Grenke’s ‘Reputational Disaster’ Raises More Troubling Questions

(Bloomberg) -- The resignation Monday of Grenke AG’s Chief Operating Officer Mark Kindermann has raised new questions about the severity of the German leasing company’s compliance issues. The stock plunged the most since initial allegations were published in September, leaving investors to chew over what Commerzbank analyst Christoph Blieffert called a “reputational disaster.”

Grenke said Kindermann resigned to avoid any dispute prior to the completion of two special audits. Some auditors had pointed to a lack of staffing and documentation failures in the compliance and internal auditing units, according to people close to the company who asked not to be identified.

The company’s woes come at a delicate time for Germany, with the political and financial communities still coming to terms with last year’s spectacular collapse of payments company and one-time establishment darling Wirecard AG, the subject of an ongoing parliamentary inquiry in Berlin. Here is what we know about Grenke so far:

What are the allegations?

In September, Fraser Perring’s Viceroy Research Group alleged that Grenke was using acquisitions to hide that much of its cash doesn’t exist -- echoing the Wirecard case, which Perring also flagged early on. Since 2011, Grenke has spent more than 100 million euros ($119 million) buying franchise companies controlled by Grenke executives and other insiders, without disclosing the ties, according to Perring. The 64-page Viceroy report also alleged the company’s compliance was flawed and enabled fraud and money laundering through its clients.

Grenke strongly rejected the accusations, while Germany’s financial regulator and prosecutors started an investigation. The company’s founder and biggest shareholder, Wolfgang Grenke, temporarily resigned from the supervisory board and it commissioned audits by KPMG LLP and Warth & Klein Grant Thornton to try to lay the allegations to rest.

Where is the cash and what did the special audits reveal so far?

In October, Grenke shares recovered after KPMG received written confirmations from banks, including Germany’s Bundesbank, covering more than 98% of its cash.

Grenke said in December that KPMG had failed to uncover evidence supporting the fraud allegations. Background research on its 30 largest resellers did not reveal any indications that they do not exist, are involved in criminal transactions, or that their business activities are questionable in any other respect. Money-laundering claims have also not been substantiated.

Warth & Klein Grant Thornton concluded that the 17 franchise acquisitions completed to date can be described as positive overall for Grenke, though in some cases the purchase price was higher than what the originally agreed evaluation methodology suggested was feasible.

What role do Grenke franchise partners and the company’s founder play?

Grenke has used franchises to expand into new markets. The managing directors of those franchise firms were often former Grenke employees, who owned minority stakes, while the controlling interests were held “by various financial investors, including CTP Handels- und Beteiligungs GmbH,” Grenke has said.

After four to six years, the company would typically acquire the franchise firms. Wolfgang Grenke became the sole shareholder of CTP’s parent company Sacoma AG in February 2020, according to Grenke. It is unclear who controlled Sacoma before that. Grenke said only that neither Wolfgang Grenke nor the company held shares in CTP prior to the takeover. According to Perring, however, Wolfgang Grenke had “involvement in CTP since at least the early 2000s.”

What is the company doing to improve compliance?

Grenke has said it will integrate its franchise companies in an effort to become more transparent. The company said in October it aims to purchase the 16 franchise companies it doesn’t already own within 18 months, according to a statement.

Last month, Grenke added the position of chief risk officer to the board of directors. It hired Isabel Roesler, a long-term employee at auditing firm PricewaterhouseCoopers, to take the role and oversee risk controlling, compliance, money laundering prevention and data protection. In addition, Grenke shifted all internal auditing functions directly to Chief Executive Officer Antje Leminsky. The company has also appointed Sebastian Hirsch as chief financial officer.

When will the company present the final audit reports?

The audits are ongoing and the company hasn’t committed to a specific date.

What do analysts and investors say?

Since September, five out of 10 analysts tracked by Bloomberg have suspended their stock recommendation, with Commerzbank analysts the latest to take action. Blieffert said he won’t put out any rating until details about the external audit findings are disclosed.

Oddo BHF analyst Roland Pfaender kept his outperform rating and said the need to put a stronger focus on compliance processes and risk management was expected. Yet he notes that the departure of Kindermann leaves questions unanswered and that “it remains unclear if the criticism on the compliance and audit processes are justified and how material the potential findings could be.”

Grenke second-biggest investor after Wolfgang Grenke, Acatis Investment GmbH, said it has not received enough information to provide a comment. “We are in conversations with the company and await clarifying information,” Hendrik Leber, Acatis’s managing partner, said in an email.

©2021 Bloomberg L.P.