Trouble ahead for Adler Group as it defends against fraud charges

There's real trouble brewing at German listed property company Adler Group after renowned UK short-seller Fraser Perring and his Viceroy Research group published a 60-page document accusing Adler of grossly manipulating its balance sheet and falsifying its figures. Adler's shares went into freefall, and the German financial watchdog BaFin said it was taking the allegations seriously. Adler refuted the allegations, saying Viceroy's accusations of exaggerated valuations were "demonstrably false".

Whatever happens now, it looks certain that Adler's shares will remain under pressure for the next foreseeable period, as the numerous claims made by the Viceroy group are addressed individually.

Attacking the Adler management as "Bond Villains" and describing them as thieves and kleptomaniacs, out to enrich themselves at the expense of stock and bond investors, the Viceroy team have published their claims openly on their website, https://viceroyresearch.org/2021/10/06/adler-group-bond-villains/

The former social worker Fraser Perring has built up a fearsome reputation as a short-seller, and has a strong track record in being proven right in his accusations of management misdeeds and cover-ups. He caused outrage when openly attacking German firms such as the fintech Wirecard, furniture seller Steinhoff and - to a lesser extent - office equipment leasing company Grenke, but was proved to have been on the right track when the companies were forced to face up to manipulation and shady dealings. In the case of Wirecard, it was obviously catastrophic for bondholder and the numerous - including thousands of small, individual - shareholders who lost everything.

Viceroy says in its report that Adler's balance sheet "has been artificially inflated to a significant degree, and its shares are not investible."

Adler responded by saying "This is evidently false. The real estate value set forth in Adler's balance sheet has been determined by independent market leading real estate property appraisers and confirmed independently by financing banks."

It further responded, "This report contains insinuations that Adler rejects in the strongest possible terms." It contains numerous "inaccurate allegations". It said it was currently preparing "a detailed response" and will comment on the report "in a timely manner".

Financial regulator BaFin said it was taking the report seriously, and was in the process of reviewing the allegations made in it. The BaFin will be mindful of its muddied reputation after leading the charge against foreign journalists and short-sellers whom it accused of market manipulation when they produced reports showing that the DAX-listed Wirecard was a sham enterprise built on sand. Perring and his time had put a target price on the Wirecard stock of 'zero' at the time - in other words, worthless.

The Luxembourg-headquartered Aggregate Holdings, the largest shareholder in Adler with 26.6%, said in a statement that it was fully convinced of the value of its holding in Adler, and the now collapsing share price did not accurately reflect the value in the company. Adler needed to address the charges being made against it, it said.

Adler owns 70,000 apartments throughout Germany, and has a further 10,000 in its development pipeline, so there is certainly realisable value there. The question is one of valuation. Vonovia, which has just secured a majority of the shares in rival Deutsche Wohnen, is always keen to add to its 550,000+ apartments, and Aggregate Holdings has since confirmed, just before the weekend, that Vonovia has taken out an option to buy 13.3%, or half Aggregate's stake in Adler, over the next eighteen months. Reports suggest it is offering a hefty premium over the current beaten-down share price - which would of course offer support to the share price from falling even further.

Although the Adler share price has showed signs of stabilisation in the days since the publication of the Viceroy report on 6th October, it has nonetheless suffered a steep fall, halving in price over the last three months to its lowest price since the start of the COVID pandemic. The share price has lost 75% of its value over the past three years, since the time it began its aggressive campaign of acquiring companies frequently with larger capitalisations than itself, and embarking on the pattern of dubious business deals highlighted by Viceroy in its report.

The yield on its 1.5% coupon bond issued with April 2022 maturity leaped from 6% to more than 15%, while the 2026-due bond with a 3% coupon jumped from 5.6% to 6.8%.

Adler has been countering the whiff of sulphur that has been surrounding its business practices over the past few months. It presented a strong set of interim figures and raised its full-year forecasts for its key perfomance indicators, although it has not been able to shrug off accusations of intransparency in relation to a complex set of transactions leading to the merger of Adler Real Estate, Ado Properties and Consus Real Estate leading to the latest iteration of the Adler Group.

With both Ado Properties and another subsidiary Westgrund having a heavy focus on Berlin residential property, the company has been attracting further scrutiny from the hard-core left political party, Die Linke. In particular, Adler has been giving a lot of prominence to its debt-reduction strategies over the last week, which have helped keep pressure on its bond and share obligations. It would be surprising if these announcements were completely unrelated to the report that it must have known Perring and his team at Viceroy were preparing.

Given the comprehensiveness of the 60-page report, it is clear that the short-sellers have been doing a lot of legwork, and must be fairly confident of their position. At the same time, it was probably a signal, as well as providing a fertile moment, for Viceroy to launch its full-frontal attack on the company and expose what it claims are the holes in its balance sheet.

Very specifically, Viceroy accuses Adler of buying up better and stronger capitalised companies, loading them up with debt, and then hollowing them out by dodgy transactions with people closely connected to the company. Additionally, it accused Adler of balance sheet trickery, project developments which have come to a standstill, and gross overvaluation of real estate assets.

Viceroy identifies the culprits and beneficiaries of the web of deception and crookery it describes. At the centre of this web of profiteers is Austrian entrepreneur Cevdet Caner, who while not having any official management function at Adler, controls the company like a master puppeteer, directing his 'friends and family' within the enterprise to profit, at the expense of the bond- and shareholders. Viceroy makes it clear that it is in no doubt that Caner is the operating brains behind Adler Group, and who has built up a group of cohorts close to himself and the group to do his bidding.

Those with longer memories (and that includes REFIRE, as we reported widely on the man and the company at the time) will recognise the name Cevdet Caner, as the man who built up the German property company Level One from 2004 to 2008 before it collapsed, leaving behind debts of more than €1bn. The company, via a complex web of more than 150 offshore companies, invested in low-grade eastern German housing, and ended up as the biggest creditor of Swiss bank Credit Suisse, owing it €800m, most of which the bank ultimately had to write off. The collapse of Level One was the second-biggest real estate insolvency in Germany in the post-war years.

Caner and his lawyer Ben Irle have likewise denied having any influential role in the management of Adler, let alone positioning family members within the company network to contribute to buying companies or helping burdening them with debt. They have threatened legal action against media, notably business daily Handelsblatt, which devoted considerable coverage to the Viceroy report in its Thursday edition (7th October). 

In the report, reference is made to the conclusion of the Austrian Takeover Commission in 2016, at a time when Adler was attempting to take over Austrian investor and developer Conwert (which was subsequently bought by Vonovia), that Adler as a company was controlled by Cevdet Caner, although he had no official function in the company. As one auditor told the Commission, "If you want to talk business with Adler, you will have to de facto talk with Cevdet Caner", the Commission reported.

Delving deeper into the report, even the casual reader cannot help being dragged into an incestuous pit of associated family members, brothers-in-law, favoured developers being given sweetheart deals, sales at fictitious prices to insider partners that have yet to be repaid, and a host of other murky deals. At the very least, there will be a lot of explaining to do, now that the Pandora's box has been opened. 

Handelsblatt point to several other short-sellers who would benefit from a falling Adler share price. The UK's Gladstone Capital Management has a 1.41% short position, US group Susquehanna International Holdings has a 1.21% position, and the Australian hedge fund Bronte Capital Management has a net short position of 0.42% in the company. All increased their short positions the day before Perring published his report, according to the official Bundesanzeiger, which short-sellers with a position of more than 0-5% are required to notify.

Lawyers for all sides, including from major shareholder Aggregate Holdings, are now furiously examining the legal positions of themselves or their clients. It seems clear, from reading the lawyers letters in the appendix to the Viceroy Report, that senior management at Adler was aware of the existence of the report, and possibly of its imminent publication. The company released a statement on Monday merely advising of its intention to sell part of its holdings, allegedly to reduce debt. This leaves the company open to the charge that it did not notify its bond and shareholder of the impending threat to the value of their holdings on publication of the report.

REFIRE: We suspect this lawyerly activity is just the beginning of a longer process in which a lot of uncomfortable questions will have to be answered. BaFin, mindful of its track record of neglect in responding to demands for closer scrutiny of corporate governance, and its appalling behaviour in respect of Wirecard and other blind spots, will surely have to step up to the plate on this one. We see a lot of trouble ahead here.