SoftBank's $1 billion Wirecard bet under scrutiny as troubled payments processor fights for survival

Key Points
  • A SoftBank subsidiary invested 900 million euros in Wirecard last year through a convertible note deal. 
  • Analysts say the transaction was structured in such a way that there was no financial risk to SoftBank.
  • Nevertheless, it has renewed scrutiny about the Japanese tech conglomerate's investment strategy.
CEO of Softbank Group Masayoshi Son attending a news conference in Tokyo on February 8, 2017.
Alessandro Di Ciommo | NurPhoto | Getty Images

SoftBank has come under renewed scrutiny about its investment strategy — but this time it's about one of the Japanese tech conglomerate's lesser-known bets.

Last year, the company made a 900 million euros ($1 billion) investment in Wirecard, as part of a broader tie-up between the two on digital payments. But that deal has raised eyebrows now due to a deepening accounting crisis at the German payments processor.

The Munich-based company is fighting for its survival after revealing that 1.9 billion euros of missing cash — roughly a quarter of its balance sheet — likely doesn't exist. Auditors at EY refused to sign off the firm's 2019 accounts last week because they couldn't locate the funds.

The scandal has battered the tech firm's shares, which have fallen more than 80% since last Wednesday's market close. And this has led to fresh doubts over SoftBank's methods, although a person familiar with the matter, who preferred to remain anonymous as the information has not been made public, said the Japanese firm took care to hedge against potential losses.

Complex transaction

Wirecard and SoftBank announced the investment and partnership between the two firms in April 2019. The two structured a 900 million euros convertible note issuance from Wirecard — convertible notes being a type of debt that can be repaid in stock rather than cash.

The notes, which have a five-year maturity, would convert into a 6% stake in Wirecard. Analysts say the deal was structured in such a way that there was no financial risk to SoftBank.

Markus Braun, chief executive officer of Wirecard AG, arrives for the company's annual news conference in the Aschheim district of Munich, Germany, on Tuesday, April 25, 2019.
Michaela Handrek-Rehle | Bloomberg via Getty Images

At the time, there had already been concerns about Wirecard's accounting practices. The Financial Times ran a series of reports detailing suspicious transactions and forged contracts used to artificially inflate Wirecard's balance sheet. But at that stage, these were allegations that Wirecard disputed and even threatened legal action over.

As far as SoftBank was concerned, Wirecard's financials were in good health. The business was growing and the firm had recently replaced Commerzbank in Germany's blue-chip DAX index.

The transaction was managed by SoftBank Investment Advisors, the SoftBank subsidiary in charge of its huge $100 billion Vision Fund, and Credit Suisse was hired to act as advisor.

Credit Suisse was not immediately available for comment when contacted by CNBC.

The deal was given shareholder approval in June, while Wirecard secured an investment-grade credit rating from Moody's in August. Moody's has since downgraded the company's rating to junk.

In September, SoftBank did another deal, this time looking to hedge against its original bet. The company essentially repackaged the convertible bonds into exchangeables, which are also repaid in stock.

Credit Suisse helped SoftBank sell the debt to a group of institutional investors to book early profits and protect its principal investment. This strategy, reported by other outlets including the FT, was confirmed to CNBC by the source familiar with the deal.

Neil Campling, a tech, media and telecom analyst at Mirabaud Securities, told CNBC the transaction "was structured in such a way that SoftBank took no financial risk whatsoever."

KPMG audit

Then in October, the FT released a new report claiming that Wirecard employees appeared to conspire to fraudulently inflate sales and profits. That same month, Wirecard had brought in KPMG to run an independent audit of the company's accounts.

The findings of that audit did not work in Wirecard's favor. KPMG said it was unable to conclude whether revenues booked from three partner processing companies — which had been highlighted in the FT's reporting — existed or not for the years 2016, 2017 and 2018.

Wirecard has said it won't be commenting further on the matter.

CNBC understands that SoftBank was relying on the same data used by Germany's BaFin financial regulator, lenders, shareholders and ratings agencies.

We need better incentives for whistleblowers in Germany, attorney says
We need better incentives for whistleblowers in Germany, attorney says

"Allegations that continued to surround the company after the release of the 2018 audited financials, and our investment, led us to push for the independent audit that helped to uncover the apparent fraud, which had gone undetected for years," a SoftBank Investment Advisers spokesperson told CNBC by email Tuesday.

And SoftBank appears to have cut its exposure to Wirecard. According to reports, the $1 billion financing came out of SoftBank executives' pockets as well as Abu Dhabi's Mubadala sovereign wealth fund, but not SoftBank's balance sheet.

SoftBank declined to comment on the limited partners — in other words, the investors who put in the cash — when questioned by CNBC. Mubadala was not immediately available to comment on the deal.

Wirecard shares have collapsed and there are some analysts who think the company's stock price may be worthless.

The plunge in the company's value is sure to weigh on the original bond issuance. However, any losses incurred would in theory impact SoftBank's partners rather than the group itself, according to reports. 

Nevertheless, it highlights another big-ticket deal from the Japanese tech investment juggernaut that is now facing questions over due diligence. SoftBank's notorious multi-billion investment in office rental firm WeWork — which saw its private valuation slashed from $47 billion to just $2.9 billion in a year — has clouded the company's image.

"I think as far as Softbank's investment portfolio is concerned, we could hear now that, in reality, the investments in Wirecard, in WeWork, in Oyo the hotels business, all of those have had different issues, but all have issues," said Campling.

"What that tells you is that perhaps the Vision Fund requires new vision in its investment strategy. Because if you look at the quotes historically from the Softbank CEO, he needs to change because his vision has been somewhat clouded through a plethora of mistakes in recent time."

SoftBank CEO Masayoshi Son has previously quoted Yoda and said he has made some investments using his sense of "smell." More recently, he compared himself to a misunderstood Jesus Christ while defending his investment strategy.