Aurelius Equity Opportunities SE & Co KGaA: The Next Arques AG or the next Philip Green?

GOTHAM CITY RESEARCH’S OPINIONS

  • Aurelius’ shares are worth no more than €8.56 per share, implying at least -88% downside to its current share price.
  • Aurelius may face similar scrutiny as Philip Green did in the UK, who was accused of systematically plundering BHS.

SUMMARY OF FINDINGS

  • We were unable to reconcile 43% – 100%+ of Aurelius’s reported earnings to the sum of its subsidiaries’ earnings.
  • 2015 contingent liabilities, as calculated by the sum of its parts, seem understated by 46% or more.
  • Aurelius’ income from negative goodwill accounts for over 120% of 2011-2015 earnings.
  • Similarly high levels of negative goodwill preceded a permanent -95%+ collapse in the share price of Arques AG, whose business model seems identical to Aurelius’.
  • Aurelius claims to be a “good home for companies” yet nearly 60% of portfolio companies entered insolvency after Aurelius sold them, per our review.
  • Our estimate of NAV is 80%-90% lower than Aurelius’ unaudited and DCF-based NAV.
  • Aurelius has never received an unqualified audit opinion on its audited financial statements.
  • CEO Dirk Markus, a former Finance executive of Arques is also the CFO of Aurelius, according to Hauck & Aufhauser.
  • Aurelius’ executives sold €169 million of shares in December 2016 (40% or more their stake) at €52.5 per share. The prevailing market price was €59 that day.
  • Aurelius has been accused of illegal conveyance (and found guilty in some cases) in its business dealings (Einhorn case, EDS case).
  • Aurelius “abstains” from providing negative goodwill-related disclosures “because it believes that they can lead to economic disadvantages.”

MDC Partners (ticker = MDCA): Like Valeant Pharmaceuticals, But with Understated Debts

GOTHAM CITY RESEARCH’S OPINIONS

  • MDCA shares are worth less than $1.00 per share, implying 96%+ downside.
  • MDCA will restate several years’ historical results as a result of the issues covered in this report and elsewhere.
  • The on-going SEC investigation will lead to new revelations of wrong-doing.

SUMMARY OF FINDINGS

  • 2015 organic revenue growth is ~1.5%, not 7.2% as reported. Organic growth well below industry averages.
  • MDCA’s true Debt is understated by ~$300 million, or 23% of stated Debt as of 2015.
  • At least 42%-53% of reported profits are suspect.
  • 7+ executive departures within recent quarters. At most 3 of Crispin Porter Bogursky’s original 13 partners remain.
  • Doner lost a key 16 year-old client account in Q4 2015.
  • 72andSunny was recently sued twice for copyright infringement. Crispin Porter Bogursky was similarly sued several years ago before CP+B’s fell from grace.
  • BDO and David Wiener & Co are quasi-captive entities MDCA used to structure its dubious accounting strategies.
  • Tax deductible intangibles and goodwill have declined from 100% tax deductible in 2013 to only 16% in 2015.
  • MDCA’s former auditor KPMG expressed “an adverse opinion on the effective operation of, internal control over financial reporting”. MDCA soon after hired BDO.
  • The BDO audit partner assigned to MDCA, after MDCA’s switch from KPMG to BDO, was sued in Nussdorf v BDO Seidman for promoting fraudulent & illegal tax shelters.
  • Deferred acquisition considerations paid out to acquired companies’ partners may be taxed at ordinary income.
  • Dubious related party transactions continue, despite Miles Nadal’s departure, e.g. Lori Senecal’s husband hired last year & compensated $1 million for 5 months’ work.

EIGI: Adjusted EBITDA is a Meaningless Metric, as It Does Not Correlate with Free Cash Flow – 4 Questions All Analysts Should Ask EIGI

Gotham City Research expects:

  • EIGI will ‘beat’ its Adjusted EBITDA estimates today (just as we expect university students to ‘ace’ self-graded exams). EIGI has generated negative free cash flow each quarter it has “beat” Adj. EBITDA estimates.
  • Endurance will aggressively dangle its vague $500 million Adjusted EBITDA long-term goal, hoping to fool some investors into thinking that the previously disclosed $500 million figure is new information, when in fact, the $500 million target is old news from several months ago.

Gotham City Research believes investors will gain a more accurate understanding of the company’s health and prospects, by asking the following questions (for more information, read the report):

  1. Average Revenue per Subscriber (ARPS): What are the total number of end subscribers and resellers you had for each year between 2012 and 2014? How many currently? What % of your total revenues are sourced from resellers for those years?
  1. Churn Rate: What is EIGI’s monthly churn rate, from 2012-Present? You claim, “Our MRR retention rate was 99% for all periods presented”. How is this possible, given Endurance’s data center outages, under-investment in core infrastructure, negative customer/employee reviews, and industry peers’ skepticism regarding your implied churn?
  1. International Revenue, Directi, and your undisclosed subsidiary
    1. What was your 2014 International revenue?
    2. Explain the Directi revenue inconsistencies found within your 2014 10K (that is, why do they not add up?) See our report for context.
    3. Who is the “Domain Name Business” (i.e. the undisclosed subsidiary) that you “purchased from a company associated with the founders of Directi Holdings”?

Does your long-term target $500 million adjusted EBITDA suggest positive Free Cash Flow as well? Your historical Adjusted EBITDA has not corresponded with positive Free Cash Flow. In fact, you’ve generated negative Free Cash Flow each quarter you “beat” Adjusted EBITDA estimates.

Endurance International Group: A Web of Deceit

GOTHAM CITY RESEARCH’S OPINIONS

  • EIGI shares will go to $0.00 per share, as the company will struggle to service its debt. Normalized EBITDA margins do not cover interest expense.
  • Recent years’ reported EBITDA benefited from attracting Blinkx-like revenue (spam/malware, terrorism, etc.).
  • EIG profits at the expense of its customers (service outages, poor customer service, etc.).

SUMMARY OF FINDINGS

  • 40%-100%+ of EIGI’s reported profits are suspect.
  • 2014 Average Revenue per Subscriber (ARPS) actually declined -13%. EIGI’s 10K claims ARPS grew +11%.
  • Organic growth overstated ~3x. We calculate organic growth to be ~5.6%, not 13.0%-15.0% as EIG claims.
  • Directi’s revenues per the Indian filings are 30%-67% lower than reported in EIGI’s 10K.
  • Directi revenue figures within the EIGI 10K do not add up.
  • EIGI paid 17% of its ’12-’14 EBITDA to a related party tied to the CEO. The related party seems to be Endurance.
  • No international revenue disclosures, despite promoting itself as an ‘international growth’ concern.
  • An undisclosed subsidiary falsely claimed to the US Government that the FBI “recommended” them.
  • EIGI’s BlueHost, JustHost, HostGator and HostMonster hosted terrorist websites as recently as few weeks ago.
  • EIGI domains hosted 1,000s of spam/malware-related sites per spam/malware watchdogs (the hosting world’s Blinkx).
  • EIGI spends ~1/6th on core infrastructure vs Godaddy.
  • Customer reviews are consistently poor.
  • A 15+ year industry executive states EIGI uses a churn model/definition that is “not industry common practice, while using industry terminology.”
  • EIGI is free cash flow negative. Godaddy is FCF positive.
  • The management team (including the CEO) recently sold ~30% of their stake in EIGI.