generously assume that the entire EUR18
million increase in current financial liabilities were borrowings, then at
least EUR28 million of the EUR46 million in cash flow from borrowings was
non-current.  Therefore, Ströer's response that its year end cash flow
statement presentation of borrowings on a net basis is proper because the
borrowings are short-term is contradicted by its own quarterly accounts. 
We maintain our view that Ströer's auditor erred in not apparently
identifying this issue.


6. Ströer Appears to Contradict Itself on freeXmedia, and Strengthened Our
Conviction this was an Improper Transaction

The company's response on the conference call "The company executed the
acquisition of Ströer Interactive Group, including freeXmedia and
businessAD, with diligence in every respect. The board of management and
supervisory board were fully aware of
the special aspects of the
transaction in terms of the related party position of the seller and took
these into account in a particularly sensitive manner. All legal and
valuation issues were examined step by
step by legal firms of international repute, and their legality and
correctness were documented in expert opinions. The supervisory board was
informed of every step taken by the board of management and received
detailed written and oral reports from the advisers. The company filed
special valuation reports with the commercial register in connection with
the capital increase performed during the transaction and made this
publicly available at an Extraordinary Shareholder Meeting of the company
in March 2013."

Yet despite this purportedly very diligent process, the company did not
ascribe any price to freeXmedia, despite agreeing to acquire it before
Media Ventures could have integrated it into the other businesses.  If this
is true that there was no discussion of the specific purchase price of
freeXmedia (and the other companies), then a) it's hard to believe there
was real diligence exercised, and b) it doesn't mean the company cannot now
allocate values at least on a rough basis in order to reassure shareholders
that Müller and Dirk Ströer didn't unjustly enrich themselves.  The company
should of course also release details of Media Ventures's investment basis
in the other companies.


7. Müller Appears to have told an Untruth

On the call, management stated "I mean we spend only EUR 2 million in
conducting fees on lawyers and accountants in Ströer to make 100% sure that
everything what we do in connection with this transaction is 100%
compliant."
Ströer's 2013 AR discloses only EUR329,000 in transaction costs.  Was the
disclosure inaccurate then, or is it inaccurate now?  Or is there any other
reason for the difference between the two numbers?


8. "Project Zero" and Alleged Ballroom Material Misstatements

Ströer never denied that a) it found material misstatements in any of the
Turkey subsidiaries in 2014, b) it codenamed the investigation and / or
aftermath "Project Zero", or c) it reported the materially misstated
numbers in its 2014 financials. It would be interesting if the company had
to answer questions about these items in a public or on the record forum.


9. Ströer Confirmed that Public Video is Unusually Profitable; Yet it
Offered No Explanation as to Why

The company seemed to ratify our understanding that the company has told
investors that Infoscreen's EBITDA margins approximate 50%.  The company
also seemed to acknowledge that these margins are much higher than the rest
of the industry.  However, the company did not address the fact that when
it reclassified Public Video in 2015, it made it appear more profitable by
transferring EUR5.5 million of Public Video expenses to non-segment
expenses (without explanation).  Nor did the company provide any additional
explanation for why it appears to possibly be the best Public Video
operator in the history of the world.


10. Müller and Ströer's Moaning is Disingenuous 

Our jaws also dropped to the floor when we hear Udo Müller state on the
conference call that one of our third party investigators had declined
Ströer's invitation to introduce him to Ströer employees.  We believe this
complete misstatement and twisting of the facts is typical of management's
seemingly estranged relationship to the truth.

The fact is that Christian Schmalzl had emailed the investigator, and
offered to give him a list of former employees with whom to speak.  The
investigator accepted Schmalzl's offer.  Schmalzl then rescinded the offer,
writing that German privacy laws prohibited the company from making good on
the offer.

Schmalzl wrote that the investigator could instead ask Schmalzl to contact
specific former employees who were non-responsive.  (We include the entire
email exchange between Schmalzl and the investigator in Appendix A
available in the full response at www.muddywatersresearch.com/research/) 
We felt this was a thinly disguised attempt by Schmalzl to try to influence
what interviewees would say, and so did not accept quasi-offer number two.

As a corollary, at the beginning and end of the call, Mr. Müller moaned
that we had not sought to contact Ströer.  However, during the Q&A, he
implied that our vendors had attempted to speak with approximately 150
employees.  For those who are wondering, as we researched Ströer, we
recognized patterns of deception and ethical lapses that caused us to have
no trust in management.  That is why we chose not to attempt to speak with
management directly.

The email exchange in Appendix A available in the full response at
www.muddywatersresearch.com/research/ also shows that Ströer was likely
aware when it contacted our investigator that a) Muddy Waters was the
client (our testimonial is on the vendor's website), and b) that Ströer was
aware we had spoken with its investor relations representative
pseudonymously.  (Schmalzl's email read in part "we have been at least in
indirect contact with you[r] client already.")  Therefore, Müller's
statement at the beginning of the call "At no time has Muddy Waters Capital
attempted to make contact with Ströer, let alone held a telephone
conversation or personal conversation with Ströer" appears to be a knowing
falsehood.


11. Dirk Ströer's Relationship to Sambara Stiftung / Müller's Failure to
Address His Irregular Series of Share Transactions

Ströer was surprisingly reticent about potential connections between Dirk
Ströer and Sambara Stiftung, a trust established in Liechtenstein. Ströer
only published Dirk Ströer's statement that "he did not control the Sambara
Trust (Sambara Stiftung) at any time".  A Liechtenstein Stiftung does not
issue voting rights and, hence, legally you cannot control it like a
subsidiary.  Therefore, in our opinion the Ströer's response does not
provide sufficient transparency at this point.  Why didn't Dirk Ströer take
the chance and state that neither he nor any related party is entitled to
the economic benefits of Sambara Stiftung?  Ströer rather danced around the
issue while it still appears that (i) Dirk Ströer transferred 2.8 million
shares in Ströer to Sambara Stiftung for zero compensation in May 2013 and
(ii) Sambara Stiftung disposed of all of its shares on the very same date
in November 2015 on which also Media Ventures and Green Towers Holding
(owned by former Ströer executive Matthias Rumpelhardt) disposed of their
shares or financial instruments.These circumstances alone should cause
Ströer and its boards to scrutinize the accuracy of the voting right
notifications it has received from its major shareholder.

On a related matter, we note that neither Ströer nor Mr. Müller ever
addressed the strange series of transactions involving the stock Media
Ventures received in the freeXmedia transaction.  There was no discussion
of why Matthias Rumpelhardt, who is a former Ströer executive, received
financial instruments overlying this stock; and, why Mr. Müller waited
approximately two and one-half years to notify Ströer of this transaction.


12. Dirk Ströer's Bizarre "Temporary Retirement" 

Ströer announced that the retirement of Dirk Ströer from the supervisory
board was intended all along to be temporary, and solely related to
"appointment rights" of Deutsche Telekom AG.  However, in its latest annual
report the company did not describe Dirk Ströer's retirement from the
supervisory board as "temporary".  We would have expected a German listed
company like Ströer to immediately announce that a supervisory board member
has resigned and provide the public and its shareholders with full
transparency on the resignation. Furthermore, if these changes solely
related to so-called appointment rights of Deutsche Telekom, why didn't the
EGM in September 2015 resolved upon those changes or why did it not vote on
enlarging the supervisory board so that both Dirk Ströer and the Telekom
appointee could be a member of the board?

The transformation report also solely states that it was agreed that
Deutsche Telekom would be represented in the Supervisory Board of Ströer SE
& Co. KGaA for one term.  Nothing is said about a representation in the
board of Ströer SE, nothing is said about "appointment rights" (it should
be noted that neither Ströer SE & Co. KGaA's articles as of today nor
Ströer SE's previous articles provided for "appointment rights"). Good
corporate governance looks different in our eyes. We are also amazed about
the fact that the composition of the current supervisory board differs from
the voting results of the EGM in 2015 without finding relevant publications
of Ströer that would explain the reasons.

In addition, it should be worth for Ströer to scrutinize whether the
"temporary retirement" of Dirk Ströer might relate to the massive disposal
of shares of Ströer's insiders in fall 2015 and the late notifications of
by then undisclosed insider deals in 2013.  Dirk Ströer resigned on
November 2, a replacement candidate was appointed by court on November 12
and on November 20 these insider deals took place and were disclosed soon
afterwards. With his resignation just a couple of days prior to these
dealings he at least prevented them from being published in the company
register - including inter alia the price - and notified to BaFin. He might
also have circumvented a potential obligation as a board member to explain
these dealings and / or the late notification in detail to the company.


13. Former CIA Behavioral Analyst and Polygrapher Found Numerous Indicia of
Deception in Ströer's Call and Written Response

We engaged a former CIA behavioral analyst and polygrapher to analyze
Ströer's written response and the transcript of the call.  He found
numerous indicia of deception.  Below are three excerpts from his report. 
The entire report is in Appendix C of the full response available at
www.muddywatersresearch.com/research/.

A.  Udo Müller - Ströer SE
"Third-party reviews, we are more than happy to do that. So we're more than
happy to do that, so if there's really demand for a third-party review of
what we're saying today, we're absolutely willing to do that, yes. We have
nothing to hide. And we are totally transparent and would be more than
happy to answer every question and give other people also the opportunity
to prove that whatever we say is 100% correct. You know what, let me add
here one thing: There was -- I mean there's -- obviously, there was also
here the idea that we created this story to push the stock because we sold
stock and after 20 years or at the very end of last year. I mean -- and
take into the account that, after that, the stock actually goes down. I
mean, if you really -- I mean, obviously somebody just didn't understand
what is a Germany family-owned business. Because if you have 80% of your
wealth in the company, you must be the most stupid investor on the world if
you -- and the company because you sell 20% of your stock. I mean this is
really ridiculous. I mean, if I want to push the stock or whether I want to
say something and take -- and tell people bull**** then take the
[indiscernible], then I'd sell all of my stocks but not 20% on [ph] 80%.
And so that's -- it's really ridiculous."

Müller's declaration that "We have nothing to hide" and "we are totally
transparent" are two classic convincing statements (1) and non-specific
denials (2). A non-specific denial is when someone makes a statement meant
to serve as a denial of wrong-doing, but is broader than the specific
allegation. For example, if one was accused of stealing a hammer from a
hardware store, and when asked if he stole it responded "I didn't do
anything wrong", you would be right to follow up with "But did you steal
the hammer?" It should be noted that at no point in this call does a single
member of the Ströer SE management team ever specifically deny a single
allegation. Instead, they routinely implore us to trust them, their
lawyers, and their board. We are told to just "talk to us", and "if you
want information, surely you will get it from us". These statements side
step the obvious concern that the information they provide is not reliable.
Müller's comment captures it best when he states, "I mean I never
understand the concept where somebody who wants to find something out about
you doesn't want to talk to you about it."

Finally, the entire second part of Müller's above response is a theme (3).
Themes are not denials, but are a story designed to convince the listener
that the allegations don't make sense or could never apply to them. Some
themes appeal to emotion, others to logic, and others to sentimentality.
Müller's theme is essentially saying "Why would I try to manipulate the
stock of a company I have 80% of my wealth in?" I can think of a few
reasons.

B.  (Recall Evidero, discussed infra in #3)

Marcus Diebel - JP Morgan Chase
"Have you purchased any further assets from Media Ventures in the past and
do you plan to do it again in the future?"

Udo Müller - Ströer SE
"No. This was the only assets literally that's acquired from Media
Ventures. And for sure, we're not going to do that in the future again. As
I must underline again, I mean, our first step in Digital was clearly our
sales house and because this was very close to our sales house activities
already out of home. So the only independent sales house was actually the
one from Media Ventures because all the other sales houses are related to
[indiscernible], so there was additional decision, "take it or leave it."
And this would have at the end reside [ph] that we cannot enter really in
digital space. So I understand that people were in -- I mean this is now 4
years ago, I must say, and we've probably discussed it 150 times, and it
happened. But I mean, at the end, it was the right decision for everybody.
And you can be sure -- I mean we spend only EUR 2 million in conducting
fees on lawyers and accountants in Ströer to make 100% sure that everything
what we do in connection with this transaction is 100% compliant."

Müller's initial response is clear and definitive, but soon ventures into
justification for the transaction. Is it true that Ströer would never have
another opportunity to enter the digital space unless it made this deal
with Media Ventures? That seems unlikely, but creating that impression is
beneficial for one who wishes to justify the transaction as a
once-in-a-life time opportunity. Müller's repetitive use of the phrase "I
mean" also stands out (1). This kind of phraseology is used when one wishes
to convey that they had no choice in the matter or that anyone would have
done the same thing in their shoes. It is similar to the use of the word
"Well," at the start of an answer. For example, if someone asked "Did you
rob that bank?", and the answer begins with "Well.." It really doesn't
matter what comes next. There is simply no reason for the truthful person
to use those kinds of caveats. In isolation this usage would not be a
significant indicator, but it is used three times in a narrow window, and
is paired with the following Convincing Statements (2). The suggestion that
the transaction was "the right decision for everybody" is a justification
more than a fact. It further side-steps the underling spirit of the
question, which is: Was it an ethical transaction? To cover the implication
of the question without directly answering it Müller points Diebel to their
legal process. This is an aversion designed to convince us of the
legitimacy of his actions. It is also curious that if the transaction was
"100% compliant" and "right.for everybody", than why so adamant that "we're
not going to do that in the future again"?

C.  (Regarding the written response)

The following headlines are used by Ströer SE throughout their rebuttal:

1) This claim by Muddy Waters Capital is incorrect!
2) This adjustment by Muddy Waters Capital is incorrect!
3) The entire claims regarding insider trading made by Muddy Waters Capital
in this context are completely unfounded, slanderous and the conclusions
Muddy Waters Capital comes to on the basis of these claims are downright
wrong!
4) This assertion by Muddy Waters Capital is tendentious and incorrect!
5) This assertion by Muddy Waters Capital is wrong in its substance and
intended implications! The implied assertion by Muddy Waters Capital that
our guidance relating to the profitability of this product group is
questionable is grossly incorrect!

The collection of these statements are attacking statements (1) designed to
re-direct the accusation back at the accuser. It should be noted that they
all conspicuously contain an exclamation mark (!) at the end, which is
intended to convey conviction and moral outrage. Deceptive persons often
respond with moral outrage and bewilderment when confronted with an
accusation of wrong-doing. This reaction is meant to convince the observer
that they couldn't be guilty of the alleged actions. They also constitute a
non-specific denial (2), the most common of which is the phrase "I would
never do something like that!".  Collectively, these statements are
designed to sell the idea that Stroër's management "would never do
something like that." You will note that #3 and #5 are different than the
others. It is my view that #3 in particular is the allegation Stroër SE is
most concerned with.



# # # 


About Muddy Waters Capital LLC 

Muddy Waters Capital LLC, along with its affiliate Muddy Waters, LLC, is an
alternative investment firm and pioneer in on-the-ground, freely published
investment research. The firm's investment and research process peels back
the layers, often built up by seemingly respected but sycophantic law
firms, auditors, and venal managements, to assess a company's true worth.
Muddy Waters prides itself on being able to see through the opacity and
hype that some managements create in order to expose business and
accounting fraud as well as fundamental problems at companies across the
globe. Its research approach combines diverse talents, including
accountants, trained investigators, valuation experts and entrepreneurs,
many of whom have hands-on experience running businesses in the U.S. and
emerging markets. For more information, please visit
www.muddywatersresearch.com or follow on Twitter at @muddywatersre.


Media Contact US/UK
Dukas Linden Public Relations
Zach Kouwe
(o) +1 646-808-3665
(m) +1 551-655-4032
Twitter - @zkouwe


Media Contact Germany
Charles Barker Corporate Communications
Thomas Katzensteiner / Tobias Eberle
+49 69 79 40 90 25
+49 69 79 40 90 24
Thomas.Katzensteiner@charlesbarker.de
Tobias.Eberle@charlesbarker.de


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Key word(s): Finance

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