Grifols S.A. GRFS, the Barcelona, Spain-based pharmaceutical company, saw its shares plummet by 24% on Tuesday. This marked the company’s most significant single-day drop since its initial public offering.
The cause? A bombshell short report released by Gotham City Research that accused Grifols of serious accounting irregularities, bringing into question its stock value.
Gotham City Research, known for its forensic financial analysis, had been scrutinizing the operations of Grifols SA since last spring. Over nine months, the firm dug deep into the company’s financials, uncovering what they describe as a troublesome “pattern of behavior.”
“We believe shares are uninvestable, likely zero,” the report affirmed.
The Grifols debacle has cast a shadow over the wider Spanish stock market. The company, known for blood-related medicines, significantly underperformed compared to European peers during today’s session.
The iShares MSCI Spain ETF EWP has seen a decline of 1.9% as of this writing.
Chart 1: Grifols’ Share Price Movement After Gotham City’s Short Report
Grifols Chart Reveals Further Downside Ahead
The Gotham report triggered a significant sell-off in Grifols’ shares as investors grappled with the potential implications.
Tuesday’s downturn marked a significant deviation in Grifols’ share price trajectory, halting the steady upward channel it had maintained since mid-October 2022.
The stock has now dropped to a low not seen since April 2023. Notably, previous dips to similar levels have typically aligned with a deeply oversold condition on the Relative Strength Index (RSI), an indicator that has yet to signal such a state in this instance.
Moving forward, the $6.50 price point stands out as the critical support level to monitor closely.
Gotham’s Allegations
The report accuses Grifols of inflating its EBITDA, manipulating debt levels, and engaging in tunneling transactions — a process where assets and profits are siphoned out for the benefit of insiders, at the expense of the company and its shareholders.
They allege that Grifols, together with related family entities like Scranton Enterprises NV, has been involved in undisclosed loans and share pledges, which have been used to paint a misleadingly robust picture of the company’s leverage, suggesting it may be understated by as much as 46%.
“Both GRF and Scranton Enterprises (a Grifols family vehicle) fully consolidate BPC + Haema onto their financial statements. This treatment is materially deceptive and incorrect,” Gotham City Research wrote.
The Numbers
According to Gotham City Research “Grifols understates its debt burden and is, therefore, materially more levered than the company indicates.”
Gotham’s investigation suggests that Grifols’ actual debt could be closer to EUR 8.9 billion, significantly higher than the reported EUR 8 billion.
They estimate that the company’s leverage is not the reported 6x, but could be alarmingly between 10x to 13x.
If these claims are substantiated, Grifols could face drastically higher financing costs, potentially pushing the company into an unsustainable financial position.
Shares Are Potentially ‘Worthless’
Despite 20 buy ratings from analysts, Gotham City Research paints a dire picture of a company whose EBITDA margins have been in decline for the past 11 years, even as its net debt has quadrupled since 2012.
They draw parallels with NMC Health plc, a company that also went on a debt-fueled acquisition spree before accounting scandals led to its bankruptcy.
The report concludes that Grifols’ shares may be uninvestable and potentially worthless.
Furthermore, it warns that if Grifols were to pay interest rates commensurate with the actual level of leverage, its cash flows would be insufficient to cover the debt, hinting at a possibility of insolvency or severe dilution of equity.
Grifols Refutes Gotham City Research Claims
Grifols S.A. responded to allegations made by Gotham City Research in a Tuesday’s press release, firmly stating their awareness of what they consider to be false information and speculations circulating about their accounting and financial disclosure practices.
The pharmaceutical giant has actively engaged with the Spanish regulatory authorities, submitting two formal statements to clarify its position.
Grifols also expressed perplexity over Gotham City Research’s interpretation of their financial data, suggesting that the research firm’s motive, as a fund focused on short-selling, might be to manipulate the market for profit.
This accusation points to a contentious section on page 2 of Gotham City Research’s report, where the firm seemingly acknowledges a vested interest in the decline of Grifols’ share price. This development adds a new layer of complexity to the unfolding narrative, indicating a potential conflict of interest that could be influencing the public perception of Grifols’ financial health.
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