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 End of Media Release --------------------------------------------------------------------------- Issuer: Muddy Waters Capital LLC Key word(s): Finance 28.04.2016 Dissemination of a Press Release, transmitted by DGAP - a service of EQS Group AG. The issuer is solely responsible for the content of this announcement. The DGAP Distribution Services include Regulatory Announcements, Financial/Corporate News and Press Releases. Media archive at www.dgap-medientreff.de and www.dgap.de --------------------------------------------------------------------------- 458893 28.04.2016
Statement by Muddy Waters on response of Ströer to Muddy Waters report
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