Bicycle Crash

After Millions Go Missing, Bike Maker Mifa Pedals into Uncertain Future

A flat tire for investors?
  • Why it matters

    Why it matters

    East Germany’s Mifa was just beginning to reinvent itself as an electric bikes specialist. But state investigators are now investigating the former chief executive over possible fraud, raising questions of the standards of oversight and record keeping at the company.

  • Facts


    • German state prosecutors have launched a criminal investigation to determine if the company defrauded investors.
    • Hero Cycles gains valuable technology and manufacturing prowess for its €19 million investment, but painful cuts loom.
    • Mifa’s predecessor VEB-Fahrradwerken was the largest bike maker in communist East Germany.
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Everyone can misplace their wallet once in awhile, but German  bicycle manufacturer Mitteldeutsche Fahrradwerke (Mifa) has seen €15 million ($19.7 million) simply vanish from its 2013 balance sheet.

Based in the eastern German town of Sangerhausen, Mifa says the discrepancy was caused by bad accounting procedures. But state prosecutors in Halle have confirmed to Handelsblatt that they are launching an investigation into the roles played by Peter Wicht, who was the chief executive officer from 2004 until his sudden departure in April for “health reasons,” and others affiliated with the company.

“We are investigating because of possible offenses against corporation law and other criminal offenses,” a spokeswoman for the prosecutor’s office said. At issue is whether investors were purposely deceived or defrauded. Mr. Wicht was not available for comment.

Word of the official inquiry comes as India’s Hero Cycles Ltd., the largest maker of bicycles in the world, has announced it will acquire a controlling 60 percent interest in Mifa for €19 million. Creditors had given Mifa until August 25 to find a solution to its financial woes.

With about 770 workers, Mifa rose from the ashes of the VEB-Fahrradwerken, which was once the largest bicycle maker in communist East Germany. Following years of difficult downsizing and restructuring in the wake of German reunification in 1990, the firm had begun to expand greatly recently, with an emphasis on producing electric bicycles. Hero Cycles would gain access to that technology, which would give it an even stronger position in a market for bikes estimated at €37.1 billion worldwide.

Triggering the investigation were concerns about the issuance of a corporate bond in summer 2013. The company has said it will be “fully cooperative and do everything necessary to support the investigations.”

To avoid bankruptcy, Mifa creditors have agreed on a restructuring plan with a new majority owner and painful cuts on the horizon.

In March, Mifa acknowledged the gaping, multi-million-euro hole in its balance sheet, despite revenues of €108 million, which the company attributed to bookkeeping errors. “That is a catastrophe,” said Daniel Bauer of the German Association for the Protection of Capital Investors (SdK). “The controlling evidently completely failed.”

Last year, Mifa raised €25 million in capital through a mini bond, which has subsequently turned out to be based on the false numbers. The prospectus at the time displayed only the results of the first half of 2013 including profits of €3.5 million. Mr. Wicht spoke glowingly of growing sales and earnings.

The company now concedes financial statements over the past few years were also inaccurate. Apparently, Mifa falsely estimated two balance sheet items for years for both raw materials and finished bicycles. Products that never existed were counted. The inventory difference between 2012 and 2011 amounted to about €19 million, the company reported.

Mr. Bauer finds it hard to fathom how accounts failed to find the financial errors. “The company data would have at least had to have been controlled again in spot checks,” he said.

The last audited financial statement was in 2012, when Koblenz-based accounting and consulting firm Mittelrheinische Treuhand confirmed a loss of about €1 million. The firm had no comment on the investigation, citing client confidentiality.

The Mifa affair may cost investors dearly. To avoid bankruptcy, creditors have agreed on a restructuring plan with a new majority owner and painful cuts on the horizon. Mini bond investors may lose about 60 percent of their investment as terms of the bond are reworked to generate less interest, though they will likely receive a 10 percent share in the company.

Shareholders also are bleeding as their share of the company shrinks to about 1 percent with the Hero Cycles deal. It’s particularly painful for Carsten Maschmeyer, the founder of the financial services company AWD Holding, who according to Bloomberg News held 20 percent of the company’s stock, and for the departed Mr. Wicht, who also held substantial shares.

The stock isn’t worth much. In March, shares were selling at €6.90, but this week they were worth barely €1.

As the new majority shareholder, Hero Cycles hold about 89 percent of the shares after a capital increase. The Indian firm plans to invest at least €15 million in Mifa and has made concessions to creditors in able to close the deal, which is not yet official. Bond and debt creditors still must agree on the restructuring plan.

The restructuring should be complete by March 2015 – assuming no more holes appear on the balance sheets.

This article was translated by Anna Park Kim. Jeff Borden and Marc Young also contributed to this story. To contact the author:

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