Rupee do: what is Wirecard buying?

Wirecard, the German listed payments company, is to pay as much as €330m for a business which was barely involved in payments two years ago, according to Indian corporate filings.

Accounts for the largest subsidiary of the group to be acquired show qualified audit opinions due to concerns about revenue recognition and an inability to verify key financial totals, and recent resignations of directors and auditors.

Sales and profits claimed by Wirecard for the businesses it intends to buy also imply a dramatic transformation in financial performance during the last 18 months.

The question for shareholders, from whom Wirecard has raised €0.5bn in recent years to fund such dealmaking, is what exactly has it agreed to buy?

We’ve previously raised questions about the way Wirecard buys companies, undisclosed portions of previous deals, apparent mismatches between sets of accounts in different countries, the way the cash flow profile of the business is not what might be expected, and a large receivables balance obscured by adjustments the company asks analysts to make.

The company’s cash flow is under scrutiny, and analysts have been waiting to see how the group uses €360m raised from the sale of stock more than 18 months ago.

Wirecard’s purchase also comes at a time when investors are paying close attention to technology companies operating in distant jurisdictions after a series of controversies. For instance Globo, a UK listed group technology group placed into administration this month after the chief executive resigned and admitted “certain matters regarding the falsification of data and the misrepresentation of the company’s financial situation”. The collapse of the company followed a critical report published by a New York hedge fund which found claimed sales partners did not exist, including a Mumbai group which turned out to be a laptop repair specialist which hadn’t heard of Globo.

What Wirecard announced it would buy on October 27 is the fast growing payments business of Great India Retail, which includes the Smart Shop and iCashcard brands, and 60 per cent of GI Technology, a subsidiary operating prepaid payment cards. The company says these operations will have revenues of €45m in 2015, and €75m the year after. Earnings, on a pre-tax, interest, depreciation and amortisation basis will be €7m this year and then as much as €18m in 2016, Wirecard says. It will pay €230m initially, and up to another €100m dependent on future profits.

Wirecard told us “the main legal entities where the payment business of GI Retail Group were concentrated and which were acquired as part of the transaction are Hermes and GI Technology (of which Hermes is the main operative company/revenue generator and GI Technology is mainly the licence provider).”

The two main efforts are iCashcard and Smart Shop, what a spokesperson called “retail assisted ecommerce” — essentially kiosks where Indians can have someone interact with the internet on their behalf. Wirecard also says remittances are a big part of the business. To generate that €45m of sales expected this year, Wirecard said the ecommerce and remittances will transact about €2.8bn of payment volumes.

Wirecard also said “The National Payments Corporation of India (NPCI) ranks GI Technology as number one bank’s remitter among 123 members, as of 6th of October 2015.”

To do so, it must be growing very fast indeed. We could only find two references to GI Technology on the NPCI website. One is the number-light table to the right.

The other is in a list of milestones of the Immediate Payment Services (IMPS) network run by the NPCI:

GI Technology Pvt. Ltd as a RBI authorized Prepaid Payments Instrument Issuer (PPI) joins IMPS – 4-Jun-13

Swift work to reach number one in under two and a half years. NCPI did not respond to a request for comment.

According to the most recent balance sheet available for GI Technology, at the end of March 2014 trade payables were 87m rupees, or about €1m, and trade receivables were about €0.24m. The group also lists 62m rupees of “security deposits”, up from 49m the year before.

GI Technology was granted a prepaid card license in 2009, but it was only in October last year that it amended its memorandum of association to make reference to remittances and foreign exchange.