Factbox: What does the Gotham City report say about Grifols?

General Plastic Industrial

09/01/2024 19:17

By Nell Mackenzie
       LONDON, Jan 9 (Reuters) - Shares in Grifols  GRLS.MC 
fell as much as over 40% on Tuesday, wiping $3.83 billion off
its market value, after hedge fund Gotham City Research
questioned its accounting, prompting the Spanish drugmaker to
"categorically" deny any wrongdoing.
    
Below are some of the main points from the report and company
comments - translated from Spanish - from a response it had sent
to the Spanish financial regulator and shared with Reuters. 

    OVERSTATED EARNINGS
    Gotham City Research said that Grifols received almost all
of its earnings from so-called "non-controlling interests."
    These satellite companies a few of which the shortseller
focused on in its report, include blood donation firm Haema AG,
plasma donation company BPC Plasma and testing firm Grifols
Diagnostics Solutions, account for 96.8% of the company's
profits, the report says.
    However, Scranton Enterprises, a family office set up by
members of the Grifols founding family, also reports earnings
from the same subsidiaries, according to the report, which said
Grifols sold Haema AG and BPC Plasma to Scranton Enterprises in
2018. 
    Both Scranton Enterprises and Grifols cannot claim those
earnings at the same time, the report said.
    Grifols said in its statement to the regulator that under a
management contract it continued to manage the plasma centers of
Biotest and Haema and bought all the plasma obtained by these
companies. It did not address Gotham's claim of double-reporting
of profits in its statement to the regulator or in its response
to a Reuters request for comment about that claim.

    OWNERSHIP OF HAEMA AG AND BPC PLASMA
    Grifols reports the earnings of Haema AG and BPC Plasma on
its accounts because it has an option to buy back the two
companies' shares, Gotham City says. But the shortseller argues
that counting earnings from companies that it doesn't own is
"highly suspect."
    In its statement to the regulator, Grifols said that
accounting rules meant it did have control of these companies
through voting rights attached to the options.
    
    UNDERSTATED DEBT
    While Grifols included satellite companies' earnings in its
accounts, the firms' debts are not included in Grifols accounts,
and would add to its debt burden if they were, says Gotham City.
   A $95 million loan to Scranton Enterprises in 2018, is not
disclosed in Grifols’ filings and only appears in Scranton
filings, the report says.
   Nothing material is hidden here, Grifols said in its
statement. Scranton Plasma, which bought Biotest and Haema,
asked for financing from "credit institutions" and a lender
required Grifols to provide a "vendor's financing" loan to
Scranton Plasma for the transaction, the company said. Grifols
is not affected in any way by the loan, did not participate in
its negotiation, does not have the power to finance it and is
not its guarantor, said the statement. 
   Grifols was involved in a share stake sale of one of its U.S.
diagnostics subsidiaries with Shanghai RAAS (SRAAS) but has not
removed its total earnings from accounts, says the Gotham City
report.
    Grifols says under the sale terms and agreement it could
still recognize these earnings on its accounts. 
    The Gotham City report also said that Scranton Enterprises,
the Grifols' family entity, was highly leveraged and if it were
to fail, that would be material to Grifols because of the debt
owed between the companies.
     Grifols said in its statement that transactions between the
two entities have been recorded on the books of the company and
in its public accounts, presented to the Spanish regulator and
the company has filed forms with the SEC in the United States,
so there is no new information that can be considered hidden,
Grifols said in its statement.
    
    SHORTSELLER PROFITS
    General Industrial Partners, a joint venture between hedge
funds Gotham City Research and Portsea Asset Management took a
short position of 0.57% in Grifols on Jan. 8, a regulatory
filing with the Spanish regulator CNMV shows.
    The hedge funds would have made around 20 million euros in
profit when Grifols shares tumbled by up to 40% after Gotham
City's report was published.
    Grifols said in its statement it did not understand the
report's " interpretation" unless its only objective was to
lower the company's share price and profit from it.
    Grifols said in its statement to the regulator it planned to
issue another response regarding aspects of the business
mentioned in the Gotham City report. 
($1 = 0.9142 euros)

 (Reporting by Nell Mackenzie; Edited by Amanda Cooper and
Tomasz Janowski)
 ((Nell.Mackenzie@thomsonreuters.com; https://twitter.com/nellmooney;))