Grifols: Maintaining Our FVE but Raising Uncertainty to Very High Following Gotham City Research

Gotham City Research released a report on Jan. 9 accusing Grifols of manipulating its debt ratios with its accounting treatment for noncontrolling interests and related party transactions, lowering reported debt to EBITDA to 6 times, from closer to 10-13 times according to Gotham City. After sorting through the accusations, our initial opinion is that Gotham City’s motives are suspect, as it discloses that it holds a short position in Grifols. Given this position, we believe Gotham is likely concerned that Grifols’ recently announced $1.8 billion sale of a 20% stake in China plasma firm Shanghai RAAS, which is expected to close in the first half of 2024, could significantly improve its financial health. The announcement of the sale had led to significant share appreciation in late December. In addition, Gotham City claims that Grifols did not disclose a $95 million loan in 2018 to Scranton Enterprises, a noncontrolling shareholder in Grifols that is associated with the Grifols family, although we clearly see the disclosure in the firm’s 20-F filings, which leads us to question the accuracy of Gotham City’s report. Grifols’ financial statements have been audited by KPMG for the past several years, and we therefore continue to model Grifols based on its reported financials, and we’re not making any changes to our fair value estimate. We think the firm’s position in the global plasma therapeutic market continues to warrant a narrow moat. That said, we acknowledge that Grifols’ business has grown more complex over the past several years, and the firm has understated its debt at least once; Grifols reclassified the roughly EUR 800 million investment from Singapore sovereign wealth fund GIC as a financial liability rather than as an equity investment following an audit by KPMG in 2022. Given the complexity around the firm’s accounting, we’re raising our Morningstar Uncertainty Rating from High to Very High.