Gotham City, the UK-based short-seller, tightens its campaign against Grifols. After the devastating January report that questioned the Catalan pharmaceutical company’s accounting and argued that its shares should be worth zero, a second, shorter Gotham publication now focuses directly on the ties between Grifols and Scranton, the alleged holding company controlled by the Grifols family. Gotham now estimates up to 475 million euros in transactions between Grifols and Scranton in recent years, insisting that the key to the case lies in these so-called tunnel transactions. But what are tunnel transactions?
Gotham defines them as “the transfer of assets and benefits out of companies to the benefit of those who control them.” In this instance, it argues that Grifols shareholders or management of the first company (Grifols) typically own the second company (Scranton) as well, enabling benefits from transactions that would otherwise be disastrous. The short report recalls that Grifols has said the links between Scranton and Grifols refer only to two concrete collaborations: leasing Grifols’ headquarters, in place since 2012 following the Talcris acquisition, and the Haema and BPC arrangements since 2018. Gotham, however, questions whether these are the only ties. “This is one of the issues the CNMV may be examining,” the report notes. Gotham also asks, “Who owns and controls Scranton Enterprises?” and answers that “Grifols disclosed that the family owns less than 20%, but did not reveal whether the Grifols family controls Scranton and by what degree.”
Three disputed operations
Regarding numbers, Gotham’s second mini-report identifies three transactions at the heart of the scrutiny.
- An increase of 59 million euros in Scranton’s 2021 balance sheet related to an advance from Grifols Worldwide Operations. This transaction has not been seen reflected in Grifols’ financial statements.
- “Grifols’ files show 113.4 million euros of non-current loans to related parties” in the first half of 2023. Gotham explains this balance may include a 95 million euro loan from Grifols to Scranton for the Haema/BPC acquisition.
- Also in the first half of 2023, Gotham notes that “Grifols … have Other financial assets with related parties 321.3 million euros outstanding, compared to 0 euros in 2018, indicating rapid cash outflow to interested parties.” The report asks Grifols to confirm or deny whether Scranton is a direct or indirect buyer of any of these assets.
False and misleading insinuations
On all these accusations, Grifols again denies the insinuations as malicious, false, and misleading and states that their sole aim is to destabilize Grifols and sow doubt among institutional investors. The company asserts it has answered every question, reaffirms its commitment to transparency, integrity, and ethical conduct, and notes that it will continue its legal action against Gotham.
Stock hit and leadership changes
The release of the shortened second report hit Grifols in the stock market again, with the session opening down more than 7 percent before losses moderated later in the day. Since the year started, the Catalan drugmaker has shed roughly 30 percent of its value on the Ibex. The fallout has also led Grifols to remove Raimon Grifols, Víctor Grifols Deu, and Albert Grifols from their executive roles to avoid possible conflicts of interest with Scranton, according to market sources, though they will remain on the board as non-executive directors. Thomas Glanzmann will continue as chief executive, and Nacho Abia will become the new chief executive officer.
Another unquantified angle raised by Gotham is that “Grifols fully consolidates Haema and BPC Plasma in its financial statements, while Scranton Enterprises also consolidates Haema and BPC.” These facts lead the bearish camp to question how the same assets could be consolidated at the same time using the global consolidation method, and whether Grifols or Scranton disclosed this to lenders and creditors.
Shareholders and the Transparency Council
Legal clashes around the case continue. Shareholders grouped under Aemec and represented by the firm Cremades & Calvo-Sotelo have petitioned the Transparency Council, a body under the finance minister, after the CNMV refused access to the Grifols file. The investors are pursuing civil responsibility claims for alleged damages should illicit acts be proven. In parallel, several U.S. law firms are reportedly preparing joint lawsuits, amid suspicions that Grifols provided false market information.