In our most recent blog post we have already given some first comments on the Viceroy-Grenke-case HERE. We think some more points are worth commenting, in particular to remind everybody that – despite the fact that we see most of the accusations as highly overdone – this short-seller attack is not something to take lightly.
- Related Parties
The question of whether the franchise businesses fall under the scope of IAS 24 Related Party Disclosure was already discussed in our former blog post. Due to new information from a press release yesterday (“Wolfgang Grenke comments on the franchise system of GRENKE AG”, 17 September 2020) we have to revisit this issue.
In the press release, Grenke explained again that Mr. Grenke did not have ownership or control of CTP Handels- und Beteiligungs GmbH, the investment vehicle that took equity stakes during the foundation phase of the franchise companies. This supports the non-related-party assumption. However, it is also written in the release that since 2014 Garuna AG also took minority stakes in franchise firms and that “The shares in Garuna AG are held by a personal confidant of Mr. Grenke, Ms. Corina Stingaciu, as the beneficial owner.” We do not know exactly who Ms. Stingaciu is (memyselfandi007 speculates – really only speculates – that she could be the girlfriend of Mr. Grenke HERE) , but being a ‘personal confidant’ of the CEO is a tricky thing in terms of related parties, anyway. Again, according to IAS 24.9, related party is “A person or a close member of that person’s family is related to a reporting entity if that person: (i) has control or joint control over the reporting entity; (ii) has significant influence over the reporting entity; or (iii) is a member of the key management personnel of the reporting entity or of a parent of the reporting entity.” By the words, it seems that Ms. Stingaciu does not fulfil the requirements of IAS 24.9 – even ‘significant influence’ is presumably not relevant here. But with personal relationships things are never really clear. This one remains very tricky. Perhaps disclosure on related party transactions might have been mandatory here.
Anyway, regarding this whole construct we think the questions raised by memyselfandi007 to be addressed to the management. We have rewritten them here below (Source: Grenke – Quick take on the first statement from W. Grenke, LINK):
- who were the old owners of CTP ?
- did CTP invest in anything else than Grenke franchises ?
- What profits did CTP make over the last 5,10,15 years being a PE company from selling Grenke franchises ?
- what was the transaction price for Mr. Grenke ? (Important !!)
- what did Mrs. Stingaciu pay via Garuna for her stake in the franchises ? Did she pay at all ?
- Cash
One point of Viceroy accusations relates to the high cash amount on the balance sheet which – according to Viceroy – stand in contrast to Grenke’s regular financing activities at capital markets. However, we have looked at the cash and cash equivalents position (1,077,981 Euro at the end of Q2/2020) in more detail and could not find that the sheer amount is particularly high.
Source: Extract from the Balance Sheet of the Grenke Halfyear Financial Report H1/2020, p. 19.
Running large-scale leasing operations is a highly dynamic business model from a financial point of view. Huge amounts of financing are needed and constant refinancing activities take place. In the below extract from the consolidated cash flow statement of Grenke one can see how much financing amount is churned only in Q2/2020.
Source: Extract from the Cash Flow Statement of the Grenke Halfyear Financial Report H1/2020, p. 20.
Only by contrasting the first and the second quarter of 2020 we can also see the dynamics in this business: strong changes in positions and refinancing amounts dependent on the concrete timing of different contracts.
Against this background it is not a big surprise that a relatively high amount of cash is needed on the balance sheet in order to secure flexibility in refinancing and to run the refinancing at reasonable costs. Furthermore, in such a dynamic environment the cash & cash equivalents position is always a snapshot of a particular day. It might well be that the cash and cash equivalents position looks quite different today.
Hence, in our eyes the sheer amount of cash & cash equivalents combined with ongoing capital market financing activities of Grenke is not problematic point or a sign of potential fraud per see.
- The Brink-Problem
The high financing dynamic of the leasing business model also makes it a quite fragile business model. The refinancing market has to be accessible at all times. And a stable credit rating is a necessity for getting attractive financing conditions. In fact, the strong financing situation has always been a competitive advantage of Grenke and a barrier for new entrants into this business.
Whether the allegations are true or not (as you could read from our comments: we think the main part of the allegations is not true), if such accusations are around then stakeholders – in particular the refinancing market – might react adversely. And this might have serious consequences for such business models – it might even push them over the brink (which we do not think in this case). It is particular a problem in times where the new business suffers anyway from the coronavirus situation.
To make it clear again, we do not think that the core of the business model of Grenke is hit. But even if it is just rumours, Grenke has to be very fast, carefully and transparent with its communication. It is necessary to fight all the allegations at utmost rigour. This is even more so true as S&P has put Grenke today on the watchlist for a potential downgrade from its BBB+ Rating – a very uncomfortable positive feedback situation for Grenke. The fact that several sell side analysts have temporarily suspended coverage of the Grenke share does not help either.
Such brink-situations are nothing new. They happen quite often. We have seen many situations where, once a critical point is touched, things got their own life. ‘“How did you go bankrupt?” Bill asked “Two ways,” Mike said. “Gradually and then suddenly.”’ is a famous quote from Ernest Hemingway’s ‘The Sun also Rises’, and it describes the dynamics very clear. The mother of all such brink-situations in Germany was certainly the interview of former Deutsche Bank CEO Rolf E. Breuer about doubts regarding the financing situation of Kirch Media Group on 3 February 2002 which is assumed by many to have led to the insolvency of the Kirch Group. However, we do not think that insolvency is really an issue for Grenke – but it is worth to have an eye on these dynamics.
- Summary
Again, we couldn’t find any major support for many the Viceroy allegations. From our current analytical position we do not think that the core of the business model of Grenke is in danger. Some points, however, are indeed questionable. And it could be that we are wrong. Anyway, whether the allegations are true or whether most of it are only rumours: It is highly important that Grenke fights the accusations – quick and transparent. Time is a highly relevant issue in such cases.
Disclaimer: We hold no economic stake in the company involved in this blog post – in whatsoever direction. We base our analysis on imperfect information and hence we might be wrong with some conclusions. This is just our subjective view and no investment recommendation at all!