Wirecard Is a Wild Card, Even Without SoftBank Money

(Bloomberg Opinion) -- What's more perplexing, a company that can't seem to avoid due diligence failures, or one that throws its name behind a controversial partner without putting in a dime? Investors in SoftBank Group Corp. may have seen a bit of both. Now, its entanglement with Wirecard AG leaves shareholders wondering exactly what kind of business they've been sinking their money into.

Over the past year, SoftBank's $80 billion startup splurge has quickly unraveled, as WeWork imploded and the initial public offering of Uber Technologies Inc. fell flat. But unlike WeWork, Wirecard won't force SoftBank to write down any assets — because the tech conglomerate never put money into Wirecard itself.

Instead, SoftBank facilitated a 900 million euro ($1 billion) convertible bond deal for the German digital payments company. Without requiring any SoftBank cash, the deal appeared to give the company's stamp of approval to Wirecard, which had faced scrutiny over its accounting for years before admitting that 1.9 billion euros had gone missing from its accounts.  Wirecard's shares soared more than 25% between the announcement of the tie-up and its signing.

The outlines of this offering emerged in April 2019. It was eventually sold to Mubadala Investment Co. — Abu Dhabi's sovereign fund, and the second biggest backer of the Vision Fund after Saudi Arabia's Public Investment Fund — as well as a few senior SoftBank employees, according to the Financial Times.

This instrument gave investors the option to convert their holdings into 6.9 million Wirecard shares, or 5.6% of the company at the time, at 130 euros per share — just over a 5% premium. To convince its existing holders to accept this dilution, Wirecard talked at length of the “economic benefits” of a strategic partnership with SoftBank, from geographic expansion into Japan and South Korea, to access to the Vision Fund's vast portfolio, according to an invitation to Wirecard's annual general meeting last June. “The potential on the equity side is much, much higher than the potential dilution,” then-CEO Markus Braun, who has since resigned, said at the time of the announcement. SoftBank echoed similar sentiments. 

But shortly after Sept. 18, 2019 — when the companies' strategic tie-up was signed, and Wirecard's stock was trading at 158 euros per share — Credit Suisse Group AG repackaged and resold those instruments, which were issued just hours before, to a broader group of investors at substantially less attractive terms. In other words, Mubadala et al got some of their Wirecard stake for free, thanks to SoftBank. 

Now that Wirecard has filed for insolvency, one can't help wondering why SoftBank got involved in the first place. After a series of high-profile due diligence errors, SoftBank can ill afford any brush with a company battling corporate governance issues. This question is particularly relevant right now, because the Japanese tech giant is rapidly closing its conglomerate discount through aggressive share buybacks and sales of its most prized assets.

On March 23, founder Masayoshi Son unveiled a 4.5 trillion yen ($42 billion) asset sale and an additional 2 trillion yen share repurchase over the next year. SoftBank's conglomerate discount has since narrowed to just 29%, compared with 65% during its mid-March low, according to Bernstein Research. On average, SoftBank sported a valuation discount of 38% after the initial closing of the Vision Fund in 2017, using the firm's methodology.

SoftBank has more than doubled in market value since mid-March, and is now up 15% for the year. But once the company sells off its best holdings, its net-asset-value discount is only set to widen again. Such metrics reflect business behavior, history, strategy and vision, all of which are getting worse at SoftBank. As the Wirecard drama unfolds, it may well turn into this year's WeWork, another public-relations disaster for Son.

In early 2019, the Financial Times published a series of investigative reports questioning Wirecard's internal controls.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

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