Lebara guidance beat overshadowed by selective accounting, technical default and sponsor equity contribution concerns

27 February 2017

Lebara posted strong 4Q17 headline numbers yesterday, with a 20% YoY EBITDA jump beating guidance while its cash position improved. But the European pre-pay telco only reported the results for its mobile group and did not provide unaudited results for the other potentially loss-making divisions that form part of VIEO BV, the HoldCo through which it issued its bonds, sparking concerns that it is hiding costs at these entities, according to three buysiders and an analyst.


The fourth quarter numbers published by the company yesterday (27 February) relate solely to Lebara Mobile Group BV. However the HoldCo VIEO BV also comprises Lebara Digital Group, Lebara Media Services and Lebara Service Centre.


Given that the group incurred sizeable losses at these divisions during 2016, investors are concerned that some of these losses continued in 2017, which would amount to selective accounting and could mean that the reported FY17 numbers overstated the EBITDA of the consolidated group, the buysiders and the analyst warned.


Stratospheric leverage


Lebara marked its EUR 350m senior secured 2022 FRN paying Euribor+ 675bps in August last year on around EUR 64m FY16 EBITDA. But in FY16 Lebara incurred some EUR 37m negative EBITDA at Lebara Digital and EUR 25m negative EBITDA at Lebara Service Centre, which meant that the real EBITDA of the consolidated group was just EUR 2.1m, according to a Quality of Earnings (QoE) report produced by PwC during its due diligence on the company, the buysiders said.


The QoE report was made available to prospective bond investors during the roadshow, buysiders said. CLICK HERE to access the report.


On the basis of the actual consolidated FY16 EBITDA number, leverage would have been off the scale at bond launch, versus the 5.2x the bond was marketed at.


“How did people miss the FY16 EBITDA number during the roadshow?” one buysider asked.


Lebara Digital and Lebara Service Centre have always been outside the quarterly reporting as they are part of a ‘permitted reorganisation’. Management told investors that it expects to complete the process at the end of 1Q19, and that these entities will not have an impact on the group, and that the costs will be in line with the investment case presented to investors during August 2017.


The entities include a voice-over-internet business, which is being closed down, and Lebara Play, a content business, that Lebara is hoping to exit with an asset sale. The group also plans to close Lebara Service Centre, which is supporting its businesses.


However management was unable answer any questions relating to the scale of any potential losses incurred by the entities during 2017, although it claimed that they would not have a material impact on the group, the buysiders said.


According to its bond documents, Lebara is required to report cashflow statements for the consolidated group, and risks being in technical default if it fails to produce them, the buysiders said.


“Lebara did not publish cashflow statements in Q4 or Q3,” a second buysider commented.


“They need to provide an annual cashflow statement by the end of April,” the first buysider noted. “But they said on the call one won’t be available until May. And why can’t they just disclose the financials of the other subsidiaries if there is nothing to hide?”


The group plans to provide a supplementary cash flow statement tomorrow (28 February).


Management also faced queries over the equity contribution sponsor Palmarium, a Swiss family office, made as part of the deal. The sponsor acquired the intellectual property, including the Lebara trademarks, shortly before acquiring the company itself. Held by the Yokara entity, this IP accounted for EUR 85m of the EUR 95m of equity Palmarium put into the deal. However, according to publicly available accounts for Leon Holdings AS, through which one of the sellers held the IP, it had a book value of just NOK 170m (EUR 17m), two buysiders said.


Management told investors that EUR 85m was the purchase price under the SPA (sales purchase agreement) for the IP and that the valuation was in accordance with a valuation report from PWC.


Headroom improves


Lebara Mobile Group’s fourth quarter revenues fell 7% YoY to EUR 131m, but EBITDA jumped 21% to EUR 29.5m, while the group ended the year with EUR 27m of cash. On those numbers it was 4.9x net levered, leaving it comfortably inside its 5.5x net leverage and EUR 15m minimum liquidity covenants. The group was 5.7x net levered and had just EUR 16.8m of cash at the end of Q3, raising concerns that it could breach, as reported.


The earnings improvement was driven by price concessions from MNOs and cost-savings. Management said it made EUR 9m of savings this year already and was ahead of schedule in terms of its planned savings. It reduced headcount by 100 and aims to cut a further 80 jobs during the first quarter. However, its subscriber base dropped by 300k to 2.9 million over the quarter, partly due to adverse regulatory changes in Germany.


“The story hasn’t changed,” a fourth buysider said. “For the leverage covenant only Lebara Mobile matters."


Lebara’s EUR350m E+ 675bps senior secured 2022 FRNs slumped some five points to 85/86 in the wake of the 4Q earnings call. The notes had initially gained a point to 90.25/91.25 after the group reported the jump in quarterly earnings, but started softening on news that CFO Leon Kramer resigned and after management came under fire on the earnings call over refusing to disclose earnings at some of the subsidiaries that form part of VEIO BV.


A EUR 10m piece of the FRNs traded at 86 yesterday, according to a trader and one of the buysiders.


Lebara and Palmarium declined to comment.


by Robert Schach