Adler - Timing
All,
Please find our unchanged analysis here.
The moment has come. Bafin have filed criminal charges against Adler over the Gerresheimer transaction and the Frankfurt prosecutor is now formally investigating. Of course, that is a bigger problem, Gerresheimer is a Brack asset. But there may be a simple reason for the action. Along the lines of what we previously described, Adler might need this investigation now. But will it happen in time?
The Brack sale:
- Undeniably the biggest swing factor in the liquidity plan we have received from Adler is the sale of Brack. If LEG buy it, then Adler have time to pay down the 2023s and present audited (and positively opined on) annual accounts. The bet is that after that the market opens somewhat.
- However, something has been preventing LEG from exercising their option. It’s unlikely to do with the yielding portfolio, which leaves only four development assets. Of those, one is minor and two are early-stage and uneventful. The last one is Gerresheimer.
- Interestingly, Brack did receive a clean audit opinion (with KPMG’s name on the clean audit opinion) in March after reversing the Gerresheimer transaction. So presumably by March, the news of Adler’s troubles had made it to Tel Aviv, right?
- Still, LEG have not exercised their option. We think that could have one of two reasons:
Reason 1) Planning Permission
- LEG don’t want to make a dilutive transaction. The company trades at a discount to NAV, whereas the transaction is supposed to come at a small premium.
- This could change if the Gerresheimer asset for instance would receive planning permission. Adler / Schrattbauer have been seeking that permission for a long Time. In the south of the area Deutsche Bahn have some rail tracks to store idle trains. The operator has been seeking alternative tracks from the City and as long as it does not receive those it is withholding consent to construction permits on Gerresheimer (or such is our understanding at present).
- Planning permission would materially increase the value of the asset and that may be the point at which LEG might consider the acquisition accretive.
- So any progress on this planning permission might be THE major driver of Adler bonds and equity. We are making calls in Düsseldorf and Gerresheim to understand the current situation.
Reason 2) Cleaning up
- LEG may be looking for additional assurances that the transaction will not result in subsequent liability for past misconduct - despite the clean audit opinion.
- LEG had bought their stake in Brack on the understanding that Brack would unwind the Gerresheimer transaction and take a reduced valuation back on the books. It’s announcement of the option deal came only 2 days after Adler presented its Q3 results, which showed the unwind. Yet, LEG may not be satisfied.
- KPMG Forensic could not finish their job (and perhaps would have taken for ever anyway).
- Until last week KPMG Audit would then have had the task of hardening the January 1st balance sheet, but is now no longer available. A new auditor will take too long.
- So as we’ve said before (conspiracy theory), the only way to make LEG comfortable could be to go through the investigation, let the state prosecutor examine the missing mails, focus everything on the Brack transaction only and - hopefully - come out the other end with a definitive result.
- However, we understand from our trusted German legal friends that this investigation could also take 9 months, if not longer. We think that given the concentration on a single property, this could be a little bit quicker.
Positioning:
- Our positioning remains unchanged. We have sold our equity and remain in the Consus 22s.
- The timing of Adler’s planned restitution has slipped dramatically in recent weeks and we are not sure the investigation will conclude in time to give any comfort to LEG.
- The obvious solution is for Adler to buy the property out of Brack and give assurances, but they may not we worth par today.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003