Hedge Fund Accuses Adler of Overstating Proceeds From Sales

(Bloomberg) -- Adler Group SA has been accused by a hedge fund of overstating the amount it received in a highly anticipated asset sale that sent the shares of the embattled property company soaring.

Adler’s management, discussing the sale on a conference call with analysts, gave a price that was about 130 million euros ($147 million) higher than the amount the buyer, LEG Immobilien SE, said it agreed to pay. The hedge fund manager is also questioning how Adler has incurred about 100 million euros of transaction costs. 

The German landlord may have engaged in “serious market abuse,” Barry Norris, the chief executive officer of London-based Argonaut Capital Partners, wrote in an email to BaFin, which was seen by Bloomberg News. Argonaut has been betting against Adler’s shares and stands to benefit if they fall.

The LEG deal was closely watched both for the cash it delivered to Adler to help pay down debt, and because Adler pointed to the properties fetching a price above their book value as a sign that its valuations were conservative.

A BaFin spokeswoman said the regulator doesn’t comment on individual filings made to the watchdog’s whistleblower hotline. BaFin follows up on every filing and examines whether there is a potential violation of supervisory regulations, she said.

A spokesman for Adler did not respond to a request for comment on Argonaut’s allegations or follow-up questions seeking clarification on its disclosed numbers. 

It is the latest skirmish in a battle between the German landlord and short-sellers betting against the company’s stock and bonds. Adler’s shares have gained about 40% from the record lows recorded at the end of last month, spurred by the sale to LEG that was confirmed this month.

About 15% of Adler’s free-floating shares are currently on loan to short-sellers, according to Markit data. Argonaut has been short Adler stock since January this year, a person with knowledge of the fund’s investments said. A spokesman for Argonaut declined to comment on the firm’s short positions.

The embattled landlord came under attack by short-seller Fraser Perring’s Viceroy Research which published a highly critical report on Adler in October that included accusations that the company had inflated the value of its properties. Perring has also questioned the price discrepancy on the LEG deal in a tweet. 

Adler has rejected the allegations made in the Viceroy report.

At the heart of the latest spat is a portfolio of more than 15,000 German apartments. Adler said in October it had provisionally agreed to sell a 90% stake in the companies that owned the properties to LEG and that the deal would be based on a portfolio value of 1.485 billion euros. In a separate press release at the time it said it would net about 800 million euros from the sale, once debt and other costs have been taken into account.  

After more than seven weeks of due diligence and negotiation with Adler, LEG said it had agreed to pay 1.29 billion euros for 100% of the shares in the companies that owned the properties. It said it will also pay 88 million euros in real estate transfer tax after agreeing to acquire the companies in full. 

Meanwhile, Adler’s announcement on the same day did not state the price, but the company said that it would still net about 800 million euros from the transaction. Pressed to explain how Adler could achieve the same net proceeds if the price was lower, co-chief executive officer Thierry Beaudemoulin said on an investor call to discuss the deal that although the headline price was below Adler’s original number, it was higher than LEG’s announced figure. 

The discount to the price originally floated was the result of due diligence findings and working capital adjustments but still represented a premium to book value, Beaudemoulin said on the call. He did not explain the discrepancy between his figure and the one announced by LEG. 

Investors on the call also questioned the costs and adjustments that bridge the gap between what Adler’s management says LEG is paying and the amount they will ultimately bank. Beaudemoulin pointed to a deferred tax liability that would be payable as a result of the sale, which he said reduces the amount to 1.29 billion euros. 

The portfolio also had 379 million euros of debt, according to a separate investor presentation, leaving Adler about 906 million euros once it is repaid, based on Beaudemoulin’s numbers. The discrepancy between that figure and the 800 million euros Adler announced was due to “minor transaction costs, Beaudemoulin said in response to a follow-up question on the call. 

The unspecified transaction costs is significantly higher than those Adler expects to incur on a separate deal it is in the process of undertaking. The company is in talks to sell about 1 billion euros of homes to a buyer that Bloomberg News has reported is KKR & Co. 

Tax and transaction costs on the KKR deal total about 45 million euros, or 4.5% of the total purchase price, according to Bloomberg calculations. By contrast, the costs and taxes for its transaction with LEG represent more than 16.5% of the 1.42 billion euros Beaudemoulin says Adler will be paid.

“In my view, such high transaction costs are suspicious,” Norris said in a follow-up email to German financial regulator BaFin and seen by Bloomberg News. 

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