“We take any critique of the company seriously,” Network International said in a statement. “While we believe many of the issues raised have already been addressed, the historical nature of certain statements in the report means that a full response will take some time.”
ShadowFall, a research house setting out to uncover unethical practices in equity markets, on Wednesday published a paper on the US$288mln DPO deal which Network International announced in July.
DPO, which focuses on Africa, was founded in Ireland in 2016, “birthed by the ‘back-room boys’ to Wirecard UK & Ireland; it is even registered two floors above,” ShadowFall's analysts said.
Wirecard is a financial services provider that is now insolvent due to accounting scandals, which saw some senior executives implicated in criminal proceedings.
“The first business DPO bought on its four-year roll-up was from a former Wirecard director, who in November 2016 was convicted of fraud and money laundering. The auditor to DPO was a colleague of the convicted money launderer,” they added.
“The secretary and initial director to DPO are two individuals who were also associated with a company which is subject to an ongoing US CFTC court case regarding binary option scams.”
ShadowFall noted that DPO is to be acquired on 12x its financial year 2019 pro-forma revenue, even though it has acquired its revenue on what the researchers calculated to be between 1.0x-2.5x sales; less than a year ago DPO acquired around 37% of its pro-forma revenue on 2.5x sales.
Analysts highlighted that this significant mark-up in value in such a short period of time has similarities to when Wirecard acquired the Indian business, GI Retail.
We believe our report and NETW’s disclosures raises a number of questions which NETW’s shareholders may welcome some clarity on. These questions can be read in our open letter, which we have addressed to NETW: https://t.co/NoMNLUa3vN 7/7— ShadowFall (@ShadowFallCR) December 23, 2020
“We believe that the major pre-IPO shareholder, who also happens to be Network International’s major customer, could have been incentivised to boost Network International’s numbers ahead of IPO,” they said.
“Now that this shareholder retains a fraction of its former holding, this incentive is significantly reduced. We are unconvinced that losses which were attributed to ‘discontinued operations’ were entirely related to the disposed businesses.”
In this scenario, information relating to business disposals does not reconcile with the local filings nor the buyer’s version of events, so ShadowFall reckons there is a rising risk of debt covenant breach.