Wirecard’s core business in Europe and America has been loss for years, casting doubt on the economic substance of the parts of the company that are not directly affected by its accounting scandal.
The German payments group collapsed in insolvency last month after revealing that € 1.9bn in cash in its accounts probably “did not exist.” For years it had been presented as a highly profitable business.
According to its EY-audited financial reports, between 2016 and 2018 Wirecard generated operating margins of around 22 percent and nearly doubled annual earnings before interest and taxes to € 439 million. Last year, the company also promised investors a five-fold increase in earnings by 2025.
But such gains appear to have largely existed on paper, according to data in the confidential appendix of a special audit conducted by KPMG and viewed by the Financial Times. The report was commissioned by the company late last year in response to questions about its accounting practices.
Wirecard’s internal numbers reveal that the operating performance of its core business, primarily payment processing in Europe and credit card issuance in Europe and North America, was far worse than previously known.
Figures show that those core activities have also increasingly turned into losses in recent years, despite accounting for half of the company’s reported revenue and nearly two-thirds of transaction volume.
In 2018, when Wirecard’s stock market valuation topped € 24 billion and replaced Commerzbank in Germany’s prestigious Dax index, activities under the company’s direct control produced operating losses of € 74 million, compared to losses of € 3 million from the previous year, numbers in the appendix of The KPMG report shows.
This was masked by earnings attributed to outsourced activities in Asia, where Wirecard said it relied on external business partners because it did not have its own licenses to operate.
These outsourced activities are now at the center of an accounting scandal that has rocked German finances. Wirecard warned investors last month that this part of the business may not have been “really done for the benefit of the company” and was misrepresented to investors.
Wirecard declined to comment.
The published version of the KPMG report, which did not include the appendix, stated that the outsourced activities accounted for “most” of the group’s profits, but did not disclose any numbers.
But activities outside Asia have failed to generate profits since 2016, when that part of the business earned € 20 million, contributing just 8% to group EBIT.
When the Financial Times reported last year that three opaque trading partners in Asia were responsible for the majority of Wirecard’s earnings, Chief Executive Officer Markus Braun told analysts in a earnings call that “this is simply not true.”
The poor operating performance of Wirecard’s activities outside Asia highlights the challenges Wirecard administrator Michael Jaffé faces as he searches for buyers of Wirecard’s remaining business.
A sale of Wirecard’s subsidiaries should take place in a few weeks or they will lose the remaining value, people familiar with the matter said.
“Wirecard has very few physical assets, and the risk is that many of its clients will soon switch to rivals,” said one of the people, adding that Wirecard’s legal claims against its former management and accountant may be more valuable. than your remaining operation. deal.
Last week, Jaffé said that “numerous” potential buyers had decreased appetite for Wirecard parts. Germany’s largest lender Deutsche Bank has become a potential bidder for parts of the missing payment group.
“Obviously we are a big participant in the payments business, it’s a big part of what we do, especially at the corporate bank,” Deutsche chief financial officer James von Moltke told the Financial Times, adding that the lender had been “quite clear”. that we would look for opportunities to grow “in that business.
Last week Deutsche Bank said it was ready to provide financial support to Wirecard Bank, the payment group’s lending arm, which until now has not been part of insolvency proceedings. Mr. von Moltke said the discussions on Wirecard were “in the early days” and that assessing the true value of Wirecard’s remaining operations was “very, very difficult.”
Germany’s finance minister Olaf Scholz said Sunday that he thought “so far we have only seen the tip of the iceberg” regarding the Wirecard scandal. “There is probably more to come,” Allgemeine Sonntagszeitung told Frankfurter in an interview.
Additional reports by Stephen Morris in London
