Activist short target Corporate Travel Management brought in EY last week ahead of hedge fund VGI Partners escalating its campaign against the company.

The company is understood to have brought in the accounting firm, which is not its auditor, to examine three issues raised in the VGI report. 

They related specifically to its strong financial performance, the conversion of its cash flows and the carrying value of its North American assets. Corporate Travel appeared to be comfortable with EY’s findings, which support its position that its assets are not at risk of impairment.  

The $2.2 billion Brisbane-based travel firm, which is the subject of a campaign instigated by the hedge fund, called for a trading halt on Tuesday, after VGI Partners distributed a 50-page document to its investors that derided Corporate Travel’s response to the issues it previously raised as “weak”.

The company says the second attack by VGI “raises no substantive new issues”, but as of early Tuesday it was not possible to “fully review the further report or comprehensively respond” by the time the market opened for trading. A reply will be provided in due course, it said. 

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VGI told its wholesale investors on Monday that it had increased its short bet against Corporate Travel Management by 23 per cent to more than 2.5 million shares, in anticipation of the price falling further because of what it claimed to be a “weak” response to its concerns around accounting and disclosure.

VGI has also challenged Corporate Travel Management’s claim that the hedge fund concealed the extent of its inquiries. The listed travel business conveyed that it was caught off guard by the detailed allegations mounted by VGI, which sent a 176-page presentation to its own clients on October 28 outlining 20 so-called “red flags”.

Corporate Travel’s share price has fallen from $27.64 to $20 since the first report was released on October 28.

The initial report also claimed that several of Corporate Travel’s offices were either “phantom” or “ghost” locations that didn’t exist or were not staffed. The company said that its website has not been updated and some locations were being wound down. The company’s managing director, Jamie Pherous, said his operations consisted of “big offices” in Boston, Los Angeles, Seattle and Denver. 

But VGI Partners said in its letter that they could only find a “handful of employees in normal business hours” at these locations.

The fund also called on Corporate Travel to provide a detailed city by city breakdown of the location of 2,750 staff members. 

“Will Corporate Travel soon be telling us they don’t need ‘big offices’ because their 2,750 employees are telecommuting from home in their pyjamas?” the hedge fund asked.

The location of staff has become a point of contention in an industry where it is not uncommon for staff to work remotely.

Corporate Travel Management on October 31 denounced VGI’s work and strongly denied its conclusions, saying the hedge fund misunderstood how the business works.

“The questions and the amount of data they put into things like the offices, the technology and many things here they never approached us on,” Mr Pherous said last week on a conference call with investors.

But according to extracts of an e-mail chain VGI shared with its investors late on Monday, chief financial officer Steve Fleming was already corresponding with the hedge fund on, as VGI wrote, “some accounting issues that our screens have thrown up”.

VGI believes “most of the concerns” raised in its presentation were known to the company in advance.

These questions included issues around cash receipts, franking disclosures and reconciliation of cash outflows attributed to acquisitions.

VGI asserted that Corporate Travel’s explanation for lowering its discount rate used to calculate the value of its goodwill in 2017-18 was “disturbing”.

“If the discount rate had not declined, we believe Corporate Travel may have needed to take a goodwill write-down in its North America business,” the activist concludes in its follow-up.

Corporate Travel assured investors that it had passed impairment testing. Its annual report supports this, where $407.2 million of goodwill was recorded as held and no impairment charge was recorded, PwC’s audit notes say.

The company was probed by institutional investors about the lowered discount rate on last week’s teleconference. That is when Corporate Travel revealed it relied on calculations provided by a New York University professor as the source of its inputs.

VGI concluded this was professor Aswarth Damadoran, a renowned valuation expert who makes his research available online.

The hedge fund contacted the professor who told them he had “had never heard of Corporate Travel”.

“We’ve used the professor’s public data to do the math ourselves and can’t get close to the discount rate reductions that appear in the Corporate Travel accounts,” VGI said.

On this basis, it continues to allege that Corporate Travel’s North American business is vulnerable to impairment, and Corporate Travel’s revenue growth assumption only needs to fall to 0.9 per cent in the region to trigger such an event.

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